[C A M B R E X LOGO]
September 6, 2006
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
Securities and Exchange Commission
Division of Corporate Finance
Washington, DC
Dear Mr. Rosenberg:
This letter is Cambrex Corporation's ("the Company") response to your letter to
the Company dated July 28, 2006 regarding the Company's 2005 Form 10-K filed
May 26, 2006 (File No. 001-10638). The Company acknowledges that;
o it is responsible for the adequacy and accuracy of the disclosure in
its filings under the Securities Exchange Act of 1934;
o staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
these filings; and
o it may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
Your letter included the following inquiries related to the Company's Revenue
Recognition policy described within the Summary of Significant Accounting
Policies on page 51 of the Company's 2005 Form 10-K:
1. To help us understand how your method of recognizing revenue for
contracts that contain milestone based payments complies with GAAP,
please explain to us:
o Whether revenue earned from these contracts are solely milestone
based payments.
Company's response
The Company recognized $0.2 million, $10.5 million, and $12.4
million pursuant to milestone based contracts in 2003, 2004 and
2005 respectively. These revenues represented 0.1%, 2.4% and 2.8%
respectively of the Company's consolidated gross sales for those
years. The revenues earned on these contracts were predominantly
milestone-based except for certain amounts related to consumable
materials that are reimbursable at cost plus a small mark-up.
Projects may shift to product-based arrangements in their later
stages where pricing is on a per-batch basis, but the Company has
had only one such contract to date.
Cambrex Corporation | One Meadowlands Plaza | East Rutherford, NJ 07073
Phone 201.804.3000 | Fax 201.804.9852 | www.cambrex.com
o The nature of the services/events that trigger milestone
payments.
Company's response
The Company's milestone-based revenue occurs within its Biopharma
segment, a provider of contract biopharmaceutical services
including process development and manufacturing.
Within the Biopharma segment, the services/events that trigger
milestone payments are the completion of distinct activities
determined jointly by the customer and the Company to be the key
measures of progress within the arrangement. These activities
vary by contract but often include:
o Technology transfer and related activities - the Company
will start early-stage work related to a new biotech
drug by transferring the customer's knowledge related to
its production process into the Company's labs.
Milestone payments for these activities are triggered by
the completion of the technology transfer, the delivery
of a report documenting the activities performed and
customer acknowledgement that the service has been
satisfactorily completed;
o Process development activities - the Company improves
production processes developed by the customer in order
to facilitate the larger-scale manufacture of the drug
to be used for clinical trials. There are various
milestones based on discrete and identifiable
achievements within the process development phase of the
arrangement. Milestone payments for these activities are
typically triggered by the completion of the process
development activities, delivery of a report documenting
the activities performed and customer acknowledgement
that the service has been satisfactorily completed;
o Pre-production activities - these activities include raw
material procurement, testing of raw materials and
development of related procedures. Milestone payments
for these activities are triggered by the completion of
the testing of the raw materials, completion of the
related documentation and customer acknowledgement of
the completion of these activities;
o Production activities - initial production runs have the
goal of demonstrating the large-scale manufacturing
process using the equipment that will be used for actual
production at a later stage. These activities are often
referred to as engineering runs and the milestone
payment is triggered by the completion of the initial
production run, execution of the batch record
documenting all related procedures performed, and
customer acknowledgment of the completion of these
activities.
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The Company also produces product to be used in clinical
trials. Milestone payments related to this product will
generally be triggered by the completion of final product
testing and quality assurance release by both the Company
and the customer. However, revenue will not be recognized
for product to be used in clinical trials until the
milestone has been met and the related product has been
delivered to the customer or a customer-designated site.
o Why you believe that you are able to reasonably estimate "total
estimated contractual costs" and "total expected contractual
payments."
Company's response
The Company believes it is able to reasonably estimate total
contractual costs due to the significant experience of both its
management and staff-level personnel in completing the types of
milestones and overall projects discussed above. Significant
effort is expended by both the Company and its customers in
coming to agreement on expected effort required and the resulting
milestone pricing.
