The Company incorporates by reference certain information from parts of its proxy statement for the 2007 Annual Meeting of Stockholders. The SEC allows the Company to disclose important information by referring to it in that manner. Please refer to such information. The Company’s proxy statement for the 2007 Annual Meeting of Stockholders and 2006 Annual Report will be available on the Company’s website ( www.bms.com ) under the “Investors—SEC Filings” caption on or after March 19, 2007.
Business Segments
The Company has three reportable segments—Pharmaceuticals, Nutritionals and Other Health Care. The Pharmaceuticals segment is made up of the global pharmaceutical and international consumer medicines business. The Nutritionals segment consists of Mead Johnson Nutritionals (Mead Johnson), primarily an infant formula and children’s nutritionals business. The Other Health Care segment consists of ConvaTec and Medical Imaging. For additional information about these segments, see “Item 8. Financial Statements—Note 18. Segment Information.”
Pharmaceuticals Segment
The Pharmaceuticals segment competes with other worldwide research-based drug companies, smaller research companies and generic drug manufacturers. These products are sold worldwide, primarily to wholesalers, retail pharmacies, hospitals, government entities and the medical profession. The Company manufactures these products in the U.S. and Puerto Rico and in fourteen foreign countries. Pharmaceuticals net sales accounted for 77% of the Company’s net sales in 2006, 79% in 2005 and 80% in 2004. U.S Pharmaceuticals net sales accounted for 54%, 54% and 55% of total Pharmaceuticals net sales in 2006, 2005 and 2004, respectively, while Pharmaceuticals net sales in Europe, Middle East and Africa accounted for 28%, 29% and 31% of total Pharmaceuticals net sales in 2006, 2005 and 2004, respectively. Pharmaceuticals net sales in Japan accounted for 4%, 4% and 3% of total Pharmaceuticals net sales in 2006, 2005 and 2004, respectively.
The Company’s pharmaceutical portfolio has continued to transition away from products which have lost exclusivity towards growth drivers, recently launched and other products, which have resulted from the Company’s focus on areas with significant unmet medical need. Products that the Company considers to be growth drivers include PLAVIX* (clopidogrel bisulfate), AVAPRO/AVALIDE* (irbesartan/irbesartan–hydrochlorothiazide), REYATAZ (atazanavir sulfate), ABILIFY* (aripiprazole) and ERBITUX* (cetuximab). Recently launched and other products include the SUSTIVA Franchise (efavirenz), SPRYCEL (dasatinib), BARACLUDE (entecavir) and ORENCIA (abatacept).
The Company has experienced substantial revenue losses in the last several years due to the expiration of market exclusivity for certain of its products. For 2007, the Company expects no major new exclusivity losses and, accordingly, expects reductions of net sales to moderate to a range of $0.9 billion to $1 billion from 2006 levels for products that have lost exclusivity in previous years, primarily PRAVACHOL (pravastatin sodium) in the U.S. and Europe and TAXOL ® (paclitaxel) in Europe and Japan, compared to a net sales reduction of $1.4 billion in 2006 from 2005 levels. The timing and amounts of sales reductions from exclusivity losses, their realization in particular periods and the eventual levels of remaining sales revenues are uncertain and dependent on the levels of sales at the time exclusivity ends, the timing and degree of development of generic competition (speed of approvals, market entry and impact) and other factors.
The composition of matter patent for PLAVIX*, which expires in 2011, is currently the subject of patent litigation in the U.S. with Apotex Inc. and Apotex Corp. (Apotex) and other generic companies as well as in other less significant jurisdictions. On August 8, 2006, Apotex launched a generic clopidogrel bisulfate product that competes with PLAVIX*. On August 31, 2006, the court in the patent litigation with Apotex granted a motion by the Company and its product partner, Sanofi-Aventis (Sanofi), to enjoin further sales of Apotex’s generic clopidogrel bisulfate product, but did not order Apotex to recall product from its customers. The court’s grant of a preliminary injunction has been affirmed on appeal. The trial in the underlying patent litigation ended on February 15, 2007 and the Court is expected to rule following post-trial briefing. The generic launch had a significant adverse impact on PLAVIX* sales and results of operations in 2006. The full impact of the generic launch by Apotex in August 2006 cannot be estimated with certainty at this time, and will depend on a number of factors, including the amount of generic product that Apotex sold into the distribution channels prior to the grant of a preliminary injunction halting such sales. It is not possible at this time reasonably to assess the outcome of the patent litigation with Apotex and/or the timing of any renewed generic competition from Apotex or additional generic competition from other generic pharmaceutical companies. However, if Apotex were to prevail in the patent litigation, the Company would expect renewed generic competition promptly thereafter.
While the Company expects generic clopidogrel bisulfate inventory in the market to have a continued residual impact on 2007 PLAVIX* net sales, the Company does expect PLAVIX* net sales and earnings growth in 2007, assuming the absence of renewed or additional generic competition. The Company expects increased prescription demand for PLAVIX* as well as for other growth drivers and recently launched products. Compared to 2006, the Company’s gross margin is expected to improve due to growth of higher margin products, lower margin erosion related to exclusivity losses, and improved manufacturing efficiencies. Marketing, selling and administrative expense is expected to remain relatively unchanged as efficiency savings should largely offset inflationary cost increases, and as the Company continues to focus on high value primary care and specialist physicians and implements various productivity initiatives. The Company expects to continue to increase investments to develop additional new compounds and support the introduction of new products.
The Company and its subsidiaries are the subject of a number of significant pending lawsuits, claims, proceedings and investigations including the pending PLAVIX* litigation. It is not possible at this time reasonably to assess the final outcome of these investigations or litigations. Management continues to believe, as previously disclosed, that the aggregate impact, beyond current reserves, of the pending PLAVIX* patent litigation, these other litigations and investigations and other legal matters affecting the Company is reasonably likely to be material to the Company’s results of operations and cash flows, and may be material to its financial condition and liquidity. The Company’s expectations for 2007, described above, do not reflect the potential impact of either the pending PLAVIX* patent litigation or other litigations or investigation or the impact of any other legal matters on the Company’s results of operations for 2007, beyond current reserves for ongoing matters.
For more information about these and other matters, see “—Products,” “—Competition” and “—Research and Development” below, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—PLAVIX*,” “—Outlook,” and “Item 8. Financial Statements—Note 21. Legal Proceedings and Contingencies.”
Products
Most of the Company’s pharmaceutical revenues come from products in the following therapeutic classes: cardiovascular; virology, including human immunodeficiency virus (HIV); oncology; affective and other (psychiatric) disorders; and immunoscience.
In the pharmaceutical industry, the majority of an innovative product’s commercial value is usually realized during the period in which the product has market exclusivity. Market exclusivity is based upon patent rights and/or certain regulatory forms of
exclusivity. In the U.S. and some other countries, when these patent rights and other forms of exclusivity expire and generic versions of a medicine are approved and marketed, there are often very substantial and rapid declines in the sales of the original innovative product. The Company’s business is focused on innovative pharmaceutical products, and the Company relies on patent rights and other forms of protection to maintain the market exclusivity of its products. For further discussion of patents rights and regulatory forms of exclusivity, see “—Intellectual Property and Product Exclusivity” below. For further discussion of the impact of generic competition on the Company’s business, see “—Generic Competition” below.
The chart below shows the net sales of key products in the Pharmaceuticals segment, together with the year in which the basic exclusivity loss (patent rights or data exclusivity) occurred or is currently estimated to occur in the U.S., the European Union (EU) and Japan. The Company also sells its pharmaceutical products in other countries; however, data is not provided on a country-by-country basis because individual country sales are not significant outside the U.S., the EU and Japan. In many instances, the basic exclusivity loss date listed below is the expiration date of the patent that claims the active ingredient of the drug or the method of using the drug for the approved indication. In some instances, the basic exclusivity loss date listed in the chart is the expiration date of the data exclusivity period. In situations where there is only data exclusivity without patent protection, a competitor could seek regulatory approval by submitting its own clinical trial data to obtain marketing approval prior to the expiration of data exclusivity.
The Company estimates the market exclusivity period for each of its products on a case-by-case basis for the purposes of business planning only. The length of market exclusivity for any of the Company’s products is impossible to predict with certainty because of the complex interaction between patent and regulatory forms of exclusivity and the inherent uncertainties regarding patent litigation. Although the Company provides these estimates for business planning purposes, these are not intended as an indication of how the Company’s patents might fare in any particular patent litigation brought against potential infringers. There can be no assurance that a particular product will enjoy market exclusivity for the full period of time that appears in the estimate or that the exclusivity will be limited to the estimate.
| Pharmaceutical Products |
2006 | 2005 | 2004 | Past or Currently Year of U.S. Basic |
Past or Currently Year of EU Basic Exclusivity Loss (a) |
Past or Currently Year of Japanese Basic | |||||||||
| Dollars in Millions | |||||||||||||||
| Cardiovascular |
|||||||||||||||
| PLAVIX* |
$ | 3,257 | $ | 3,823 | $ | 3,327 | 2011 | 2008-2013 | ++ | ||||||
| PRAVACHOL |
1,197 | 2,256 | 2,635 | 2006 | 2002-2008 | ++ | |||||||||
| AVAPRO*/AVALIDE* |
1,097 | 982 | 930 | 2012 | 2007-2013 | ++ | |||||||||
| COUMADIN |
220 | 212 | 255 | 1997 | (b) | ++ | |||||||||
| MONOPRIL |
159 | 208 | 274 | 2003 | 2001-2008 | ++ | |||||||||
| Virology |
|||||||||||||||
| REYATAZ |
931 | 696 | 414 | 2017 | 2014-2017 | 2017 | |||||||||
| SUSTIVA Franchise (total revenue) |
791 | 680 | 621 | 2013 (c) | 2013 (c) | ++ | |||||||||
| ZERIT |
155 | 216 | 272 | 2008 | 2007-2011 | 2008 | |||||||||
| BARACLUDE |
83 | 12 | — | 2010 | 2011 | 2011 | |||||||||
| Other Infectious Diseases |
|||||||||||||||
| CEFZIL |
87 | 259 | 270 | 2005 | 2004-2009 | ++ | |||||||||
| Oncology |
|||||||||||||||
| ERBITUX* |
652 | 413 | 261 | 2017 (e) | ++ | ++ | |||||||||
| TAXOL ® (paclitaxel) |
563 | 747 | 991 | 2000 | 2003 | 2006 | |||||||||
| SPRYCEL |
25 | — | — | 2020 | 2020 (d) | ++ | |||||||||
| Affective (Psychiatric) Disorders |
|||||||||||||||
| ABILIFY* (total revenue) |
1,282 | 912 | 593 | 2014 | 2014 (f) | ++ | |||||||||
| EMSAM* |
18 | — | — | 2009 | ++ | ++ | |||||||||
| Immunoscience |
|||||||||||||||
| ORENCIA |
89 | — | — | 2016 (e) | ++ | ++ | |||||||||
| Other Pharmaceuticals |
|||||||||||||||
| EFFERALGAN |
266 | 283 | 274 | ++ | N/A | ++ |
Note: The currently estimated year of basic exclusivity loss includes any statutory extensions of exclusivity that have been earned, but not those that are speculative. In some instances, there may be later-expiring patents that cover particular forms or compositions of the drug, as well as methods of manufacture or methods of using the drug. Such patents may sometimes result in a favorable market position for the Company’s product, but product exclusivity cannot be predicted or assured. Note also that for products filed under a Biologics License Application (BLA) in the U.S. the year of exclusivity is listed as the year of patent expiration even though there is currently not a regulatory pathway for the approval of follow-on biologic products, as described in more detail in “—Intellectual Property” and “—Product Exclusivity” below.
