Paladin Labs Inc.
TSX : PLB

Paladin Labs Inc.

August 07, 2008 07:30 ET

Paladin Reports 2008 Second Quarter Financial Results

Announces acquisition of worldwide rights to Antizol®

MONTREAL, CANADA--(Marketwire - Aug. 7, 2008) - Paladin Labs Inc. (TSX:PLB), a leading Canadian specialty pharmaceutical company, today reported its 2008 second quarter financial results.

Second Quarter Highlights

- Revenues reached a record $20.7 million, an increase of 34% over the same period last year

- Net income before extraordinary gain was a record $2.6 million, an increase of 150% over the same period last year

- EBITDA(1) reached a record $7.0 million, a 37% increase over the same period last year

- Plan B® granted over-the-counter status by the National Association of Pharmacy Regulatory Authorities (NAPRA)

- Licensed to Nuvo Research Inc. (TSX:NRI) the exclusive rights to develop and commercialize a novel pain formulation

- Entered into a Canadian co-promotion agreement for Seasonale™ with Procter & Gamble (P&G) Pharmaceuticals Canada Inc. - Canada's first and only extended-cycle oral contraceptive available in Canada

Subsequent to Second Quarter

- Modified the existing licensing arrangements with Nuvo Research Inc. for Pennsaid® and its follow-on product, Pennsaid® Plus.

- Acquired the Canadian, Australian and New Zealandian rights to Unisom™ and the Canadian rights to Kaopectate® from Johnson & Johnson Inc. (NYSE:JNJ).

- Acquired the worldwide rights to Antizol® and Antizol-Vet® from Jazz Pharmaceuticals, Inc. (NASDAQ:JAZZ).

"We are pleased with our strong performance marked by quarterly record revenues and EBITDA. Our product offering expanded with the addition of Unisom™ and Kaopectate® from J&J and Antizol® from Jazz Pharmaceuticals. Thus far in 2008, we have invested over $22.5 million in product acquisitions, product licenses and related inventory, and strategic investments. This has set the stage for strong, sustainable growth," said Jonathan Ross Goodman, President and CEO of Paladin Labs.

Financial Results

Revenues for the second quarter of 2008 increased 34% or $5.3 million to $20.7 million, compared to $15.4 million in the second quarter of 2007. This increase is due primarily to strong performance from the Company's key promoted products, including Tridural™, Twinject®, Seasonale™, Plan B®, Pennsaid®, Metadol®, Trelstar®, and Testim® which combined increased by 43% in the second quarter of 2008 compared to the corresponding period a year ago.

Second quarter 2008 earnings before interest expense, taxes, depreciation, amortization, and unusual items (EBITDA(1)) increased 37% to $7.0 million, compared to EBITDA of $5.1 million in the second quarter of 2007. For the six months ended June 30, 2008, EBITDA increased 25% to 12.4 million from $9.9 million

Net income for the quarter was $2.6 million or $0.17 per fully diluted share, compared to net income before extraordinary gain of $1.0 million or $0.07 per fully diluted share for the same period last year. Net income for the six months ended June 30, 2008 was $4.1 million or $0.27 per fully diluted share compared to net income before extraordinary gain of $2.3 million or $0.15 per fully diluted share for the same period last year. Net income for the three months and six months ended June 30, 2007 was $5.9 million or $0.38 per fully diluted share and $7.2 million or $0.47 per fully diluted share, respectively.

Selling and marketing expense for the second quarter of 2008 increased 13% to $5.6 million from $4.9 million in the second quarter of 2007. For the six months ended June 30, 2008, selling and marketing expenses were $11.1 million, an increase of 19% from $9.3 million for the same period last year. The promotional activities driving selling and marketing expenses primarily relate to Paladin's launch of Seasonale™, Tridural™, Testim® and Trelstar® as well as the continued promotional activities for Twinject®, Plan B®, Pennsaid® and Metadol®.

