UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 offices) (Zip Code)
Registrant's telephone number, including area code: (845) 425-7100
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 3 No
32,769,517
Number of shares of Common Stock outstanding as of November 8, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
SEPTEMBER DECEMBER
ASSETS 30, 2002 31, 2001
------ -------- --------
Current assets:
Cash and cash equivalents $33,782 $67,742
Accounts receivable, net of allowances of
$41,355 and $47,168 64,880 38,009
Inventories 48,217 31,458
Prepaid expenses and other current assets 5,686 4,156
Deferred income tax assets 45,171 34,485
-------- --------
Total current assets 197,736 175,850
Property, plant and equipment, net of
accumulated depreciation and amortization 28,062 24,345
Other assets 13,618 8,426
Intangible assets, net of accumulated
amortization 24,787 8,305
Goodwill 24,643 -
-------- --------
Total assets $288,846 $216,926
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $207 $239
Accounts payable 22,504 18,007
Payables due to distribution agreement partners 19,251 32,295
Accrued salaries and employee benefits 5,038 2,859
Accrued expenses and other current liabilities 6,477 4,817
Income taxes payable 29,041 14,766
-------- --------
Total current liabilities 82,518 72,983
Long-term debt, less current portion 922 1,060
Accrued pension liability 331 331
Deferred income tax liabilities, net 3,843 4,129
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01 per share;
authorized 90,000,000 shares;
issued and outstanding 32,703,674 and
32,035,189 shares 327 320
Additional paid-in capital 117,629 115,610
Retained earnings 83,276 22,493
-------- --------
Total shareholders' equity 201,232 138,423
-------- --------
Total liabilities and shareholders' equity $288,846 $216,926
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
--2--
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (ACCUMULATED DEFICIT)
(In Thousands, Except Per Share Amounts)
(Unaudited)
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
(*RESTATED) (*RESTATED)
SEPT. 30, SEPT. 29, SEPT. 30, SEPT. 29,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $282,500 $182,925 $100,237 $127,924
Cost of goods sold 149,858 111,448 53,285 75,996
------- ------- ------- -------
Gross margin 132,642 71,477 46,952 51,928
Operating expenses:
Research and development 10,590 7,436 3,653 3,779
Selling, general and administrative 27,457 15,928 11,094 6,974
------- ------- ------- -------
Total operating expenses 38,047 23,364 14,747 10,753
------- ------- ------- -------
Operating income 94,595 48,113 32,205 41,175
Settlements 9,051 - - -
Other (expense) income (4,492) 431 (112) 67
Interest income (expense) 490 (580) 109 (138)
------- ------- ------- -------
Income before provision for income taxes 99,644 47,964 32,202 41,104
Provision for income taxes 38,861 10,532 12,559 7,372
------- ------- ------- -------
NET INCOME 60,783 37,432 19,643 33,732
Retained earnings (accumulated deficit):
Beginning of period 22,493 (31,429) 63,633 (27,729)
------- ------- ------- -------
End of period $83,276 $6,003 $83,276 $6,003
======= ======= ======= =======
NET INCOME PER SHARE OF COMMON STOCK:
BASIC $1.89 $1.24 $.60 $1.09
======= ======= ======= =======
DILUTED $1.84 $1.17 $.59 $1.04
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 32,194 30,106 32,476 30,871
======= ======= ======= =======
DILUTED 32,962 31,902 33,152 32,428
======= ======= ======= =======
* Restated as described in Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
--3--
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
NINE MONTHS ENDED
-----------------
(*RESTATED)
SEPT. 30, SEPT. 29,
2002 2001
---- ----
Cash flows from operating activities:
Net income $60,783 $37,432
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred income taxes (10,972) (10,721)
Depreciation and amortization 3,857 2,481
Write-off of inventories 3,085 1,195
Allowances against accounts receivable (5,813) 12,987
Settlements (9,051) -
Tax effect from exercise of stock options (159) 11,254
Other (23) 146
Changes in assets and liabilities:
Increase in accounts receivable (20,802) (103,564)
Increase in inventories (19,776) (4,919)
Increase in prepaid expenses and other assets (9,343) (3,848)
Increase in accounts payable 4,398 1,143
(Decrease) increase in payables due to distribution agreement partners (13,044) 52,150
Increase in accrued expenses and other current liabilities 3,916 3,078
Increase in income taxes payable 14,275 8,693
------- -------
Net cash provided by operating activities 1,331 7,507
------- -------
Cash flows from investing activities:
Capital expenditures (4,736) (2,743)
Acquisition of FineTech, net of cash acquired (32,598) -
Proceeds from sale of fixed assets 28 19
------- -------
Net cash used in investing activities (37,306) (2,724)
------- -------
Cash flows from financing activities:
Proceeds from issuances of Common Stock 2,185 7,362
Net proceeds from revolving credit line - (9,646)
Principal payments under long-term debt and other borrowings (170) (212)
------- -------
Net cash provided by financing activities 2,015 (2,496)
------- -------
Net (decrease) increase in cash and cash equivalents (33,960) 2,287
Cash and cash equivalents at beginning of period 67,742 222
------- -------
Cash and cash equivalents at end of period $33,782 $2,509
------- -------
Supplemental disclosure of cash flow information Cash paid during the year for:
Taxes $35,717 $1,653
------- -------
Interest $102 $587
------- -------
* Restated as described in Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
--4--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
Pharmaceutical Resources, Inc. (the "Company" or "PRX") operates,
primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. ("Par"),
in one business segment, the manufacture and distribution of generic
pharmaceuticals in the United States. Marketed products are principally in solid
oral dosage form (tablet, caplet and two-piece hard-shell capsule). The Company
also distributes one product in the semi-solid form of a cream and one oral
suspension.