* Indicates brand names of products which are registered trademarks not owned by the Company or its subsidiaries. Specific trademark ownership information can be found on page 150. ++ The Company does not currently market the product in the jurisdiction indicated. (a) References to the EU throughout this Form 10-K include the following current 27 member states: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom (UK). Basic patent applications have not been filed in all 27 current member states for all of the listed products. In some instances the date of basic exclusivity loss will be different in various EU member states. In such instances, the earliest and latest dates of basic exclusivity loss are listed. For those EU countries where the basic patent was not obtained, there may be data protection available. (b) EU basic exclusivity expired before BMS acquired the product. (c) Exclusivity period relates to SUSTIVA brand only. (d) Pending application. EU patent application not filed in Cyprus, Estonia, Latvia, Lithuania, Malta, Netherlands, Slovakia and Slovenia. (e) Biologic product approved under a BLA. In the U.S., there is currently no regulatory approval path for generic biologics. (f) The Company’s rights to commercialize aripiprazole in the U.S. terminate in 2012.
Below is a summary of the indication, intellectual property position, licensing arrangements, if any, and third-party manufacturing arrangements, if any, for each of the above products in the U.S. and where applicable, the EU and Japan.
Cardiovascular PLAVIX* Clopidogrel bisulfate is a platelet aggregation inhibitor, which is approved for protection against fatal or non-fatal heart attack or stroke in patients with a history of heart attack, stroke, peripheral arterial disease or acute coronary syndrome. Clopidogrel bisulfate was codeveloped and is jointly marketed with Sanofi. The worldwide alliance operates under the framework of two geographic territories: one in the Americas and Australia (the Company’s primary territory) and the other in Europe and Asia (Sanofi’s primary territory). The composition of matter patent in the U.S. expires in 2011 (which includes a statutory patent term extension), and is currently the subject of patent litigation in the U.S. with Apotex and other generic companies, as well as in other less significant jurisdictions. It is not possible at this time reasonably to assess the outcome of the litigation with Apotex and/or the timing of any renewed generic competition from Apotex or potential additional generic competition from other generic pharmaceutical companies. However, if Apotex were to prevail in the patent litigation, the Company would expect renewed generic competition promptly thereafter. For more information about these litigation matters, as well as the generic launch by Apotex, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary—PLAVIX*,” “—OUTLOOK” and “Item 8. Financial Statements—Note 21. Legal Proceedings and Contingencies”. In the EU, regulatory data exclusivity extends to 2008 in all the EU member countries and the key composition of matter patent expires in 2013 in the majority of the EU member countries. The Company obtains its bulk requirements for clopidogrel bisulfate from Sanofi and a third party. Both the Company and Sanofi finish the product in their own facilities. For more information about the Company’s arrangements with Sanofi, see “—Strategic Alliances” below and “Item 8. Financial Statements—Note 2. Alliances and Investments.” PRAVACHOL Pravastatin sodium is an HMG Co-A reductase inhibitor indicated as an adjunct to diet and exercise for patients with primary hypercholesterolemia, for lowering the risk of a first heart attack in people without clinically evident coronary heart disease who have elevated cholesterol, and for reducing the risk of heart attack and stroke in patients with clinically evident coronary heart disease. The Company has licensed a patent covering pravastatin, marketed by the Company in the U.S. as PRAVACHOL, from Sankyo Company, Ltd. (Sankyo) of Japan, with key provisions of the agreement
expiring as exclusivity expires on a market-by-market basis. Exclusivity in the U.S. under the patent (including pediatric extension) expired in April 2006. The Company entered into a distribution agreement with Watson Pharmaceutical (Watson) in November 2005 authorizing Watson to distribute generic pravastatin sodium tablets in the U.S.
In the EU, the composition of matter patent has expired in all countries except in Italy, where expiration will occur in January 2008.
The Company obtains its bulk requirements for pravastatin from Sankyo and finishes the product in its own facilities.
AVAPRO*/AVALIDE* Irbesartan/irbesartan-hydrochlorothiazide is an angiotensin II receptor antagonist indicated for the treatment of hypertension and diabetic nephropathy. Irbesartan was codeveloped and is jointly marketed with Sanofi. The worldwide alliance operates under the framework of two geographic territories: one in the Americas and Australia (the Company’s primary territory) and the other in Europe and Asia (Sanofi’s primary territory). In September 2006, the Company elected to terminate its copromotion of this product with Sanofi in Ireland, Sweden, Norway, Finland and Denmark. The basic composition of matter patent in the U.S. expires in 2012 (including pediatric extension) and in the EU in 2013. Data exclusivity in the EU expires in August 2007 for AVAPRO* and in October 2008 for AVALIDE*.
Irbesartan is manufactured by both the Company and Sanofi. The Company manufactures its bulk requirements for irbesartan and finishes AVAPRO*/AVALIDE* in its own facilities. For AVALIDE*, the Company purchases bulk requirements for hydrochlorothiazide from a third party.
For more information about the Company’s arrangements with Sanofi, see “—Strategic Alliances” below and “Item 8. Financial Statements—Note 2. Alliances and Investments.”
COUMADIN Warfarin sodium is an oral anti-coagulant used predominantly in patients with atrial fibrillation or deep venous thrombosis/pulmonary embolism. Market exclusivity expired in the U.S. in 1997. Basic patent protection and regulatory data protection had expired before the Company acquired COUMADIN in 2001. The Company obtains its bulk requirements for warfarin from a third party and produces the majority of finished goods in its own facilities. MONOPRIL Fosinopril sodium is a second-generation angiotensin converting enzyme inhibitor with once-a-day dosing indicated for the treatment of hypertension. MONOPRIL was discovered and developed internally.
The basic composition of matter patent in the U.S. expired in June 2003. The basic composition of matter patent expired in Denmark, Greece and Portugal in 2001 and in Spain in October 2002. A composition of matter patent was not obtained in Finland. For the rest of the EU, the composition of matter patent expires on a country-by-country basis through 2008.
The Company manufactures its bulk requirements for fosinopril and finishes the product in its own facilities.
Virology REYATAZ Atazanavir sulfate is a protease inhibitor for the treatment of HIV. REYATAZ was launched in the U.S. in July 2003. The Company developed atazanavir under a worldwide license from Novartis AG (Novartis) for which it pays a royalty based on a percentage of net sales. The Company is entitled to promote REYATAZ for use in combination with Ritonavir (atazanavir) under a Non-Exclusive License Agreement between Abbott Laboratories and the Company dated July 30, 2003, as amended, for which it pays a royalty based on a percentage of net sales.
Market exclusivity for REYATAZ is expected to expire in 2017 in the U.S., in the major EU member countries and Japan.
The Company manufactures its bulk requirements for atazanavir and finishes the product in its own facilities.
SUSTIVA Franchise Efavirenz, the active ingredient in SUSTIVA, is a non-nucleoside reverse transcriptase inhibitor (NNRTI) for the treatment of HIV. The SUSTIVA Franchise includes SUSTIVA, an antiretroviral drug used in the treatment of HIV, and as well as bulk efavirenz included in the combination therapy, ATRIPLA*, which is sold through a joint venture with Gilead Sciences, Inc. (Gilead). The Company and Gilead share responsibility for commercializing ATRIPLA* in the U.S. Gilead records 100% of ATRIPLA* revenues and consolidates the results of the joint venture in its operating results. The Company records revenue for the bulk efavirenz component of ATRIPLA* upon sales of that product by the Gilead joint venture to third party customers. The Company’s revenue for the efavirenz component is determined by applying a percentage to ATRIPLA* revenue, which approximates revenue for the SUSTIVA brand. For more information about the Company’s arrangement with Gilead, see “—Strategic Alliances” below and “Item 8. Financial Statements—Note 2. Alliances and Investments.”
Rights to market efavirenz in the U.S., Canada, the UK, France, Germany, Ireland, Italy and Spain are licensed from Merck & Co., Inc. for a royalty based on a percentage of net sales.
Market exclusivity for SUSTIVA is expected to expire in 2013 in the U.S. and in countries in the EU; the Company does not, but another company does, market efavirenz in Japan.
The Company obtains its bulk requirements for efavirenz from third parties and produces finished goods in its own facilities. ZERIT Stavudine is used in the treatment of HIV. The Company holds an exclusive patent license for ZERIT from Yale University (Yale) pursuant to which it pays a royalty based on product sales. In Japan, the Company has an exclusive license for ZERIT from Yamasa Corporation pursuant to which it pays a royalty based on net sales in Japan.
The use patent expires in the U.S. in December 2008. The use patent series expires in the EU from 2007 through 2011 (patent applications are pending in Denmark and Finland), and in Japan in December 2008.
The Company manufactures its bulk requirements for stavudine and finishes the product in its own facilities.
BARACLUDE Entecavir is a potent and selective inhibitor of hepatitis B virus that was approved by the U.S. Food and Drug Administration (FDA) in March 2005 for the treatment of chronic hepatitis B infection. BARACLUDE was discovered and developed internally. It has also been approved and marketed in over 50 countries outside of the U.S. including China, Japan and the EU. The Company has learned that in China two companies have received clinical trial permission for entecavir and two other companies are seeking marketing approval of other formulations of entecavir. Due to uncertainty about China’s exclusivity laws, it is possible that one or more of these companies could receive marketing authorization from China’s health authority by the end of 2007. The Company has a composition of matter patent that expires in the U.S. in 2010. An application for a patent term extension has been filed in the U.S. which, if approved, would extend the patent expiration to 2015. The composition of matter patent expires in 2011 in both the EU and Japan. The Company manufactures its bulk requirements for entecavir and finishes the product in its own facilities. Other Infectious Diseases CEFZIL Cefprozil is a semi-synthetic broad-spectrum cephalosporin antibiotic for the treatment of mild to moderately severe bacterial infections of the throat, ear, sinuses, respiratory tract and skin. Cefprozil was discovered and developed internally.
The basic composition of matter patent protecting cefprozil in the U.S. (including patent term extension) expired in December 2005. In Spain, the patent expired in February 2005, and for certain other European countries and Japan, the patent expired in 2004. In several European countries including Austria, Finland, Italy, Switzerland and the UK, the composition of matter patent expires in 2008-2009 (including term extension).
The Company manufactures its bulk requirements for cefprozil and finishes the product in its own facilities.