On July 28, 2008, the Company received notices of re-assessment from the Canada Revenue Agency ("CRA") containing adjustments relating to the use of certain non-capital losses acquired as part of the Dimethaid Health Care Ltd. (subsequently renamed Squire Pharmaceuticals Inc. "Squire") acquisition from Nuvo Research Inc. ("Nuvo"). The notices of re-assessment, if they stood, would amount to additional Canadian federal tax due of approximately $2.6 million plus interest and penalties of approximately $1.1 million. It is likely that the CRA and provincial tax authorities will propose similar adjustments for 2007 and for future years. The Company, under the terms of the Share Purchase Agreement ("SPA") for Squire, holds certain indemnifications from Nuvo relating to the status of the Squire tax accounts and certain tax asset values. The Company estimates the total tax liability exposure as a result of the CRA's position to be approximately $13.9 million, including interest and penalties of which it can claim at least $9.65 million from Nuvo under the indemnification provisions of the SPA. The Company disagrees with the position taken by the CRA and believes it is without merit. The Company intends to file Notices of Objection through the CRA appeals process and the courts if necessary. In connection with the appeals process, the Company is required to post a deposit of up to one half of the tax and interest assessed amounting to $1.9 million and will make a claim from Nuvo under the SPA. Management currently believes that the resolution of this matter will not have a material effect on the Company's results of operations, financial position or liquidity. However, an unfavourable resolution with the CRA combined with a failure of Nuvo to satisfy their obligations under the SPA, could have a material impact on the Company's results of operations, financial position and cash flows in the quarter in which an adjustment is recorded or the tax is due or paid.

At June 30, 2008, Paladin's cash, cash equivalents and investments in marketable securities totalled $36.5 million. From this strong cash position, Paladin continues to pursue product acquisition and development opportunities.

Product Developments

During the quarter, the National Association of Pharmacy Regulatory Authorities (NAPRA) granted Plan B® full Over-the-Counter status (OTC) (schedule III). Previously, Plan B® had Behind-the-Counter status (schedule II). This means that Canadian women will no longer need to request Plan B® from the pharmacist and will be able to purchase Plan B® just like any other OTC product.

Also during the quarter, Paladin licensed to Nuvo Research Inc. the exclusive rights to develop and commercialize a novel topical pain formulation with the potential to treat inflammatory and neuropathic pain conditions. The formulation is in the pre-clinical formulation development stage and is the subject of a pending patent application. As part of the transaction, Paladin will have rights to market, distribute and sell the product in Canada, Israel, South Africa, and South & Central America.

In addition, Paladin entered into a Canadian Co-Promotion Agreement with Procter & Gamble (P&G) Pharmaceuticals Canada, Inc. for Seasonale™ - Canada's first and only extended-cycle oral contraceptive. With Seasonale™, Canadian women have an oral contraceptive option that will allow them to have just four periods per year.

Subsequent to the quarter, Paladin announced modifications to its existing licensing arrangements for Pennsaid® and its follow-on product, Pennsaid® Plus. The existing Canadian Pennsaid® Plus license between Nuvo and Squire has been amended to grant Squire the right to market, distribute and sell Pennsaid® Plus in South Africa and Israel and, if certain conditions are met, Central and South America. Pennsaid® Plus is an improved, patent pending, gel formulation of Pennsaid that may require less frequent dosing.

We acquired in July 2008 the Canadian, Australian and New Zealandian rights to Unisom™, a temporary sleep aid and the Canadian rights to Kaopectate®, an orally taken medication used for the treatment of mild diarrhoea from Johnson & Johnson Inc. According to IMS, in 2007 combined sales of these two products amounted to $3.3 million.

