UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
Annual Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Fiscal Year Ended December 31, 2001
Commission File Number 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Ram Ridge Road, Spring Valley, New York 10977
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (845) 425-7100
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
Common Stock, $.01 par value The New York Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock and non-voting common
equity held by non-affiliates of the Registrant was $672,209,753, as of March
21, 2002 (assuming solely for purposes of this calculation that all directors
and executive officers of the Registrant are "affiliates").
Number of shares of the Registrant's common stock outstanding as of
March 21, 2002: 32,056,122
DOCUMENTS INCORPORATED BY REFERENCE : NONE
PART I
ITEM 1. BUSINESS.
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*RESTATEMENT OF RESULTS
Certain items in the consolidated financial statements for fiscal years
2000 and 1999 have been restated to change the manner in which Pharmaceutical
Resources, Inc. ("PRI" or the "Company") accounted for its transactions with
Merck KGaA in fiscal year 1998. In June 1998, the Company sold Merck KGaA
10,400,000 shares of its Common Stock, and entered into a distribution
agreement, dated March 1998, with Genpharm, Inc. ("Genpharm"), a Canadian
subsidiary of Merck KGaA. Previously, the Company accounted for the sale of the
Common Stock and the distribution agreement as separate transactions. In
restating its consolidated financial statements, the Company has accounted for
the two agreements as a single transaction under Emerging Issues Task Force
Issue ("EITF") No. 96-18 "Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling Goods or
Services". Under EITF 96-18, the fair value of the Common Stock sold, to the
extent it exceeded the cash consideration received, must be attributed to the
distribution agreement. The Company determined the fair value of the Common
Stock sold to Merck KGaA to be $27,300,000, which exceeded the cash
consideration of $20,800,000 by $6,500,000. That $6,500,000 has therefore been
assigned to the distribution agreement, with a corresponding increase in
shareholders' equity. Additionally, the Company recorded a deferred tax
liability, and a corresponding increase in the financial reporting basis of the
distribution agreement, of $4,333,000 to account for the difference between the
basis in the distribution agreement for financial reporting and income tax
purposes as required by Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes". The aggregate of $10,833,000 assigned to the
distribution agreement is included in intangible assets, reduced each period by
amortization, which beginning in the third calendar quarter of 1998, is being
recorded on a straight-line basis over fifteen years as a non-cash charge
included in selling, general and administrative expenses (see "Notes to
Consolidated Financial Statements-*Restatement of Results").
GENERAL
PRI is a holding company that, through its subsidiaries, is in the
business of developing, manufacturing and distributing a broad line of generic
drugs in the United States. PRI operates primarily through its wholly owned
subsidiary, Par Pharmaceutical, Inc. ("Par"), a manufacturer and distributor of
generic drugs. The Company's executive offices are located at One Ram Ridge
Road, Spring Valley, New York 10977, and its telephone number is (845) 425-7100.
Generic drugs are the pharmaceutical and therapeutic equivalents of brand
name drugs and are usually marketed under their generic (chemical) names rather
than by a brand name. Generally, a generic drug cannot be marketed until the
expiration of applicable patents on the brand name drug. Generic drugs must meet
the same government standards as brand name drugs, but are typically sold at
prices below those of brand name drugs. Generic drugs provide a cost-effective
alternative for consumers while maintaining the safety and effectiveness of the
brand name pharmaceutical product.
The Company's product line consists of prescription and, to a lesser
extent, over-the-counter generic drugs consisting of approximately 119 products
representing various dosage strengths for 51 drugs. In addition to manufacturing
its own products, the Company has strategic alliances with several
pharmaceutical and chemical companies providing it with products for sale
through distribution, development or licensing agreements (see "-Product Line
Information").
The Company markets its products primarily to wholesalers, retail drug
store chains, drug distributors and repackagers principally through its own
sales staff. The Company promotes the sales efforts of wholesalers and drug
distributors that sell the Company's products to clinics, government agencies
and other managed health care organizations (see "-Marketing and Customers").
RECENT DEVELOPMENTS:
Results of Operations. Fiscal year 2001 was a historical year for the
Company in terms of revenues, net income and new product introductions. The
Company's net income of $53,922,000 for fiscal year 2001 increased $55,573,000
from a net loss of ($1,651,000) for fiscal year 2000. The significantly improved
results followed record sales and gross margin growth, primarily attributable to
the introduction of three new products, megestrol acetate oral suspension, the
generic version of Bristol Myers Squibb's ("BMS") Megace(R) Oral Suspension, and
fluoxetine 10 mg and 20 mg tablets and fluoxetine 40 mg capsules, the generic
versions of Eli Lilly and Company's Prozac(R), that benefited in 2001 from
marketing exclusivity which ended in January 2002. Revenues of $271,035,000 for
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fiscal year 2001 increased 219% from fiscal year 2000 and 237% from fiscal year
1999. Gross margins improved to $109,729,000 (40% of net sales) in fiscal year
2001 from $22,690,000 (27% of net sales) in fiscal year 2000 and $16,175,000
(20% of net sales) in fiscal year 1999. The Company has increased spending on
research and development over the last three years and expects to continue
investing in its internal research and development programs, as well as, seeking
new products through joint ventures, distribution, licensing or other
agreements.
DR. REDDY'S LABORATORIES LTD. In April 2001, the Company and Dr. Reddy's
Laboratories Ltd. ("Reddy"), a producer of bulk active ingredients for the
pharmaceutical industry and a developer and manufacturer of finished dosage
forms located in India, entered into a broad-based co-marketing and development
agreement (the "Reddy Development and Supply Agreement") covering 14 generic
pharmaceutical products, five of which have been filed with the United States
Food and Drug Administration ("FDA") awaiting approval, to be marketed
exclusively by Par in the United States and certain other United States
territories upon FDA approval.
MARKETING EXCLUSIVITY. On July 16, 2001, the Federal Circuit Court of
Appeals in Washington D.C. affirmed the Company's summary judgment victory in
its patent infringement case with BMS over megestrol acetate oral suspension. On
July 25, 2001, the FDA granted the Company final approval for megestrol acetate
oral suspension with marketing exclusivity until mid-January 2002 and the
Company began shipping the product to its customers. Megestrol acetate oral
suspension, which according to the Company's market research had an estimated
$180 million of annual sales in 2001, is not subject to any profit sharing
agreements. The Company's 180-day exclusivity period ended in mid-January 2002
for megestrol acetate oral suspension and the Company recently learned that
another generic competitor was granted FDA approval to market another generic
version of the product. The Company has patents that cover its unique
formulation for megestrol acetate oral suspension and will avail itself of all
legal remedies and will take all of the necessary steps to protect its
intellectual property rights. Although a competitor may be entering the market
at some point in fiscal year 2002, megestrol acetate oral suspension is still
anticipated to be a significant profit contributor during 2002, while it appears
that there may be limited competition.
In August 2001, the Company began marketing with exclusivity fluoxetine
10 mg and 20 mg tablets, covered under a distribution agreement with Genpharm,
and fluoxetine 40 mg capsules covered under the Reddy Development and Supply
Agreement. With respect to fluoxetine, the exclusivity period ended in
late-January 2002 and since that time at least ten additional generic
manufacturers have introduced comparable products (tablets or capsules) for the
10 mg and 20 mg tablets and at least two additional generic manufacturers have
introduced a comparable product for the 40 mg capsules. In addition to its
fluoxetine 10 mg and 20 mg tablets, the Company also began marketing fluoxetine
10 mg and 20 mg capsules in February 2002 through a distribution agreement with
Genpharm. As a result of the introduction of these competing generic products
during the first quarter of 2002, the sales price for fluoxetine has
substantially declined from the price received by the Company during the
exclusivity period. Accordingly, the Company's sales and gross margins on
fluoxetine in fiscal year 2002 will be adversely affected. Although there can be
no assurance, the Company expects to introduce new products in fiscal year 2002
and increase sales of certain existing products to offset the loss of sales and
gross margin on its fluoxetine products.
FIRST-TO-FILE OPPORTUNITIES. On July 31, 2001, Alphapharm Pty Ltd.
("Alphapharm"), an Australian subsidiary of Merck KGaA, was granted final
approval by the FDA for flecainide acetate tablets, the generic version of
Minnesota Mining and Manufacturing Companys' ("3M") Tambocor(R), which, based on
the Company's market research, had an estimated $110 million of annual brand
sales in 2001. Since Alphapharm was the first-to-file an abbreviated new drug
application ("ANDA") and obtained Paragraph IV certification, the Company
anticipates receiving up to 180 days of marketing exclusivity for the product,
covered under a distribution agreement with Genpharm. The Company anticipates it
could begin marketing the product in the second quarter of fiscal year 2002
pending the outcome of litigation between Alphapharm and 3M.
Under a profit sharing agreement with Genpharm, PRI is entitled to
receive at least 30% of profits generated by Genpharm based on the sale of
omeprazole, the generic version of Astra Zeneca's ("Astra") Prilosec(R), which
based on the Company's market research, had estimated annual U.S. sales in
excess of $4 billion in 2001. The timing and value of the arrangement will
depend on the following factors: (i) the outcome of litigation between Genpharm
and Astra which focuses on both the invalidity of Astra's patents and the
infringement of Genpharm's formulation, the outcome of which will determine the
timing of the launch of the product, (ii) the outcome of a Federal Trade
Commission ("FTC") review with Andrx Corporation ("Andrx"), a pharmaceutical
company located in Fort Lauderdale, Florida relating to an agreement
("Memorandum of Understanding") between Andrx and Genpharm entered into in
fiscal year 2001, pursuant to which Genpharm would receive approximately 15% of
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the profit generated by Andrx during the exclusivity period for omeprazole
which, pursuant to the profit sharing agreement between the Company and Genpharm
would result in Par receiving 4.5% of Andrx profit.
In late 2001, the FDA granted co-exclusivity to Genpharm and Andrx,
allowing both companies to enter the market together and compete against each
other during the exclusivity period. In the event that Genpharm receives FDA
regulatory approval and the FTC does not allow the Memorandum of Understanding
to stand, Genpharm would enter the market during the exclusivity period. There
can be no assurance that Genpharm or Andrx will prevail in the litigation or FTC
review or that a full 180-days of exclusivity will be available at the time of
launch.
MERCK KGaA. On September 5, 2001, EMD, Inc. ("EMD" formerly known as
Lipha Americas, Inc.), a subsidiary of Merck KGaA, Merck KGaA and Genpharm sold
their entire ownership stake in PRI, which consisted of 13,634,012 shares of
Common Stock, or approximately 43% of the total outstanding number of shares of
Common Stock at the close of the transaction, to 53 unaffiliated institutional
investors in a private placement. Such shares were registered with the
Securities and Exchange Commission (the "Commission") pursuant to a registration
statement on Form S-3 under the Securities Act of 1933, as amended, and became
available for resale to the public. As a result of the transaction, four
directors designated by EMD to serve on the Company's Board of Directors (the
"Board") resigned. The Company has since filled three of the vacancies. Peter S.