Oncology
ERBITUX* ERBITUX* (cetuximab) is an IgG1 monoclonal antibody designed to exclusively target and block the
Epidermal Growth Factor Receptor (EGFR), which is expressed on the surface of certain cancer cells in
multiple tumor types as well as some normal cells. ERBITUX*, a biological product, is approved for the
treatment in combination with irinotecan of patients with EGFR-expressing metastatic colorectal cancer who
had failed an irinotecan-based regimen and as monotherapy for patients who are intolerant of irinotecan. In
March 2006, the FDA approved ERBITUX* for use in the treatment of squamous cell carcinoma of the head
and neck. ERBITUX* is marketed in North America by the Company under a distribution and copromotion agreement with ImClone Systems Incorporated (ImClone). The Company and ImClone will share distribution rights to ERBITUX* with Merck KGaA in Japan. ERBITUX* is not yet marketed in Japan, although an application has been submitted with the Japanese Pharmaceuticals and Medical Devices Agency (PMDA) for the use of ERBITUX* in treating patients with advanced colorectal cancer. For a description of the Company’s alliance with ImClone, see “—Strategic Alliances” below and “Item 8. Financial Statements—Note 2. Alliances and Investments.” There is no composition of matter patent that specifically claims ERBITUX*. ERBITUX* has been approved by the FDA and other health authorities for monotherapy, for which there is no use patent. The use of ERBITUX* in combination with an anti-neoplastic agent is approved by the FDA. Such combination use is claimed in a granted U.S. patent that expires in 2017. The inventorship of this use patent has been challenged by three researchers from Yeda Research and Development Company Ltd. (Yeda) who claim they should have been named as co-inventors. In September 2006, the court granted Yeda the complete ownership of that patent. ImClone has appealed the court’s decision. ImClone also filed a declaratory judgment action alleging that if the Yeda researchers remain sole inventors of the patent, the patent is invalid. There can be no assurance that there will not be any financial consequences to the Company as a result of the court’s decision. For more information about this litigation, see “Item 8. Financial Statements—Note 21. Legal Proceedings and Contingencies.” The European equivalent of this use patent has been opposed. For more information about biologics patents, see “—Intellectual Property and Product Exclusivity” below. The Company obtains its finished goods requirements for cetuximab from ImClone. ImClone manufactures bulk requirements for cetuximab in its own facilities and finishing is performed by a third party for ImClone. For a description of the Company’s supply agreement with ImClone, see “—Manufacturing and Quality Assurance” below. TAXOL ® (paclitaxel) Paclitaxel is used in the treatment of refractory ovarian cancer, first-line treatment of ovarian cancer in combination with cisplatin, second-line treatment of acquired immunodeficiency syndrome (AIDS) related Kaposi’s Sarcoma, treatment of metastatic breast cancer after failure of combination chemotherapy, adjuvant treatment of node positive breast cancer and in the treatment of non-small cell lung carcinoma with cisplatin. The active ingredient in TAXOL ® (paclitaxel) did not have patent protection in the U.S., the EU or Japan, but did have regulatory protection in the form of data exclusivity. Data exclusivity in the U.S. expired in 1997. An initial approval for a U.S. generic version of paclitaxel was granted in 2000, revoked by the FDA in 2001 and then reinstated in 2002. Data exclusivity in the EU expired in 2003. Data exclusivity for TAXOL ® (paclitaxel) in Japan expired in 2003. A patent claiming the approved dosing and administration schedule expires in Japan in 2013. A nullity action filed in 2004 in the Japanese Patent Office invalidated this patent and the Company is appealing that decision. Meanwhile, a generic paclitaxel was launched in Japan in 2006. Paclitaxel was developed under a collaborative research and development agreement with the U.S. Government. Under the agreement, the Company obtained rights to the U.S. Government’s TAXOL ® (paclitaxel) data. The Company manufactures its bulk requirements for paclitaxel and finishes the product in its own facilities. SPRYCEL Dasatinib is a multi-targeted tyrosine kinase inhibitor that was approved by the FDA in June 2006, for treatment of adults with chronic, accelerated, or myeloid or lymphoid blast phase chronic myeloid leukemia with resistance or intolerance to prior therapy including imatinib, and for the treatment of adults with Philadelphia chromosome-positive acute lymphoblastic leukemia with resistance or intolerance to prior therapy. Dasatinib was approved in the EU in November 2006. SPRYCEL was discovered and developed internally.
The basic composition of matter patent protecting dasatinib in the U.S. is due to expire in April 2020, and a patent term extension has been requested which, upon grant, would extend the patent term until June 2020. In several EU countries, the patent is pending and upon grant, would expire in April 2020 (excluding term extensions). An EU patent application was not filed in Cyprus, Estonia, Latvia, Lithuania, Malta, Netherlands, Slovakia or Slovenia. In the U.S., New Chemical Entity Protection expires in 2011, and Orphan Drug Exclusivity expires in 2013, which protects the product from generic applications for the currently approved orphan indications only.
The Company manufactures its bulk requirements for dasatinib and finishes the product in its own facilities.
Affective (Psychiatric)
Disorders
ABILIFY* Aripiprazole is an atypical antipsychotic agent for patients with schizophrenia, acute bipolar mania and Bipolar I Disorder. ABILIFY* was introduced in the U.S. in November 2002 and has been approved for marketing in the EU and Switzerland. Applications are pending in other countries. Aripiprazole is copromoted in the U.S. by the Company and Otsuka Pharmaceutical Co., Ltd. (Otsuka). The Company’s rights to commercialize aripiprazole in the U.S. terminate in 2012. Thereafter, Otsuka has the sole right to commercialize aripiprazole in the U.S. The Company also has the right to distribute and/or copromote ABILIFY* in several European countries (the UK, France, Germany, Italy and Spain) and to act as exclusive distributor for the product in the rest of the EU. The Company is the exclusive licensee for the product in the rest of the world, excluding Japan and certain other countries. In the U.S., Spain and Germany, the Company records alliance revenue for its contractual share of the net sales and records all expenses related to the product. Alliance revenue is recorded by the Company as net sales based upon 65% of Otsuka’s net sales in the copromotion countries. The Company recognizes this alliance revenue when ABILIFY* is shipped and all risks and rewards of ownership have transferred to Otsuka’s customers. In the UK, France and Italy, the Company currently records 100% of the net sales and related cost of products sold. In countries where the Company has an exclusive right to sell ABILIFY*, the Company also records 100% of the net sales and related cost of products sold. For more information about the Company’s arrangement with Otsuka, see “—Strategic Alliances” below and “Item 8. Financial Statements—Note 2. Alliances and Investments.” The basic U.S. composition of matter patent for ABILIFY* expires in 2014 (including the granted patent term extension). In 2004, Otsuka filed with the U.S. Patent and Trademark Office (USPTO) a Request for Reexamination of a U.S. composition of matter patent, U.S. Patent No. 5,006,528 (the ‘528 Patent), covering ABILIFY* (aripiprazole). The USPTO granted the request for reexamination. Otsuka determined that the original ‘528 Patent application mistakenly identified a prior art reference by the wrong patent number. In addition, Otsuka took the opportunity to bring other citations to the attention of the USPTO. The Reexamination allowed the USPTO to consider the patentability of the patent claims in light of the correctly identified patent reference and newly cited documents. In June 2006, the USPTO issued an Ex Parte Reexamination Certificate for the ‘528 Patent confirming the patentability of the original claims and approving additional new claims. Otsuka has received formal notices from each of Teva Pharmaceuticals USA, Barr Pharmaceuticals, Inc., Sandoz Inc., Synthon Laboratories, Inc., Sun Pharmaceuticals Ltd. and Apotex stating that each has filed an Abbreviated New Drug Application (aNDA) with the FDA for various dosage forms of aripiprazole, which the Company and Otsuka comarket in the U.S. as ABILIFY*. Each of the notices further states that its aNDA contains a p(IV) certification directed to ‘528 Patent, which covers aripiprazole and expires in October 2014. In addition, each of the notices purports to provide Otsuka with the respective p(IV) certification. These certifications contain various allegations regarding the enforceability of the ‘528 Patent and/or the validity and/or infringement of some or all of the claims therein Otsuka has sole rights to enforce the ‘528 Patent.
A composition of matter patent is in force in Germany, the UK, France, Italy, the Netherlands, Romania, Sweden, Switzerland, Spain and Denmark. The original expiration date of 2009 has been extended to 2014 by grant of a supplemental protection certificate in all of the above countries except Romania and Denmark. Data exclusivity in the EU expires in 2014. There is no composition of matter patent in Austria, Belgium, Finland, Greece, Ireland, Luxembourg, Portugal, Latvia, Hungary, Cyprus, Czech Republic, Slovenia, Slovakia, Poland, Malta, Lithuania, Bulgaria and Estonia.
The Company obtains its bulk requirements for aripiprazole from Otsuka. Both Otsuka and the Company finish the product in their own facilities.
EMSAM*
EMSAM* is a transdermal patch for the delivery of a monoamine oxidase inhibitor for the treatment of major depressive disorder in adults, which was approved by the FDA in February 2006 and made commercially available in the U.S. in April 2006. EMSAM* was developed by Somerset Pharmaceuticals, Inc. (Somerset), a joint venture between Mylan Laboratories, Inc. (Mylan) and Watson. The Company has obtained exclusive distribution rights to commercialize EMSAM* in the U.S. and Canada and markets EMSAM* in the U.S. As a new drug formulation, EMSAM* received three years of Hatch-Waxman data exclusivity, which expires in 2009 in the U.S. Two U.S. patents cover different aspects of the selegiline transdermal patch technology, issued to Mylan Technologies, Inc., an affiliate of Mylan, which expire in 2018. Data exclusivity covering the new dosage form expires in the U.S. in 2009.
In the third quarter of 2006, the Company recorded an impairment charge of $27 million, representing the unamortized balance of the regulatory approval milestone paid in the first quarter of 2006, resulting from the lower than expected sales of EMSAM*.
EMSAM* is manufactured on behalf of Somerset by Mylan Technologies, Inc. in the U.S. through a third party. Somerset obtains finished goods from Mylan Technologies, Inc. The finished product is supplied to the Company by Somerset.
Immunoscience ORENCIA
Abatacept, a biological product, is a fusion protein with novel immunosuppressive activity targeted initially at adult patients with moderate to severe rheumatoid arthritis, who have had an inadequate response to certain currently available treatments. Abatacept was approved by the FDA in December 2005 and made commercially available in the U.S. in February 2006.
ORENCIA was discovered and developed internally.
The Company has a series of patents covering abatacept and its method of use. The latest of the composition of matter patents expires in the U.S. in 2016. The Company has submitted its request for extending the composition of matter patent for time lost during the regulatory review period per the Hatch-Waxman Act. In January 2006, Repligen and the Regents of the University of Michigan filed a complaint against the Company in the U.S. District Court for the Eastern District of Texas, Marshall Division alleging that the Company’s then-anticipated sales of ORENCIA will infringe U.S. Patent No. 6,685,941. In August 2006, Zymogenetics Inc. filed a complaint against the Company in the U.S. District Court for the District of Delaware. The complaint alleges that the Company’s manufacture and sales of ORENCIA infringe U.S. Patents No. 5,843,725 and 6,018,026. For more information about these litigations, see “Item 8. Financial Statements—Note 21. Legal Proceedings and Contingencies.”
The Company obtains bulk abatacept from a third party and from its own manufacturing facilities. The Company finishes the product in its own facilities.
EFFERALGAN Efferalgan is a formulation of acetaminophen first introduced in 1972 and distributed as an effervescent tablet. It is indicated for the treatment of fever of mild to moderate pain for adults and children, and marketed exclusively in Europe. There is no composition of matter patent in Europe for Efferalgan.
In addition to the products discussed above, the Company’s Pharmaceuticals segment also includes the Company’s wholly owned UPSA Consumer Medicines business in Europe, which includes EFFERLAGAN, described above, as well as ASPIRINE UPSA, DAFALGAN and FERVEX in Europe and other overseas markets.
