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Exhibit 99.1
SORIATANE PRODUCT LINE OF HOFFMANN-LA ROCHE INC.
INDEX
DECEMBER 31, 2003 AND 2002 AND THREE YEARS ENDED DECEMBER 31, 2003
PAGE(S)
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Report of Independent Auditors....................................................................... 2
Statements of Assets Acquired and Liabilities Assumed................................................ 3
Statements of Revenues and Direct Costs and Expenses................................................. 4
Notes to Financial Statements........................................................................ 5-8
1
REPORT OF INDEPENDENT AUDITORS
To the Stockholder and Board of Directors of
Hoffmann-La Roche Inc.
We have audited the accompanying statements of assets acquired and liabilities
assumed of the Soriatane product line ("Soriatane") of Hoffmann-La Roche Inc.,
as of December 31, 2003 and 2002 and the related statements of revenues and
direct costs and expenses for the three years ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2, the accompanying financial statements attributable to
Soriatane are not intended to be a complete presentation of Soriatane's
financial position or results of operations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the revenues and direct costs and expenses of Soriatane
for the three years ended December 31, 2003 and the related assets acquired and
liabilities assumed as of December 31, 2003 and 2002, in conformity with
accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
April 16, 2004
2
SORIATANE PRODUCT LINE OF HOFFMANN-LA ROCHE INC.
STATEMENTS OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
DECEMBER 31,
--------------------------
(amounts in thousands of dollars) 2003 2002
------------ -----------
ASSETS ACQUIRED
Inventories, net $ 1,460 $ 875
------------ -----------
Total assets acquired 1,460 875
------------ -----------
LIABILITIES ASSUMED
Sales returns reserve, net of $850 assumed by Hoffmann-La
Roche Inc. (3,700) (3,629)
Rebates reserve (41) (35)
------------ -----------
Total liabilities assumed (3,741) (3,664)
------------ -----------
Net liabilities assumed $ (2,281) $ (2,789)
============ ===========
The accompanying notes are an integral part of these financial statements.
3
SORIATANE PRODUCT LINE OF HOFFMANN-LA ROCHE INC.
STATEMENTS OF REVENUES AND DIRECT COSTS AND EXPENSES
YEARS ENDED DECEMBER 31,
----------------------------------------
(amounts in thousands of dollars) 2003 2002 2001
---------- ---------- -----------
NET REVENUES $ 41,187 $ 34,520 $ 36,157
---------- ---------- -----------
DIRECT COSTS AND EXPENSES
Cost of goods sold 1,915 612 974
Advertising and promotion expenses 4,963 6,161 4,316
Field force expenses 7,918 6,190 4,513
Marketing expenses 742 620 401
Distribution costs 314 257 305
Restructuring costs 1,364 - -
---------- ---------- -----------
Net revenues in excess of direct costs and expenses $ 23,971 $ 20,680 $ 25,648
========== ========== ===========
The accompanying notes are an integral part of these financial statements.
4
SORIATANE PRODUCT LINE OF HOFFMANN-LA ROCHE INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SALE OF SORIATANE
GENERAL
Hoffmann-La Roche Inc. (the "Company") is a wholly owned subsidiary of
Roche Holdings, Inc. (the "Parent Company"), a Delaware corporation.
The Soriatane product line ("Soriatane") is manufactured by the Company
in Clifton, New Jersey. Soriatane is an approved oral therapy for the
treatment of severe psoriasis in adults. Soriatane was approved by the
Food and Drug Administration in October 1996 and was launched in the
United States in October 1997 in both 10mg and 25mg dosage forms. The
patent protection ended for Soriatane in 1999, although there are
currently no generic competitors on the market. Soriatane is sold
through distributors in the United States and through one U.S. based
distributor which sells products outside the U.S.
SALE AND PURCHASE AGREEMENT
A Sale and Purchase Agreement (the "Agreement") was entered into
between the Company (the "Seller") and Connetics Corporation (the
"Buyer") on February 2, 2004, whereby Connetics Corporation purchased
the U.S. rights of Soriatane from the Company. The Buyer acquired
certain assets and assumed certain liabilities as of March 4, 2004 (the
"Closing Date") for $123,000,000 plus certain adjustments on closing,
as defined in the Agreement. The assumed liabilities as of March 4,
2004 primarily relate to sales returns in connection with sales of
Soriatane in the United States up to March 4, 2004. The Seller is
liable for all sales returns for Soriatane during the six month period
after the Closing Date, up to a maximum limit of $850,000. The Buyer is
liable for all sales returns which occur beyond six months after the
Closing Date plus the excess of sales returns over $850,000 in the
first six months after the Closing Date. The Seller estimates, based on
its historical experience, that actual returns during the six month
period after the Closing Date will exceed the $850,000 maximum and
therefore the sales return liability included in the statements of
assets acquired and liabilities assumed has been reduced by the
$850,000 portion of this liability to be assumed by the Seller.