Knight was appointed to the Board on October 11, 2001 and Scott Tarriff and
Ronald M. Nordmann were each appointed on December 14, 2001. They join current
Board members John D. Abernathy, Mark Auerbach and Kenneth I. Sawyer. The Board
is considering further nominations and expects to fill the additional vacancy
with a qualified individual.
ACQUISITION OF BMS PRODUCTS. On March 5, 2002 the Company acquired the
U.S. rights to five products from BMS. The products include the
antihypertensives Capoten(R) and Capozide(R), the cholesterol-lowering
medications Questran(R) and Questran Light(R), and Sumycin(R), an antibiotic.
Based on the Company's market research, these products are expected to generate
annual net sales of approximately $10,000,000 in fiscal year 2002 and beyond.
The product acquisition agreement is retroactive to January 1, 2002. To obtain
the rights to the five products, Par will make total payments of $3,000,000 and
agreed to terminate its outstanding litigation against BMS involving megestrol
acetate oral suspension and buspirone.
TERMINATION OF ISP FINETECH ACQUISITION. On March 15, 2002, the Company
announced the termination of negotiations with International Specialty Products
Inc. ("ISP") concerning the previously announced proposed purchase of the ISP
FineTech fine chemical business. ISP FineTech, based in Haifa, Israel and
Columbus, Ohio, specializes in the design and manufacture of proprietary
synthetic chemical processes used in the production of complex and valuable
organic compounds for the pharmaceutical industry. The Company discontinued
negotiations with ISP as a result of various events and circumstances that have
occurred since the announcement of the proposed transaction. Pursuant to the
termination of the purchase, the Company paid ISP a $3,000,000 break-up fee in
March 2002, which is subject to certain credits and offsets. As part of the
termination the Company received the rights to a raw material developed by ISP
FineTech under a prior agreement.
PRODUCT LINE INFORMATION
The Company operates in one industry segment, namely the manufacture and
distribution of generic pharmaceuticals. Products are marketed principally in
solid oral dosage form consisting of tablets, caplets and two-piece hard-shell
capsules. The Company also distributes one product in the semi-solid form of a
cream and one oral suspension product.
Par markets approximately 61 products, representing various dosage
strengths for 25 drugs that are manufactured by the Company and approximately 58
additional products, representing various dosage strengths for 26 drugs that are
manufactured for it by other companies. Par holds ANDAs for the drugs it
manufactures. Below is a list of drugs manufactured and/or distributed by Par.
The names of all of the drugs under the caption "Competitive Brand-Name Drug"
are trademarked. The holders of the trademarks are non-affiliated pharmaceutical
manufacturers.
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NAME COMPETITIVE BRAND-NAME DRUG
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CENTRAL NERVOUS SYSTEM:
Biperiden Hydrochloride Akineton
Benztropine Mesylate Cogentin
Buspirone BuSpar
Clonazepam Klonopin
Doxepin Hydrochloride Sinequan, Adapin
Fluoxetine Prozac
Fluphenazine Hydrochloride Prolixin
Imipramine Hydrochloride Tofranil
Triazolam Halcion
CARDIOVASCULAR:
Acebutolol Sectral
Amiodarone Hydrochloride Cordarone
Captopril Capoten
Doxazosin Mesylate Cardura
Enalapril Vasotec
Guanfacine Tenex
Hydralazine Hydrochloride Apresoline
Hydra-Zide Apresazide
Indapamide Lozol
Isosorbide Dinitrate Isordil
Minoxidil Loniten
Nicardipine Hydrochloride Cardene
Sotalol Betapace
ANALGESIC/ANTI-INFLAMMATORY:
Aspirin (zero order release) Zorprin
Carisoprodol and Aspirin Soma Compound
Dexamethasone Decadron
Etodolac Lodine
Ibuprofen Advil, Nuprin, Motrin
Naproxen Sodium Aleve
Orphengesic/Orphengesic Forte Norgesic/Norgesic Forte
Oxaprozin Daypro
ANTI-BACTERIAL:
Doxycycline Monohydrate Monodox
Silver Sulfadiazine (SSD) Silvadene
ANTI-DIABETIC:
Metformin Hydrochloride Glucophage
ANTI-DIARRHEAL:
Diphenoxylate Hydrochloride and Atropine Sulfate Lomotil
ANTIEMETIC:
Meclizine Hydrochloride Antivert
Prochlorperazine Maleate Compazine
ANTI-GOUT:
Allopurinol Zyloprim
ANTI-HISTAMINIC:
Cyproheptadine Hydrochloride Periactin
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ANTI-NEOPLASTIC:
Hydroxyurea Hydrea
Megestrol Acetate Megace
Megestrol Acetate Oral Suspension Megace Oral Suspension
ANTI-PARKINSON:
Selegiline Eldepryl
ANTI-THROMBOTIC:
Ticlopidine Hydrochloride Ticlid
ANTI-ULCERATIVE:
Ranitidine Zantac
Famotidine Pepcid
ANTI-VIRAL:
Acyclovir Zovirax
ANTI-HYPERTHYROID:
Methimazole Tapazole
BRONCODILATOR:
Metaproterenol Sulfate Alupent
CHOLESTEROL LOWERING:
Lovastatin Mevacor
GENTRO-URINARY (DIURETIC):
Amiloride Hydrochloride Midamor
OVULATION STIMULANT:
Clomiphene Clomid
From January 1, 2001 to March 21, 2002, the FDA approved ANDAs filed by
either the Company or its strategic partners for the following drugs: buspirone
5 mg, 7.5 mg, 10 mg and 15 mg tablets, famotidine, flecainide acetate,
fluoxetine 40 mg capsules, fluoxetine 10 mg and 20 mg tablets and capsules,
lovastatin, megestrol acetate oral suspension, metformin, methimazole 20 mg
tablets and oxaprozin. In addition, the Company or its strategic partners
received tentative FDA approval in the same period for the following drugs:
ciprofloxacin, lisinopril, nizatidine and ofloxacin.
The Company has two patents related to its unique formulation of
megestrol acetate oral suspension. The U.S. Patent and Trademark Office granted
the patents, United States patent No. 6,028,065 and No. 6,268,356, on March 1,
2000 and July 31, 2001, respectively.
The Company seeks to introduce new products not only through its internal
research and development program, but also through joint venture, distribution
and other agreements with pharmaceutical companies located throughout the world.
As part of that strategy, the Company has pursued and continues to pursue
arrangements and affiliations which it believes could provide access to raw
materials at favorable prices, share development costs, generate profits from
jointly-developed products and expand distribution channels for new and existing
products. The Company's material distribution agreements are described below.
The Company and Reddy entered into the Reddy Development and Supply
Agreement, dated April 17, 2001, covering 14 generic pharmaceutical products,
five of which are filed with the FDA awaiting approval, to be marketed
exclusively by Par in the United States and certain other United States
territories upon FDA approval. Reddy is required to use commercially reasonable
efforts to develop the products covered by the Reddy Development and Supply
Agreement, and is responsible for the completion of product development and for
obtaining all applicable regulatory approvals. The Company will pay Reddy a
percentage of the gross profits on sales of the products sold by Par in
accordance with the Reddy Development and Supply Agreement. On August 2, 2001,
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the Company received 180-day marketing exclusivity for fluoxetine 40 mg
capsules, covered under the Reddy Development and Supply Agreement, and
immediately began shipping the product.
The products covered by the Reddy Development and Supply Agreement are in
addition to five products currently being marketed by the Company under prior
agreements with Reddy. Pursuant to these agreements, the Company also pays Reddy
a certain percentage of the gross profits on sales of any products covered under
such agreements.
The Company has a distribution agreement with Genpharm (the "Genpharm
Distribution Agreement"), dated March 25, 1998, pursuant to which Genpharm
granted exclusive distribution rights to the Company within the United States
and certain other United States territories with respect to approximately 40
generic pharmaceutical products. To date, 16 of such products have obtained FDA
approval and 15 are currently being marketed by Par. The remaining products are
either currently being developed, have been identified for development, or have
been submitted to the FDA for approval. Currently, there are 12 ANDAs for
potential products (three of which have been tentatively approved) covered by
the Genpharm Distribution Agreement pending with, and awaiting approval from,
the FDA. Products may be added to or removed from the Genpharm Distribution
Agreement by mutual agreement of the parties. Genpharm is required to use
commercially reasonable efforts to develop the products and is responsible for
the completion of product development and for obtaining all applicable
regulatory approvals. The Company pays Genpharm a percentage of the gross
profits on all sales of the products included in the Genpharm Distribution
Agreement. On July 31, 2001, Alphapharm was granted final approval by the FDA
for flecainide acetate tablets that will be distributed by the Company under the
Genpharm Distribution Agreement. Since Alphapharm was the first-to-file an ANDA
and obtained Paragraph IV certification, the Company anticipates receiving up to
180 days of marketing exclusivity for the product. The Company anticipates it
could begin marketing of the product in the second quarter of 2002 pending the
outcome of litigation between Alphapharm and 3M.
The Company and Genpharm have a second distribution agreement (the
"Genpharm Additional Product Agreement"), dated November 27, 2000, pursuant to
which Genpharm granted the Company exclusive distribution rights within the
United States and certain other United States territories with respect to five
additional generic pharmaceutical products. The products are either being
developed, have been identified for development, or have been submitted to the
FDA for approval. Currently, there is one ANDA (tentatively approved) for a
potential product covered by the Genpharm Additional Product Agreement pending
with, and awaiting approval from, the FDA. Genpharm and the Company are sharing
the costs of developing the products and for obtaining all applicable regulatory
approvals. The Company will pay Genpharm a percentage of the gross profits on
all sales of products included in the Genpharm Additional Product Agreement. On
August 2, 2001, the Company received 180-day marketing exclusivity for
fluoxetine 10 mg and 20 mg tablets through the Genpharm Additional Product
Agreement and immediately began shipping the product.
In April 1997, Par entered into a Manufacturing and Supply Agreement (the
"BASF Supply Agreement") with BASF Corporation ("BASF"), a manufacturer of
pharmaceutical products. Under the BASF Supply Agreement, Par agreed to purchase
minimum quantities of certain products manufactured by BASF, and to phase out
Par's manufacturing of those products. As part of the agreement, BASF
discontinued its direct sale of those products. The agreement had an initial
term of three years and would have renewed automatically for successive two-year
periods until December 31, 2005, if Par had met certain purchase thresholds.
Since Par did not meet the minimum purchase requirement of one product in the
third and final year of the agreement, BASF had the right to terminate the
agreement with a notice period of one year. BASF has not given Par such notice
and to ensure continuance of product supply, BASF and the Company have agreed to
continue to operate under terms similar to those of the BASF Supply Agreement.
In June 2000, the Company and Elan Transdermal Technologies, Inc.