Strategic Alliances and Arrangements
The Company enters into strategic alliances and arrangements with third parties, which give the Company rights to develop, manufacture, market and/or sell pharmaceutical products, the rights to which are owned by such third parties. The Company also enters into strategic alliances and arrangements with third parties, which give such third parties the rights to develop, manufacture, market and/or sell pharmaceutical products, the rights to which are owned by the Company. These alliances and arrangements can take many forms, including licensing arrangements, codevelopment and comarketing agreements, copromotion arrangements and joint ventures. Such alliances and arrangements reduce the risk of incurring all research and development expenses that do not lead to revenue-generating products; however, the gross margins on alliance products are generally lower, sometimes substantially so, than the gross margins on the Company’s own products that are not partnered because profits from alliance products are shared with the Company’s alliance partners. While there can be no assurance that new alliances will be formed, the Company actively pursues such arrangements and views alliances as an important complement to its own discovery and development activities.
The Company’s most significant current alliances and arrangements for the Company’s products are those with Sanofi for PLAVIX* and AVAPRO*/AVALIDE*, Otsuka for ABILIFY*, ImClone for ERBITUX*, Gilead for ATRIPLA*, Somerset for EMSAM*, and Sankyo for PRAVACHOL. The Company’s most significant alliances and arrangements for investigational compounds under development are with Pierre Fabre Medicament S.A. (Pierre Fabre) for vinflunine, a novel investigational anti-cancer agent, the rights to which are owned by Pierre Fabre, with Medarex, Inc. (Medarex) for ipilimumab, a monoclonal antibody being investigated as an anticancer treatment, the rights to which are owned by Medarex and with AstraZeneca PLC (AstraZeneca) for saxagliptin, an oral compound for the potential treatment of diabetes, and dapagliflozin, a sodium-glucose cotransporter-2 (SGLT2) inhibitor. Each of these significant alliances and arrangements are discussed in more detail below. Additionally, the Company has licensing arrangements with Yale for ZERIT, with Novartis for REYATAZ, and with Helmholtz Zentrum für Infektionsforschung (Helmholtz Centre for Infection Research) for ixabepilone, a novel microtubule-stabilizing agent for multiple tumor types. In general, the Company’s strategic alliances and arrangements are for periods co-extensive with the periods of market exclusivity protection on a country-by-country basis. Based on the Company’s current expectations with respect to the expiration of market exclusivity in the Company’s significant markets, the licensing arrangements with Yale for ZERIT are expected to expire in 2008 in the U.S., between 2007-2011 in the EU and in 2008 in Japan; and with Novartis for REYATAZ are expected to expire in 2017 in the U.S., the EU and Japan. For further discussion of market exclusivity protection, including a chart showing net sales of key products together with the year in which basic exclusivity loss occurred or is expected to occur in the U.S., the EU and Japan, see “—Products” above and “—Intellectual Property and Product Exclusivity” below.
Each of the Company’s strategic alliances and arrangements with third parties who own the rights to manufacture, market and/or sell pharmaceutical products contain customary early termination provisions typically found in agreements of this kind and are generally based on the other party’s material breach or bankruptcy (voluntary or involuntary) and product safety concerns. The amount of notice required for early termination generally ranges from immediately upon notice to 90 days after receipt of notice. Termination immediately upon notice is generally available where the other party files a voluntary bankruptcy petition or if a material safety issue arises with a product such that the medical risk/benefit is incompatible with the welfare of patients to continue to develop or commercialize this product. Termination upon 30 to 90 days notice is generally available where an involuntary bankruptcy petition has been filed (and has not been dismissed) or a material breach by the other party has occurred (and not been cured). Early termination due to product safety concerns typically arises when a product is determined to create significant risk of harm to patients due to concerns regarding the product’s efficacy or level of toxicity. The Company’s strategic alliances and arrangements typically do not otherwise contain provisions that provide the other party the right to terminate the alliance on short notice. In general, where the other party to the Company’s strategic alliance and arrangement will continue to have exclusivity protection upon the expiration or termination of the alliance, the Company does not retain any rights to the product or to the other party’s intellectual property. The loss of rights to one or more products that are marketed and sold by the Company pursuant to strategic alliance arrangements with third parties in one or more countries or territories could be material to the Company’s results of operations and cash flows and, in the case of PLAVIX*, could be material to its financial condition and liquidity. As is customary in the pharmaceutical industry, the terms of the Company’s strategic alliances and arrangements generally are co-extensive with the exclusivity period, which as discussed above, may vary on a country-by-country basis.
As discussed below, the Company’s strategic alliance with Otsuka expires in November 2012 in the U.S. and Puerto Rico, which may be prior to expiration of market exclusivity protection for ABILIFY* which is expected to expire in 2014 in the U.S. (including a granted patent term extension).
Current Marketed Products
Sanofi The Company has agreements for the codevelopment and cocommercialization of AVAPRO*/AVALIDE*, an angiotensin II receptor antagonist indicated for the treatment of hypertension and diabetic nephropathy, which is copromoted in certain countries outside the U.S. under the tradename APROVEL*/COAPROVEL* and comarketed in certain countries outside the U.S. by the Company under the tradename KARVEA*/KARVEZIDE*; and PLAVIX*, a platelet aggregation inhibitor, which is copromoted in certain countries outside the U.S. under the tradename PLAVIX* and comarketed in certain countries outside the U.S. by the Company under the tradename ISCOVER*.
The worldwide alliance operates under the framework of two geographic regions, one covering certain European and Asian countries, defined as Territory A, and one covering the U.S., Puerto Rico, Canada, Australia and certain Latin American countries, defined as Territory B. The region covering the U.S., Puerto Rico, Canada, Australia, and certain Latin American countries is managed by two separate territory agreements, one for U.S. and Puerto Rico AVAPRO*/AVALIDE* only, and a second agreement for U.S. and Puerto Rico PLAVIX* only, plus Canada, Australia, Mexico, Brazil, Colombia and Argentina for both products. Within each of Territory A and B, a Territory Partnership exists to supply product to the countries within each territory and to manage certain central expenses such as marketing, research and development and royalties. Countries within Territory A and B are structured so that the Company’s local affiliate and Sanofi either comarket, whereby each affiliate operates independently and sells a competing brand, or copromote a single brand.
Within Territory A, the comarketing countries include Germany, Spain, Italy (irbesartan only), Greece and China. The Company sells ISCOVER* and KARVEA*/KARVEZIDE* and Sanofi sells PLAVIX* and APROVEL*/COAPROVEL* in these countries, except China, where the Company retains the right to, but does not currently comarket ISCOVER*. The Company and Sanofi copromote PLAVIX* and APROVEL*/COAPROVEL* in France, the UK, Belgium, Netherlands, Switzerland and Portugal. In addition, the Company and Sanofi copromote PLAVIX* in Austria, Italy, Ireland, Denmark, Finland, Norway, Sweden, Turkey, Taiwan, Korea, Singapore, Malaysia and Hong Kong, and APROVEL*/COAPROVEL* in certain French export countries. Sanofi acts as the operating partner for Territory A and owns a 50.1% majority financial controlling interest in this territory. The Company’s ownership interest in this territory is 49.9%. The Company accounts for the investment in partnership entities in this territory under the equity method and records its share of the results in equity in net income of affiliates in the consolidated statement of earnings. The Company’s share of net income from these partnership entities before taxes was $439 million in 2006, $345 million in 2005 and $269 million in 2004.
Within Territory B, the Company and Sanofi copromote PLAVIX* in the U.S., Canada and Puerto Rico and AVAPRO*/AVALIDE* in Canada. The other Territory B countries Australia, Mexico, Brazil, Colombia (clopidogrel bisulfate only) and Argentina are comarketing countries. In 2001, the Company and Sanofi modified their previous exclusive license to the Company for AVAPRO*/AVALIDE* in the U.S. and Puerto Rico to form a copromotion joint venture, as part of which the Company contributed the AVAPRO*/AVALIDE* intellectual property and Sanofi agreed to pay the Company $200 million in 2001 and $150 million in 2002. The Company accounts for these payments as a sale of an interest in a license and defers and amortizes the total amount of $350 million into other income over the expected useful life of the license, which is approximately 11 years from the date of the formation of the copromotion joint venture. The Company acts as the operating partner for Territory B and the U.S./Puerto Rico AVAPRO*/AVALIDE* Territory and owns a 50.1% majority controlling interest in these territories. As such, the Company consolidates all partnership results in these territories and records Sanofi’s share of the results as a minority interest expense, net of taxes, which was $428 million in 2006, $578 million in 2005 and $502 million in 2004. The Company recorded sales in Territory B, the U.S./Puerto Rico AVAPRO*/AVALIDE* Territory and in comarketing countries (Germany, Italy, Spain and Greece) of $4,355 million in 2006, $4,805 million in 2005 and $4,257 million in 2004.
In September 2006, the Company opted-out of its copromotion rights with Sanofi for APROVEL*/COAPROVEL* in Ireland, Sweden, Denmark, Finland and Norway. The Company has also opted out of its comarketing or copromotion arrangements in a number of other countries prior to 2006. The Company receives a royalty payment from Sanofi based on a percentage of Sanofi’s net sales in the opt-out countries.
The territory partnerships are governed by a series of committees with enumerated functions, powers and responsibilities. Each territory has two senior committees (Senior Committees) which have final decision making authority with respect to that territory as to the enumerated functions, powers and responsibilities within its jurisdiction.
The agreements with Sanofi expire on the later of (i) with respect to PLAVIX*, 2013 and, with respect to AVAPRO*/AVALIDE*, 2012 in the Americas and Australia and 2013 in Europe and Asia, and (ii) the expiration of all patents and other exclusivity rights in the applicable territory.
The alliance arrangements may be terminated by the Company or Sanofi, either in whole or in any affected country or Territory, depending on the circumstances, in the event of (i) voluntary or involuntary bankruptcy or insolvency, which in the case of involuntary bankruptcy continues for 60 days or an order or decree approving same continues unstayed and in effect for 30 days; (ii) a material breach of an obligation under a major alliance agreement that remains uncured for 30 days following notice of the breach except where commencement and diligent prosecution of cure has occurred within 30 days after notice; (iii) deadlocks of one of the Senior Committees which render the continued commercialization of the product impossible in a given country or Territory or, in the case of AVAPRO*/AVALIDE* in the U.S., with respect to advertising and promotion spending levels or the amount of sales force commitment; (iv) an increase in the combined cost of goods and royalty which exceeds a specified percentage of the net selling price of the product; or (v) a good faith determination by the terminating party that commercialization of a product should be terminated for reasons of patient safety.
In the case of each of these termination rights, the agreements include provisions for the termination of the relevant alliance with respect to the applicable product in the applicable country or territory or, in the case of a termination due to bankruptcy or insolvency or material breach, both products in the applicable territory. Each of these termination procedures is slightly different; however, in all events, the Company could lose all rights to either or both products, as applicable, in the relevant country or territory even in the case of a bankruptcy or insolvency or material breach where the Company is not the defaulting party.
For further discussion of the Company’s strategic alliance with Sanofi, see “Item 8. Financial Statements—Note 2. Alliances and Investments.”