Revenue is then recognized using the "lesser of" non-refundable
milestone payments earned or the result achieved by applying
percentage of completion based upon costs. The "lesser of"
methodology provides additional assurance that revenue recognized
is consistent with the company's efforts and the value
transferred to the customer. It should be noted that it is rare
that the percentage of completion cost formula governs revenue
recognition; instead it is almost always the milestone payments
that dictate how much revenue is recognized.
Once work under a milestone arrangement is underway, project
teams review all significant projects regularly (at least
monthly) and total expected contractual costs are updated as
necessary (at least quarterly).
The Company believes it is reasonably able to estimate total
expected contractual payments because the milestone payments are
fixed, and as such, there is typically little variability in the
milestone payments once the arrangement is contractually defined.
o Whether or not and if so how the likelihood of actually achieving
the milestone is factored into the decision to include the amount
in your "total estimated contractual costs" and "total expected
contractual payments."
Company's response
Achievability of milestones is assessed by a Technical Evaluation
Team within Cambrex prior to the Company's proposal to provide
services under any
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milestone arrangements. This team evaluates the adequacy of the
Company's assets, people and know-how to achieve identified
milestones and if it is determined that there is a reasonable
level of doubt regarding the Company's ability to complete all
milestones, the arrangement will not be approved or it will be
proposed to the customer under a different arrangement (e.g.,
billing based solely on time and materials incurred). The Company
has achieved all milestones since it began entering
milestone-based arrangements in 2003.
o Why using an input measure of progress on the contracts such as
costs is appropriate when typically an output measure is a more
appropriate measure of progress in these circumstances.
Company's response
Within its milestone arrangements, the company is primarily
performing services for the client and providing detailed reports
documenting those services. As such, our predominant input, labor
hours, is representative of the service provided to the customer.
Milestones in the later stages of these arrangements may include
the production of a defined amount of drug product to be used in
human clinical trials that would typically constitute the only
defined and "measurable" output within a typical arrangement
other than written reports. In such situations, revenue is
recognized upon the delivery of the product to the customer or a
customer-designated site.
For a further discussion of the nature of the services triggering
milestone payments, see the Company's response to the staff's
related question above.
o Why you believe that your method reasonably recognizes revenue as
earned and complies with GAAP.
Company's response
The first step in the Company's revenue recognition process for
milestone-based arrangements is to identify all accounting units
as defined within EITF 00-21. Our customers contract for common
types of services during the development stages of a
biotechnology drug's life cycle, and as any individual service or
subset of these services fails to have stand-alone value, these
arrangements almost always constitute one Accounting Unit.
There is a natural tension between the Company and its customers
related to the amount and timing of the milestone payments,
resulting in the milestone payments reflecting a reasonable
balance of the proportionate effort required to complete each
milestone and the customer's perceived relative value of each
milestone.
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EITF 91-6 limits revenue recognition to the lesser of 1)
non-refundable milestone payments earned and due and payable, and
2) cost to date as a percentage of total expected cost multiplied
by total milestone payments under the arrangement, and as such,
provides a built-in and appropriate level of conservatism that
mitigates the possibility of recognizing revenue too early as a
result of "front-loaded" milestone payments. As stated earlier,
it is rare that the cost formula governs revenue recognition;
instead it is almost always the milestone payments that limit how
much revenue is recognized.
o How your situation is analogous to the Issue in EITF 91-6 and is
appropriate for you to use.
Company's response
In late 2003 when the Company entered its first milestone-based
payment arrangement, it consulted relevant authoritative
literature, its external auditors' engagement team,
(PricewaterhouseCoopers) and their SAB 104 Guide, which draws an
analogy to EITF 91-6 as an appropriate method to recognize
milestone payments. EITF 91-6 provides a workable revenue
recognition model for competitively negotiated contracts whereby
billings occur based upon a schedule agreed upon in advance and
vendor activities/outputs may vary from original estimates during
the term of the contract. The Company believes its milestone
contract fact patterns are reasonably analogous to the issue in
EITF 91-6. The Company reviewed the different methods outlined by
PwC's SAB 104 Guide by which revenue for these arrangements could
be recognized and chose the EITF 91-6 model as the most
appropriate method.
Sincerely,
/s/ Luke M. Beshar
----------------------------
Luke M. Beshar
Executive Vice President and
Chief Financial Officer
Cambrex Corporation
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