April 26, 2007
BY EDGAR AND HAND DELIVERY
Jeffrey P. Riedler
Assistant Director
U.S. Securities and Exchange Commission
100 F Street N.E.
Washington, D.C. 20549
Assistant Director
U.S. Securities and Exchange Commission
100 F Street N.E.
Washington, D.C. 20549
| Re: | Sucampo Pharmaceuticals, Inc. Registration Statement on Form S-l File No. 333-135133 |
Dear Mr. Riedler:
On behalf of Sucampo Pharmaceuticals, Inc. (“Sucampo” or the “Company”), this letter responds
to the comment in your letter dated November 27, 2006 to Sachiko Kuno, the President and Chair of
the Board of Directors of Sucampo, regarding the filing of Amendment No. 4 to the Registration
Statement on Form S-1 (the “Registration Statement”). The Company originally responded to your
November 27, 2006 comment in a letter addressed to you and dated December 15, 2006 and the Company
provided a revised response in a letter addressed to you and dated March 29, 2007. Based on a
telephonic conversation with various members of the Staff on April 19, 2007, and at the suggestion
of the Staff, the Company is today further revising its response to your original comment. We have
reproduced the original comment below for your convenience. As discussed with the Staff, the
Company intends to file an amendment to the Registration Statement after the Staff has had the
opportunity to review this revised response, which would include (1) restated financial statements
for the years ended December 31, 2004 and 2005 reflecting the revised accounting treatment
described in the response below, including revised footnote disclosure, and (2) financial
statements for the year ended December 31, 2006 reflecting the revised accounting treatment.
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ORIGINAL STAFF COMMENT:
Financial Statements
Note 11. Collaboration and License Agreements, page F-26
| 1. | We have reviewed your response to our previous comment number 13 and the collaboration and License Agreement included as Exhibit 10.21. Please revise your disclosure of the Agreement with Takeda to include a description of all your rights and obligations, the performance period, all deliverables, and the contractual cash flows as stipulated within the agreement. Please identify each unit of accounting pursuant to EITF 00-21, the revenue recognition method you employ for each unit, and the basis for using each revenue recognition method. Please tell us and disclose if you have bundled several deliverables into one single unit of accounting and how management determined the revenue recognition model to be used for this single unit of accounting. Lastly, it appears that there is an obligation of management to participate in several committees defined within the Agreement without a specifically associated cash flow stream. Please tell us and disclose how you have incorporated what appears to be an obligation of the company into your EITF 00-21 analysis. |
REVISED RESPONSE:
Background
On October 29, 2004, Sucampo Pharmaceuticals, Inc. (“Sucampo” or the “Company”) and Takeda
Pharmaceutical Company Limited (“Takeda”) entered into a Collaboration and License Agreement (the
“Agreement”), which was filed as Exhibit 10.21 to the Registration Statement. The purpose of this
Agreement was for the two parties to co-develop, commercialize, and sell products for
gastroenterology indications (“Products”) in the United States and Canada. The Products are
pharmaceutical drugs that contain the compound SPI-0211, or lubiprostone. AMITIZA, the only
Product to date, was approved by the United States Food and Drug Administration (the “FDA”) for the
treatment of chronic idiopathic constipation (“Constipation”) in January 2006. A second indication
for AMITIZA for the treatment of irritable bowel syndrome with constipation (“IBS-C”) continues to
be developed. Prior to the execution of the Agreement, the Company had been in the process of
developing SPI-0211 for both the Constipation and the IBS-C indications. At the time the Agreement
was signed, the Company had completed Phase III trials for the Constipation indication and was in
the process of initiating a Phase III trial for the IBS-C indication. The Agreement also
contemplated that the Company and Takeda could subsequently jointly agree to pursue the development
and commercialization of additional indications in the U.S. and Canadian gastroenterology market.
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The term of the Agreement is from October 29, 2004 through December 31, 2020, unless
terminated earlier. The Agreement is terminable for the following reasons:
| • | A material breach of obligations by either party; | ||
| • | A change of control of either party occurs, unless the change of control party confirms its agreement to comply with its obligations in the Agreement; | ||
| • | A change of control of Takeda occurs and the surviving entity is developing or marketing a product that competes with Sucampo Products; | ||
| • | A bankruptcy, insolvency or similar event of either party; | ||
| • | Sucampo may terminate if Takeda fails to achieve specified net sales revenue targets; and | ||
| • | If a New Drug Application (“NDA”) approval for IBS-C cannot be obtained in the United States, the parties will negotiate in good faith whether to continue future development and commercialization of Products. If the parties cannot agree, then either party will have the right to terminate. |
The effect of termination is as follows:
| • | Takeda is not required to make additional payments for which services have not yet been rendered or which are not due to Sucampo as of the termination date; and | ||
| • | The licenses granted to Takeda will terminate and the related rights will revert to Sucampo. |
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The Agreement includes several deliverables that Sucampo is responsible to complete and Takeda
is responsible to fund. The following table summarizes the key deliverables by Sucampo within the
Agreement as of its execution on October 29, 2004:
| Deliverable | ||||||
| (with related | ||||||
| Agreement sections) | Contractual Cash Flows | Sucampo Obligations | Performance Period | |||
License of the
compound SPI-0211
to Takeda
( 2.1 )
|
There are no defined
contractual cash
flows for the grant
of the license to
Takeda. If Sucampo achieves commercialization of Products, Takeda shall, for the Products sold during the term of the Agreement, pay Sucampo royalties on net sales. The level of royalty payments is tiered based on the level of net sales revenue earned by Takeda. |
Sucampo shall provide Takeda with an exclusive license to co-develop, use, sell, promote, offer for sale, import and distribute the Products during the Agreement period. | The license was
granted upon
execution of the
Agreement in
October 2004 and
will expire when
the Agreement
expires in 2020 or
when it is earlier
terminated. Royalty payments, which Sucampo began to receive in July 2006, will cease when the Agreement is terminated (except with respect to unsold inventory) and all cash payments due to Sucampo are paid. |
|||
Development for NDA
submission for
Constipation and
IBS-C (4.2(i)
and 7.2).