Otsuka In 1999, the Company entered into a worldwide commercialization agreement with Otsuka, to codevelop and copromote ABILIFY* for the treatment of schizophrenia and related psychiatric disorders, except in Japan, China, Taiwan, North Korea, South Korea, the Philippines, Thailand, Indonesia, Pakistan and Egypt. The Company began copromoting the product with Otsuka in the U.S. and Puerto Rico in November 2002. In June 2004, the Company received marketing approval from the European Commission. The product is currently copromoted with Otsuka in the UK, Germany, France and Spain. In the U.S., Germany and Spain, where the product is sold by an Otsuka affiliate as distributor, the Company records alliance revenue for its 65% contractual share of Otsuka’s net sales. The Company recognizes this alliance revenue when ABILIFY* is shipped and all risks and rewards of ownership have transferred to Otsuka’s customers. In the UK, France and Italy where the Company is presently the exclusive distributor for the product, the Company records 100% of the net sales and related cost of products sold.
The Company also has an exclusive right to sell ABILIFY* in a number of other countries in Europe, the Americas and Asia. In these countries the Company records 100% of the net sales and related cost of products sold. Under the terms of the agreement, the Company purchases the product from Otsuka and performs finish manufacturing for sale by the Company. The agreement expires in November 2012 in the U.S. and Puerto Rico. For the EU, the agreement expires in June 2014, or on the later of the tenth anniversary of the first commercial sale in such country or expiration of the applicable patent in such country. Early termination is available based on the other party’s voluntary or involuntary bankruptcy, failure to make minimum payments, failure to commence the first commercial sale within three months after receipt of all necessary approvals and material breach. The amount of notice required for early termination of the strategic alliance is immediately upon notice (i) in the case of voluntary bankruptcy, (ii) where minimum payments are not made to Otsuka, or (iii) if first commercial sale has not occurred within three months after receipt of all necessary approvals, 30 days where a material breach has occurred (and not been cured or commencement of cure has not occurred within 90 days after notice of such material breach) and 90 days in the case where an involuntary bankruptcy petition has been filed (and not been dismissed). In addition, termination is available to Otsuka upon 30 days notice in the event that the Company were to challenge Otsuka’s patent rights or, on a market-by-market basis, the Company were to market a product in direct competition with ABILIFY*. Upon termination or expiration of the alliance, the Company does not retain any rights to ABILIFY*.
The Company recorded total revenue for ABILIFY* of $1,282 million in 2006, $912 million in 2005 and $593 million in 2004. Total milestone payments made to Otsuka from 1999 through 2006 were $217 million, of which $157 million was expensed as acquired in-process research and development in 1999. The remaining $60 million was capitalized in other intangible assets and is amortized into cost of products sold over the remaining life of the agreement in the U.S., ranging from 8 to 11 years. The Company amortized in cost of products sold $6 million in each of 2006 and 2005, and $5 million in 2004. The unamortized capitalized payment balance was $35 million and $41 million as of December 31, 2006 and 2005, respectively.
For further discussion of the Company’s strategic alliance with Otsuka, see “Item 8. Financial Statements—Note 2. Alliances and Investments.”
ImClone In 2001, the Company purchased 14.4 million shares of ImClone for $70 per share, or $1,007 million, which represented approximately 19.9% of the ImClone shares outstanding just prior to the Company’s commencement of a public tender offer for those ImClone shares. ImClone is a biopharmaceutical company focused on developing targeted cancer treatments, which include growth factor blockers, cancer vaccines and anti-angiogenesis therapeutics. The equity investment in ImClone is part of a strategic agreement between the Company and ImClone that also included an arrangement expiring in September 2018 to codevelop and copromote the cancer drug, ERBITUX*, for a series of payments originally totaling $1 billion. The Company paid ImClone a milestone payment of $200 million in 2001, of which $160 million was expensed as acquired in-process research and development, and $40 million was recorded as an additional equity investment to eliminate the income statement effect of the portion of the milestone payment for which the Company has an economic claim through its ownership interest in ImClone. In 2002, the agreement with ImClone was revised to reduce the total payments to $900 million from $1 billion. In accordance with the agreement, the Company paid ImClone $140 million in 2002, $60 million in 2003, and $250 million in 2004 and $250 million in the first quarter of 2006. The 2004 payment was made upon the approval by the FDA of the BLA for ERBITUX* for use in combination with irinotecan in the treatment of patients with EGFR - expressing, metastatic colorectal cancer who are refractory to irinotecan - based chemotherapy and for use as a single agent in the treatment of patients with EGFR - expressing, metastatic colorectal cancer who are intolerant to irinotecan - based chemotherapy. In 2004, the FDA also approved ImClone’s Chemistry, Manufacturing and Controls supplemental Biologics License Application (sBLA) for licensure of its BB36 manufacturing facility. The 2006 milestone payment was made upon FDA approval of ERBITUX* for use in the treatment of squamous cell carcinoma of the head and neck. The Company also has codevelopment and copromotion rights in Canada and Japan to the extent the product is commercialized in such countries. In Japan, the Company and ImClone will share distribution rights to ERBITUX* with Merck KGaA. In February 2007, the Company and ImClone submitted an application with the Japanese PMDA for the use of ERBITUX* in treating patients with advanced colorectal cancer. Under the agreement, ImClone receives a distribution fee based on a flat rate of 39% of product revenues in North America. The Company purchases all of its commercial requirements for bulk ERBITUX* from ImClone at a price equal to ImClone’s manufacturing cost plus 10%.
The Company accounts for the $500 million total approval milestones paid in 2004 and 2006 as license acquisitions and amortizes the payments into cost of products sold over the term or remaining term of the agreement that ends in 2018. The Company amortized into cost of products sold $34 million, $17 million and $14 million for 2006, 2005 and 2004, respectively. The unamortized capitalized payment balance is recorded in intangible assets, net in the consolidated balance sheet and was $435 million and $219 million as of December 31, 2006 and 2005, respectively.
The Company determines its equity share in ImClone’s net income or loss by eliminating from ImClone’s results the milestone revenue ImClone recognized for the pre - approval milestone payments that were recorded by the Company as additional equity investment. The Company recorded net income of $43 million in 2006, net loss of $5 million in 2005 and net income of $9 million in 2004 for its share of ImClone’s net income/losses. The Company records its share of the results in equity in net income of affiliates in the consolidated statement of earnings. The Company recorded net sales for ERBITUX* of $652 million in 2006, $413 million in 2005 and $261 million in 2004.
The Company’s recorded investment and the market value of its holdings in ImClone common stock was $109 million and approximately $385 million as of December 31, 2006, respectively, and $66 million and approximately $493 million as of December 31, 2005, respectively. The Company holds 14.4 million shares of ImClone stock, representing approximately 17% of ImClone’s shares outstanding at December 31, 2006 and 2005. On a per share basis, the carrying value of the ImClone investment and the closing market price of the ImClone shares as of December 31, 2006 were $7.59 and $26.76, respectively, compared to $4.55 and $34.24, respectively, as of December 31, 2005.
Early termination is available based on material breach and is effective 60 days after notice of the material breach (and such material breach has not been cured or commencement of cure has not occurred), or upon six months notice from the Company if there exists a significant concern regarding a regulatory or patient safety issue that would seriously impact the long-term viability of the product. Upon termination or expiration of the alliance, the Company does not retain any rights to ERBITUX*.
During 2004 and through May 2005, McKesson Corporation (McKesson), one of the Company’s wholesalers, provided warehousing, packing and shipping services for ERBITUX*. McKesson held ERBITUX* inventory on consignment and, under the Company’s revenue recognition policy, the Company recognized revenue when such inventory was shipped by McKesson to the end-users. McKesson also held inventories of ERBITUX* for its own account. Upon the divestiture of Oncology Therapeutics Network (OTN) in May 2005, the Company discontinued the consignment arrangement with McKesson and McKesson no longer held inventories for its own account. Thereafter, the Company sold ERBITUX* to intermediaries (such as wholesalers and specialty oncology distributors) and shipped ERBITUX* directly to the end-users of the product who are the customers of those intermediaries. Beginning in the third quarter of 2006, the Company expanded its distribution model to include one of the Company’s wholesalers who then held ERBITUX* inventory. The Company recognizes revenue upon such shipment consistent with its revenue recognition policy.
For further discussion of the Company’s strategic alliance with ImClone, see “Item 8. Financial Statements—Note 2. Alliances and Investments.”
Sankyo The Company has licensed a patent covering pravastatin, marketed by the Company in the U.S. as PRAVACHOL, from Sankyo, with key provisions of the agreement expiring as exclusivity expires on a market-by-market basis. Exclusivity has expired in every market except for Italy where exclusivity will expire in January 2008. Early termination is available based on the other party’s voluntary or involuntary bankruptcy and material breach. The amount of notice required for early termination of the strategic alliance is immediately upon notice in the case of either voluntary or involuntary bankruptcy and 90 days after notice in the case where a material breach has occurred (and not been cured or commencement of cure has not occurred). Upon termination or expiration of the alliance, the Company does not retain any patent or other exclusivity rights in relation to pravastatin.
Gilead In 2004, the Company and Gilead entered into a joint venture to develop and commercialize a fixed-dose combination of the Company’s SUSTIVA and Gilead’s TRUVADA* (emtricitabine and tenofovir disoproxil fumarate) in the U.S. In July 2006, the FDA approved this treatment, ATRIPLA*, which is the first complete Highly Active Antiretroviral Therapy treatment product for HIV available in the U.S. in a fixed-dose combination taken once daily. Fixed-dose combinations contain multiple medicines formulated together and may help simplify HIV therapy or patients and providers. Guidelines issued by the U.S. Department of Health and Human Services list the combination of emtricitabine, tenofovir disoproxil fumarate and efavirenz as one of the preferred non-NNRTI-based treatments for use in appropriate patients that have never taken anti-HIV medicines before.
The Company and Gilead share responsibility for commercializing ATRIPLA* in the U.S., and both provide funding and field-based sales representatives in support of promotional efforts for ATRIPLA*. Gilead records 100% of ATRIPLA* revenues and consolidates the results of the joint venture in its operating results. The Company records revenue for the bulk efavirenz component of ATRIPLA* upon sales of that product by the Gilead joint venture to third party customers. The Company’s revenue for the efavirenz component is determined by applying a percentage to ATRIPLA* revenue, which approximates revenue for the SUSTIVA brand.
In September 2006, the companies amended their agreements to commercialize ATRIPLA* in Canada, subject to the approval of the product by Health Canada. As in the U.S., the companies will share responsibility for commercializing ATRIPLA* in Canada, with Gilead recording 100% of ATRIPLA* revenues and the Company recording revenue for the bulk efavirenz component of ATRIPLA*.
The joint venture between the Company and Gilead will continue until terminated by mutual agreement of the parties or otherwise as described below. In the event of a material breach by one party, the non-breaching party may terminate the joint venture only if both parties agree that it is both desirable and practicable to withdraw the combination product from the markets where it is commercialized. At such time as one or more generic versions of SUSTIVA appear on the market in the U.S., Gilead will have the right to terminate the joint venture and thereby acquire all the rights to the combination product, both in the U.S. and Canada; however, the Company will continue for three years to receive a percentage of the net sales based on the contribution of bulk efavirenz to ATRIPLA*, and otherwise retains all rights to SUSTIVA.
For further discussion of the Company’s strategic alliance with Gilead, see “Item 8. Financial Statements—Note 2. Alliances and Investments.”