BASIS OF PREPARATION:
The accompanying consolidated financial statements at September 30, 2002
and for the nine-month and three-month periods ended September 30, 2002 and
September 29, 2001 are unaudited; however, in the opinion of the Company's
management, such consolidated statements include all adjustments (consisting of
normal recurring accruals) necessary to present a fair statement of the
information presented therein. The consolidated balance sheet at December 31,
2001 was derived from the Company's audited consolidated financial statements at
such date.
On April 17, 2002, the Company purchased FineTech Ltd. ("FineTech"), which
is based in Haifa, Israel from International Specialty Products ("ISP"). The
acquisition was accounted for as a purchase under Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations", and the
accompanying consolidated financial statements include the operating results of
FineTech from the date of acquisition.
Pursuant to accounting requirements of the Securities and Exchange
Commission ("SEC") applicable to quarterly reports on Form 10-Q, the
accompanying consolidated financial statements and these notes do not include
all disclosures required by accounting principles generally accepted in the
United States for audited financial statements. Accordingly, these statements
should be read in conjunction with the accounting policies and Notes to
Consolidated Financial Statements included in the Company's most recent annual
financial statements.
The results of operations for interim periods are not necessarily
indicative of those that may be achieved for a full fiscal year.
RESTATEMENT OF PRIOR YEAR RESULTS
Certain items in the consolidated financial statements for the nine and
three-month periods ended September 29, 2001 have been restated due to a change
in the manner the Company accounted for its transactions with Merck KGaA in
fiscal year 1998. In June 1998, the Company sold to Merck KGaA 10,400,000 shares
of its Common Stock, and entered into a distribution agreement (the "Genpharm
Distribution Agreement"), dated March 1998, with Genpharm, Inc. ("Genpharm"), a
Canadian subsidiary of Merck KGaA. The Company previously accounted for the sale
of the Common Stock and the distribution agreement as separate transactions. In
restating its consolidated financial statements, the Company accounted for the
two transactions as a single transaction under Emerging Issues Task Force
("EITF") Issue 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 Issue 96-18, the fair value of the Common Stock sold, to
the extent it exceeded the cash consideration received for such Common Stock, is
attributed to the distribution agreement. Under the restatement, 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 received by
the Company by $6,500,000. That $6,500,000 was assigned to the Genpharm
Distribution Agreement, with a corresponding increase in shareholders' equity.
Additionally, the Company recorded a deferred tax liability of $4,333,000 and a
corresponding increase in the financial reporting basis of the distribution
agreement to account for the difference between the basis in the distribution
agreement for financial reporting and income tax purposes as required by SFAS
No. 109, "Accounting for Income Taxes" ("SFAS 109"). The aggregate value
assigned to the Genpharm Distribution Agreement of $10,833,000 is being
amortized on a straight-line basis over fifteen years beginning in the third
quarter of fiscal 1998, and the net amount is included in intangible assets. The
amortization is included as a non-cash charge in selling, general and
administrative expenses.
--5--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
In addition, certain items in the Company's consolidated financial
statements have been restated to reflect the reversal of a price protection
reserve originally recorded in the third quarter of 2001 related to the
Company's fluoxetine (Prozac(R)) product launch in August 2001. The Company had
intended to record the effect of the total projected price protection reserve
anticipated upon competition entering the market at the end of the Company's
exclusivity period in late-January 2002 over the entire exclusivity period based
on its net sales in each period. However, because the total projected price
protection reserve was based on customer inventories at the end of the
exclusivity period, the accounting treatment requires that the entire reserve be
recorded only in the periods in which the remaining inventory would have been
sold. As a result, the Company restated its results for the third quarter 2001
(reversing the reserve in such quarter) and recorded the entire price protection
reserve in the fourth quarter of 2001 and January 2002. The restatement related
to price protection resulted in increases in net sales of $28,200,000, gross
margin of $10,365,000 and net income of $6,882,000 in the third quarter of 2001.
The impact of the restatements described above on the previously reported
results for the nine and three-month periods ended September 29, 2001 were as
follows:
NINE MONTHS ENDED THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF SEPTEMBER 29, SEPTEMBER 29,
- -------------------------- 2001 2001
---------------------------------- ----------------------------------
OPERATIONS AND RETAINED EARNINGS REPORTED RESTATED REPORTED RESTATED
- -------------------------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
Net Sales $154,725 $182,925 $99,724 $127,924
Gross margin 61,112 71,477 41,563 51,928
Selling, general and administrative 15,385 15,928 6,793 6,974
Operating income 38,291 48,113 30,991 41,175
Net income 30,912 37,432 26,850 33,732
Retained earnings (as of Sept. 29, 1,289 6,003 1,289 6,003
2001)
Net income per share of common stock:
Basic $1.03 $1.24 $0.87 $1.09
Diluted $0.97 $1.17 $0.83 $1.04
ACCOUNTS RECEIVABLE:
SEPTEMBER 30, DECEMBER 31,
2002 2001
(IN THOUSANDS)
Accounts receivable $106,235 $85,177
------- ------
Allowances:
Doubtful accounts 1,006 998
Returns and allowances 16,112 4,847
Price adjustments 24,237 41,323
------- ------
41,355 47,168
------- ------
Accounts receivable,
net of allowances $64,880 $38,009
The accounts receivable amounts above at September 30, 2002 and December 31, 2001 are net of provisions for customer rebates
of $17,822,000 and $14,081,000, and chargebacks of $102,195,000 and $41,830,000, respectively. 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
made during an applicable monthly, quarterly or annual period.