|
Takeda shall fund the
initial $30 million
of development costs,
after which Sucampo
shall fund the next
$20 million and the
parties shall equally
share any required
funding in excess of
$50 million. Takeda shall pay Sucampo non-refundable milestone payments for the Products upon certain development events as related to specific indications. 1 |
Sucampo shall conduct all development work necessary for an NDA submission (in the United States and Canada) for Constipation and IBS-C. | There was no
defined performance
period inherent in
the Agreement,
however as of
October 29, 2004
the Company
estimated that it
would complete the
research &
development in
December 2006. An NDA for Amitiza (for Constipation) was submitted in March 2005 and approved by the FDA in January 2006. During the second quarter of 2006, the Company estimated that the NDA submission for IBS-C would be completed in May 2007 and, as of the date of this letter, the Company estimates that the completion will be June 2007. |
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Participate in the
following committees:
- - Joint Steering Committee (“JSC”) (3.1) - - Joint Development Committee (“JDC”)(4.1) - - Joint Commercialization Committee (“JCC”) (5.1) - - Joint Manufacturing Committee (“JMC”) (6.1) |
No separate cash flows were established for these activities at the inception of the agreement. | Sucampo agreed to participate in the committees during the respective periods in which each committee was active | There is no defined performance period for each committee. None of the committees will extend beyond the term of the Agreement. The Company expects participation within all committees, except the JDC, to occur throughout the Agreement term. The Company expects participation in JDC meetings to continue only while development activities are in process. |
| 1 | The following is a listing of the up-front payment and development milestone events and the milestone and research and development payments that have been received by Sucampo from Takeda after the occurrence of the applicable event through December 31, 2006. |
| Description | Payment (in millions) | |||
Execution of Agreement |
$ | 20 | ||
NDA filing for Constipation |
10 | |||
Phase III entered for IBS-C |
20 | |||
NDA approved for Constipation |
20 | |||
Constipation and IBS-C research and development revenue |
30 | |||
| $ | 100 | |||
As discussed in the table above, there are significant contractual cash payments,
including a nonrefundable up-front payment, nonrefundable milestone payments and reimbursements of
development costs owed to Sucampo upon completion of the associated deliverables. As of December
31, 2006, approximately two years after the Agreement was executed, the Company had received (a)
the $20 million nonrefundable up-front payment, (b) $50 million of nonrefundable milestone
payments, (c) $30 million of reimbursements of development costs, and (d) approximately $4.5
million of royalty payments on Takeda’s net sales of AMITIZA.
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Technical Accounting Research Considerations
The Company has performed the following steps in determining the appropriate accounting model
for its above mentioned deliverables and associated cash payments that Sucampo has received and
will receive from Takeda:
| 1. | Consideration of the contract deliverables, pursuant to EITF 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”), to determine whether separate units of accounting exist; | ||
| 2. | Selection of an accounting model for revenue recognition; and | ||
| 3. | Evaluation of EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent (“EITF 99-19”), and EITF 01-14, Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred (“EITF 01-14”), to determine the appropriate presentation of certain revenue streams. |
Step 1 — Identification of deliverables and evaluation of EITF 00-21:
As discussed in the previous chart, at the time of its original execution, the Agreement
included multiple deliverables that the Company was responsible to perform. The original
assessment of EITF 00-21 by the Company at inception of the Agreement on October 29, 2004 resulted
in a single unit of accounting for the deliverables within the Agreement, including the
participation in the committees. The Company has since determined that this conclusion was
incorrect as a result of the Company’s reassessment of the application of EITF 00-21 to this
Agreement. The reassessment is explained in detail below.
Throughout the term of the Agreement, as each item of the arrangement was delivered, the
Company re-assessed each deliverable using the guidance of EITF 00-21 to determine which
deliverables, if any, should be considered as separate units of accounting. In addition, the
Company updated this re-assessment at the end of each reporting period
As part
of this process, a re-assessment performed by the Company identified four separate
units of accounting as of the inception of the Agreement: (1) the development of Constipation and
IBS-C in order to file an NDA for each indication, which also includes participating in the JDC,
(2) participation in the JCC, (3) participation in the JSC and (4) participation in the
JMC. The evaluation of EITF 00-21 to determine the four separate units of
accounting is discussed in the following paragraph.
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The Company has determined that its participation in the three identified committees (the JCC,
JMC and JSC), which are not associated with development, has value to Takeda on a stand-alone basis
because the Company provides the background knowledge of AMITIZA and the individual expertise of
the participants in these committee meetings, which the Company considers necessary for the
Agreement to be successful. Takeda could have obtained similar expertise by hiring independent
consultants, but relied instead on the expertise of the Company.
The Company has also determined that there is objective and reliable evidence of the fair
value of its participation in the JCC, JMC and JSC committees. For the participation in each
meeting of these committees, including anticipated expenses expected to be incurred to meet its
obligations, the Company determined fair value based on contract agreements between the Company and
specialized consultants for other development projects the Company is and has been involved with,
and applied the resulting fair value per-meeting rate (inclusive of expenses) to the number of
required meetings throughout the Agreement term.
This Agreement does not include any general rights of return related to the participation in
the JCC, JMC and JSC committees. As such, all criteria within EITF 00-21 to determine separate
units of accounting were met for each of these three deliverables.
The Company is not, however, able to conclude that its participation in the JDC has value to
Takeda on a stand-alone basis separate from the Company’s obligations to perform research and
development of Constipation and IBS-C because the participation in the JDC was to occur
concurrently with the development work. As a result, the participation in the JDC and the
performance of research and development of Constipation and IBS-C are not accounted for as separate
units of accounting but rather as two deliverables within a single unit of accounting.
Step 2 — Selection of accounting model:
In 2004, when the Agreement was executed and the Company began to receive payments from
Takeda, the Company attempted to determine a systematic and rational attribution pattern that was
representative of and faithful to the economic substance of the Agreement, but that would not
result in revenue being recognized at any time in excess of the accumulated amounts owed to the
Company from Takeda. The Company had originally recorded the cash payments from Takeda as revenue
using the substantive milestone method. The method is frequently used as industry practice by
other comparable companies with similar collaboration and license
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arrangements. Under the substantive milestone method, revenue for the payment is recognized
once the milestone is achieved, SAB No. 104, Revenue Recognition (“SAB 104”) criteria are met and
the following substantive-milestone-method criteria are met:
| • | A substantive effort must be involved in achieving each milestone; | ||
| • | Milestone payments must be reasonable in relation to the effort expended; | ||
| • | A reasonable amount of time should pass between the up-front payment and the first milestone as well as between successive milestones; | ||
| • | Risk should be considered; and | ||
| • | All milestone payments in an agreement should be compared to the effort needed to achieve the milestone with one another and with the up-front payment. |
If these criteria are not met, then that milestone payment is deemed to be non-substantive and
the related payment is recognized separately over the term of the deliverable period. Accordingly,
while there is a single unit of accounting, there are two different attribution models for revenue
recognition resulting from the application of the substantive milestone method — one for
substantive milestones and one for all other amounts. One could argue the application of the
substantive milestone method conflicts with a literal application of EITF 00-21 (i.e., two revenue
attribution methods applied to one unit of accounting). The re-assessment by the Company to
literally apply EITF 00-21 and further analyze its use of the substantive milestone method resulted
in the Company concluding that one attribution model to recognize revenue should be applied against
each unit of accounting in this Agreement. Accordingly, the Company determined that the
substantive milestone method would not be appropriate.