Somerset In 2004, the Company and Somerset, a joint venture between Mylan and Watson, entered into an agreement for the commercialization, supply and distribution of Somerset’s EMSAM* (selegiline transdermal system), a monoamine oxidase inhibitor administered as a transdermal patch for the treatment of patients with major depressive disorder. Somerset received approval from the FDA for EMSAM* in February 2006 for use without dietary restriction at the recommended dose of 6mg/24 hours. EMSAM* is the first transdermal treatment for major depressive disorder.
Under the terms of the agreement, the Company received exclusive distribution rights to commercialize EMSAM*, when approved, in the U.S. and Canada. The Company made and expensed a $5 million upfront payment in December 2004 and made a further $30 million payment following regulatory approval in the U.S. in the first quarter of 2006, which was capitalized and was being amortized into cost of products sold over the remaining term of the agreement. In the third quarter of 2006, the Company recorded an impairment charge for the unamortized balance of $27 million, resulting from the lower than expected sales of EMSAM*. The charge was recorded in cost of products sold in the Company’s consolidated statement of earnings. In addition to these payments, Somerset may receive milestone payments based on achievement of certain sales levels, as well as reimbursement of certain development costs incurred over the term of the agreement. Somerset will supply products to the Company and receive royalties on the Company’s sales of EMSAM*.
Unless earlier terminated or extended in accordance with its terms, the agreement will terminate on the fifth anniversary of the date of the first commercial sale of EMSAM*. The agreement may be earlier terminated by either party in the event of a material breach of the agreement by or the bankruptcy of the other party. In addition to the general rights of termination, the Company has the right to terminate the agreement any time following the launch of a generic product, the occurrence of a material safety issue relating to EMSAM*, or after the date which is 30 months after the date of first commercial sale of EMSAM* upon 180 days prior notice. Somerset has the right to terminate the agreement any time following the occurrence of a material safety issue relating to EMSAM* or the failure of the Company to meet specified detailing requirements. Upon termination, Somerset retains all product rights to EMSAM*.
Investigational Compounds Under Development
Medarex In 2004, the Company entered into a worldwide collaboration and share purchase agreement with Medarex to codevelop and copromote ipilimumab, a fully human antibody currently in Phase III development for the treatment of metastatic melanoma. The agreement became effective in January 2005, after the companies received certain governmental clearances and approvals, and the receipt of consent from the U.S. Public Health Service of the sublicense to the Company of Medarex’s rights to MDX–1379 (gp100), a vaccine that is being developed in combination with ipilimumab. The FDA has granted Fast Track status to ipilimumab in combination with MDX-1379 for treatment of patients with late stage unresectable metastatic melanoma who have failed or are intolerant to first line therapy.
In January 2005, under the terms of the agreement, the Company made a cash payment of $25 million to Medarex which was expensed as research and development, and an additional $25 million equity investment in Medarex. Further milestone payments are expected to be made upon the successful achievement of various regulatory and sales related stages. The Company and Medarex will also share in future development and commercialization costs. Medarex could receive up to $205 million if all regulatory milestones are met, and up to $275 million in sales-related milestones. Medarex will have an option to copromote and receive up to 45% of the profits with the Company in the U.S. The Company will receive an exclusive license outside of the U.S. and pay royalties to Medarex.
The agreement with Medarex does not expire unless and until one of the following events occurs: (1) the Company voluntarily terminates the agreement in its entirety or on a country-by-country basis by providing Medarex with six months prior written notice;
(2) the Company voluntarily terminates the agreement on a product-by-product basis (but only if a second product is then in GLP toxicology studies or later) or a country-by-country basis by providing Medarex with six months prior written notice depending on the circumstances; (3) the Company terminates Medarex’s co-promotion option and rights in the U.S. on sixty days written notice after the end of the second calendar year in the event Medarex provides less than sixty percent of certain performance obligations in any two out of three consecutive calendar years (such termination right to be exercised only with respect to those indications as to which Medarex failed to meet such performance obligation). Upon any such termination by the Company via any of the scenarios in (1) – (3) above, Medarex will no longer have a right to share in the profits and losses of the product for the terminated indication(s) and, instead the Company will pay Medarex royalties on net sales of the product; or (4) Medarex terminates the agreement with respect to all products on sixty days written notice if the Company provides less than sixty percent of certain performance obligations in any two out of three consecutive calendar years. Generally, upon termination in (4), the Company will assign all rights to the product to Medarex and receive a royalty thereafter on intellectual property licensed by the Company to Medarex. Medarex may also elect not to copromote a product for one or more indications in the U.S., in which event it will receive a royalty on sales of the product for such indication. If there is a material breach as to manufacturing by a party, then the other party shall be limited to termination of such party’s manufacturing rights only.
Pierre Fabre In 2004, the Company and Pierre Fabre entered into three related agreements (a patent and know-how license agreement, a trademark license agreement and a supply agreement) to develop and commercialize vinflunine, a novel investigational anti-cancer agent. Vinflunine is in Phase III clinical trials for metastatic bladder cancer and is in Phase III trials for lung and breast cancer. Under the terms of the agreement, the Company receives an exclusive license to vinflunine in the U.S., Canada, Japan, Korea and select Southeast Asian markets. Pierre Fabre will be responsible for the development and marketing of vinflunine in all other countries, including those of Europe, and will supply the Company’s requirements for the product. Under the terms of the agreement, the Company made and expensed upfront and milestone payments of $10 million in 2006, $10 million in 2005, and $35 million in 2004, with the potential for an additional $155 million in milestone payments over time.
The patent and know-how license agreement, under which the Company licensed the right to market vinflunine, expires on a country-by-country and product form-by-product form basis, on the date that is the latter of: (i) the expiration of applicable patent or data exclusivity for a given product form in a country, or (ii) the tenth anniversary of commercial sale of such product form in such country, at which time the Company may exercise a royalty-free, nonexclusive right to market the product. The Agreement may be terminated sooner, as follows: (1) a party may terminate the agreement for voluntary or involuntary bankruptcy or insolvency of the other party that is not dismissed within a certain period of time; (2) a party may terminate for material breach by the other that is not cured with a specified period. Such termination shall relate only to the countries and product forms relating to the material breach, unless the product form is the IV form (in which case all forms can be terminated) and unless the breach pertains to the U.S. (in which case all countries can be terminated); (3) by Pierre Fabre, if Pierre Fabre terminates the supply agreement for material breach by the Company; (4) by either party, upon 60 days notice, if justifiable and demonstrable safety, efficacy, technical or regulatory reasons preclude development of the IV form for any indication, as determined by the Joint Steering Committee; (5) by Pierre Fabre, if (a) the Company fails to file or process a registrational filing required to be filed under the Agreement without justifiable and demonstrable safety, efficacy, technical or regulatory reasons; (b) if the Company does not launch the IV product form in a country within a time period required by the agreement (generally, ninety days) following receipt of regulatory (and if applicable, pricing) approval; (c) if the Company should challenge or contest Pierre Fabre Patent Rights; (d) if the Company makes an improper contract assignment; or (e) if the Company fails to meet certain minimum sales levels under the agreement; or (6) by the Company, without cause, on a country-by-country basis, by giving Pierre Fabre at least (i) ninety days’ prior written notice, if such notice is given prior to the regulatory approval of the first approved indication in the U.S., or (ii) one hundred eighty days’ prior written notice after regulatory approval of a first approved indication in the U.S. Generally, for any termination made by Pierre Fabre or for termination by the Company without cause, the Company shall retain no rights to the product and all rights shall revert to Pierre Fabre.
AstraZeneca In January 2007, the Company entered into two worldwide (except for Japan) codevelopment and cocommercialization agreements with AstraZeneca, one for the codevelopment and cocommercialization of saxagliptin, a DPP-IV inhibitor in Phase III clinical trials (Saxagliptin Agreement), and one for the codevelopment and cocommercialization of dapagliflozin, a SGLT2 inhibitor in Phase IIB clinical trials (SGLT2 Agreement). Both compounds are being studied for the treatment of diabetes and were discovered by the Company. Under the terms of the agreements, the Company received upfront payments of $100 million in January 2007, which will be capitalized and amortized over the life of the agreement into other income. Milestone payments are expected to be received by the Company upon the successful achievement of various regulatory and sales related stages. Under each agreement, the Company and AstraZeneca will also share in future development and commercialization costs. Under the Saxagliptin Agreement, the Company could receive up to $300 million if all regulatory milestones are met and up to an additional $300 million if all sales-based milestones are met. Under the SGLT2 Agreement, the company could receive up to $350 million if all regulatory milestones are met and up to an additional $300 million if all sales-based milestones are met. The majority of development costs under the initial development plans through 2009 will be paid by AstraZeneca and any additional development costs will generally be shared equally. Under each agreement, the two companies will share commercialization expenses and profits/losses equally on a global basis, excluding Japan, and the Company will manufacture both products and, with certain limited exceptions, record net sales.
Under each agreement additional compounds in each of the DPP-IV and SGLT2 classes that may be developed by either party must be proposed for inclusion in the collaboration at pre-designated trigger points (end of Phase I, II and III) or if the lead compound fails and either party is then actively conducting clinical development of any other compound in the class. If accepted by the other party for inclusion into the collaboration, an upfront payment and regulatory and sales-based milestones may be paid by the non-developing party on such additional compound, the amount and timing of which will depend on the nature of the triggering event and whether the additional compound is replacing or being developed in addition to the lead compound. In such event, if AstraZeneca is the party that developed the compound and controls its intellectual property rights, AstraZeneca will assume the rights and obligations of the Company under the collaboration with respect to such compound, and the Company will have the rights of AstraZeneca with respect to such compound, with certain limited exceptions. If the Company is the party that developed the compound and controls its intellectual property, it will have the same rights as it has with respect to the initial two compounds.
Each agreement expires on a product-by-product and country-country basis upon the latest of (1) the expiration of the last-to-expire patent controlled by the parties covering a product in a country, (2) the expiration of any other statutory exclusivity for a product in a country, and (3) permanent cessation of the sale of a product in a country. The agreement may be sooner terminated, in its entirety or on a product-by-product and region-by-region or country-by-country basis, as the case may be, by mutual written agreement or by a party in accordance with the terms of the agreement as follows: (i) by AstraZeneca without cause, on a region-by-region and product-by-product basis, on six months notice given not sooner than the finalization of the clinical database (database lock) of the last to be completed pivotal Phase III clinical trial and not later than the date that the Company may elect to opt out of all or some of its sale force efforts obligations in the U.S.; (ii) by AstraZeneca without cause, on a region-by-region and product-by-product basis, on twelve months notice, which termination may not be effective earlier than two years after launch of the product in such region; (iii) by either party, with respect to the agreement in its entirety, upon written notice given following permanent cessation of development of a product so long as there are no other products then being developed or commercialized; (iv) by a party, upon 180 days notice, if the other party materially breaches the agreement or engages in gross negligence, willful misconduct or a willful misrepresentation that fundamentally frustrates the transactions contemplated by the agreement; (v) by a party in the event of insolvency or bankruptcy of the other party; (vi) by a party for a given product or country if the other party fails to provide at least 60% of its required sales force effort in any two out of three consecutive years; (vii) by a party if the other party becomes incapable for 12 consecutive months of performing any of its material obligations because of Force Majeure; (viii) by either party, on a product-by-product basis, in the event of material safety issues; or (ix) by either party if development and commercialization of a given compound is enjoined. Under the SGLT2 Agreement, AstraZeneca may also exercise a termination right if the lead compound does not meet specified end of phase II success criteria.