--6--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
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. The increased chargebacks are primarily
due to lower contract pricing on fluoxetine and a larger volume of sales through
the Company's wholesale customers, primarily due to new product awards and trade
show promotions.
The accounts receivable allowances include price adjustments that consist
of cash discounts, sales promotions and price protection or shelf-stock
adjustments. The Company generally offers price protection, also known as
shelf-stock adjustments, with respect to sales of new generic drugs for which it
has a market exclusivity period. Price protection accounts for the fact that the
price of such drugs typically will decline, sometimes substantially, 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 Company's industry, generally provide for a credit to customers with respect
to the customer's remaining inventory at the end of the exclusivity period for
the difference between the Company's new price and the price at which the
Company originally sold the product.
The Company's exclusivity period for fluoxetine, the generic version of
Eli Lilly and Company's Prozac(R), ended in late-January 2002. With respect tO
fluoxetine, the Company established a price protection reserve during the
exclusivity period of approximately $34,400,000, based on its estimate that
between eight and ten additional generic manufacturers would introduce and
market comparable products for the 10 mg and 20 mg tablets and between one and
three additional manufacturers would introduce and market a comparable product
for the 40 mg capsules. As a result of the introduction of these competing
generic products during the first quarter of 2002, the sales price for
fluoxetine substantially declined from the sales price the Company charged
during the exclusivity period. Through September 30, 2002, the Company issued
price protection credits of approximately $27,400,000 and reduced the reserve by
approximately $5,800,000 for price protection on the 40 mg that was no longer
necessary. Pursuant to a distribution agreement with a strategic partner, the
reduction of the reserve had a favorable impact on the Company's gross margin of
approximately $1,160,000 in the second quarter of 2002. The Company expects that
the remaining price protection reserve of approximately $1,200,000 at September
30, 2002 will be sufficient.
The Company's exclusivity period for megestrol acetate oral suspension,
the generic version of Bristol Myers Squibb's ("BMS") Megace(R) OraL Suspension,
ended in mid-January 2002. One generic competitor was granted U.S. Food and Drug
Administration ("FDA") approval to market another generic version of megestrol
acetate oral suspension and began shipping the product to a limited number of
customers in the second quarter of 2002. In addition, a second potential generic
competitor entered into a settlement agreement with BMS pursuant to which the
public record states that the present formulation of the generic company's
product infringes a BMS patent related to megestrol acetate. However, at this
time the Company has no information as to whether the settlement agreement
provides for the generic competitor to enter the market at some point in the
future. 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.
Based on these factors, the Company did not record a price protection reserve
for such product as of September 30, 2002. The Company will continue to evaluate
the effect of potential competition and will record a price protection reserve
when it deems necessary.
INVENTORIES:
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
(IN THOUSANDS)
Raw materials and supplies $15,377 $11,574
Work in process and finished goods 32,840 19,884
------ ------
$48,217 $31,458
====== ======
--7--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
OTHER ASSETS:
Included in other assets are amounts paid for contractual rights acquired
by the Company to a process, product or other legal right that has multiple or
alternative future uses which support its realizability. These values are
capitalized and amortized over the period in which the related cash flows are
generated. All costs that are capitalized are subject to periodic impairment
testing.
In November 2001, the Company entered into a joint development 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. As a
result of this agreement, Par filed an Abbreviated New Drug Application ("ANDA")
for latanoprost, including a Paragraph IV certification that the existing
patents for the product 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. In December 2001, Pharmacia, among others, initiated
a patent infringement action against Par. Par intends to vigorously defend its
position in the pending litigation with Pharmacia. Pursuant to this agreement,
Par made payments of $2,500,000 in fiscal year 2001 and $2,500,000 in the first
quarter of fiscal year 2002 to Breath Ltd., which are included in other assets
on the consolidated balance sheets (see "-Legal Proceedings").
In April 1999, the Company entered into an agreement with FineTech for the
right to use a process for the pharmaceutical bulk active latanoprost. Pursuant
to this agreement, the Company paid FineTech approximately $2,000,000 in fiscal
years 2000 and 2001, which is included in other assets on the consolidated
balance sheets, for a completed process together with its technology transfer
package and patent. The Company will pay royalties to FineTech on gross margins
from sales of all products developed pursuant to this agreement.
In April 2002, the Company entered into an agreement (the "Genpharm 11
Product Agreement") to expand its strategic product partnership with Merck KGaA.