The Agreement also states that the Buyer shall be financially
responsible for rebates invoiced by any state governments beginning two
quarters after the quarter in which the Closing Date occurs, as well as
for all chargebacks with an invoice date subsequent to two months
following the Closing Date. Based on its historical experience, the
Seller expects that the Buyer will assume a portion of the liabilities
for rebates invoiced by state governments related to sales through the
Closing Date as the average historical lag time between the sale of
Soriatane and the related rebate settlement date exceeds the period of
time between the Closing Date and the date that the Buyer begins to
assume responsibility for such rebates. As a result, a liability for
the portion of government rebates to be assumed by the Buyer determined
on a historical basis has been included in the statements of assets
acquired and liabilities assumed at December 31, 2003 and 2002. The
liability for these rebates in these financial statements represents
the excess of the total liability for government rebates related to
Soriatane determined on an historical basis less the portion estimated
to be retained by the Seller. As of December 31, 2003 and 2002,
respectively, the total liability for government rebates related to
Soriatane totaled approximately $760,000 and $757,000, respectively, of
which $41,000 and $35,000, respectively, relate to estimated payments
after the two quarter period per the Agreement and have been recorded
as liabilities in the statements of assets acquired and liabilities
assumed. Based on historical experience, the Company does not expect
any chargebacks related to sales generated on or prior to the Closing
Date to be received after the two month period for chargebacks and
therefore no accruals for chargebacks have been included in the
statements of assets acquired and liabilities assumed as of December
31, 2003 and 2002.
5
SORIATANE PRODUCT LINE OF HOFFMANN-LA ROCHE INC.
NOTES TO FINANCIAL STATEMENTS
The assets acquired by the Buyer as of March 4, 2004 include certain
intangible assets as defined in the Agreement. These assets include
intellectual property, trademark rights, customer database, historical
sales data, marketing and promotional materials and plans,
manufacturing technology and know-how, permits or other Governmental
Authority authorizations exclusively relating to Soriatane and rights
and future obligations of the Seller relating exclusively to Soriatane
under the customer contracts.
The Buyer also acquired all finished goods inventory of Soriatane held
by the Seller as of March 4, 2004. The active ingredient required to
manufacture Soriatane is Acitretin. The Company purchases all of the
Acitretin needed to produce Soriatane from an affiliate company on a
cost plus 25% basis. At this time, there are no other suppliers in the
marketplace. Under a separate Manufacturing and Supply Agreement
entered into on March 4, 2004, the Seller will continue to supply as
much finished product as the Buyer requires at a pre-determined price,
through December 31, 2004. The Seller has also committed to supply to
the Buyer sufficient active ingredients to enable the Buyer to transfer
the manufacture of Soriatane to a third party with no interruption of
product supply. For the years ended December 31, 2003, 2002 and 2001,
the mark-up on Acitretin included in cost of goods sold amounted to
$146,112, $123,805 and $184,277, respectively. As of December 31, 2003
and 2002, the mark-up on Acitretin included in inventories, net
amounted to $121,724 and $69,198, respectively.