In the event of termination by AstraZeneca (or by the Company in the event the development and commercialization of the collaboration compounds are enjoined), each party must offer into the collaboration any compounds for which it is then actively conducting clinical development. If accepted by the other party for inclusion into the collaboration, an upfront payment and regulatory and sales-based milestones may be paid by the non-developing party on such additional compound. In such event, if AstraZeneca is the party that developed the compound and controls its intellectual property rights, AstraZeneca will assume the rights and obligations of the Company under the collaboration with respect to such compound, and the Company will have the rights of AstraZeneca with respect to such compound, with certain limited exceptions. If there are no additional compounds to be offered or an additional compound that is offered is not accepted into the collaboration, the agreement will terminate. In the event of a change in control of either party, whether as a result of a merger, consolidation, sale of substantially all its assets or similar transaction, the agreements would be assigned to or assumed by the successor company. If the agreement is terminated by AstraZeneca as described in clause (iv), (v) or (vi) of the preceding paragraph prior to a change of control of the Company, then the Company will retain all rights to the product and will pay AstraZeneca a royalty on net sales thereafter. If the agreement is terminated by AstraZeneca as described in clause (iv), (v) or (vi) of the preceding paragraph following a change of control of the Company, then AstraZeneca may elect to receive a royalty on net sales thereafter or elect to have the product rights assigned to it and pay the Company a royalty on net sales thereafter. If the agreement is terminated by the Company as described in clause (iv), (v) or (vi) of the preceding paragraph, then the Company will retain all rights to the product and will pay AstraZeneca a royalty on net sales thereafter.
For further information on alliances relating to products under development and drug discovery, see “—Research and Development” below.
HEALTH CARE GROUP
The Health Care Group consists of two segments – Nutritionals and Other Health Care. The Other Health Care segments currently consists of ConvaTec and Medical Imaging and, prior to 2006, also included Consumer Medicines. Health Care Group sales accounted for 23% of the Company’s sales in 2006, 21% of the Company’s sales in 2005, and 20% of the Company’s sales in 2004. U.S. Health Care Group sales accounted for 49%, 52% and 54% of total Health Care Group sales in 2006, 2005 and 2004, respectively, while international Health Care Group sales accounted for 51%, 48% and 46% of total Health Care Group sales in 2006, 2005 and 2004, respectively.
Nutritionals Segment
The Nutritionals segment, through Mead Johnson, manufactures, markets, distributes and sells infant formulas and other nutritional products, including the entire line of ENFAMIL products and the ENFAMIL LIPIL product is the first infant formula in the U.S. to contain the nutrients docosahexaenoic acid (DHA) and arachidonic acid (ARA). Also naturally found in breast milk, DHA and ARA are believed to support infant brain and eye development. The Company obtains these nutrients from a sole provider pursuant to a non-exclusive worldwide license and supply agreement. The supply agreement, in force until at least 2011, provides no firm guaranty of supply and pricing is subject to change pursuant to a pricing formula. The license expires beginning in 2024 on a country-by-country basis 25 years after the Company commenced sales in a country.
The Company’s Nutritionals products are generally sold by wholesalers and retailers and are promoted primarily to health care professionals. The Company also promotes Nutritionals products directly to consumers worldwide through advertising. The Company manufactures these products in the U.S. and in five foreign countries. Nutritionals sales accounted for 13% of the Company’s sales in 2006, 12% of the Company’s sales in 2005 and 10% of the Company’s sales in 2004. U.S. Nutritionals sales accounted for 46%, 49% and 50% of total Nutritionals sales in 2006, 2005 and 2004, respectively, while international Nutritionals sales accounted for 54%, 51% and 50% of total Nutritionals sales in 2006, 2005 and 2004, respectively. Approximately one-half of U.S. gross sales of infant formula are subject to rebates issued under the Women, Infants and Children (WIC) program. Sales subject to WIC rebates have much lower margins than those of non-WIC program sales.
Net sales of selected products and product categories in the Nutritionals segment were as follows:
| Dollars in Millions |
2006 | 2005 | 2004 | ||||||
| Infant Formulas |
$ | 1,637 | $ | 1,576 | $ | 1,405 | |||
| ENFAMIL |
1,007 | 992 | 859 | ||||||
| Toddler/Children’s Nutritionals |
606 | 529 | 468 | ||||||
| ENFAGROW |
262 | 206 | 179 |
In February 2004, the Company completed the divestiture of its Adult Nutritional business to Novartis for $386 million, including a $20 million payment contingent on the achievement of contractual requirements, which were satisfied, and a $22 million upfront payment for a ten-year supply agreement.
Other Health Care Segment
The Other Health Care segment currently consists of ConvaTec and Medical Imaging and, prior to 2006, also included Consumer Medicines. Other Health Care sales accounted for 10%, 9% and 10% of the Company’s sales in 2006, 2005 and 2004, respectively. U.S. Other Health Care sales accounted for 53%, 56% and 58% of total Other Health Care sales in 2006, 2005 and 2004, respectively, while international Other Health Care sales accounted for 47%, 44% and 42% of total Other Health Care sales in 2006, 2005 and 2004, respectively.
ConvaTec
ConvaTec manufactures, distributes and sells ostomy and modern wound and skin care products. Principal brands of ConvaTec include NATURA, SUR-FIT, ESTEEM, AQUACEL, DUODERM and FLEXI-SEAL. These products are marketed worldwide, primarily to hospitals, the medical profession and medical suppliers. The Company mainly relies on an internal sales force, and sales are made through various distributors around the world. The Company manufactures these products in the U.S., the UK and the Dominican Republic.
ConvaTec sales accounted for approximately 6% of the Company’s sales in 2006, and 5% of the Company’s sales in 2005 and 2004. U.S. ConvaTec sales accounted for 33%, 31% and 32% of total ConvaTec sales in 2006, 2005 and 2004, respectively, while international ConvaTec sales accounted for 67%, 69% and 68% of total ConvaTec sales in 2006, 2005 and 2004, respectively.
Medical Imaging
Medical Imaging manufactures, distributes and sells medical imaging products. Principal brands include CARDIOLITE (Kit for the Preparation of Technetium Tc99m Sestamibi for Injection), a cardiac perfusion imaging agent and DEFINITY (Vial for Perflutren Lipid Microsphere Injectable Suspension), an ultrasound contrast agent. These products are manufactured by the Company in Puerto Rico and by a third party in the U.S., and are marketed through an internal sales force in the U.S. CARDIOLITE and other radiopharmaceutical products are primarily sold to and distributed via third-party radiopharmacies to end-customers (e.g., healthcare providers) in the U.S. DEFINITY is distributed directly to end-user customers. DEFINITY (called LUMINITY in the EU) has been approved in the EU. In the U.S., the Company is currently one of two suppliers of technetium Tc99m generators, a widely used
radioisotope required to compound unit-dose CARDIOLITE injections. The Company relies on a single source for its supply of a key ingredient, molybdenum-99. In connection with the Company’s international business, Medical Imaging owns certain radiopharmacies outside the U.S. CARDIOLITE is covered by a series of patents that claim its components. The patent coverage differs somewhat on a country-by-country basis. In the U.S., CARDIOLITE patent exclusivity expires in January 2008. CARDIOLITE will be entitled to a six-month extension of exclusivity (until July 2008) if the Company submits to the FDA by January 2008 certain pediatric clinical data in accordance with a Written Request issued by the FDA. There is no guarantee that the Company will be able to fulfill all of the requirements of the Written Request. In the EU, the patent expiry timeline spans December 2006 into 2008. In Japan, the patent expiry timeline spans August 2006 into 2008.
Medical Imaging sales accounted for approximately 4% of the Company’s sales in 2006 and approximately 3% of the Company’s sales in 2005 and 2004. U.S. Medical Imaging sales accounted for 85% of total Medical Imaging sales in 2006, 2005 and 2004, while international Medical Imaging sales accounted for 15% of total Medical Imaging sales in 2006, 2005 and 2004. The Company maintains license and supply agreements with radiopharmacies, including Cardinal Health Nuclear Pharmacy Services and other independent radiopharmacies, which provide the right to sell CARDIOLITE in the U.S.
Sources and Availability of Raw Materials
In general, the Company purchases its raw materials, medical devices and supplies required for the production of the Company’s products in the open market. For some products, the Company purchases its raw materials, medical devices and supplies from a single source, which in certain circumstances is specified in the Company’s product registrations thereby requiring the Company to obtain such raw materials and supplies from that particular source. The Company attempts, if possible, to mitigate raw material supply risks to the Company, through inventory management and alternative sourcing strategies. For further discussion of sourcing, see “—Manufacturing and Quality Assurance” below and discussions of particular products.
Manufacturing and Quality Assurance
The Company seeks to design and operate its manufacturing facilities, manage its third-party manufacturers, and maintain inventory in a way that will allow it to meet all expected product demand while maintaining flexibility to reallocate manufacturing capacity, to improve efficiency and respond to changes in supply and demand. Pharmaceutical production processes are complex, highly regulated and vary widely from product to product. Shifting or adding manufacturing capacity can be a very lengthy process requiring significant capital expenditures and regulatory approvals. For further discussion of the regulatory impact on the Company’s manufacturing, see “—Government Regulation and Price Constraints” below.
Pharmaceutical manufacturing facilities require significant ongoing capital investment for both maintenance and compliance with increasing regulatory requirements. In addition, as the Company adds to its product line and realigns its focus over the next several years, the Company expects to modify its existing manufacturing networks and devote substantial resources in excess of historical levels to meet heightened processing standards that may be required for sterile or newly introduced products, including biologics. Biologics manufacturing involves more complex processes than those of traditional pharmaceutical operations. Although the Company does have the capacity to manufacture biologics for clinical trials and commercial launch, its capacity to manufacture larger commercial volumes is limited. As biologics become more important to the Company’s product portfolio, the Company may continue to make arrangements with third-party manufacturers, and in addition expects to make substantial investments to increase its internal capacity to produce biologics on a commercial scale. During 2006, the Board of Directors approved capital expenditures of approximately $750 million for a bulk biologics manufacturing facility in the U.S. In February 2007, the Company completed the land purchase of an 89 acre site to locate its large scale multi-product bulk biologics manufacturing facility in Devens, Massachusetts. Construction of this facility is expected to begin in early 2007, and the facility is projected to be operationally complete by 2009. The Company expects to submit the site for regulatory approval in 2010. Commercial production of biologic compounds is anticipated to begin by 2011.
The Company relies on third parties to manufacture, or to supply it with active ingredients necessary for it to manufacture certain products, including PLAVIX*, ABILIFY*, ERBITUX*, the SUSTIVA Franchise, ORENCIA*, PRAVACHOL, COUMADIN and TAXOL ® (paclitaxel). To maintain a stable supply of these products, the Company takes a variety of actions designed to provide that there is a reasonable level of these ingredients held by the third-party supplier, the Company or both, so that the Company’s manufacturing operations are not interrupted. As an additional protection, in some cases, the Company takes steps to maintain an approved back-up source where available.