Under the terms of the Genpharm 11 Product Agreement, Par has licensed the
exclusive rights to 11 generic pharmaceutical products currently under
development and not included in any other distribution agreements between the
Company and Genpharm (see "-Distribution Agreements-Genpharm, Inc."). Pursuant
to the Genpharm 11 Product Agreement, Genpharm has agreed to develop the
products, submit all corresponding ANDAs to the FDA and subsequently manufacture
the products. Par has agreed to serve as exclusive U.S. marketer and distributor
of the products, pay a share of the costs, including development and legal
expenses incurred to obtain final regulatory approval, and pay Genpharm a
percentage of the gross profits on all sales of products covered under this
agreement. Pursuant to the Genpharm 11 Product Agreement, the Company paid
Genpharm a non-refundable fee of $2,000,000 in the second quarter of 2002, which
is included in other assets on the consolidated balance sheets, for two of the
products, loratadine 10 mg tablets and mirtazapine tablets, which have been
tentatively approved by the FDA and are expected to be marketed in fiscal years
2003 to 2004. In addition, the Company will be required to pay an additional
non-refundable fee of up to $414,000 based upon FDA acceptance of filings for
six of the nine remaining products.
INTANGIBLE ASSETS:
SEPTEMBER 30,DECEMBER 31,
2002 2001
(IN THOUSANDS)
BMS Asset Purchase Agreement, net of
accumulated amortization of $975 $10,725 -
Genpharm Distribution Agreement, net of
accumulated amortization of
$3,070 and $2,528 7,763 8,305
Intellectual property, net of
accumulated amortization o f$281 6,299 -
------ -----
$24,787 $8,305
====== =====
Intangible assets include the estimated fair values of certain
distribution rights of the Company to certain products of third parties and the
intellectual property acquired with the acquisition of FineTech (see
"-Acquisition of FineTech"). The values of the distribution rights are
capitalized and amortized on a straight-line basis over the products estimated
useful lives of 7 to 15 years. The values of the intellectual property,
consisting of trademarks, patents, product and core technology, and research
contracts, are amortized on a straight-line basis over their estimated useful
lives of 6 to 10 years.
--8--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
On March 5, 2002 the Company entered into an agreement with BMS (the "BMS
Asset Purchase Agreement") and acquired the United States rights to five of
BMS's brand products including the antihypertensives Capoten(R) anD Capozide(R),
the cholesterol-lowering medications Questran(R) and QuestRan Light(R), and
Sumycin(R), an antibiotic. Pursuant to the BMS Asset PurchAse Agreement, the
Company paid approximately $1,024,000 in March 2002, agreed to make an
additional payment of approximately $1,025,000 in the first quarter of 2003, and
terminated its outstanding litigation against BMS involving megestrol acetate
oral suspension and buspirone. The Company determined, through an independent
third party appraisal, the fair value of the BMS Asset Purchase Agreement to be
$11,700,000, which exceeded the cash consideration of $2,049,000 and associated
costs of $600,000 by $9,051,000. The $9,051,000 value was assigned to the
litigation settlements and included in settlement income in the first quarter of
2002. The fair value of the BMS Asset Purchase Agreement is amortized on a
straight-line basis over seven years beginning in March 2002, and the net amount
is included in intangible assets. The amortization is included as a non-cash
charge in cost of goods sold.
The Company recorded amortization expense related to intangible assets of
$1,798,000 and $767,000, respectively, for the nine and three-month periods
ended September 30, 2002. Annual amortization expense related to these
intangible assets in each of the next five years is expected to be $3,070,000
per year.
ACQUISITION OF FINETECH:
On March 15, 2002, the Company announced the termination of negotiations
with ISP related to the Company's purchase of the entire ISP FineTech fine
chemical business, based in Haifa, Israel and Columbus, Ohio. At that time, the
Company discontinued negotiations with ISP as a result of various events and
circumstances that occurred after 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 was subject to certain credits and offsets,
and incurred approximately $1,254,000 in related acquisition costs, both of
which are included in other expense in fiscal year 2002.
The Company subsequently purchased FineTech, based in Haifa, Israel, from
ISP in April 2002 for approximately $32,000,000 and $1,217,000 in related
acquisition costs financed by its cash-on-hand. The Company acquired the
physical facilities, intellectual property and patents of FineTech and retained
all of FineTech employees. FineTech specializes in the design and manufacture of
proprietary synthetic chemical processes used in the production of complex
organic compounds for the pharmaceutical industry. FineTech also manufactures
complex synthetic active pharmaceutical ingredients for companies in the branded
and generic pharmaceutical industries at its manufacturing facility in Haifa,
Israel. This facility operates in compliance with FDA current good manufacturing
practices (cGMP) standards. FineTech had revenues of approximately $6,000,000 in
fiscal year 2001; however, the purchase is not expected to have a material
effect on the Company's earnings in fiscal year 2002. The Company expects to
transfer a portion of FineTech's personnel and technological resources to a
laboratory facility in the northeastern United States. FineTech is operated as
an independent, wholly-owned subsidiary of PRX and will provide immediate
chemical synthesis capabilities and strategic opportunities to the Company and
other customers.
The purchase price for FineTech has been allocated to assets and
liabilities based on management's estimates of fair value through an independent
third party valuation firm. The following table sets forth the allocation of the
purchase price (in thousands):
Current assets $971
Property, plant and equipment 1,045
Intellectual property 6,580
Goodwill 24,643
------
Total assets acquired 33,239
Current liabilities 22
--
Total liabilities assumed 22
--
Net assets acquired $33,217
======
--9--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
the goodwill will not be amortized, but will be tested for impairment using a
fair value approach at least annually.