Effective August 1, 2008 Paladin acquired the worldwide rights to Antizol® and Antizol-Vet® from Jazz Pharmaceuticals, Inc. Antizol® is indicated as an antidote for ethylene glycol (such as antifreeze) or methanol poisoning, or for use in suspected ethylene or methanol ingestion. Antizol-Vet® is indicated as an antidote for ethylene glycol (antifreeze) poisoning in dogs that have ingested or are suspected of having ingested ethylene glycol. Paladin licensed the Canadian rights to Antizol® in 1999 and launched in 2000. Paladin expects that worldwide sales of Antizol® over the next twelve months will be approximately $2-3 million.

(1) EBITDA (earnings before interest, taxes, depreciation and amortization) does not have any standardized meaning under Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable to similar measures presented by other companies. The Company defines EBITDA as earnings before interest expense, taxes, amortization, and unusual items; such as write-downs and gains (losses) on intellectual property and investments. EBITDA is calculated and presented consistently from period to period and agrees, on a consolidated basis, with the amount disclosed as "Earnings before under noted items" on the consolidated statement of income. The Company believes EBITDA to be an important measurement that allows it to assess the operating performance of its ongoing business on a consistent basis without the impact of amortization expenses. The Company excludes amortization expenses because their level depends substantially on non-operating factors such as the historical cost of intangible and capital assets. The Company's method for calculating EBITDA may differ from that used by other issuers and, accordingly, this measure may not be comparable to EBITDA used by other issuers.

Conference Call Notice

Paladin will host a conference call to discuss its second quarter results on Thursday, August 7, 2008, at 9:30 a.m. EST. The dial-in number for the conference call is 1-800-814-4853 or 1-416-915-5765. The call will be audio-cast live and archived for 30 days at www.paladinlabs.com.

About Paladin Labs

Paladin Labs Inc., headquartered in Montreal, Canada, is a specialty pharmaceutical company focused on acquiring or in-licensing innovative pharmaceutical products for the Canadian market. With this strategy, a focused national sales team and proven marketing expertise, Paladin has evolved into one of Canada's leading specialty pharmaceutical companies. For more information, please visit the Company's web site at www.paladinlabs.com

These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. The Companies consider the assumptions on which these forward-looking statements are based to be reasonable at the time they were prepared, but caution that these assumptions regarding the future events, many of which are beyond the control of the Companies and their subsidiaries, may ultimately prove to be incorrect. Factors and risks, which could cause actual results to differ materially from current expectations, are discussed in the annual reports, as well as in the Companies' Annual Information Forms for the year ended December 31, 2007. The Companies disclaim any intention or obligation to update or revise any forward-looking statements whether a result of new information, future events, or except as required by law. For additional information on risks and uncertainties relating to these forward-looking statements, investors should consult the Companies' ongoing quarterly filings, annual reports and Annual Information Forms and other filings found on SEDAR at www.sedar.com.



CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian dollars)

June 30 December 31
2008 2007
$ $
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(unaudited)
ASSETS
Current
Cash and cash equivalents 7,324 6,074
Marketable securities 29,222 26,041
Accounts receivable 16,405 11,920
Inventory 5,578 6,781
Other current assets 1,566 2,943
Investment tax credits receivable - 244
Future income tax asset 2,414 2,992
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Total current assets 62,509 56,995

Long-term marketable securities - 4,101
Investment tax credits recoverable 776 773
Capital assets 526 300
Pharmaceutical product licences and rights 28,071 24,366
Deferred charges 550 1,455
Investments 3,365 4,041
Future income tax assets 7,119 6,874
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Total assets 102,916 98,905
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 11,674 11,582
Accounts payable to related parties 1,307 1,032
Deferred revenue - 271
Income taxes payable 4,251 2,056
Balance of sale payable 531 89
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Total current liabilities 17,763 15,030

Long-term
Future income tax liability 885 1,357
Balance of sale payable - 518
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Total liabilities 18,648 16,905
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Shareholders' equity
Capital stock 59,996 59,797
Other paid-in capital 2,567 2,019
Accumulated other comprehensive loss (1,796) (324)
Retained earnings 23,501 20,508
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Total shareholders' equity 84,268 82,000
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Total liabilities and
shareholders' equity 102,916 98,905
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CONSOLIDATED STATEMENTS OF INCOME
(In thousands of Canadian dollars except for share and per share amounts)
(unaudited)