("Elan") entered into an agreement pursuant to which the Company sold Elan all
of the Company's remaining distribution rights for a non-prescription
transdermal nicotine patch and terminated its right to royalty payments under
the September 1998 termination agreement (the "Termination Agreement"). Pursuant
to this agreement, the Company received a $500,000 payment in July 2001.
Pursuant to the Termination Agreement, the Company's exclusive right to
distribute an Elan manufactured prescription transdermal nicotine patch in the
United States ended on May 31, 1999. The Company began selling Elan's
prescription transdermal nicotine patch in January 1998 and paid Elan a
percentage of gross profits through the termination date. In exchange for
relinquishing long-term distribution rights to the prescription transdermal
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nicotine patch and a nitroglycerin patch under the Termination Agreement, the
Company received payments of $1,000,000 in the third quarter of 1999 and
$2,000,000 in October 1998.
RESEARCH AND DEVELOPMENT
The Company's research and development activities consist of (i)
identifying and conducting patent and market research on brand name drugs for
which patent protection has expired or will expire in the near future, (ii)
researching and developing new product formulations based upon such drugs, (iii)
obtaining approval from the FDA for such new product formulations, and (iv)
introducing technology to improve production efficiency and enhance product
quality. The scientific process of developing new products and obtaining FDA
approval is complex, costly and time consuming and there can be no assurance
that any products will be developed despite the amount spent on research and
development. The development of products may be curtailed in the early or later
stages of development due to the introduction of competing generic products or
for other strategic reasons.
The research and development of oral solid and suspension products,
including preformulation research, process and formulation development, required
studies and FDA review and approval, has historically taken approximately two to
three years. Accordingly, Par typically selects for development products that it
intends to market several years in the future. However, the length of time
necessary to bring a product to market can vary significantly and can depend on,
among other things, availability of funding, problems relating to formulation,
safety or efficacy or patent issues associated with the product.
The Company contracts with outside laboratories to conduct biostudies,
which, in the case of oral solids, generally are required for FDA approval.
Biostudies are used to demonstrate that the rate and extent of absorption of a
generic drug are not significantly different from the corresponding brand name
drug and currently cost between $100,000 to $500,000 for each biostudy. During
fiscal year 2001 the Company contracted with outside laboratories for an
aggregate of approximately $1,575,000 to conduct biostudies for six potential
new products and will continue to do so in the future. In addition, the Company
shared in certain costs for biostudies totaling approximately $1,350,000 for
products in co-development with its strategic partners. Biostudies must be
conducted and documented in conformity with FDA standards (see "-Government
Regulation").
As part of its internal research and development program, the Company has
seven products in active development. The Company expects that approximately
four of these products will be the subject of biostudies in 2002, but has not
filed any ANDAs with respect to such potential products. In addition, the
Company from time to time enters into agreements with third parties with respect
to the development of new products and technologies. To date, the Company has
entered into agreements and advanced funds to several non-affiliated companies
for products in various stages of development. Annual research and development
expenses for fiscal year 2002, including certain payments to non-affiliated
companies, are expected to total approximately $15,000,000, an increase of 35%
from fiscal year 2001.
As a result of its internal product development program, the Company
currently has five ANDAs pending with the FDA, one of which has received
tentative approval, for potential products that are not subject to any
distribution or profit sharing agreements. In addition, there are 20 ANDAs
pending with the FDA, four of which have received tentative approval, that have
been filed by the Company or one of its strategic partners, for potential
products covered under various distribution agreements. No assurance can be
given that the Company or any of its strategic partners will successfully
complete the development of products either under development or proposed for
development, that they will obtain regulatory approval for any such product,
that any approved product will be produced in commercial quantities or that any
approved product can be sold at a profit.
The Company's domestic research and development program is integrated
with that of Israel Pharmaceutical Resources L.P. ("IPR"), its research facility
in Israel. The Company, IPR, and Generics (UK) Ltd. ("Generics"), a subsidiary
of Merck KGaA, entered into an agreement (the "Development Agreement"), dated
August 11, 1998, pursuant to which Generics agreed to fund one-half the costs of
the operating budget of IPR up to a maximum of $1,000,000 in any one calendar
year in exchange for the exclusive distribution rights outside of the United
States to products developed by IPR after the date of the Development Agreement.
In addition, Generics agreed to pay IPR a perpetual royalty for all sales of the
products by Generics or its affiliates outside the United States. To date, no
such products have been brought to market by Generics or its affiliates and no
royalty has been paid to IPR.
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In December 2001, Par entered into an agreement with Elan to develop a
range of modified release drugs over the next five years. Under the terms of the
agreement, the companies will identify two drug candidates for development at
the beginning of each year, commencing in the first quarter of 2002. Elan will
be responsible for the development and manufacture of all products, while Par
will be responsible for marketing, sales and distribution. Par will reimburse
Elan for research and development costs and Elan will receive a royalty from the
sale of the products.
In November 2001, the Company entered into a joint manufacturing and
marketing agreement with Breath Ltd. of the Arrow Group to pursue the worldwide
distribution of latanoprost ophthalmic solution 0.005%, the generic equivalent
of Pharmacia Corporation's ("Pharmacia") Xalatan(R), a glaucoma medication.
According to the Company's market research, sales of Xalatan(R) were
approximately $430 million in the U.S. in fiscal year 2001. As a result of this
agreement, Par filed an ANDA for latanoprost, which was developed by Arrow and
is pending at the FDA, seeking approval to engage in the commercial manufacture,
sale and use of the latanoprost product in the United States. Par's ANDA
includes a Paragraph IV certification that the existing patents in connection
with Xalatan(R) are invalid, unenforceable or will not be infringed by Par's
generic product. Par has reason to believe that its ANDA is the first to be
filed for this drug with a Paragraph IV certification. Under the terms of this
agreement, Par will market and distribute the drug in the U.S and share with
Arrow the net profits generated from the sales. In December 2001, Pharmacia
initiated a patent infringement action against Par, which the Company intends to
vigorously defend. At this time, it is not possible for the Company to predict
the outcome of this litigation and the impact, if any, that it might have on the
Company (see "-Legal Proceedings").
In November 2001, the Company entered into a license agreement with
Pentech Pharmaceuticals, Inc. ("Pentech") to market paroxetine hydrochloride
capsules. Paroxetine hydrochloride is the generic version of GlaxoSmithKline's
Paxil(R). Currently, GlaxoSmithKline markets Paxil(R) only in tablet form.
Paxil(R), a selective serotonin reuptake inhibitor, is indicated for the
treatment of depression and other disorders. According to the Company's market
research, Paxil(R) had U.S. sales of approximately $1.7 billion in fiscal year
2001. Par believes that its ANDA submission for paroxetine hydrochloride
capsules is the first to be filed with a paragraph IV certification. The Company
has reason to believe that another generic drug company has first-to-file status
for the tablet form of this product. Par intends to market a capsule form of the
product.
In April 2001, Par entered into an agreement with Elan to market a
generic clonidine transdermal patch, a generic version of Boehringer Ingelheim's
Catapres TTS(R), which is a treatment for hypertension and, based on the
Company's market research, had brand sales of approximately $160 million in
fiscal year 2001. Elan filed an ANDA for the product with the FDA earlier in
fiscal year 2001, including a Paragraph IV certification, certifying that the
product did not infringe the branded product's formulation patent, which expires
May 2003. Elan will be responsible for the development and manufacture of the
product, while Par will be responsible for marketing, sales and distribution.
Par will reimburse Elan for research and development costs and Elan will receive
a royalty from the sale of the product. The launch of the clonidine transdermal
patch is expected to occur in either late 2002 or early 2003.
In April 1999, the Company entered into an agreement with FineTech, which
was later modified in August 2000, to develop processes for pharmaceutical bulk
actives. Pursuant to the agreement, as modified, the Company paid FineTech
$2,000,000 for one such completed process together with its technology transfer
package, DMF and patent filings. FineTech has paid all costs and expenses
associated with the development of the process, exclusive of patent prosecution
and maintenance, which shall be at the Company's expense. In addition, the
Company will pay royalties on gross margins generated from Par's future sales of
the product.
For fiscal year 2001, the Company increased research and development
spending to $11,113,000 from $7,634,000 and $6,005,000, respectively, in fiscal
years 2000 and 1999. The increase in 2001 reflects payments to Elan related to
the development of a clonidine transdermal patch, increased biostudy activity,
personnel and material costs. Costs in all three periods are net of funding from
Generics pursuant to the Development Agreement. Fiscal year 2000 and 1999
include reimbursements from Genpharm for work performed by PRI related to
products covered by the Genpharm Distribution Agreement (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Operating Results-Research and Development").
9
MARKETING AND CUSTOMERS
The Company primarily markets its products under the Par label to
wholesalers, retail drug store chains, distributors and, to a lesser extent,
drug manufacturers and government agencies, primarily through its own sales
staff. Some of the Company's wholesalers and distributors purchase products that
are warehoused for certain drug chains, independent pharmacies and managed
health care organizations. Customers in the managed health care market include
health maintenance organizations, nursing homes, hospitals, clinics, pharmacy
benefit management companies and mail order customers. The Company promotes its
products primarily through incentive programs with its customers, trade shows
and advertisements in trade journals.
The Company has approximately 140 customers, some of which are part of
larger buying groups. In fiscal year 2001, the Company's three largest customers
in sales volume, McKesson Drug Co., Walgreen Co. and Bergen Brunswig Corporation
accounted for approximately 14%, 13% and 9%, respectively, of its net sales. The
loss of any of these customers or the substantial reduction in orders from any
of such customers could have a material adverse affect on the Company's
operating results and financial condition (see "Notes to Consolidated Financial
Statements-Accounts Receivable-Major Customers").
ORDER BACKLOG
The dollar amount of open orders, believed by management to be firm, as
of December 31, 2001 was approximately $12,800,000, as compared to approximately
$4,400,000 at December 31, 2000 and $4,000,000 at December 31, 1999. Although
open orders are subject to cancellation without penalty, management expects to
fill substantially all of such orders in the near future.
COMPETITION
The generic pharmaceutical industry is highly competitive due principally
to the number of competitors in the market along with the consolidation of the
Company's distribution outlets through mergers, acquisitions and the formation
of buying groups. The Company has identified at least ten principal competitors,
and experiences varying degrees of competition from numerous other companies in
the health care industry. The Company also experiences competition from certain
manufacturers of brand name drugs and/or their affiliates introducing generic
pharmaceuticals comparable to certain of the Company's products. Many of the
Company's competitors have longer operating histories and greater financial,
research and development, marketing and other resources. Consequently,
competitors may be able to develop products and/or processes competitive with,
or superior to those of the Company.
As other manufacturers introduce generic products in competition with the
Company's existing products, its market share and prices with respect to such
existing products typically decline. Similarly, the Company's potential for
profits is significantly reduced, if not eliminated, as competitors introduce
products prior to the Company. In addition, the Company believes that
consolidation among wholesalers and retailers, the formation of large buying
groups and competition between distributors have resulted in further pricing
pressures. Accordingly, the level of revenues and gross profit generated by the
Company's current and prospective products depend, in large part, on the number
and timing of introductions of competing products and the Company's timely
development and introduction of new products.