The Company then evaluated two separate attribution models, the EITF 91-6 model and the
time-based model, in determining which revenue model would be more appropriate, considering the
specific economic substances of research and development activities and the respective earnings
processes associated with the funding arrangements from Takeda. The following summarizes the
results of the Company’s assessment of these two models:
The EITF 91-6 model
The Company assessed the application of a revenue model similar to the guidance discussed in
EITF 91-6, Revenue Recognition of Long-Term Power Sales Contracts, which relates to accounting for
long-term power sales contracts. Under this model, revenue is recognized using the lesser of
non-refundable cash received or the result achieved using percentage-of-completion accounting using
cost of efforts. The Company determined that the
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EITF 91-6 model was not appropriate for the facts and circumstances of the Agreement because
the Company would not have been able to reasonably estimate its costs for its research and
development due to the significant amount of volatility in its costs, FDA regulations, and reliance
on third parties to complete studies.
The Time-Based Model
The Company also assessed a revenue model similar to the EITF 91-6 model, with the performance
period being the revenue-recognition driver instead of expenses. The Company has concluded that
this time-based model is appropriate and has determined to utilize this model to recognize revenue
under the Agreement. In applying this model, the Company made the following assumptions for each
unit of accounting:
| • | The cash flow streams related to each unit of accounting are ratably recognized as revenue over the estimated performance period. | ||
| • | Upon receipt of cash payments during the performance period, revenue is recognized to the extent the accumulated service time, if any, has occurred. The remainder is deferred and recognized ratably over the expected remainder of the performance period. | ||
| • | A change in the period of time expected to complete the deliverable is accounted for on a prospective basis as a change in estimate through the remainder of performance period. |
The cash flow items for each unit of accounting will be deferred upon receipt and recognized
as revenue ratably over the respective service periods. The accumulated revenue recognized will at
no time exceed the accumulated amounts owed to the Company from Takeda.
The cash flow amounts received from Takeda through December 31, 2006 associated with each unit
of accounting are as follows:
· Participation in JCC 2 |
$ | 675,568 | ||
· Participation in JSC 2 |
$ | 1,273,485 | ||
· Participation in JMC 2 |
$ | 427,071 | ||
· Development of Constipation and IBS-C 3 |
$ | 97,623,876 |
2 The amount is based on objective and reliable evidence of the estimated fair
value of the undelivered services, including anticipated expenses expected to be incurred to
meet its obligations, when the Company became required to participate in the meetings and is
deferred as a separate component of the up-front $20 million payment.
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| 3 The amount is the remaining cash flows received from Takeda related to the required undelivered services (development of Constipation and IBS-C and participation in the JDC), including the residual amount totaling $17,623,876 of the up-front $20 million payment after deferring the fair value of the three committee meetings. |
Step 3 — Evaluation of EITF 99-19 and EITF 01-14:
The Company further evaluated the presentation of the cash flows received from Takeda on a
gross versus net basis in accordance with EITF 99-19. Based on the evaluation of the indicators
within this guidance, the Company determined that the cash payments from Takeda should be
recognized as revenue on a gross basis and reported as revenue in the consolidated statements of
operations. In particular, the Company deemed itself to be the principal of the Agreement because
it is the primary obligor under the Agreement since it is responsible for executing the development
plan. Additionally, the Company has complete supplier discretion, the Company is involved in
determining the service specifications, and the Company assumes credit risk for all expenses
incurred during the service periods. This is consistent with the responses to comments 50 and 51
in the Company’s response letter to the Staff dated August 11, 2006.
Additionally, the consensus in EITF 01-14 reinforces the Company’s assertion that
reimbursements received for out-of-pocket expenses incurred should be characterized as revenue.
Supplemental Agreement with Takeda
On August 18, 2005, Sucampo notified Takeda in writing that Sucampo believed Takeda was in
material breach of the Agreement and that the Agreement would be terminated if disputed actions
surrounding the marketing and co-promotion of the drug candidate, which had since become AMITIZA,
could not be resolved. In particular, Sucampo asserted that Takeda had not sufficiently met its
marketing obligations under the Agreement and further asserted that Sucampo’s rights under the
Agreement could only be met by the establishment of new specific co-promotion actions. On
February 1, 2006, the two parties settled the disputed items by defining these actions as
obligations of Sucampo and further defining the related funding obligations between the two parties
in a new agreement (the “Supplemental Agreement”). The Supplemental Agreement was filed as Exhibit
10.25 to the Registration Statement.
The purpose of the Supplemental Agreement was to amend the original Agreement by establishing
certain obligations for the Company’s sales force within specified target markets and providing
that Takeda is obligated to fund a portion of the direct costs of these activities. In addition,
the Company became obligated, at its discretion, to perform miscellaneous marketing
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activities as approved by the JCC, with Takeda as the funding source for these activities.
There were no monies paid by either party for the execution of the Supplemental Agreement. The
term of the Supplemental Agreement ends when the Agreement expires or is terminated.
As previously noted, AMITIZA was approved by the FDA in January 2006 for the treatment of
Constipation. The commercial launch of AMITIZA began in April 2006.
The Supplemental Agreement includes the deliverables that Sucampo is responsible to complete
and Takeda is responsible to fund. The following table summarizes the key deliverables by Sucampo
under the Supplemental Agreement as of its execution on February 1, 2006:
| Deliverable | ||||||
| (with related | ||||||
| Supplemental | ||||||
| Agreement section) | Contractual Cash Flows | Sucampo Obligations | Performance Period | |||
Co-promote Amitiza
with Takeda
(5.4 (a) of
Agreement and 6.2
of Supplemental
Agreement )
|
Takeda shall pay Sucampo a specified amount per day per Sucampo’s sales force representative, but not to exceed certain pre-defined amounts. | Sucampo shall
employ a sales
force of
approximately 38
representatives to
supplement Takeda’s
sales activities.