The Company received approval from the FDA to manufacture ORENCIA at the Company’s Syracuse, NY manufacturing facility. Given the Company’s current limited capacity for commercial volumes of biologics products, the Company also received approval from the FDA to manufacture ORENCIA at the Lonza Biologic PLC’s (Lonza) manufacturing facility and also expects to rely on Celltrion, Inc.’s (Celltrion) existing facility and on Celltrion’s new large-scale facility to provide additional capacity for ORENCIA for commercial scale production pending submission and approval of an sBLA to the FDA. The Company will rely initially on third-party manufacturers to manufacture belatacept and ipilimumab on a commercial scale if these products are commercialized. Belatacept and ipilimumab are investigational biologics compounds in late stage development. The Company has not made any filings with the FDA seeking approval for: (i) Celltrion to manufacture ORENCIA or (ii) Lonza or Celltrion to manufacture belatacept or ipilimumab. The Company has not sought approval from the FDA to market and sell belatacept or ipilimumab, and there
can be no assurance that regulatory approval of either of these products will be obtained, or that regulatory approval of manufacturing facilities will be obtained. The Company has entered into agreements with Lonza and Celltrion that, among other things: (i) reserve portions of their respective biologics manufacturing capacity for the Company’s future requirements of ORENCIA; and (ii) contain certain other rights to negotiate with Lonza and Celltrion for additional biologics manufacturing capacity for other biologics products. The Company has commenced certain discussions with third-party manufacturers relating to biologics manufacturing capacity for belatacept and ipilimumab if regulatory approval is obtained. For information about ORENCIA, see “—Products” above. For additional information about belatacept and ipilimumab, see “—Research and Development” below.
If the Company or any third-party manufacturer that the Company relies on for existing or future products is unable to maintain a stable supply of products, operate at sufficient capacity to meet its order requirements, comply with government regulations for manufacturing pharmaceuticals or meet the heightened processing requirements for biologics, the Company’s business performance and prospects could be negatively impacted. Additionally, if the Company or any of its third-party suppliers were to experience extended plant shutdowns or substantial unplanned increases in demand or suspension of manufacturing for regulatory reasons, the Company could experience an interruption in supply of certain products or product shortages until production could be resumed or expanded.
In connection with divestitures, licensing arrangements or distribution agreements of certain of the Company’s products, or in certain other circumstances, the Company has entered into agreements under which the Company has agreed to supply such products to third parties. In addition to liabilities that could arise from the Company’s failure to supply such products under the agreements, these arrangements could require the Company to invest in facilities for the production of non-strategic products, result in additional regulatory filings and obligations or cause an interruption in the manufacturing of its own products.
The Company’s success depends in great measure upon customer confidence in the quality of its products and in the integrity of the data that support their safety and effectiveness. Product quality arises from a total commitment to quality in all parts of the Company’s operations, including research and development, purchasing, facilities planning, manufacturing, and distribution. The Company maintains quality-assurance procedures relating to the quality and integrity of scientific information and production processes.
Control of production processes involves rigid specifications for ingredients, equipment and facilities, manufacturing methods, processes, packaging materials, and labeling. The Company performs tests at various stages of production processes and on the final product to assure that the product meets all regulatory requirements and the Company’s standards. These tests may involve chemical and physical chemical analyses, microbiological testing, or a combination of these along with other analyses. Quality control is provided by business unit/site quality assurance groups that monitor existing manufacturing procedures and systems used by the Company, its subsidiaries and third-party suppliers.
Intellectual Property and Product Exclusivity
The Company owns or licenses a number of patents in the U.S. and foreign countries primarily covering its pharmaceutical products. The Company has also developed many brand names and trademarks for products in all areas. The Company considers the overall protection of its patent, trademark, license and other intellectual property rights to be of material value and acts to protect these rights from infringement.
In the pharmaceutical industry, the majority of an innovative product’s commercial value is usually realized during the period in which the product has market exclusivity. In the U.S. and some other countries, when market exclusivity expires and generic versions of a product are approved and marketed, there can often be very substantial and rapid declines in the product’s sales. The rate of this decline varies by country and by therapeutic category. For a discussion of how generic versions of a product can impact that product’s sales, see “—Generic Competition” below.
A product’s market exclusivity is generally determined by two forms of intellectual property: patent rights held by the innovator company and any regulatory forms of exclusivity to which the innovative drug is entitled.
Patents are a key determinant of market exclusivity for most branded pharmaceuticals. Patents provide the innovator with the right to exclude others from practicing an invention related to the medicine. Patents may cover, among other things, the active ingredient(s), various uses of a drug product, pharmaceutical formulations, drug delivery mechanisms and processes for (or intermediates useful in) the manufacture of products. Protection for individual products extends for varying periods in accordance with the expiration dates of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent, its scope of coverage and the availability of meaningful legal remedies in the country.
Market exclusivity is also sometimes influenced by regulatory intellectual property rights. Many developed countries provide certain non-patent incentives for the development of medicines. For example, the U.S., the EU and Japan each provide for a minimum period of time after the approval of a new drug during which the regulatory agency may not rely upon the innovator’s data to approve a competitor’s generic copy. Regulatory intellectual property rights are also available in certain markets as incentives for research on new indications, on orphan drugs and on medicines useful in treating pediatric patients.
Regulatory intellectual property rights are independent of any patent rights that the Company may possess and can be particularly important when a drug lacks broad patent protection. However, most regulatory forms of exclusivity do not prevent a competitor from gaining regulatory approval prior to the expiration of regulatory data exclusivity on the basis of the competitor’s own safety and efficacy data on its drug, even when that drug is identical to that marketed by the innovator.
The Company estimates the likely market exclusivity period for each of its products on a case-by-case basis. It is not possible to predict the length of market exclusivity for any of the Company’s products with certainty because of the complex interaction between patent and regulatory forms of exclusivity, and inherent uncertainties concerning patent litigation. There can be no assurance that a particular product will enjoy market exclusivity for the full period of time that the Company currently estimates or that the exclusivity will be limited to the estimate. For a discussion on market exclusivity, see “—Pharmaceuticals Segment” above.
In addition to patents and regulatory forms of exclusivity, the Company also holds intellectual property in the form of trademarks on products such as ENFAMIL. Trademarks have no effect on market exclusivity for a product, but are considered to have marketing value. Worldwide, all of the Company’s important products are sold under trademarks that are considered in the aggregate to be of material importance. Trademark protection continues in some countries as long as used; in other countries, as long as registered. Registration is for fixed terms and can be renewed indefinitely.
Specific aspects of the law governing market exclusivity for pharmaceuticals vary from country to country. The following summarizes key exclusivity rules in markets representing significant Company sales:
United States
A company seeking to market an innovative pharmaceutical in the U.S. must file a complete set of safety and efficacy data to the FDA. The type of application filed depends on whether the drug is a chemical (a small molecule) or a biological product (a large molecule). If the innovative pharmaceutical is a chemical, the company files a New Drug Application (NDA). If the medicine is a biological product, a BLA is filed. The type of application filed affects regulatory exclusivity rights.
A competitor seeking to launch a generic substitute of a chemical innovative drug in the U.S. must file an aNDA with the FDA. In the aNDA, the generic manufacturer needs to demonstrate only “bioequivalence” between the generic substitute and the approved NDA drug. The aNDA relies upon the safety and efficacy data previously filed by the innovator in its NDA.
Medicines approved under a NDA can receive several types of regulatory data protection. An innovative chemical pharmaceutical (also known as a new chemical entity) is entitled to five years of regulatory data protection in the U.S., during which an aNDA cannot be filed with the FDA. If an innovator’s patent is challenged, as described below, the generic manufacturer may file its aNDA after the fourth year of the five-year data protection period. A pharmaceutical drug product that contains an active ingredient that has been previously approved in a NDA, but is approved in a new formulation or for a new indication on the basis of new clinical trials, receives three years of data protection. Finally, a NDA that is designated as an Orphan Drug, which is a drug that gains an indication for treatment of a condition that occurs only rarely in the U.S., can receive seven years of exclusivity for the orphan indication. During this time period, neither NDAs nor aNDAs for the same drug product can be approved for the same orphan use.
Because a significant portion of patent life can be lost during the time it takes to obtain regulatory approval, the innovator can extend one patent to compensate the innovator for the lost patent term, at least in part. More specifically, the innovator may identify one patent, which claims the product or its approved method of use, and, depending on a number of factors, may extend the expiration date of that patent. There are two limits to these extensions. First, the maximum term a patent can be extended is 5 years, and second, the extension cannot cause the patent to be in effect for more than 14 years from the date of NDA approval.
A company may also earn six months of additional exclusivity for a drug where specific clinical trials are conducted at the written request of the FDA to study the use of the medicine to treat pediatric patients, and submission to the FDA is made prior to the loss of basic exclusivity. This six-month period extends most forms of exclusivity (patent and regulatory) that are listed with the FDA at the time the studies are completed and submitted to the FDA, but not against products already finally approved.
Currently, generic versions of biological products cannot be approved under U.S. law. However, the law could change in the future. Even in the absence of new legislation, the FDA is taking steps toward allowing generic versions of certain biologics. Competitors seeking approval of biological products must file their own safety and efficacy data, and address the challenges of biologics manufacturing, which involves more complex processes and are more costly than those of traditional pharmaceutical operations.
Many (but not all) innovative drugs are also covered by patents held by the NDA sponsor beyond the minimum period of regulatory exclusivity provided by U.S. law.
The innovator company is required to list certain of its patents covering the medicine with the FDA in what is commonly known as the Orange Book. Absent a successful patent challenge, the FDA cannot approve an aNDA until after the innovator’s listed patents expire. However, after the innovator has marketed its product for four years, a generic manufacturer may file an aNDA and allege that one or more of the patents listed in the Orange Book under an innovator’s NDA is either invalid or not infringed. This allegation is commonly known as a “Paragraph IV certification.” The innovator then must decide whether to file a patent infringement suit against the generic manufacturer. If one or more of the NDA-listed patents are successfully challenged, or if the innovator chooses not to sue, the first filer of a Paragraph IV certification (or first filers if more than one generic qualifies) may be entitled to a 180-day period of market exclusivity as against all other generic manufacturers. From time to time aNDAs, including Paragraph IV certifications, are filed with respect to certain of the Company’s products. The Company evaluates these aNDAs on a case-by-case basis and, where warranted, files suit against the generic manufacturer to protect its patent rights.
In the U.S., the increased likelihood of generic challenges to innovators’ intellectual property has increased the risk of loss of innovators’ market exclusivity. First, generic companies have increasingly sought to challenge innovators’ basic patents covering major pharmaceutical products. For a discussion of one such litigation related to patent challenges by generic companies, see “Item 8. Financial Statements—Note 21. Legal Proceedings and Contingencies—PLAVIX* Litigation,” and “—Other Intellectual Property Litigation.” Second, statutory and regulatory provisions in the U.S. limit the ability of an innovator company to prevent generic drugs from being approved and launched while patent litigation is ongoing. Third, the FDA is actively considering ways to expand the use of a regulatory mechanism that allows for regulatory approval of drugs that are similar to (but not generic copies of) innovative drugs on the basis of less extensive data than is required for a full NDA. As a result of all of these developments, it is not possible to predict the length of market exclusivity for a particular Company product with certainty based solely on the expiration of the relevant patent(s) or the current forms of regulatory exclusivity. For more information about new legislation, see “—Government Regulation and Price Constraints” below.
European Union
In the EU, most innovative pharmaceuticals are entitled to ten years of regulatory data protection if marketing approval is obtained via the “centralized procedure.” A product that receives approval under the centralized p