Three-month period Six-month period
ended June 30 ended June 30
2008 2007 2008 2007
$ $ $ $
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Revenues 20,668 15,436 37,502 28,329
Cost of sales 5,452 3,734 9,396 6,206
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Gross profit 15,216 11,702 28,106 22,123
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Expenses (income)
Selling and marketing 5,569 4,910 11,102 9,331
General and administrative 1,955 1,444 3,369 2,461
Research and development 1,079 610 2,122 1,156
Interest income, net (384) (356) (903) (739)
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Earnings before
under-noted items 6,997 5,094 12,416 9,914
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Amortization of intangible
assets and deferred charges 3,123 3,274 6,060 5,892
Unrealized (income) loss on
derivative instruments (66) 34 (64) 244
Gain on disposal of investment - - - (74)
Other income (127) - (130) -
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Income before income taxes 4,067 1,786 6,550 3,852
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Provision for income taxes
Current 1,444 520 2,293 674
Future 35 229 192 877
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1,479 749 2,485 1,551
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Net income before
extraordinary gain 2,588 1,037 4,065 2,301
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Extraordinary gain (net
of $nil taxes) - 4,874 - 4,874
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Net income for the period 2,588 5,911 4,065 7,175
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Earnings per share before
extraordinary gain
Basic 0.17 0.07 0.27 0.15
Diluted 0.17 0.07 0.27 0.15

Earnings per share
Basic 0.17 0.39 0.27 0.48
Diluted 0.17 0.38 0.27 0.47
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Weighted average number
of shares outstanding
Basic 14,829,218 15,100,003 14,829,889 15,052,122
Diluted 15,066,153 15,437,995 15,075,385 15,382,160
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian dollars)
(unaudited)

Three-month period Six-month period
ended June 30 ended June 30
2008 2007 2008 2007
$ $ $ $
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Operating activities
Net income 2,588 5,911 4,065 7,175
Add items not affecting cash
Amortization 3,147 3,292 6,106 5,930
Future income taxes 35 (5,541) 192 (4,893)
Stock based compensation expense 466 391 709 520
Unrealized net (gain) loss on
derivative instruments (66) 34 (64) 244
Accreted interest (26) (19) (50) (36)
Gain on disposal of investments - - - (74)
Imputed interest on
balance of sale 6 6 12 12
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6,150 4,074 10,970 8,878
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Net change in non-cash
balances relating
to operations (2,108) (220) 446 (752)
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Cash flows from operating
activities 4,042 3,854 11,416 8,126
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Investing activities
Additions to pharmaceutical
product licenses and rights,
and deferred charges - (11,758) (8,867) (11,758)
Investment in portfolio
company (1,000) - (1,000) -
Acquisition of property,
plant and equipment (55) (32) (310) (71)
Purchases of short-term
marketable securities (13,363) - (25,128) (25,986)
Maturities of short-term
marketable securities 11,649 9,292 26,171 41,062
Purchases of long-term
marketable securities - - - (10,378)
Proceeds from the disposal
of investment - - - 232
Business acquisition - (650) - (650)
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Cash flows used in
investing activities (2,769) (3,148) (9,134) (7,549)
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Financing activities
Common shares issued for cash 304 552 774 880
Repurchase of shares - - (1,806) (373)
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Cash flows from (used in)
from financing activities 304 552 (1,032) 507
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Net change in cash and cash
equivalents during the period 1,577 1,258 1,250 1,084

Cash and cash equivalents,
beginning of period 5,747 2,595 6,074 2,769

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Cash and cash equivalents,
end of period 7,324 3,853 7,324 3,853
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Cash and cash equivalents 7,324 3,853
Short-term marketable
securities 29,222 28,708
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36,546 32,561
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