The terms within the Agreement for co-promotion activities were superseded by the Supplemental Agreement. The Agreement stated Sucampo had the option to employ sales representatives. The Supplemental Agreement amended the Agreement to state that Sucampo shall employ approximately 38 sales representatives for such purposes. Detailed plans and strategies must be approved by the JCC. |
60 months following the first date (April 2006) that Sucampo deployed sales representatives. | |||
Perform
miscellaneous
marketing
activities for
Amitiza
( Article 3 of
Supplemental
Agreement )
|
Takeda shall reimburse Sucampo for all approved external costs incurred for such miscellaneous marketing activities. | Sucampo shall conduct all miscellaneous marketing activities as approved by the JCC. | There is no defined performance period, but it will not exceed January 31, 2007. Such marketing activities were completed as of December 31, 2006. |
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The Company views the deliverables under the Supplemental Agreement as economically
independent of those in the original Agreement and, as such, these deliverables are treated as a
single unit of accounting separate from the original Agreement. The Company will recognize the
cost reimbursements received for these deliverables as revenue when services are performed and the
reimbursement payments are due under the Supplemental Agreement.
Additional Required Deliverables
In the second quarter of 2006, the Company and Takeda agreed to begin three new studies
related to funding arrangements discussed in both the Agreement and Supplemental Agreement. The
deliverables that Sucampo is responsible to complete and Takeda is primarily responsible to fund in
connection with these new studies are summarized in the following schedule:
| Deliverable | ||||||
| (with related | ||||||
| Agreement section) | Contractual Cash Flows | Sucampo Obligations | Performance Period | |||
Changes to labeling
(4.2 (iii) of
Agreement)
|
Takeda shall fund 70% of labeling studies and Sucampo shall fund the remaining 30% | Sucampo shall conduct all studies required to modify, change or expand the labeling of Products for Constipation and IBS-C as approved by the JCC. | Sucampo estimates that the Renal/Hepatic labeling studies that were initiated in August 2006 will be completed in January 2008. | |||
Perform Phase IV
studies ( 4.2
(vi) of Agreement
and 5.1 of
Supplemental
Agreement )
|
Takeda shall fund all Phase IV studies. | The terms within the Agreement for Phase IV studies were superseded by the Supplemental Agreement. The Agreement states Takeda shall conduct all Phase IV studies. The Supplemental Agreement has amended the Agreement to state that Sucampo shall conduct all Phase IV studies approved by the JCC. | The Company has begun incurring development expenses related to its Phase IV studies for the Constipation indication of Amitiza, which are estimated to be completed in January 2008. |
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Development of
additional
indication (4.2
(iv))
|
Per each
additional
indication, Takeda
shall fund all
internal and external
development work up
to a maximum
aggregate of $50
million. If development costs exceed these amounts, Takeda and Sucampo shall equally share such excess costs. |
Sucampo shall conduct all development of the additional indication(s) as approved by the JCC. |
Sucampo has
recently begun work
on the first
additional
indication for
Amitiza, for the
treatment of
opioid-induced
bowel dysfunction
(“OBD”).
Development costs
are currently
estimated to exceed
$50 million for
this indication. Sucampo has begun incurring development expenses related to its pivotal Phase II/III OBD study, for which Sucampo expects to file an IND in early 2007. At the time of its agreement to conduct these additional |
|||
| deliverables, Sucampo estimated that this study would be completed in June 2009. |
As noted in the previous table, upon joint agreement with Takeda through the JCC, the
Company became obligated to complete three deliverables in the second quarter of 2006 and began
work on these deliverables during the third quarter of 2006. These deliverables are viewed as
economically independent from the deliverables agreed to when the Agreement and the Supplemental
Agreement were executed. The Company was under no obligation to perform the three new studies
prior to the second quarter of 2006 when the two parties agreed on the studies. The Company
re-assessed each deliverable using the guidance of EITF 00-21 to determine which deliverables
should be considered as separate units of accounting. Consistent with the Company’s initial EITF
00-21 assessment of the Constipation and IBS-C deliverable, the Company was unable to obtain
objective and reliable evidence of the fair value of the undelivered studies. Accordingly, the
Company has combined these three new required deliverables as a single unit of accounting.
Consistent with the discussion above, the Company
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has applied the time-based model, by which the Company will ratably recognize this revenue
over the estimated performance period of the combined deliverables. The estimated completion date
is June 2009.
The Company also re-assessed this revenue under EITF 99-19 and EITF 01-14 and concluded that
the Company is the principal with respect to these deliverables and revenues should be presented
gross.
Summary
The Company entered into the Agreement with Takeda in October 2004. The Company then
expected, and continues to expect, the Agreement and the Supplemental Agreement to be profitable,
particularly in light of receiving the up-front and milestone payments for development events and
payments for commercial events and the ongoing royalty revenue stream for the AMITIZA sales.
The Company had originally identified the required deliverables as a single unit of accounting
and recognized such revenue under the substantive milestone method. The Company has reassessed all
of the deliverables when they became requirements for both the Agreement and Supplemental Agreement
pursuant to EITF 00-21 and the revenue recognition model to be applied to the separate units of
accounting. This re-assessment resulted in a different revenue model, a time-based model, to be
applied against multiple units of accounting. In reviewing and assessing SFAS 154, the Company
will restate its 2004 and 2005 consolidated financial statements to reflect a correction of an
error in the next amendment to the Registration Statement.
* * * * *
Proposed Revised Footnote Disclosures
In response to the Staff’s comment, the Company has included the following proposed revised
footnote disclosures for the restatement of previously issued consolidated financial statements
(Note 2), revenue recognition (Note 3) and the details of the collaboration and license agreements
with Takeda (Note 11). The Company intends to include these revised footnotes to its consolidated
financial statements in an amendment to the Registration Statement after the Staff has had the
opportunity to review the proposed language. The Company also intends, at that time, to modify its
“Management’s Discussion and Analysis” section as appropriate to reflect similar modifications.
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Restatement of Previously Issued Consolidated Financial Statements (Note 2)
The Company has restated its previously issued consolidated financial statements and related
footnotes as of December 31, 2005 and for the years ended December 31, 2004 and 2005, as set forth
in these consolidated financial statements. The Company has restated its consolidated financial
statements to correct an error in accounting for the revenue recognition of the collaboration and
license agreements with Takeda. All amounts in these consolidated financial statements have been
updated to reflect this restatement.
Description of Errors
The Company identified an error at its operating company in the United States. This error
originated in the fourth quarter of 2004 and continued throughout 2005. The identification of this
error occurred as a result of the Company evaluating its assumptions under EITF 00-21, “Revenue
Arrangements with Multiple Deliverables”, in accounting for arrangements with multiple deliverables
that require significant judgment and estimates.