Although the Buyer only acquired the U.S. rights to Soriatane, on
February 2, 2004, a related side agreement was entered into between the
Buyer and Seller in which the Seller granted the Buyer the right to
enter into a twelve month agreement with a U.S. based customer of the
Seller which ultimately sells its products outside of the U.S. In
exchange for this right, the Buyer agreed to pay royalties to the
Seller on all net revenues of Soriatane sold to this customer for a
period of one year from the Closing Date. As the Buyer can only sell to
this customer for one year, unless additional rights are granted by the
Seller, and due to the fact that the Seller has no obligation to grant
additional rights, the financial statements do not include the
Company's activity with this customer for the periods presented. For
the years ended December 31, 2003, 2002 and 2001, the Company had net
revenues of $13.0 million, $18.6 million and $8.6 million,
respectively, and cost of goods sold of $0.6 million, $0.3 million and
$0.2 million, respectively, related to sales to this customer, and this
activity has not been included in the statements of revenues and direct
costs and expenses.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
GENERAL BASIS OF PRESENTATION
The accompanying statements were prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange
Commission for inclusion in the Form 8-K/A of Connetics related to the
acquisition of Soriatane and are not intended to be a complete
presentation of the financial position and results of operations of
Soriatane for the periods presented. The Company has not historically
prepared financial statements of Soriatane, which would be intended to
report a complete presentation of financial position, results of
operations and cash flows in accordance with accounting principles
generally accepted in the United States of America, as it is
impracticable to do so based on the information available from the
Company's books and records. Accordingly, the accompanying statements
do not purport to present the financial position or results of
operations of Soriatane that would have resulted if Soriatane had
operated as a stand alone, separate company.
6
SORIATANE PRODUCT LINE OF HOFFMANN-LA ROCHE INC.
NOTES TO FINANCIAL STATEMENTS
The statements of assets acquired and liabilities assumed have been
derived from the Company's books and records, which form the basis of
the Company's financial statements and represent the balances of those
items determined in accordance with the Sale & Purchase Agreement as of
the periods presented. All intangible assets acquired had zero
historical book value as of December 31, 2003 and 2002. All other
assets and liabilities, if any, of Soriatane have been excluded in
accordance with the Sale & Purchase Agreement.
The statements of net revenues and direct costs and expenses include
the Company's U.S. sales of Soriatane and the related amounts
attributable to the manufacture, distribution, marketing and promotion
of Soriatane for the three years ended December 31, 2003. These
statements exclude certain indirect expenses which have been incurred
by the Company but have not historically been allocated on a product
line basis. These allocations include, among other things, finance,
treasury, tax, public relations, audit and executive management
advisory functions, as well as other administrative costs. Interest
income or expense and income tax expense have also not been allocated
by the Company on a product basis and have therefore been excluded from
these financial statements.
ALLOCATIONS
Certain costs and expenses are allocated by the Company to Soriatane.
Such allocations include field force, marketing, restructuring and
distribution. Field force expenses include the portion of salaries,
benefits and travel expenses of the Company's dermatology sales force
which have been allocated to the Soriatane product line on the basis of
actual field force emphasis between the Company's two dermatological
products. In 2003, 2002 and 2001, total dermatology field force average
annual allocations to Soriatane were 54%, 40% and 30%, respectively.
Marketing and restructuring expenses have been allocated on the same
basis as field force expenses. Distribution costs have been allocated
to the Soriatane product line based upon a percentage of revenues for
all periods presented.
NET REVENUES
Revenue is recognized when products are shipped and title and risk of
loss has passed to the customer. Net revenues include gross sales less
product specific sales returns, cash discounts, government rebates, and
certain other customer discounts. At the time of sale, provisions are
recorded for returns, discounts and rebates which result in a reduction
of sales. These provisions are based upon historical experience updated
for changes in facts and circumstances, as appropriate.
For the purposes of these financial statements, returns are recorded as
a liability assumed rather than as a contra-asset in the statements of
assets acquired and liabilities assumed as accounts receivable balances
were not acquired by the Buyer in connection with the Agreement.
INVENTORIES
Inventories are comprised of finished goods and are valued at the lower
of cost or market. Cost is determined by the first-in, first-out
("FIFO") method.
ADVERTISING AND PROMOTION
The Company expenses the costs of advertising and promotion as
incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported
7
SORIATANE PRODUCT LINE OF HOFFMANN-LA ROCHE INC.
NOTES TO FINANCIAL STATEMENTS
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
3. CONCENTRATION OF CREDIT
There were three customers individually accounting for more than 15% of
Soriatane's net revenues in the periods presented. In the aggregate,
these customers accounted for greater than 67% of total net revenues
for all of the periods presented.
4. RESTRUCTURING CHARGES
In November 2003, the Company announced details of its restructuring
plan involving the Dermatology division. Total restructuring costs for
the Dermatology division amounted to $2.2 million, of which $2.1
million related to severance costs for the approximately 50 employees
that were impacted. These costs were allocated to the Soriatane product
line on the same basis as the direct field force allocation discussed
in Note 2. The majority of these costs were paid out in December 2003.
8