In the generic drug industry, when a company first introduces a generic
drug, it may, under certain circumstances, be granted exclusivity by the FDA to
market a product for a period of time before other generic manufacturers may
enter the market. At the end of such exclusivity periods, other generic
manufacturers may enter the market, and as a result the price of the drug may
decline significantly (in some instances a price decline has exceeded 90%). As a
result of the expected price decline upon the ending of a marketing exclusivity
period, it has become common in the industry for generic pharmaceutical
manufacturers that have been granted such exclusivity periods to offer price
protection to their customers. Under such price-protection arrangements, the
Company will generally provide a credit to its customers for the difference
between the Company's new price at the end of the exclusivity period and the
price at which the Company sold the customers the product with respect to the
quantity remaining on the customer's shelf at the end of the exclusivity period.
As a result, the total price protection the Company will credit customers with
at the end of an exclusivity period will depend on the amount by which the price
declines as the result of the introduction of comparable generic products by
additional manufacturers, and the shelf stock customers will have at the end of
the exclusivity period.
10
In the third quarter of fiscal 2001, Par began marketing fluoxetine 10 mg
and 20 mg tablets and fluoxetine 40 mg capsules with 180-days exclusivity that
ended in late-January 2002 and began recording a price protection reserve during
the fourth quarter of 2001. At least 10 additional generic manufacturers have
introduced comparable products for the 10mg and 20mg tablets and at least two
additional generic manufacturers have introduced a comparable product for the 40
mg capsules following the end of the exclusivity period. As a result of the
introduction of these competing generic products during the first quarter of
2002, the sales price for fluoxetine has substantially declined from the price
received by the Company during the exclusivity period. Accordingly, the
Company's sales and gross margins on fluoxetine in fiscal year 2002 will be
adversely affected. Although there can be no assurance, the Company expects to
introduce new products in fiscal year 2002 and increase sales of certain
existing products to offset the loss of sales and gross margin on its fluoxetine
products.
The Company also began exclusively marketing megestrol acetate oral
suspension in the third quarter of fiscal 2001, for which the exclusivity period
ended in mid-January 2002. The Company has patents that cover its unique
formulation for megestrol acetate oral suspension and will avail itself of all
legal remedies and will take all of the necessary steps to protect its
intellectual property rights. The Company has recently learned that another
generic competitor was granted FDA approval to market megestrol acetate oral
suspension. Although a competitor may be entering the market at some point, the
Company believes that generic competitors are less likely to enter the market
because doing so would likely infringe on either BMS's or the Company's
formulation patent. In fiscal year 2001, the Company did not record a price
protection reserve for megestrol acetate oral suspension. The Company will
continue evaluating the possibility of competition for the product and will
record a price protection reserve when it deems necessary.
The principal competitive factors in the generic pharmaceutical market,
include, among other things: (i) introduction of other generic drug
manufacturer's products in direct competition with the Company's products, (ii)
consolidation among distribution outlets through mergers, acquisitions and the
formation of buying groups, (iii) ability of generic competitors to quickly
enter the market after patent expiration or exclusivity periods, diminishing the
amount and duration of significant profits, (iv) willingness of generic drug
customers, including wholesale and retail customers, to switch among
pharmaceutical manufacturers, (v) pricing and product deletions by competitors,
(vi) reputation as a manufacturer of quality products, (vii) level of service
(including maintaining sufficient inventory levels for timely deliveries),
(viii) product appearance, and (ix) breadth of product line.
RAW MATERIALS
The raw materials essential to the Company's manufacturing business are
purchased primarily from United States distributors of bulk pharmaceutical
chemicals manufactured by foreign companies. To date, the Company has
experienced no significant difficulty in obtaining raw materials and expects
that raw materials will generally continue to be available in the future.
However, since the federal drug application process requires specification of
raw material suppliers, if raw materials from a specified supplier were to
become unavailable, FDA approval of a new supplier would be required. While a
new supplier becomes qualified by the FDA and its manufacturing process is
judged to meet FDA standards, a delay of six months or more in the manufacture
and marketing of the drug involved could result, which, depending on the
particular product, could have a material adverse effect on the Company's
financial condition. Generally the Company attempts to minimize the effects of
any such situation by specifying, where economical and feasible, two or more
suppliers of raw materials for the drugs it manufactures.
EMPLOYEES
As of December 31, 2001 the Company had approximately 393 employees
compared to 297 and 275, respectively, at December 31, 2000 and 1999. The
increased headcount levels in fiscal year 2001, primarily in the manufacturing,
quality and distribution functions, reflect the growth of the Company from
fiscal year 2000.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by
the Federal government, principally by the FDA, and, to a lesser extent, by the
Drug Enforcement Administration and state governments. The Federal Food, Drug,
and Cosmetic Act, the Controlled Substances Act, and other Federal statutes and
regulations govern or influence the testing, manufacture, safety, labeling,
storage, record keeping, approval, advertising and promotion of the Company's
products. Noncompliance with applicable requirements can result in judicially
11
and/or administratively imposed sanctions including the initiation of product
seizures, injunction actions, fines and criminal prosecutions. Administrative
enforcement measures can involve the recall of products, as well as the refusal
of the government to enter into supply contracts or to approve new drug
applications. The FDA also has the authority to withdraw approval of drugs in
accordance with regulatory due process procedures.
FDA approval is required before any new drug, including a generic
equivalent of a previously approved branded drug, can be marketed. To obtain FDA
approval for a new drug, a prospective manufacturer must, among other things,
demonstrate that its manufacturing facilities comply with the FDA's current Good
Manufacturing Practices ("cGMP") regulations. The FDA may inspect the
manufacturer's facilities to assure such compliance prior to approval or at any
other reasonable time. The manufacturer must follow cGMP regulations at all
times during the manufacture and processing of drugs. To comply with the
standards set forth in these regulations, the Company must continue to expend
significant time, money and effort in the areas of production, quality control
and quality assurance.
To obtain FDA approval of a new drug, a manufacturer must demonstrate,
among other requirements, the safety and effectiveness of the proposed drug.
There are currently two basic ways to satisfy the FDA's safety and effectiveness
requirements:
1. NEW DRUG APPLICATIONS ("NDA"): Unless the procedure discussed in
paragraph 2 below is available, a prospective manufacturer must submit
to the FDA an NDA containing complete pre-clinical and clinical safety
and efficacy data or a right of reference to such data. The
pre-clinical data must provide an adequate basis for evaluating the
safety and scientific rationale for the initiation of clinical trials.
Clinical trials are conducted in three sequential phases and may take
several years to complete. At times, the phases may overlap. Data from
pre-clinical testing and clinical trials is submitted to the FDA as an
NDA for marketing approval.
2. ABBREVIATED NEW DRUG APPLICATIONS: The Waxman-Hatch Act established a
statutory procedure for submission and FDA review and approval of
ANDAs for generic versions of drugs previously approved by the FDA
(such previously approved drugs are hereinafter referred to as "listed
drugs"). As the safety and efficacy have already been established by
the innovator company, the FDA waives the need for complete clinical
trials. However, a generic manufacturer is typically required to
conduct bioavailability/bioequivalence studies of its test product
against the listed drug. The bioavailability/bioequivalence studies
assess the rate and extent of absorption and concentration levels of a
drug in the blood stream required to produce a therapeutic effect.
Bioequivalence is established when the rate of absorption and
concentration levels of a generic product are substantially equivalent
to the listed drug. For some drugs (e.g., topical antifungals), other
means of demonstrating bioequivalence may be required by the FDA,
especially where rate and/or extent of absorption are difficult or
impossible to measure. In addition to the bioequivalence data, an ANDA
must contain chemistry, manufacturing, labeling and stability data.
The Waxman-Hatch Act also established certain statutory protections for
listed drugs. Under the Waxman-Hatch Act, approval of an ANDA for a generic drug
may not be made effective for interstate marketing until all relevant patents
for the listed drug have expired or been determined to be invalid or not
infringed by the generic drug. Prior to enactment of the Waxman-Hatch Act, the
FDA did not consider the patent status of a previously approved drug. In
addition, under the Waxman-Hatch Act, statutory non-patent exclusivity periods
are established following approval of certain listed drugs, where specific
criteria are met by the drug. If exclusivity is applicable to a particular
listed drug, the effective date of approval of ANDAs (and, in at least one case,
submission of an ANDA) for the generic version of the listed drug is usually
delayed until the expiration of the exclusivity period, which, for newly
approved drugs, can be either three or five years. The Waxman-Hatch Act also
provides for extensions of up to five years of certain patents covering drugs to
compensate the patent holder for reduction of the effective market life of the
patented drug resulting from the time involved in the Federal regulatory review
process.
During 1995, patent terms for a number of listed drugs were extended when
the Uruguay Round Agreements Act (the "URAA") went into effect to implement the
latest General Agreement on Tariffs and Trade (the "GATT") to which the United
States became a treaty signatory in 1994. Under GATT, the term of patents was
established as 20 years from the date of patent application. In the United
States, the patent terms historically have been calculated at 17 years from the
date of patent grant. The URAA provided that the term of issued patents be
either the existing 17 years from the date of patent grant or 20 years from the
date of application, whichever was longer. The effect generally was to add
12
patent life to already issued patents, thus delaying FDA approvals of
applications for generic products.
In addition to the Federal government, states have laws regulating the
manufacture and distribution of pharmaceuticals, as well as regulations dealing
with the substitution of generic drugs for brand-name drugs. The Company's
operations are also subject to regulation, licensing requirements and inspection
by the states in which they are located and/or conduct business.
The Company also is governed by Federal and state laws of general
applicability, including laws regulating matters of environmental quality,
working conditions, and equal employment opportunity.
The Federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA").
Generally, OBRA provides that a generic drug manufacturer must offer the states
an 11% rebate on drugs dispensed under the Medicaid program and must enter into
a formal drug rebate agreement, as the Company has, with the Federal Health Care
Financing Administration. Although not required under OBRA, the Company has also
entered into similar state agreements.
ITEM 2. PROPERTIES.
- ------- -----------
The Company owns an approximately 92,000 square foot facility built to
Par's specifications which contain its executive offices, and manufacturing and
domestic research and development operations. The building, occupied by Par
since fiscal year 1986, also includes research and quality control laboratories,
as well as packaging and warehouse facilities. The building is located in Spring
Valley, New York, on a parcel of land of approximately 24 acres, of which
approximately 15 acres are available for future expansion.
The Company owns another building in Spring Valley, New York, across the
street from its executive offices, occupying approximately 36,000 square feet on
two acres. This property was acquired in fiscal year 1994 and is used for
offices and warehousing. The purchase of the land and building was financed by a
mortgage loan.