CHANGES IN SHAREHOLDERS' EQUITY:
Changes in the Company's Common Stock and additional paid-in capital
accounts during the nine months ended September 30, 2002 were as follows:
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL
------ ------ -------
Balance, December 31, 2001 32,035,189 $320,000 $115,610,000
Exercise of stock options 662,546 7,000 2,020,000
Compensatory arrangements 5,939 - (1,000)
Balance, September 30, 2002 32,703,674 $327,000 $117,629,000
========== ======== ============
RESEARCH AND DEVELOPMENT VENTURES:
The Company is committed to developing new products that have limited
competition and longer product life cycles. To augment its internal development
program, the Company seeks to enter into research and development ventures where
it can share development costs while using the expertise of its partners. As of
September 30, 2002, the Company had entered into the following research and
development ventures.
RHODES TECHNOLOGIES, INC.:
In April 2002, the Company entered into an agreement with Rhodes
Technologies, Inc. ("RTI"), an affiliated company of Purdue Pharma L.P., to
establish a joint venture partnership in the United States. The new joint
venture will be named SVC Pharma and will be owned equally by both parties. SVC
Pharma will utilize, on a case-by-case basis, advanced technologies and patented
processes to develop, manufacture, market and distribute certain unique,
proprietary pharmaceutical products. Under the terms of the agreement, when both
partners agree to pursue a specific project, each partner will contribute
resources to the new enterprise. RTI will provide scientific and technological
expertise in the development of non-infringing, complex molecules. In addition
to providing chemical synthesis capabilities, RTI will provide the manufacturing
capacity for sophisticated intermediate and active pharmaceutical ingredients.
Par will provide development expertise in dosage formulation and will be
responsible for marketing, sales and distribution. The companies will share
equally in expenses and profits. SVC Pharma has identified several candidates
for drug development, the first of which has the potential to be marketed by the
Company in fiscal year 2004. The Company expects to begin funding the first
project pursuant to the agreement in the fourth quarter of fiscal year 2002. The
Company will account for the expenses of SVC Pharma as a joint venture and will
charge its portion of those expenses to research and development as incurred.
GENERICS (UK) LTD.:
The Company, Israel Pharmaceutical Resources L.P. ("IPR"), and Generics
(UK) Ltd. ("Generics"), a subsidiary of Merck KGaA, entered into an agreement
(the "Development Agreement"), dated as of August 11, 1998, pursuant to which
Generics agreed to fund one-half the costs of the operating budget of IPR, the
Company's research and development operation in Israel, 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 and no royalty has been paid. The Development
Agreement has an initial term of five years and automatically renews for
additional periods of one year subject to earlier termination upon six months'
notice in certain circumstances. Pursuant to the Development Agreement, Generics
funded $788,000 for fiscal year 2001 and $577,000 for the first nine months of
fiscal year 2002, fulfilling their funding requirements through September 30,
2002. Under the Development Agreement, Generics is not required to fund more
than $1,000,000 in any one calendar year. The expenses of IPR are included in
research and development as incurred, net of the funding from Generics.
--10--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
PRODUCT DEVELOPMENT AGREEMENTS:
In addition to research and development ventures, the Company seeks to
enter into other development agreements with third parties with respect to the
development of new products and technologies. To date, the Company has entered
into several of these types of agreements and advanced funds to several
non-affiliated companies for products in various stages of development. Amounts
related to contractual rights acquired by the Company to products which have not
yet been approved by the FDA where the Company has no alternative future use for
the product, are expensed as research and development costs. Similarly, funding
by the Company of the research and development efforts of others are charged to
research and development expense. In fiscal year 2002, the Company entered into
the following product development agreements it believes are significant.
THREE RIVERS PHARMACEUTICALS, LLC.
In July 2002, the Company and Three Rivers Pharmaceuticals, LLC ("Three
Rivers") entered into a license and distribution agreement, which was amended in
October 2002, (the "Three Rivers Distribution Agreement") to market and
distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's
Rebetol(R). Ribavirin, a synthetic nucleoside analogue witH antiviral activity,
is indicated for the treatment of hepatitis C, a chronic condition suffered by
approximately 4 million Americans. Under the terms of the Three Rivers
Distribution Agreement, Three Rivers will supply the product and be responsible
for managing the regulatory process and ongoing patent litigation. Upon FDA
approval and final marketing clearance, Par will have the exclusive right to
sell the product in non-hospital markets and will be required to pay Three
Rivers a percentage of the gross profits as defined in the agreement. In
addition, the Company paid Three Rivers $1,000,000 in November 2002 and agreed
to pay Three Rivers $500,000 at such time Par commercially launches the product.
Three Rivers filed an ANDA with a Paragraph IV certification with the FDA in
August 2001 and is currently in litigation with the patent holders. According to
current FDA practice, Par believes it may be entitled to co-exclusively market
the generic product ribavirin for up to 180 days, during which time only one
other company could be approved to market another generic version of the drug.
If successful, Par could introduce ribavirin in the 2003 to 2004 timeframe.
NORTEC DEVELOPMENT ASSOCIATES, INC.:
In May 2002, the Company entered into an agreement with Nortec Development
Associates, Inc. (a Glatt company) ("Nortec") to develop an extended release
generic version of a currently marketed branded extended release pharmaceutical
product. Under the terms of the agreement, the Company obtained the right to
utilize Nortec/Glatt's CPS(TM) Technology in iTs ANDA submission for the
potential product covered in the agreement. If formulation and development are
successful, the ANDA for the drug will be submitted to the FDA in 2003 and will
include a Paragraph IV certification. CPS(TM) Technology is Glatt's new
proprietary drug delivery system for tHe development and production of drug
pellets with controlled release properties. The Company and Nortec have agreed
to collaborate on the formulation, while Par will serve as the exclusive
marketer and distributor of the product.