The Company reassessed whether each of its required deliverables from the joint collaboration
and license agreement with Takeda had value to Takeda on a stand-alone basis and whether there is
objective and reliable evidence of the fair value of each of those deliverables. This reassessment
determined that the previous assessment of a single unit of accounting for the deliverables from
the joint collaboration and license agreement with Takeda was not appropriate. In addition, the
Company determined that the substantive milestone method was not appropriate to account for the
cash payments received from Takeda related to the Company completing these required deliverables
and a time-based model would be more applicable to account for such cash payments from Takeda.
Accordingly, in the restated consolidated financial statements for the years ended December 31,
2004 and 2005, the Company reduced the milestone revenue and increased research and development
revenue. Total revenue increased by approximately $1.2 million for the year ended December 31,
2004 and decreased by approximately $6.8 million for the year ended December 31, 2005. In
addition, related deferred revenue increased by approximately $5.6 million at December 31, 2005.
The following tables present the effects of the restatement adjustments on the affected line
items in the previously reported consolidated statements of operations and comprehensive income for
the years ended December 31, 2004 and 2005 and consolidated balance sheet as of December 31, 2005.
The restatement adjustments did not affect the overall cash (used in) provided by operating,
investing or financing activities or the effect of exchange rates on cash
and cash equivalents in the consolidated statements of cash flows for the years ended December 31,
2004 and 2005.
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Impact on Consolidated Statements of Operations and Comprehensive Income Items
| Year Ended December 31, 2004 | ||||||||||||
| As Reported | Adjustment | Restatement | ||||||||||
Collaboration revenue |
$ | — | $ | 24,496 | $ | 24,496 | ||||||
Research and development revenue |
1,482,337 | 1,355,683 | 2,838,020 | |||||||||
Contract revenue |
275,154 | (206,186 | ) | 68,968 | ||||||||
Total revenues and other income |
2,665,290 | 1,173,993 | 3,839,283 | |||||||||
General and administrative |
8,226,730 | (10,309 | ) | 8,216,421 | ||||||||
Milestone royalties — related parties |
— | 1,000,000 | 1,000,000 | |||||||||
Loss from operations |
(19,597,510 | ) | 184,302 | (19,413,208 | ) | |||||||
Loss before income taxes |
(19,653,674 | ) | 184,302 | (19,469,372 | ) | |||||||
Net loss |
(19,653,674 | ) | 184,302 | (19,469,372 | ) | |||||||
Basic net loss per share |
(5.12 | ) | 0.04 | (5.08 | ) | |||||||
Diluted net loss per share |
(5.12 | ) | 0.04 | (5.08 | ) | |||||||
Comprehensive loss |
(19,666,782 | ) | 184,302 | (19,482,480 | ) | |||||||
| Year Ended December 31, 2005 | ||||||||||||
| As Reported1 | Adjustment | Restatement | ||||||||||
Collaboration revenue |
$ | — | $ | 146,977 | $ | 146,977 | ||||||
Milestone revenue |
30,000,000 | (30,000,000 | ) | — | ||||||||
Research and development revenue |
14,671,508 | 24,287,938 | 38,959,446 | |||||||||
Contract revenue |
2,237,115 | (1,237,112 | ) | 1,000,003 | ||||||||
Total revenues and other income |
47,006,960 | (6,802,197 | ) | 40,204,763 | ||||||||
General and administrative expenses |
7,821,419 | (61,859 | ) | 7,759,560 | ||||||||
Income (loss) from operations |
6,223,347 | (6,740,338 | ) | (516,991 | ) | |||||||
Income before income taxes |
7,213,116 | (6,740,338 | ) | 472,778 | ||||||||
Net income (loss) |
6,424,775 | (6,740,338 | ) | (315,563 | ) | |||||||
Basic net income (loss) per share |
1.68 | (1.76 | ) | (0.08 | ) | |||||||
Diluted net income (loss) per share |
1.63 | (1.71 | ) | (0.08 | ) | |||||||
Comprehensive income (loss) |
6,457,463 | (6,740,338 | ) | (282,875 | ) | |||||||
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Impact on Consolidated Balance Sheet Items
| December 31, 2005 | |||||||||||||||
| As Reported1 | Adjustment | Restatement | |||||||||||||
ASSETS: |
|||||||||||||||
Deferred tax assets |
$ | 292,404 | $ | 234,348 | $ | 526,752 | |||||||||
Deferred licensing fees |
61,860 | (61,860 | ) | — | |||||||||||
Total current assets |
47,092,459 | 172,488 | 47,264,947 | ||||||||||||
Deferred tax assets — noncurrent |
687,294 | (234,348 | ) | 452,946 | |||||||||||
Deferred licensing fees — net of current portion |
865,972 | (865,972 | ) | — | |||||||||||
Total assets |
48,912,912 | (927,832 | ) | 47,985,080 | |||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|||||||||||||||
Deferred revenue — current |
$ | 16,599,457 | $ | 12,496,260 | $ | 29,095,717 | |||||||||
Total current liabilities |
24,717,355 | 12,496,260 | 37,213,615 | ||||||||||||
Deferred revenue, net of current portion |
25,333,589 | (6,868,056 | ) | 18,465,533 | |||||||||||
Total liabilities |
52,596,744 | 5,628,204 | 58,224,948 | ||||||||||||
Accumulated deficit |
(38,611,039 | ) | (6,556,036 | ) | (45,167,075 | ) | |||||||||
Total stockholders’ (deficit) equity |
(3,683,832 | ) | (6,556,036 | ) | (10,239,868 | ) | |||||||||
| 1 The ‘As Reported’ amounts in the above tables were previously restated for errors in the Company’s deferred tax assets as of December 31, 2005 and fully vested non-employee options granted during the year ended December 31, 2005. The restated consolidated financial statements to correct these two errors were included in the amendment to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 20, 2006. |
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Revenue Recognition (Note 3)
Collaboration and License Agreements
The Company’s primary sources of revenue include up-front payments, milestone payments,
reimbursements of development and co-promotion costs and royalties. The Company recognizes revenue
from these sources in accordance with Staff Accounting Bulletin (SAB) 104, “Revenue Recognition”
(SAB 104), Emerging Issues Task Force (EITF) No. 99-19, “Reporting Revenue Gross as a Principal
Versus Net as an Agent” (EITF 99-19), and EITF No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (EITF 00-21). The application of EITF 00-21 requires subjective analysis and
requires management to make estimates and assumptions about whether deliverables within
multiple-element arrangements are separable from the other aspects of the contractual arrangement
into separate units of accounting and to determine the fair value to be allocated to each unit of
accounting.