Par owns a third facility (the "Congers Facility") of approximately
33,000 square feet located on six acres in Congers, New York, which prior to
March 1999, was used by the Company for product manufacturing and tablet
coating. The Company has since outsourced the operations previously performed at
the Congers Facility to BASF and the Halsey Drug Co., Inc. ("Halsey"). In March
1999, Par entered into an agreement to lease the Congers Facility and related
machinery and equipment to Halsey. The Lease Agreement has an initial term of
three years, subject to an additional two-year renewal period and contains a
purchase option permitting Halsey to purchase the Congers Facility and
substantially all the equipment thereof at any time during the lease terms for a
specified amount. Pursuant to the Lease Agreement, Halsey paid the purchase
option of $100,000 in March 1999. The Lease Agreement provides for annual fixed
rent during the initial term of $500,000 per year and $600,000 per year during
the renewal period (see "Notes to Consolidated Financial Statements-Lease
Agreement").
Par occupies approximately 47,000 square feet in another building located
in Spring Valley, New York for warehouse space under a lease that expires
December 2004. The Company has the option to extend the lease for two additional
five-year periods.
IPR leases approximately 13,000 square feet at Yaacobi House in Even
Yehuda, Israel for product research and development. The lease expires in May
2002 and has one 35-month renewal option. The Company guarantees IPR's
obligations under the lease.
The Company believes that its owned and leased properties are sufficient
in size, scope and nature to meet its anticipated needs for the reasonably
foreseeable future (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Financial Condition" and "Notes to
Consolidated Financial Statements-Long-Term Debt" and "-Commitments,
Contingencies and Other Matters-Leases").
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
Par has filed an ANDA (currently pending with the FDA) for latanoprost
(Xalatan(R)), which was developed by Breath Ltd. of the Arrow Group pursuant to
a joint manufacturing and marketing agreement with the Company, seeking approval
to engage in the commercial manufacture, sale and use of the latanoprost product
13
in the United States. Par's ANDA includes a Paragraph IV certification that the
existing patents in connection with Xalatan(R) are invalid, unenforceable or
will not be infringed by Par's generic product. Par has reason to believe that
its ANDA is the first to be filed for this drug with a Paragraph IV
certification. As a result of the filing of the ANDA, Pharmacia Corporation,
Pharmacia AB, Pharmacia Enterprises, S.A., Pharmacia and Upjohn Company and the
trustees of Columbia University in the City of New York filed lawsuits against
the Company on December 14, 2001 in the United States District Court for the
District of Delaware and on December 21, 2001 in the United States District
Court for the District of New Jersey alleging patent infringement. Pharmacia and
Columbia are seeking an injunction. Par intends to vigorously defend the
lawsuits. At this time, it is not possible for the Company to predict the
outcome of this litigation and the impact, if any, that it might have on the
Company.
Par, among others, is a defendant in three lawsuits filed in United
States District Court for the Eastern District of North Carolina on August 1,
2001, October 30, 2001 and November 16, 2001, respectively, by aaiPharma Inc.,
involving patent infringement allegations connected to a total of three patents
related to polymorphic forms of fluoxetine (Prozac(R)). Par intends to
vigorously litigate these cases. While the outcome of litigation is never
certain, Par believes that it will prevail in these litigations.
On July 16, 2001, the Federal Circuit Court of Appeals in Washington D.C.
affirmed the Company's summary judgment victory in its patent infringement case
with BMS over megestrol acetate oral suspension. On July 25, 2001, the FDA
granted the Company final approval for megestrol acetate oral suspension with
marketing exclusivity until mid-January 2002 and the Company immediately began
shipping the product to its customers. Although the Court had disposed of all of
BMS's infringement issues, Par's counterclaims for patent invalidity, unfair
competition and tortuous interference seeking an injunction and an award of
compensatory and punitive damages remained. In March 2002 BMS sold the rights to
the five products to Par in exchange for payments of $3,000,000 and the
termination of all the Company's outstanding litigation against BMS involving
megestrol acetate oral suspension and buspirone (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Subsequent
Events").
On August 1, 2001 Alpharma USPD, Inc. filed a lawsuit in the United
States District Court for the District of Maryland seeking a declaratory
judgment that Alpharma's megestrol acetate oral suspension formulation does not
infringe United States patent No. 6,028,065 granted to the Company and/or that
the Company's patent is invalid.
On March 30, 2001, the Company reached an agreement with 3M with respect
to a previous product agreement (the "Product Co-development, Supply and
Distribution Agreement") entered into between the parties on January 6, 1994.
Under the terms of the agreement, 3M agreed to pay the Company $750,000 in April
2001 in exchange for the mutual termination of the Product Co-development,
Supply and Distribution Agreement.
The Company is involved in certain other litigation matters, including
certain product liability and patent actions, and actions by former employees,
and believes these actions are incidental to the conduct of its business and
that the ultimate resolution thereof will not have a material adverse effect on
its financial condition, results of operations or liquidity. The Company intends
to vigorously defend these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2001.
The rules promulgated by the Securities and Exchange Commission may
permit the Company to exercise discretionary authority to vote on shareholder
proposals at the 2002 Annual Meeting of Shareholders if proposals are not
included in the proxy statement relating to such meeting and the Company does
not have notice of the proposal a reasonable time before the Company mails its
proxy materials for such Meeting.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------ ---------------------------------------------------------------------
(a) MARKET INFORMATION. The Company's Common Stock is traded on the New
York Stock Exchange ("NYSE"). The following table shows the range of
closing prices for the Common Stock as reported by the NYSE for each
calendar quarter during the Company's two most recent fiscal years.
Year Ended In
2001 2000
----------------- ---------------
Quarter ended approximately High Low High Low
- --------------------------- ---- --- ---- ---
March 31 $13.41 $6.63 $7.63 $4.06
June 30 30.69 12.35 7.06 4.44
September 30 41.50 29.91 7.44 4.75
December 31 39.06 29.40 8.13 6.06
(b) HOLDERS. As of March 21, 2002, there were approximately 2,200 holders
of record of the Common Stock. The Company believes that, in
addition, there are a significant number of beneficial owners of its
Common Stock whose shares are held in "street name".
(c) DIVIDENDS. During fiscal years 2001, 2000 and 1999, the Company did
not pay any cash dividends on its Common Stock. The payment of future
dividends on its Common Stock is subject to the discretion of the
Board of Directors and is dependent upon many factors, including the
Company's earnings, its capital needs, the terms of its financing
agreements and its general financial condition. The Company's current
loan agreement with General Electric Capital Corporation ("GECC")
prohibits the declaration or payment of any dividend, or the making
of any distribution, to any of the Company's stockholders (see "Notes
to Consolidated Financial Statements Short-Term Debt").
(d) RECENT STOCK PRICE. On March 21, 2002, the closing price of a share
of the Common Stock on the NYSE was $20.98 per share.
15
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
Three
Twelve Months Ended Months Twelve Months Ended
--------------------------- Ended ---------------------------
(Restated) (Restated) (Restated) (Restated)
12/31/01 *12/31/00 *12/31/99 *12/31/98 *9/30/98 9/30/97
-------- -------- -------- -------- ------- -------
INCOME STATEMENT DATA (In thousands, except per share amounts)
Net sales $271,035 $85,022 $80,315 $16,775 $59,705 $52,572
Cost of goods sold 161,306 62,332 64,140 17,105 56,135 49,740
------- ------ ------ ------ ------ ------
Gross margin 109,729 22,690 16,175 (330) 3,570 2,832
Operating expenses:
Research and development 11,113 7,634 6,005 1,125 5,775 5,843
Selling, general and administrative 21,878 16,297 13,509 3,792 12,271 11,861
Asset impairment/restructuring charge - - - 1,906 1,212 -
--------- -------- --------- ----- ----- ---------
Total operating expenses 32,991 23,931 19,514 6,823 19,258 17,704
------ ------ ------ ----- ------ ------
Operating income (loss) 76,738 (1,241) (3,339) (7,153) (15,688) (14,872)
Other (expense) income (364) 506 906 1 6,261 6,926
Interest (expense) income (442) (916) (63) 89 (382) (545)
--- --- -- -- --- ---
Income (loss) before provision for income taxes 75,932 (1,651) (2,496) (7,063) (9,809) (8,491)
Provision for income taxes 22,010 - - - - 410
------ ------ -------- -------- -------- ---
Net income (loss) $53,922 $(1,651) $(2,496) $(7,063) $(9,809) $(8,901)
====== ===== ===== ===== ===== =====
Net income (loss) per share of common stock:
Basic $1.76 $(.06) $(.08) $(.24) $(.46) $(.48)
==== === === === === ===
Diluted $1.68 $(.06) $(.08) $(.24) $(.46) $(.48)
==== === === === === ===
Weighted average number of common and
common equivalent shares outstanding
Basic 30,595 29,604 29,461 29,320 21,521 18,681
====== ====== ====== ====== ====== ======
Diluted 32,190 29,604 29,461 29,320 21,521 18,681
====== ====== ====== ====== ====== ======
BALANCE SHEET DATA
Working capital $102,867 $18,512 $21,221 $24,208 $29,124 $15,959
Property, plant and equipment (net) 24,345 23,560 22,681 22,789 24,283 27,832
Total assets 216,926 93,844 92,435 88,418 93,576 72,697
Long-term debt, less current portion 1,060 163 1,075 1,102 1,143 2,651
Shareholders' equity 138,423 64,779 65,755 67,329 74,328 57,268
* Restated as described in Notes to Consolidated Financial Statements.
16
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- of Operations.
--------------
Certain statements in this Form 10-K may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, including those concerning management's expectations with respect to
future financial performance and future events, particularly relating to sales
of current products and the introduction of new manufactured and distributed
products. Such statements involve known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company, which could
cause actual results and outcomes to differ materially from those expressed
herein. These statements are often, but not always, made typically by use of
words or phrases such as "estimate," "plans," "projects," "anticipates,"
"continuing," "ongoing," "expects," "believes," or similar words and phrases.
Factors that might affect such forward-looking statements set forth in this Form
10-K include, among others, (i) increased competition from new and existing
competitors and pricing practices from such competitors (especially upon
completion of exclusivity periods), (ii) pricing pressures resulting from the
continued consolidation by the Company's distribution channels, (iii) the amount
of funds available for internal research and development and research and
development joint ventures, (iv) research and development project delays or
delays and unanticipated costs in obtaining regulatory approvals, (v)
continuation of distribution rights under significant agreements, (vi) the
continued ability of distributed product suppliers to meet future demand, (vii)
the costs and outcome of any threatened or pending litigation, including patent
and infringement claims and (viii) general industry and economic conditions. Any
forward-looking statements included in this Form 10-K are made only as of the
date hereof, based on information available to the Company as of the date
hereof, and, subject to applicable law to the contrary, the Company assumes no
obligation to update any forward-looking statements.