In June 2002, the Company expanded its collaboration with Nortec to
develop an extended release generic version of another currently marketed,
branded extended release pharmaceutical product. Under the terms of the new
agreement, Par also obtained the right to utilize Nortec/Glatt's CPS(TM)
Technology in its ANDA submission for the potential product covered in the
agreement. If successful in development, the Company expects to submit an ANDA
to the FDA for the product in 2003. The Company and Nortec have agreed to
collaborate on the formulation, while Par will serve as the exclusive marketer
and distributor of the product.
Pursuant to these agreements with Nortec, the Company made non-refundable
payments totaling $1,000,000, which was charged to research and development
expenses in fiscal year 2002. In addition, the Company agreed to pay a total of
$800,000 in various installments related to the achievement of certain
milestones in the development of the two potential products and $600,000 for
each product on the day of the first commercial sale. In addition to these
payments, the Company agreed to pay Nortec a royalty on net sales of the
products, as defined in the agreements.
--11--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
DISTRIBUTION AND SUPPLY AGREEMENTS:
A significant portion of the Company's product line is made up of
distributed products, which consist of products manufactured under contract and
licensed products, sold through various distribution agreements with its
strategic partners. The Company's significant distribution and supply agreements
as of September 30, 2002, include the following 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 up to 14 generic pharmaceutical
products, three of which have been filed with, and are awaiting approval from,
the FDA, to be marketed exclusively by Par in the United States and certain
other United States territories. 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. To date, three of such
products have obtained FDA approval, two of which are currently being marketed
by Par. The products covered by the Reddy Development and Supply Agreement are
in addition to four products currently being marketed by the Company under prior
agreements with Reddy. Pursuant to these agreements with Reddy, the Company pays
Reddy a certain percentage of the gross profits, as defined in each agreement,
on sales of all products covered under such agreements.
GENPHARM, INC.
Pursuant to the Genpharm Distribution Agreement, the Company has the
exclusive distribution rights within the United States and certain other United
States territories to approximately 40 generic pharmaceutical products. To date,
18 of such products have obtained FDA approval and are currently being marketed
by Par. The remaining products are either being developed, have been identified
for development, or have been submitted to the FDA for approval. Currently,
there are seven ANDAs for potential products (two of which have been tentatively
approved) that are covered by the Genpharm Distribution Agreement pending with,
and awaiting approval from, the FDA. Genpharm is required to use commercially
reasonable efforts to develop the products and is responsible for the completion
of product development and obtaining all applicable regulatory approvals. The
Company pays Genpharm a percentage of the gross profits, as defined in the
agreement, on all sales of products covered by the Genpharm Distribution
Agreement.
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' ("3Ms'") Tambocor(R). In June 2002, the Company begaN shipping
flecainide acetate, covered under the Genpharm Distribution Agreement, which is
indicated for the prevention of paroxysmal supraventricular tochycardias (PSUT)
and documented ventricular arrhythmia. Although the FDA awarded generic
marketing exclusivity for flecainide acetate to Par through October 2002, Par's
launch of flecainide acetate is under license from 3M. Under the terms of an
agreement with 3M, Par will pay a licensing fee to 3M based on a percentage of
Par's flecainide sales. The parties have also agreed to dismiss all outstanding
claims in settling patent litigation between them and counter claims between the
parties, thereby allowing Par to ship flecainide without risk of any future
litigation from 3M.
The Company and Genpharm entered into a 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
generic pharmaceutical products not included in the Company's other distribution
agreements with Genpharm. To date, two of such products have obtained FDA
approval and are currently being marketed by Par. The remaining products are
either being developed or have been identified for development. 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, as defined in the agreement, on all sales made by the Company
of products included in the Genpharm Additional Product Agreement.
--12--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
Under the Genpharm 11 Product Agreement, Genpharm will develop the
products, submit all corresponding ANDAs to the FDA and subsequently manufacture
the products. Par will serve as exclusive U.S. marketer and distributor of the
products, pay a share of the costs, including development and legal expenses
incurred to obtain final regulatory approval, and pay Genpharm a percentage of
the gross profits on all sales of products covered under this agreement.
Currently there are three ANDA's for potential products covered under the
Genpharm 11 Product Agreement, two of which have been tentatively approved,
pending with, and awaiting approval from, the FDA.
BASF CORPORATION:
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.
SHORT-TERM DEBT:
In December 1996, Par entered into a Loan and Security Agreement (the "Loan
Agreement") with General Electric Capital Corporation ("GECC"). The Loan
Agreement, as amended, provides Par with a revolving line of credit expiring
March 2005. 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)
$30,000,000. 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. As of September 30, 2002, the borrowing base was approximately
$27,000,000. 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 collateralized
by the assets of Par, PRX and certain subsidiaries, other than real property,
and is guaranteed by PRX and certain of its subsidiaries. In connection with
such facility, Par, PRX and their subsidiaries have established a cash
management system pursuant to which all cash and cash equivalents received by
any of such entities are deposited into a lockbox account over which GECC has
sole operating control if there are 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. In November 2002,
GECC waived certain events of default related to financial covenants and amended
the financial covenants in the Loan Agreement. To date, no debt is outstanding
under the Loan Agreement.
INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of
SFAS 109, which requires the Company to recognize deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. At September 30, 2002 and December 31, 2001, the
Company had deferred income tax assets of $45,171,000 and $34,485,000,
respectively, consisting of temporary differences, primarily related to accounts
receivable reserves, and net deferred income tax liabilities of $3,843,000 and
$4,129,000, respectively, primarily related to the Genpharm Distribution
Agreement. The increase in the deferred tax asset is primarily due to an
increase in the Company's provision for chargebacks (see "-Accounts
Receivable").
--13--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
EARNINGS PER SHARE:
The Company presents earnings per share data in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS 128"), which establishes the standards for the
computation and presentation of basic and diluted earnings per share data. Under
SFAS 128, the dilutive effect of stock options is excluded from the calculation
of basic earnings per share but included in diluted earnings per share except in
periods of net loss where inclusion would be anti-dilutive. The following is a
reconciliation of the amounts used to calculate basic and diluted earnings per
share:
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
(*RESTATED) (*RESTATED)
SEPT. 30, SEPT. 29, SEPT. 30, SEPT. 29,
2002 2001 2002 2001
---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
NET INCOME $60,783 $37,432 $19,643 $33,732
BASIC:
Weighted average number of common
shares outstanding 32,194 30,106 32,476 30,871
NET INCOME PER SHARE OF COMMON STOCK $1.89 $1.24 $.60 $1.09
======= ======= ======= =======
ASSUMING DILUTION:
Weighted average number of common
shares outstanding 32,194 30,106 32,476 30,871
Effect of dilutive options 768 1,796 676 1,557
------- ------- ------- -------
Weighted average number of common and common
equivalent shares outstanding 32,962 31,902 33,152 32,428
NET INCOME PER SHARE OF COMMON STOCK $1.84 $1.17 $.59 $1.04
======= ======= ======= =======
* Restated as described in Notes to Consolidated Financial Statements.
The Company had outstanding options of 2,107,958 and 2,088,828 at the end
of the nine-month and three-month periods ended September 30, 2002 that were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the Common Stock for such
period. As of September 29, 2001, none of the Company's outstanding options and
warrants was excluded from the computation of diluted earnings per share due to
their exercise price. As of September 30, 2002 and 2001, all incremental shares
from assumed conversions of the Company's outstanding options and warrants in
the three and nine-month periods were included in the computation of diluted
earnings per share.
NEW ACCOUNTING STANDARDS:
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"), which is effective for the Company as of January 1, 2003. SFAS 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The Company is
evaluating the impact of the adoption of SFAS 146, but does not believe it will
have a material impact on the Company's financial position, result of operations
or cash flows.
--14--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
COMMITMENTS:
In December 2001, Par entered into an agreement with Elan Transdermal
Technologies, Inc. ("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 on the date of the commencement of the
development program for each product. The Company paid Elan $1,000,000, which
was charged to research and development expenses, for products covered under
this agreement in the first nine months of 2002. In addition, the Company has
commitments under other product research and development, distribution and
supply agreements, which are described elsewhere in this Form 10-Q.
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
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 to prevent the Company from marketing its
generic product prior to the expiration of their patents. On February 8, 2002,
Par answered the complaint brought in the District of New Jersey and filed a
counterclaim, which seeks a declaration that the patents-in-suit are invalid,
unenforceable and/or not infringed by Par's products. Par also seeks a
declaratory judgment that the extension of the term of one of the patents is
invalid. All parties are seeking to recover their respective attorneys' fees. On
February 25, 2002, the lawsuit brought in the District of Delaware was dismissed
pursuant to a stipulation of the parties. The case in the District of New Jersey
is currently in fact discovery. Par intends to vigorously defend the lawsuit. At
this time, it is not possible for the Company to predict the outcome of the
plaintiffs' motion for injunctive relief or their claim for attorneys' fees.
Par, among others, is a defendant in three lawsuits filed in the United
States District Court for the Eastern District of North Carolina (filed 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 defend these cases. While the outcome of litigation is
never certain, Par believes that it will prevail in these litigations.
On August 1, 2001 Alpharma USPD, Inc. ("Alpharma"") filed a lawsuit in the
U.S. District Court for the District of Maryland seeking a declaratory judgment
that Alpharma's megestrol acetate formulation does not infringe U.S. Patent No.
6,028,065 (the `065 patent) granted to the Company and/or that the `065 patent
is invalid. The Company moved to dismiss Alpharma's declaratory judgment
complaint on the grounds that the court lacked subject matter jurisdiction, and
the Maryland court granted the Company's motion. On February 7, 2002 the Company
commenced a lawsuit against Alpharma in the U.S. District Court for the Southern
District of New York for infringement of the `065 patent and U.S. Patent No.
6,268,356 B1 granted to the Company. Alpharma filed a counterclaim in that
action for a declaration that its megestrol acetate formulation does not
infringe the Company's patents and/or that the asserted patents are invalid. One
of Alpharma's invalidity challenges is based on its alleged earlier invention of
the subject matter described and claimed in the Company's asserted patents. Both
the Company and Alpharma seek payment of their attorneys' fees in the lawsuit.
The parties currently are engaged in discovery in that matter. While the outcome
of litigation is uncertain, the Company believes its position in the litigation
is strong based, among other things, on the findings of the Patent Office Board
of Appeals and Interferences in its October 18, 2002 decision in the
interference proceeding involving the Company and Alpharma (see "-Subsequent
Events"). Alpharma currently does not have FDA approval to sell its megestrol
--15--
acetate formulation and is not currently marketing a megestrol acetate oral
suspension.