The Company entered into a sixteen-year collaboration and license agreement (Takeda Agreement)
with Takeda in October 2004 and a supplemental agreement to the Takeda Agreement (Supplemental
Agreement) in February 2006 (see Note 11). The Company evaluated the multiple deliverables within
the Takeda Agreement and the Supplemental Agreement in accordance with the provisions of EITF 00-21
to determine whether the delivered elements that are the obligation of the Company, have value to
Takeda on a stand-alone basis and whether objective reliable evidence of fair value of the
undelivered items exists. Deliverables that meet these criteria are considered a separate unit of
accounting. Deliverables that do not meet these criteria are combined and accounted for as a
single unit of accounting. The appropriate recognition of revenue is then applied to each separate
unit of accounting.
The Company’s deliverables under the Takeda Agreement and the Supplemental
Agreement, including the related rights and obligations, contractual cash flows and performance
periods, are more fully described in Note 11.
The Takeda Agreement consists of the following key funding streams: up-front and milestone
payments, reimbursements of development costs and royalties. The cash flows associated with the
individual units of accounting from the Takeda Agreement are recognized as collaboration and
research and development revenue using a time-based model. Under this model, cash flow streams
related to each unit of accounting are recognized as revenue over the estimated performance period.
Upon receipt of cash payments, revenue is recognized to the extent the accumulated service time, if
any, has occurred. The remainder is deferred and recognized as revenue ratably over the remaining
estimated performance period. A change in the period of time expected to complete the deliverable
is accounted for as a change in estimate on a prospective basis. Revenue is limited to amounts
that are nonrefundable and that Takeda is contractually obligated to pay to the Company. Based on
the guidance of EITF 99-19, the
Company has determined that it is acting as a principal under the Agreement and, as such,
records these amounts as collaboration revenue and research and development revenue.
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Royalties from licensees are based on third-party sales of licensed products and are recorded
on the accrual basis when earned in accordance with contractual terms when third-party results are
reliably measurable, collectability is reasonably assured and all other revenue recognition
criteria are met. Because of the lack of historical data regarding sales returns, royalty payments
related to the portion of sales by Takeda that are subject to a right of return are not reported as
revenue until the right of return lapses. For the year ended December 31, 2006, the Company
recognized approximately $6.6 million in royalty revenues
The Supplemental Agreement consists of the following key funding streams: reimbursements of
co-promotion costs and reimbursements of the costs of specified medical marketing activities.
Reimbursements of co-promotion costs under the Supplemental Agreement are recognized as
revenue as the related costs are incurred and Takeda becomes contractually obligated to pay the
amounts. Based on the guidance of EITF 99-19, the Company has determined that it is acting as a
principal as it relates to co-promotion deliverables under the Supplemental Agreement and, as such,
records reimbursements of these amounts as co-promotion revenue. For the year ended December 31,
2006, the Company recognized approximately $3.5 million of co-promotion revenue.
Reimbursements of the specified medical marketing costs under the Supplemental Agreement are
recorded as a reduction in operating expenses when the related costs are incurred and Takeda
becomes contractually obligated to pay the amounts. Based on the guidance of EITF 99-19, the
Company has determined that it is not acting as principal, but rather as an agent, as it relates to
the specified medical marketing deliverables under the Supplemental Agreement. As such, the
Company records reimbursements of these amounts as reductions in selling and marketing expenses.
Option fees received for other potential joint collaboration and license agreements with
Takeda are not recognized as revenue immediately because the transactions do not represent a
separate earnings process. Because there are contingent performance obligations by the Company
when and if the options are exercised, the Company’s policy is to recognize revenue immediately
upon expiration of the option or to commence revenue recognition upon exercise of the option and
continue recognition over the estimated performance period. When recognized, option fees are
recorded as contract revenue.
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Other Revenue Sources
Revenues from the performance of research and development cost reimbursement activities under
a long-term strategic alliance agreement (see Note 10) were recognized based on the time-based
model. Under this model, the cash flow stream related to this unit of accounting is recognized as
revenue over the estimated performance period. Upon receipt of cash payment, revenue was
recognized to the extent the accumulated service time, if any, has occurred. The remainder is
deferred and recognized as revenue ratably over the remaining estimated performance period. A
change in the period of time expected to complete the deliverable is accounted for as a change in
estimate on a prospective basis. Revenue is limited to amounts that are nonrefundable.
Contract revenue related to development and consulting activities with related parties is also
accounted for under the time-based model.
Collaboration and License Agreements (Note 11)
On October 29, 2004, the Company entered into a sixteen-year collaboration and license
agreement with Takeda to exclusively co-develop, commercialize and sell products that contain
lubiprostone for gastroenterology indications in the United States and Canada. Payments to the
Company under the Takeda Agreement include a nonrefundable up-front payment, nonrefundable
development and commercial milestone payments, reimbursement of certain development and
co-promotion costs and royalties.
Upon execution of the Takeda Agreement, the Company was required to complete several
deliverables, which Takeda is responsible to fund. The following are the required deliverables of
the Company, along with the related contractual cash flows from Takeda and the associated
obligations and performance period of the Company, as of the execution of the Takeda Agreement:
| • | The Company granted Takeda an exclusive license of lubiprostone to co-develop, commercialize, and sell products for gastroenterology indications in the United States and Canada. There are no defined contractual cash flows within the Takeda Agreement for the grant of this license, but the Company did receive the nonrefundable up-front payment of $20 million upon executing the Takeda Agreement. The license was granted to Takeda on October 29, 2004 and will expire when the Takeda Agreement expires or is |
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| terminated earlier. Upon commercial launch, Takeda shall, for the products sold by Takeda during the term of the Takeda Agreement, pay Sucampo pre-determined royalties on net revenues on a quarterly basis. The level of royalties is tiered based on the net sales recognized by Takeda. Royalty payments, which Sucampo began to earn in April 2006 and receive in July 2006, will cease when the Takeda Agreement is terminated and all cash payments due to Sucampo are paid. The Company has recorded royalty revenues of approximately $6.6 million for the year ended December 31, 2006. This revenue is recorded as royalty revenue in the consolidated statements of operations and comprehensive (loss) income. | |||
| • | The Company shall participate in the following committees, along with Takeda: Joint Steering Committee, Joint Development Committee, Joint Commercialization Committee and Joint Manufacturing Committee. There are no separate cash flows identified within the Takeda Agreement associated with the participation by the Company in these committees. There is no defined performance period for this obligation, but the performance period will not exceed the term of the Takeda Agreement. The Company expects its participation on all committees to continue throughout the term of the Takeda Agreement, except for the Joint Development Committee, which will continue until development work is complete. | ||
| • | The Company shall provide development work necessary for a New Drug Application (NDA) for the treatment of chronic idiopathic constipation (Constipation) and irritable bowel syndrome with constipation (IBS-C) indications. Takeda shall fund the initial $30 million of development costs and the two parties shall equally share any required development costs in excess of $50 million. Although there is no defined performance period for this development work, the period to perform the work will not exceed the term of the Takeda Agreement. In January 2006, the Company received approval for its NDA for AMITIZA to treat Constipation and estimates that the NDA for IBS-C will be completed and submitted to the FDA in June 2007. |
As a result of its reassessment of the deliverables under the Takeda Agreement, the Company
determined there were four separate units of accounting as of the inception of the Takeda
Agreement. The Company has assessed these required deliverables under the guidance of EITF 00-21
to determine which deliverables are considered separate units of accounting. The Company was able
to determine that its participation in the Joint Steering Committee, the Joint Manufacturing
Committee and the Joint Commercialization Committee has value to Takeda on a stand-alone basis
because the Company provides the background knowledge of AMITIZA and the individual expertise of
the participants in these committee meetings, which the Company
considers necessary for the Agreement to be successful. Takeda could have obtained similar
expertise by hiring independent consultants, but relied instead on the expertise of the Company.