RESULTS OF OPERATIONS
GENERAL
The Company's net income of $53,922,000 for fiscal year 2001 increased
$55,573,000 from a net loss of $1,651,000 for fiscal year 2000. The net income
in the most recent year was favorably impacted by the reversal of a previously
established valuation allowance of $9,092,000 related to net operating loss
("NOL") carryforwards. The Company did not recognize a tax benefit for its
losses in fiscal year 2000. A revenue increase of $186,013,000, or 219%, from
revenues realized during fiscal year 2000 led to the significant improvement,
reflecting the successful third quarter launch of three products that benefited
from marketing exclusivity in fiscal year 2001, fluoxetine (Prozac(R)) 10 mg and
20 mg tablets, fluoxetine 40 mg capsules, and megestrol acetate oral suspension
(Megace(R) Oral Suspension). Net sales reached a historical high of $271,035,000
for fiscal year 2001 compared to net sales of $85,022,000 for the same period
last year. Following the sales growth, the gross margins increased to
$109,729,000, or 40% of net sales, in 2001, from $22,690,000, or 27% of net
sales, in the same period of the prior year. The improved results included
increased investment in research and development, which totaled $11,113,000 for
the twelve months of 2001, an increase of $3,479,000 from the comparable period
of 2000. Selling, general and administrative costs for the most recent period of
$21,878,000 increased $5,581,000 from the corresponding period of the prior
year, primarily due to additional marketing programs, shipping costs and legal
fees associated with new product launches.
In fiscal year 2000, the Company's financial results improved compared to
fiscal year 1999. Higher sales and gross margins more than offset additional
legal costs related to several patent infringement actions and increased
research and development spending. Gross margins in fiscal year 2000 improved to
27% of net sales compared to 20% in fiscal year 1999, as higher margin
contributions from new products more than offset lower contributions from older
or discontinued products. The improved margins further reduced operating losses
in fiscal year 2000 to $1,241,000 from $3,339,000 in fiscal year 1999. The
Company incurred net losses of $1,651,000 and $2,496,000 for fiscal years 2000
and 1999, respectively. The net results in fiscal year 2000 included additional
interest expense from higher levels of short-term debt.
In addition to its own product development program, the Company has
several strategic alliances through which it co-develops and distributes
products. As a result of its internal program and strategic alliances, the
Company's pipeline of potential products includes 25 ANDAs (five of which have
been tentatively approved), pending with, and awaiting approval from, the FDA.
The Company pays a percentage of the gross profits to its strategic partners on
sales of products covered by its distribution agreements (see "Notes to
Consolidated Financial Statements-Distribution and Supply Agreements"). In July
2001 and August 2001, the FDA granted approvals for three ANDA submissions, one
each by Par, Reddy and Alphapharm, for megestrol acetate oral suspension,
fluoxetine 40 mg capsules and fluoxetine 10 mg and 20 mg tablets, respectively,
which as first-to-file opportunities entitled the Company 180-days of marketing
exclusivity for the products. The Company began marketing megestrol acetate oral
suspension, which is not subject to any profit sharing agreements, in July 2001.
In August 2001, the Company began marketing fluoxetine 40 mg capsules covered
under the Reddy Development and Supply Agreement and fluoxetine 10 and 20 mg
tablets covered under the Genpharm Additional Product Agreement. Generic
competitors of the Company received 180-days marketing exclusivity for
fluoxetine 10 mg and 20 mg capsules. Additional generic competitors, with
comparable products to all three strengths of the Company's fluoxetine, began
entering the market in the first quarter of 2002. Although the Company has
recently learned of another generic approval in the first quarter of 2002, to
date the Company had not experienced generic competition on its megestrol
acetate oral suspension (see "Notes to Consolidated Financial
Statements-Distribution and Supply Agreements" ).
17
Critical to sustaining the improvement in the Company's financial
condition is the introduction of new manufactured and distributed products at
selling prices that generate significant gross margin. The Company, through its
internal development program and strategic alliances, is committed to developing
new products that have limited competition and longer product life cycles. In
addition to new product introductions expected as part of its various strategic
alliances, the Company plans to continue to invest in research and development
efforts while seeking additional products for sale through new and existing
distribution agreements, additional first-to-file opportunities, vertical
integration with raw material suppliers and unique dosage forms and strengths to
differentiate its products in the marketplace. The Company is engaged in
efforts, subject to FDA approval and other factors, to introduce new products as
a result of its research and development efforts and distribution and
development agreements with third parties. No assurance can be given that the
Company will obtain or develop any additional products for sale.
The generic drug industry in the United States continues to be highly
competitive. The factors contributing to the intense competition and affecting
both the introduction of new products and the pricing and profit margins of the
Company, include, among other things: (i) introduction of other generic drug
manufacturer's products in direct competition with the Company's significant
products, (ii) consolidation among distribution outlets through mergers,
acquisitions and the formation of buying groups, (iii) ability of generic
competitors to quickly enter the market after patent expiration or exclusivity
periods, diminishing the amount and duration of significant profits, (iv)
willingness of generic drug customers, including wholesale and retail customers,
to switch among pharmaceutical manufacturers and (v) pricing and product
deletions by competitors (see "Business Marketing and Customers" and
"Competition").
NET SALES
Net sales for fiscal year 2001 of $271,035,000 increased $186,013,000, or
219%, from net sales of $85,022,000 for the corresponding period of 2000. The
sales increase was primarily due to the third quarter of 2001 launch of
fluoxetine 10 mg and 20 mg tablets sold under a distribution agreement with
Genpharm, fluoxetine 40 mg capsules sold under a distribution agreement with
Reddy, and megestrol acetate oral suspension manufactured by the Company. Net
sales of distributed products, which consist of products manufactured under
contract and licensed products, were approximately 66% and 64%, respectively, of
the Company's net sales in fiscal years 2001 and 2000. The Company is
substantially dependent upon distributed products for its sales, and as the
Company introduces new products under its distribution agreements, it is
expected this trend will continue. Any inability by suppliers to meet expected
demand could adversely affect future sales.
At December 31, 2001, the Company was within the marketing exclusivity
period with respect to two drugs, megestrol acetate oral suspension and
fluoxetine. With respect to megestrol acetate oral suspension, the Company's
180-day exclusivity period ended in mid-January 2002 and the Company has
recently learned that another generic competitor was granted FDA approval to
market the product. The Company has patents that cover its unique formulation
for megestrol acetate oral suspension and will avail itself of all legal
remedies and will take all of the necessary steps to protect its intellectual
property rights. Although a competitor may be entering the market at some point,
the Company believes that generic competitors are less likely to enter the
market because doing so would likely infringe on either BMS's or the Company's
formulation patent. Megestrol acetate oral suspension is still anticipated to be
a significant profit contributor during fiscal year 2002, while it appears there
may be limited competition. In fiscal year 2001, the Company did not record a
price protection reserve for megestrol acetate oral suspension. The Company will
continue evaluating the possibility of competition for the product and will
record a price protection reserve when it deems necessary. With respect to
fluoxetine, for which the exclusivity period ended in late-January 2002, at
18
December 31, 2001 the Company had established a price protection reserve of
approximately $31,400,000, based on its estimate that at the end of its
exclusivity period between eight and ten additional generic manufacturers would
introduce and market comparable products for the 10mg and 20mg tablets and
between one and three additional manufacturers would introduce and market a
comparable product for the 40 mg capsules. Net sales of fluoxetine and megestrol
acetate oral suspension for fiscal year 2001 were approximately $122,270,000 and
$43,689,000, respectively. The impact of the pricing competition will have an
adverse affect on sales and gross margins on fluoxetine in future periods.
Net sales of $85,022,000 in fiscal year 2000 increased $4,707,000, or 6%,
from fiscal year 1999. Additional sales from new products, primarily products
sold under distribution agreements with Genpharm, offset the termination of the
prescription transdermal nicotine patch distribution rights, effective May 31,
1999, and reduced sales of antibiotics, which decreased due to an inability by
suppliers to meet the Company's production requirements. The Company
discontinued its antibiotic product line in fiscal year 2000 due to continued
production issues with suppliers. Total sales of antibiotics were approximately
$4,088,000, or 5% of the Company's total net sales in fiscal year 1999. Net
sales of distributed products, which consist of products manufactured under
contract and licensed products, were approximately 64% of the Company's net
sales in both fiscal years 2000 and 1999.
Sales of the Company's products are principally dependent upon, among
other things, (i) pricing levels and competition, (ii) market penetration for
the existing product line, (iii) the continuation of existing distribution
agreements, (iv) introduction of new distributed products, (v) approval of ANDAs
and introduction of new manufactured products, including potential exclusivity
periods, and (vi) the level of customer service. Although there can be no
assurance, the Company anticipates introducing new products in fiscal year 2002
and increasing sales of certain existing products to offset the loss of sales
from competition on any of its significant products. The Company will continue
to implement measures to reduce the overall impact of its top products,
including adding additional products through new and existing distribution
agreements, manufacturing process improvements and cost reductions (see
"Business-Competition").
GROSS MARGINS
The gross margin of $109,729,000 (40% of net sales) for fiscal year 2001
increased $87,039,000 from $22,690,000 (27% of net sales) in the corresponding
period of the prior year. The gross margin improvement was achieved through
additional contributions from sales of higher margin new products, and to a
lesser extent, increased sales of certain existing products and more favorable
manufacturing overhead variances.
For fiscal year 2001, fluoxetine, which is subject to profit sharing
agreements with Genpharm and Reddy, contributed approximately $38,736,000 to the
margin improvement while megestrol acetate oral suspension contributed
approximately $34,613,000. As a result of the 180-day marketing exclusivity
granted to the Company for fluoxetine and megestrol acetate oral suspension,
pricing for these products is such that they yield relatively high gross
margins, before applicable profit splits, (but after the reduction of sales for
the fluoxetine price protection reserve discussed above) during the exclusivity
period. The 180 days marketing exclusivity extended into late January 2002 for
fluoxetine and until mid-January 2002 for megestrol acetate oral suspension. As
discussed above, additional generic manufacturers have introduced and began
marketing comparable fluoxetine products at the end of the Company's exclusivity
period adversely affecting the Company's sales volumes, selling prices and gross
margins for the product. As a result, the Company's gross margin from fluoxetine
is expected to substantially decline in future periods. The Company's gross
margin for megestrol acetate oral suspension could also decline if additional
manufacturers introduce and market a comparable generic product.
The gross margin in fiscal year 2000 increased $6,515,000 to $22,690,000
(27% of net sales) from $16,175,000 (20% of net sales) in the prior year. Gross
margin improvements were attained principally through the sale of new products
and lower manufacturing costs, primarily due to the leasing of the Congers
Facility in March 1999. The loss of gross margin from the termination of the
prescription transdermal nicotine patch distribution rights was partially offset
by the sale of distribution rights for a non-prescription transdermal nicotine.