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The Company was also able to determine objective and reliable evidence of the fair value of
these deliverables, including anticipated expenses expected to be incurred to meet its obligations,
in the form of contract agreements between the Company and specialized consultants for other
development projects the Company is and has been involved with currently and in the past. The
Company was not, however, able to distinguish stand-alone value for participation in the Joint
Development Committee separate from the Company’s obligations to perform research and development
of Constipation and IBS-C because the participation in the Joint Development Committee was to occur
concurrently with the development work. Thus, the Company has determined that there were four
separate units of accounting when the Takeda Agreement was executed — (1) participation in the
Joint Steering Committee, (2) participation in the Joint Manufacturing Committee, (3) participation
in the Joint Commercialization Committee and (4) the combined requirement of the development work
of Constipation and IBS-C and participation in the Joint Development Committee.
The fair value associated with the three separately identified units of accounting related to
participation of committee meetings were based on obtaining objective and reliable evidence of the
fair value of these deliverables in the form of contract agreements between the Company and
specialized consultants for other development projects the Company is and has been involved with
currently and in the past. Upon receipt of the $20 million up-front payment, the Company deferred
approximately $2.4 to be recognized using the time-based model over the performance period of the
participation in these meetings. During the years ended December 31, 2004, 2005 and 2006, the
Company recognized approximately $24,000, $147,000, and $147,000, respectively, of this deferred
amount as collaboration revenue on the consolidated statements of operations and comprehensive
(loss) income. The related deferred revenue as of December 31, 2005 and 2006 was approximately
$2.2 million and $2.1 million, respectively.
Since the execution of the Takeda Agreement through December 31, 2006, the Company deferred
the residual amount of the $20 million up-front payment totaling approximately $17.6 million,
milestone payments received totaling $50 million, and reimbursement of the initial $30 million of
research and development costs for the development of AMITIZA for Constipation and IBS-C
indications. These deferred amounts were applied towards the unit of accounting combining the
participation in the Joint Development Committee and the development of Constipation and IBS-C and
are being recognized using the time-based model over the performance period of developing the
Constipation and IBS-C NDA submissions. The Company had originally estimated that it would
complete the development of the Constipation and IBS-C
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NDA submissions in December 2006. The Company concluded in June 2006 that the estimated completion
date should be revised to May 2007. Subsequent to December 31, 2006, the Company further extended
the estimated completion date from May 2007 to June 2007. See Note 3 for a discussion of these
changes in estimates. During the years ended December 31, 2004, 2005 and 2006, the Company
recognized approximately $2.8 million, $39.0 million and $46.4 million, respectively, of these
deferred amounts as research and development revenue on the consolidated statements of operations
and comprehensive (loss) income. The related deferred revenue as of December 31, 2005 and 2006 was
approximately $35.8 million and $11.0 million, respectively.
The Company incurred research
and development costs for this development work of approximately
$1.5 million, $25.9 million and $11.6 million for the years ended December 31, 2004, 2005 and
2006, respectively. The Company has an express contractual obligation to perform the development
work under the Takeda Agreement, including for periods after receipt of funding by Takeda. Funding
from Takeda is received, in advance, on a quarterly basis based on estimated costs to be incurred
by the Company.
On February 1, 2006, the Company entered into the Supplemental Agreement with Takeda, which
amends the responsibilities of both the Company and Takeda for the co-promotion of AMITIZA and
clarifies the responsibilities and funding arrangements for other marketing services to be
performed by both parties.
Upon execution of the Supplemental Agreement, the Company was required to complete several
deliverables that Takeda was responsible to fund. The following are the required deliverables of
the Company, along with the related contractual cash flows from Takeda and the associated
obligations and performance period of the Company, when the Supplemental Agreement was executed:
| • | The Company shall co-promote AMITIZA with Takeda by employing a sales force of approximately 38 representatives to supplement Takeda’s sales activities. Takeda shall reimburse the Company a specified amount per day per sales force representative, but such reimbursements shall not exceed certain pre-defined amounts. The term of this reimbursement arrangement ceases five years following the first date that the Company deployed sales representatives, which was in April 2006. The Company has recognized approximately $3.5 million of revenues for the year ended December 31, 2006 reflecting these co-promotion reimbursements, which is recorded as co-promotion revenue in the consolidated statements of operations and comprehensive (loss) income. |
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| • | The Company shall perform miscellaneous marketing activities for AMITIZA, which will be fully reimbursed by Takeda. There is no defined performance period, but the performance period will not exceed the term of the Supplemental Agreement. The Company began performing these activities in January 2006. The Company has recorded approximately $779,000 of reimbursements of marketing costs for the year ended December 31, 2006. This amount is recorded as a reduction to selling and marketing expenses in the consolidated statements of operations and comprehensive (loss) income because the Company is acting as an agent to Takeda based on the guidance of EITF 99-19. |
During the quarter ended June 30, 2006, the Joint Commercialization Committee granted approval
for the Company and Takeda to begin three new studies related to funding arrangements discussed in
both the Takeda Agreement and the Supplemental Agreement. The following are the three additional
deliverables of the Company, along with the related contractual cash flows from Takeda and the
associated obligations and performance period of the Company, when the three studies were agreed
upon:
| • | The Company shall perform studies in connection with changes to labeling for Constipation or IBS-C. Takeda shall fund 70% of the labeling studies and Sucampo shall fund the remaining 30%. There is no defined performance period, but the performance period will not exceed the term of the Takeda Agreement. The Company initiated the first labeling study for Constipation in August 2006, which is expected to be completed in January 2008. | ||
| • | The Company shall perform all development work for the development of an additional indication for opioid-induced bowel dysfunction (OBD). Takeda shall fund all development work up to a maximum aggregate of $50 million and $20 million for each additional indication and new formulation, respectively. If development costs exceed these amounts, Takeda and the Company shall equally share such excess costs. There is no defined performance period, but the performance period will not exceed the term of the Takeda Agreement. The Company initiated work on the first additional indication for AMITIZA in July 2006, which is estimated to be completed in June 2009 and is expected to exceed $50 million in development costs. | ||
| • | The Company shall perform all development work necessary for Phase IV studies, for which Takeda shall fund all development work. There is no defined performance period, but the performance period will not exceed the term of the Supplemental Agreement. |
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| The Company began work on a Phase IV study for Constipation in August 2006, which is estimated to be completed in January 2008. |
The Company has assessed these required deliverables under the guidance of EITF 00-21 to
determine which deliverables are considered separate units of accounting. As a result of the
Company and Takeda agreeing to perform and fund these studies simultaneously, the Company
determined that there is no objective and reliable evidence to determine the fair value for each of
the studies. Accordingly, the Company has combined these three new required deliverables as a
single unit of accounting. All cash payments from Takeda related to these three deliverables will
be deferred upon receipt and recognized over the entire period to complete the three studies using
the time-based model. The estimated completion date is June 2009. During the year ended December
31, 2006, the Company recognized approximately $1.0 million related to these three deliverables as
research and development revenue on the consolidated statements of operations and comprehensive
(loss) income.