Inventory write-offs amounted to $1,790,000 for fiscal year 2001 compared
to $1,645,000 in the corresponding period of the prior year. The inventory
write-offs, taken in the normal course of business, are primarily related to
work-in-process inventory not meeting the Company's quality control standards
and the disposal of finished products due to short shelf lives. The higher
inventory write-offs in the most recent year include the disposal of validation
batches related to manufacturing process improvements.
19
Inventory write-offs of $1,645,000 in fiscal year 2000 increased from
$1,157,000 in the prior year. The higher inventory write-offs in 2000 were
primarily attributable to a delayed product launch caused by a brand-name
company obtaining an additional patent for a product and the discontinuance of
additional low margin products.
In fiscal year 2001, the Company's top four selling products accounted
for approximately 70% of net sales compared to 45% and 47%, respectively, of net
sales in fiscal years 2000 and 1999. Three of the products in the most recent
year, fluoxetine, megestrol oral suspension and ranitidine, were not part of the
top four in any of the preceding periods and accounted for approximately 45%,
16% and 4%, respectively of the Company's total 2001 net sales. The aggregate
sales and gross margin generated by fluoxetine and megestrol acetate oral
suspension accounted for a significant portion of the Company's overall sales
and gross margin improvements in fiscal year 2001 and any reductions in pricing
for these products will reduce future contributions of these products to the
Company's overall financial performance. Although there can be no assurance, the
Company anticipates introducing new products in fiscal year 2002 and increasing
sales of certain existing products to offset the loss of sales and gross margin
from competition on any of its significant products. The Company will continue
to implement measures to reduce the overall impact of the top four products,
including adding additional products through new and existing distribution
agreements, manufacturing process improvements and cost reductions.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
In fiscal year 2001, the Company incurred research and development
expenses of $11,113,000 compared to $7,634,000 for the corresponding period of
the prior year. The increased costs were primarily attributable to payments to
Elan related to the development of a clonidine transdermal patch and higher
costs for raw material, biostudies, including those related to products
co-developed with Genpharm, personnel and additional payments for formulation
development work performed for PRI by unaffiliated companies. The Company's
domestic research and development program is integrated with IPR, its research
operation in Israel. Research and development expenses at IPR for the most
recent year were $1,134,000, net of Generics funding, compared to expenses of
$1,299,000 for the comparable period of last year. The Company, IPR and Generics
have an agreement pursuant to which Generics shares one-half of the costs of
IPR's operating budget up to a maximum payment of $1,000,000 in any one calendar
year in exchange for the exclusive distribution rights outside of the United
States to the products developed by IPR after the date of the agreement (see
"Notes to Consolidated Financial Statements-Research and Development
Agreements"). Annual research and development costs in fiscal year 2002 are
expected to exceed the total for fiscal year 2001 by approximately 35%.
In fiscal year 2000, research and development expenses of $7,634,000
increased $1,629,000, or 27%, from $6,005,000 in fiscal year 1999. The higher
expenditures, primarily attributable to increased bio-study activity, personnel
and material costs, were partially offset by lower payments to purchase rights
to pharmaceutical processes and for formulation development work performed for
PRI by unaffiliated companies. The Company's domestic research and development
program is integrated with IPR, its research operation in Israel. Research and
development expenses at IPR in fiscal year 2000 were $1,299,000, net of Generics
funding, compared to expenses of $1,075,000 for fiscal year 1999.
The Company currently has five ANDAs for potential products (one
tentatively approved) pending with, and awaiting approval from, the FDA as a
result of its own product development program. The Company has in process or
expects to commence biostudies for at least four additional products during
fiscal year 2002. None of the potential products described above are subject to
any profit sharing arrangements through the Company's strategic alliances.
Under the Genpharm Distribution Agreement, Genpharm pays the research and
development costs associated with the products covered by the Genpharm
Distribution Agreement. Currently, there are 12 ANDAs for potential products
(three of which have been tentatively approved) that are covered by the Genpharm
Distribution Agreement pending with, and awaiting approval from, the FDA. To
date, the Company is marketing 15 products under the Genpharm Distribution
Agreement. Flecainide acetate tablets (Tambocor(R)), covered under the Genpharm
Distribution Agreement, received final approval from the FDA in July 2001. The
Company anticipates commencing the marketing of the product in the second
quarter of 2002 (see "Notes to Consolidated Financial Statements-Distribution
and Supply Agreements-Genpharm, Inc.").
20
Genpharm and the Company share the costs of developing the products
covered under the Genpharm Additional Product Agreement. Currently, there is one
ANDA for a potential product (tentatively approved) covered by the Genpharm
Additional Product Agreement pending with, and awaiting approval from, the FDA.
The Company began marketing fluoxetine 10 mg and 20 mg tablets, covered under
the Genpharm Additional Product Agreement, in August 2001 (see "Notes to
Consolidated Financial Statements-Distribution and Supply Agreements-Genpharm,
Inc.").
SELLING, GENERAL AND ADMINISTRATIVE
Although selling, general and administrative costs of $21,878,000 for
fiscal year 2001 increased $5,581,000, or 34%, over the same period last year,
the cost as a percentage of net sales in the respective periods decreased to 8%
in 2001 from 19% in 2000. The higher dollar amount in the current year was
primarily attributable to additional marketing programs, shipping costs and
legal fees associated with new product introductions, and to a lesser extent,
increased personnel costs. The Company anticipates it will continue to incur a
high level of legal expenses related to the costs of litigation connected with
certain potential new product introductions (see "Notes to Consolidated
Financial Statements-Commitments, Contingencies and Other Matters-Legal
Proceedings").
Selling, general and administrative costs in fiscal year 2000 of
$16,297,000 (19% of net sales) increased $2,788,000, or 21%, from fiscal year
1999 costs of $13,509,000 (17% of net sales). The increase was primarily
attributable to higher legal costs, primarily for a patent infringement action
by BMS following the Company's ANDA filing for megestrol acetate oral suspension
and, to a lesser extent, for part of the cost of the litigation related to two
products covered under the Company's distribution agreements. In addition,
fiscal year 2000 included higher personnel and accounts receivable collection
costs.
OTHER (EXPENSE) INCOME
Other expense of $364,000 in fiscal year 2001 includes approximately
$700,000 incurred in connection with the proposed acquisition of the ISP
FineTech fine chemical business and the Company's filing of a shelf registration
statement in the fourth quarter of 2001, partially offset by a payment from 3M
to the Company releasing the parties from a prior product agreement recorded in
the first quarter of 2001. Other income of $506,000 in 2000 included payments
from strategic partners to reimburse the Company for research costs incurred in
prior periods.
Other income in fiscal year 2000 decreased $400,000 from $906,000 in
fiscal year 1999, primarily due to lower payments from strategic partners to
reimburse the Company for research costs incurred in prior periods in return for
a share of the gross margin of certain products awaiting FDA approval.
INCOME TAXES
The Company recorded income tax provisions of $22,010,000, net of tax
benefits of $9,092,000 related to previously unrecognized NOL carryforwards, for
fiscal year 2001. The Company did not recognize a benefit for its operating
losses for fiscal years 2000 and 1999 (see "Notes to Consolidated Financial
Statements-Income Taxes").
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents of $67,742,000 at December 31,
2001 increased $67,520,000 from $222,000 at December 31, 2000. The net cash
position was generated primarily by operations related to the introduction of
new products and, to a lesser extent, proceeds from issuance of Common Stock
from the exercise of stock options and warrants. A portion of the cash generated
was used to pay down the Company's credit line with GECC and to fund capital
projects. Working capital, which includes cash and cash equivalents increased to
$102,867,000 at December 31, 2001 from $18,512,000 at December 31, 2000,
primarily due to the increased net cash position, deferred income tax assets and
accounts receivable partially offset by increased payables for distribution
agreements and income taxes payable. The working capital ratio improved to 2.37x
at December 31, 2001 compared to 1.65x at December 31, 2000.
21
The Company, from time to time, enters into agreements with third parties
with respect to the development of new products and technologies. To date, the
Company has entered into agreements and advanced funds to several non-affiliated
companies for products in various stages of development. These types of payments
are expensed as incurred and included in research and development costs. Annual
research and development expenses, including payments to non-affiliated
companies, are expected to total approximately $15,000,000 for fiscal year 2002.
As of December 31, 2001 the Company had payables for distribution
agreements of $32,295,000, related primarily to amounts due on fluoxetine
pursuant to profit sharing agreements with strategic partners. The Company
expects to pay these amounts out of its working capital in the first quarter of
2002.
In December 2001, Par entered into an agreement with Elan to develop a
range of modified release drugs over the next five years. Under the terms of the
agreement, the companies will identify two drug candidates for development at
the beginning of each year, commencing in the first quarter of 2002. Elan will
be responsible for the development and manufacture of all products, while Par
will be responsible for marketing, sales and distribution. Par will reimburse
Elan for research and development costs and Elan will receive a royalty from the
sale of the products. Pursuant to the agreement, Par will pay Elan up to
$1,500,000 per calendar year in monthly installments beginning the date of the
commencement of the development program for each product. The Company expects to
begin these payments in the first quarter 2002.
In December 2001, the Company committed to making an equity investment of
$2,400,000 over a period of time in HighRapids, Inc. ("HighRapids"), a Delaware
corporation and software developer. HighRapids is the surviving corporation of a
merger with Authorgenics, Inc., a Florida corporation. The Company's cash
infusion will be utilized by HighRapids for working capital and operating
expenses.
In November 2001, the Company entered into joint development and
marketing agreement with Breath Ltd. of the Arrow Group to pursue the worldwide
distribution of latanoprost ophthalmic solution 0.005% (Xalatan(R)). Pursuant to
this agreement, Par paid Breath Ltd. $2,500,000 in fiscal year 2001 and will pay
an additional $2,500,000 in the first quarter of 2002.
In November 2001, the Company entered into a license agreement with
Pentech to market paroxetine hydrochloride capsules. Pursuant to this agreement,
Par paid Pentech $200,000 in fiscal year 2001 and will pay an additional
$400,000 based on certain milestones.
In April 2001, Par entered into a licensing agreement with Elan to market
a generic clonidine transdermal patch (Catapres TTS(R)). Elan will be
responsible for the development and manufacture of all products, while Par will
be responsible for marketing, sales and distribution. Pursuant to the agreement,
the Company began paying Elan $2,000,000 in monthly installments in fiscal year
2001. In addition, Par will pay Elan $1,000,000 upon FDA approval of the product
and a royalty on all sales of the product.
In June 2000, the Company agreed to sell its remaining distribution
rights back to Elan for a non-prescription transdermal nicotine patch and to
terminate Par's right to royalty payments under a prior Termination Agreement.
Pursuant to this agreement, the Company received a $500,000 payment in July
2001. Pursuant to the Termination Agreement, the Company's exclusive
distribution rights in the United States for a prescription transdermal nicotine
patch ended on May 31, 1999 and the Company received payments of $2,000,000 and
$1,000,000, respectively, in October 1998 and the third quarter of 1999.
The Company paid FineTech a total of $2,000,000 from September 2000
through September 2001 pursuant to an agreement with FineTech in April 1999,
which was later modified in August 2000, for the right to use a process for a
pharmaceutical bulk active together with its technology transfer package, DMF
and patent filings. FineTech has paid all costs and expenses associated with the
development of the process, exclusive of patent prosecution and maintenance,
which shall be at the Company's expense. In addition, the Company will pay
royalties on gross margins generated from Par's future sales of the product.
In March 2001, the Company reached an agreement with 3M pursuant to which
3M paid the Company $750,000 in April 2001, releasing the parties from a prior
product agreement (see "Notes to Consolidated Financial Statements-Commitments,
Contingencies and Other Matters-Legal Proceedings").
22
In March 1999, the Company entered into an agreement to lease, with an
option to purchase, its Congers Facility to Halsey. Halsey paid the Company a
purchase option of $100,000 in March 1999 and is obligated to pay rent of
$500,000 annually during the initial three-year term of the lease. The rent is
expected to continue to cover the Company's fixed costs of the facility in
subsequent periods. Under the purchase option, Halsey may purchase the facility
and substantially all the machinery and equipment at any time during the lease
for a specified amount (see "Notes to Consolidated Financial Statements-Leasing
Agreement").
In January 1999, the Company entered into the Genpharm Profit Sharing
Agreement pursuant to which the Company will receive a portion of the profits
resulting from a separate agreement between Genpharm and an unaffiliated United
States based pharmaceutical company in exchange for a non-refundable fee of
$2,500,000 paid by the Company. The Company will amortize the fee over a
projected revenue stream from the products when launched by the third party (see
"Notes to Consolidated Financial Statements-Profit Sharing Agreement").
The Company, IPR and Generics entered into the Development Agreement,
dated August 11, 1998, pursuant to which Generics agreed to fund one-half of the
costs of IPR's operating budget in exchange for the exclusive distribution
rights outside of the United States to the products developed by IPR after the
date of the agreement. In addition, Generics agreed to pay IPR a perpetual
royalty for all sales of the products by Generics or its affiliates outside the
United States. To date, no such products have been brought to market by Generics
and no royalty has been paid to IPR. Pursuant to the Development Agreement,
Generics paid the Company approximately $788,000, $800,000 and $800,000,
respectively, for fiscal years 2001, 2000 and 1999, fulfilling their funding
requirements through December 31, 2001. Generics is not required to fund more
than $1,000,000 for any one calendar year (see "Notes to Consolidated Financial
Statements-Research and Development Agreements").
The Company expects to fund its operations, including research and
development activities and its obligations under the existing distribution and
development arrangements discussed herein, out of its working capital and, if
necessary, with available borrowings against its line of credit, if and to the
extent available (see "-Financing"). Although there can be no assurance, the
Company anticipates introducing new products in fiscal year 2002 and increasing
sales of certain existing products to offset the loss of sales and gross margin
from competition on any of its significant products. The Company will continue
to implement measures to reduce the overall impact of its top products,
including adding additional products through new and existing distribution
agreements, manufacturing process improvements and cost reductions.
FINANCING
At December 31, 2001, the Company's total outstanding long-term debt,
including the current portion, amounted to $1,299,000. The amount consists
primarily of an outstanding mortgage loan with a bank and capital leases for
computer equipment. In June 2001, the Company and the bank entered into an
agreement that extended the terms of the mortgage loan of which the remaining
balance was originally due in May 2001. The mortgage loan extension, in the
principal amount of $877,000, is to be paid in equal monthly installments over a
term of 13 years maturing May 1, 2014. The mortgage loan has a fixed interest
rate of 8.5% per annum, with rate resets after the fifth and tenth years based
upon a per annum rate of 3.25% over the five-year Federal Home Loan Bank of New
York rate. The loan is secured by certain real property (see "Business
Property")
At December 31, 2000, the Company's total outstanding short-term and
long-term debt, including the current portion, amounted to $10,021,000 and
$1,212,000, respectively. The short-term debt consisted of the outstanding
amount due under the Company's line of credit with GECC and the long-term debt
consisted of an outstanding mortgage loan with a bank and capital leases for
computer equipment (see "Notes to Consolidated Financial Statements-Long-Term
Debt").
Par entered into a Loan and Security Agreement (the "Loan Agreement")
with GECC in December 1996, which as amended, provides Par with a 78-month
revolving line of credit expiring June 2003. Pursuant to the Loan Agreement, Par
is permitted to borrow up to the lesser of (i) the borrowing base established
under the Loan Agreement or (ii) $20,000,000. The borrowing base is limited to
85% of eligible accounts receivable plus 50% of eligible inventory of Par, each
as determined from time to time by GECC. The interest rate charged on the line
of credit is based upon a per annum rate of 2.25% above the 30-day commercial
paper rate for high-grade unsecured notes adjusted monthly. The line of credit
with GECC is secured by the assets of Par and PRI other than real property and
is guaranteed by PRI. In connection with such facility, Par, PRI and their
affiliates have established a cash management system pursuant to which all cash
and cash equivalents received by any of such entities would be deposited into a
23
lockbox account over which GECC would have sole operating control if there were
amounts outstanding under the line of credit. The deposits would then be applied
on a daily basis to reduce the amounts outstanding under the line of credit. The
revolving credit facility is subject to covenants based on various financial
benchmarks. As of December 31, 2001, the borrowing base was approximately
$19,287,000. To date, no debt is outstanding under the loan agreement.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting policies are those that are most important to the
portrayal of the Company's financial condition and results of operations, and
require management's most difficult, subjective and complex judgments, as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. The Company's most critical accounting policies, discussed
below, pertain to revenue recognition and the related determination of accounts
receivable and related allowances, research and development expense and patent
litigation cost, deferred charges and other assets, intangible assets,
depreciable and amortizable lives, pension benefits and legal proceedings. In
applying such policies management must use some amounts that are based on its
informed judgments and estimates. Because of the uncertainty inherent in these
estimates, actual results could differ from estimates used in applying the
critical accounting policies. The Company is not aware of any reasonably likely
events or circumstances that would result in different amounts being reported
that would materially affect its financial condition or results of operations.
REVENUE RECOGNITION:
The Company recognizes revenue at the time its products are shipped to
its customers as, at that time, the risk of loss or physical damage to the
product passes to the customer, and the obligations of customers to pay for the
products are not dependent on the resale of the product or the Company's
assistance in such resale. The Company may offer price protection, or
shelf-stock adjustments, with respect to sales of new generic drugs for which it
has a market exclusivity period. To account for the fact that the price of such
drugs may decline when additional generic manufacturers introduce and market a
comparable generic product at the end of the exclusivity period, such plans,
which are common in the industry, generally provide the Company will credit its
customers for the difference between the Company's new price at the end of the
exclusivity period and the price at which the Company sold the customers the
product with respect to the quantity remaining on the customer's shelf at the
end of the exclusivity period. The Company records charges (reductions of
revenue) to accrue this amount for specific product sales that will be subject
to price protection based on the Company's estimate of customer inventory levels
and market prices at the end of the exclusivity period. Customers are permitted
to return unused product, after approval from the Company, up to 180 days before
and one year after the expiration date for the product's lot. Additionally,
certain customers are eligible for price rebates, offered as an incentive to
increase sales volume, on the basis of the volume of purchases of a product over
a specified period which generally ranges from one to three months, and certain
customers are credited with chargebacks on the basis of their resales to end-use
customers, such as HMO's, which have contracted with the Company for quantity
discounts. In each instance the Company has the historical experience and access
to other information, including the total demand for each drug the Company
manufactures, the Company's market share, the recent or pending introduction of
new drugs, the inventory practices of the Company's customers and the resales by
its customers to end-users having contracts with the Company, necessary to
reasonably estimate the amount of such returns or allowances, and records
reserves for such returns or allowances at the time of sale.
ACCOUNTS RECEIVABLE AND RELATED ALLOWANCES:
The accounts receivable amounts are net of provisions for customer
rebates and chargebacks. Customer rebates are price reductions generally given
to customers as an incentive to increase sales volume. This incentive is based
on a customer's volume of purchases during an applicable monthly, quarterly or
annual period. Chargebacks are price adjustments given to the wholesale customer
for product it resells to specific healthcare providers on the basis of prices
negotiated between the Company and the provider. Where the provider has
negotiated with the Company for a price below the normal resale price, the
Company adjusts its price to the wholesaler supplying that provider accordingly.
The adjustment is based on the wholesaler's actual resales to that provider.
The Company accepts returns of product according to the following: (i)
the returns must be approved by authorized personnel in writing or by telephone
with the lot number and expiration date accompany any request, (ii) the Company
generally will accept returns of products from any customer and will give such
customer a credit for such return provided such product is returned within six
months prior to, and until 12 months following, such product's expiration date,
(iii) any product that has more than six months until its expiration date may be
returned to the Company; however, no credit will be issued to the customer (iv)
the Company will not accept returns of products if such products cannot be
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resold, unless the reason that such products cannot be resold is that the
expiration date has passed. In addition, private label stock is not returnable.
The accounts receivable allowances include price adjustments that consist
of cash discounts, sales promotions and price protection or shelf-stock
adjustments. The total price protection the Company will credit customers at the
end of an exclusivity period will depend on the amount by which the price
declines as the result of the introduction of comparable generic products by
additional manufacturers, and the shelf stock customers will have at the end of
the exclusivity period. In the Company's experience the amount by which the
price of a drug may decline at the end of an exclusivity period will depend in
part on the number of additional generic manufacturers that introduce and market
a comparable product. The Company estimates the amount by which prices will
decline based on its monitoring of the number and status of FDA applications and
tentative approvals and its historical experience with other drugs for which the
Company had market exclusivity. The Company estimates the amount of shelf stock
that will remain at the end of an exclusivity period based on both its knowledge
of the inventory practices for wholesalers and retail distributors and
conversations it has with its major customers. Using these factors, the Company
estimates the total price protection credit it will have to issue at the end of
an exclusivity period and records charges (reductions of sales) to accrue this
amount for specific product sales that will be subject to price protection based
on the Company's estimate of customer inventory levels and market prices at the
end of the exclusivity period. As a result, the Company will be required to
credit customers for price protection based on the quantity of that inventory
and the decrease in a particular products market price at the end of the
exclusivity period.
RESEARCH AND DEVELOPMENT EXPENSE AND PATENT LITIGATION COST:
Amounts related to contractual rights acquired by the Company to products
which have not been approved by the FDA and where the Company does not have the
right to an alternative future use for the product, are charged to expense as
research and development. Similarly, Company funding of the research and
development efforts of others are charged to research and development expense.
Research and development costs the Company incurrs to develop new products and
obtain premarketing regulatory approval for such products are expensed as
incurred.
DEFERRED CHARGES AND OTHER ASSETS:
Contractual rights acquired by the Company to a process, product or other
legal right