The Company received $5.0 million as an option payment in 2004 to continue negotiations for
additional territories held by SPE and SPL. This agreement provided for negotiation terms of 12
months for the SPL territory and until NDA approval of AMITIZA for the SPE territory. Of the $5.0
million payment received, if negotiations did not succeed, a total of $2.5 million would be
required to be returned to Takeda ($1.0 million for the SPL territory and $1.5 million for the SPE
territory). The remaining $2.5 million was retained by the Company. As to that portion of the
option agreement relating to SPL ($2.0 million), the Company recorded $1.0 million as current
deferred revenue and $1.0 million as other liabilities — short term in 2004. As to the option
payment relating to SPE ($3.0 million), the Company recorded $1.5 million as long term deferred
revenue and $1.5 million as other liabilities — long term in 2004. Upon receipt of the payments
from Takeda, the refundable portions were recorded as an other liability and the non-refundable
portions were recorded as deferred revenue. The option right expired for SPL during 2005 and $1.0
million was returned to Takeda and the Company immediately recognized the deferred $1.0 million as
contract revenue for the year ended December 31, 2005. The option right expired for SPE during the
first quarter of 2006 and $1.5 million was returned to Takeda and the Company immediately
recognized the deferred $1.5 million as contract revenue for the year ended December 31, 2006. See
Note 3 for a discussion of the revenue recognition policy for option payments received by the
Company.
* * * * *
On the telephone conference call on April 19, 2007, the Staff also asked how the Company
accounts for the reimbursement of the specified medical marketing expenses under the
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Supplemental Agreement, particularly whether the Company will present the reimbursements on a
gross basis or a net basis on the statement of operations, and asked the Company to describe the
justification for doing so given the factors described in EITF 99-19
The Company’s accounting policy is to report the reimbursement of costs in connection with
marketing publications on a net basis — that is, as a reduction of sales and marketing expense as
incurred. The Company assessed the criteria in EITF 99-19, “Reporting Revenue Gross as Principal
Versus Net as an Agent”, in arriving at this conclusion. Specifically, the Company performed the
following assessment of EITF 99-19, which indicated the Company is not the principal in this
arrangement:
The significant indicators of net revenue reporting under EITF 99-19 identified by the Company
include:
| • | The supplier (not the company) is the primary obligor in the arrangement — Sucampo is not responsible for establishing the marketing publications strategy plan for AMITIZA. The selection of publication, vendor, and total costs to complete the marketing publications strategy plan are approved by Takeda, and not the Company, which only acts as an agent of Takeda to manage this process (this is differentiated from all other marketing and promotion activities which are obligations of and controlled by Sucampo). The overall acceptability of this plan is determined by Takeda. | ||
| • | The amount the company earns is fixed — Sucampo is only reimbursed an amount equal to the amount paid to the external supplier and Sucampo earns no profit on the payment. All external costs incurred by the Company are passed through to Takeda as a result of such costs being reimbursed by Takeda. | ||
| • | The company has discretion in supplier selection — The suppliers used in completing the marketing publications strategy plan are initially proposed by the Company but selected only after approval by Takeda. |
The Company also assessed the guidance in EITF 01-14, “Income Statement Characterization of
Reimbursements Received for ‘Out of Pocket’ Expenses Incurred”, and determined that this assessment
did not change the above conclusions.
The total costs incurred by the Company as an agent to and reimbursed by Takeda in connection
with marketing publications were approximately $779,000 of the $43.7 million of operating expenses
incurred during the year ended December 31, 2006. As of January 1, 2007,
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the Company was no longer the agent for Takeda and Takeda became the direct payor to the
suppliers who performed these medical marketing activities. The Company did not act and believes
it will not act as an agent for Takeda related to medical marketing activities during the years
ended December 31, 2005 and 2007, respectively.
In response to this question, the Company has expanded its revenue recognition policy, as
indicated above.
* * * * *
Under SFAS 154, paragraph 2h, the Company has a correction of an error as of December 31, 2006
and will restate its 2004 and 2005 consolidated financial statements under paragraph 25 and
corresponding disclosures under paragraph 26.
The management of the Company has discussed the matters above with PricewaterhouseCoopers LLP,
the Company’s independent registered public accountants, who concur that the Company’s conclusions
are acceptable.
If you have any questions or comments on the above, please contact me at (202) 663-6224.
Respectfully,
/s/ Brent B. Siler
Brent B. Siler
cc:
|
Ms. Sonia Barros | |
| Ms. Christine Allen | ||
| Mr. Kevin Woody | ||
| Mr. Mark Barrysmith | ||
| Securities and Exchange Commission | ||
| Sachiko Kuno, Ph.D | ||
| Ryuji Ueno, M.D., Ph.D., Ph.D. | ||
| Mr. Ron Kaiser | ||
| Ms. Mariam Morris | ||
| Jeffrey D. Karpf, Esq. |