The Company is involved in certain other litigation matters, including
product liability and patent actions, as well as 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.
OTHER MATTERS:
In December 2001, the Company made the first installment of a total agreed
equity investment of up to $2,437,000 to be made over a period of time in
HighRapids, Inc. ("HighRapids"), a Delaware Corporation and software developer
and owner of patented rights to an artificial intelligence generator. HighRapids
is the surviving corporation of a merger with Authorgenics, Inc., a Florida
corporation. HighRapids will utilize the Company's cash infusion for working
capital and operating expenses. Through September 30, 2002 the Company had
invested $591,000 in High Rapids. The remainder of the investment is subject to
the Company's ongoing evaluation of HighRapids operations. Due to HighRapids
current operating losses and the Company's evaluation of its short-term
prospects for profitability, the investment was expensed as incurred and
included in other expense on the consolidated statements of operations. The
Company has the exclusive right to market to the pharmaceutical industry certain
regulatory compliance and laboratory software currently in development by
HighRapids. PRX's Chief Executive Officer and a director of the Company, each
holds shares of HighRapids common stock (less than 1%), which were acquired
prior to the Company acquiring its interest in HighRapids.
SUBSEQUENT EVENTS:
The Company has prevailed against Alpharma in an interference proceeding
before the United States Patent and Trademark Office concerning the Company's
patents and applications relating to megestrol acetate oral suspension
formulations. The decision was issued on October 18, 2002 by a three-judge panel
of the Patent Office Board of Patent Appeals and Interferences. In the
interference proceeding, Alpharma was alleging earlier invention of subject
matter described and claimed in the Company's issued U.S. Patent Nos. 6,028,065,
and 6,268,356 and related patent application. The interference was declared
earlier this year based on a competing patent application filed by Alpharma. The
Patent Office Board determined that the Company had priority of the invention
over Alpharma. The Company's patents relating to its megestrol acetate
formulation remain valid and in force. On February 7, 2002, the Company
commenced a lawsuit against Alpharma for infringement of the Company's patents
in the United States District Court for the Southern District of New York.
In November 2001, the FDA granted Genpharm, a strategic partner of the
Company, 180 days' marketing co-exclusivity for 10 mg and 20 mg doses of
omeprazole, the generic version of Astra Zeneca's ("Astra") Prilosec(R). The
exclusivity allowed only Genpharm and/or Andrx Corporation ("Andrx") to enter
the market during the exclusivity period. Under a profit sharing agreement with
Genpharm, the Company was entitled to receive at least 30% of profits generated
by Genpharm based on the sale of omeprazole. The timing and value of the
arrangement depended on the final outcome of litigation between Genpharm and
Astra, among other factors.
In November 2002, the Company announced that Genpharm and Andrx in
conjunction with KUDCo, a subsidiary of Schwarz Pharma AG of Germany, had
relinquished its exclusivity rights for 10 mg and 20 mg doses of omeprazole
allowing KUDCo to enter the market with a generic version of Prilosec(R). As a
result, KUDCo has received final ANDA approval from the FDA for its generic
version of Prilosec(R). The terms of the agreement initially provide Genpharm a
15% share of KUDCo's profits with a subsequent reduction over a period of time
based on a number of factors. The Company reduced its share of Genpharm's profit
derived from omeprazole from 30% to 25%. KUDCo has announced that they plan to
launch omeprazole "at risk" before the end of fiscal year 2002 because Astra is
appealing the court's patent infringement decision. The full extent of KUDCo's
omeprazole launch on the Company's revenues is unclear since, among other
things, Astra has introduced a new drug, Nexium(R), in an attempt to switch
consumers using Prilosec(R) and Astra's decision to market a non-prescription
form of Prilosec(R) along with Proctor & Gamble, all of which may reduce generic
sales of omeprazole.
--16--
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS IN THIS FORM 10-Q 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-Q 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, (VIII) UNANTICIPATED COSTS IN ABSORBING ANY
ACQUISITIONS AND (IX) GENERAL INDUSTRY AND ECONOMIC CONDITIONS. ANY
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q 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.
PRIOR YEAR NUMBERS GIVE EFFECT TO THE RESTATEMENT DESCRIBED IN THE NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS.
RESULTS OF OPERATIONS
GENERAL
The Company experienced significant sales, gross margin and net income
growth in the nine-month period ended September 30, 2002 when compared to the
nine months ended September 29, 2001. Net income of $60,783,000 for the
nine-month period of 2002 increased $23,351,000 from $37,432,000 for the same
period of 2001. The net income in the prior year includes the favorable impact
of the reversal of a previously established valuation allowance of $9,092,000
related to net operating loss ("NOL") carryforwards. Net sales were $282,500,000
in the most recent nine-month period, an increase of $99,575,000, or 54%, from
fiscal year 2001. The increased revenues were primarily the result of new
product introductions in fiscal year 2002 and the continuing success of
megestrol acetate oral suspension (Megace(R) Oral Suspension), introduced in the
third quarter of 2001. The revenue increases were achieved despite lower sales
of fluoxetine (Prozac(R)) 10 mg and 20 mg tablets, which were introduced with
180-day exclusivity in August 2001 and have since experienced severe price
competition in fiscal year 2002. The sales growth generated higher gross margins
of $132,642,000, or 47% of net sales, in fiscal year 2002, compared to
$71,477,000, or 39% of net sales, in the same period of the prior year. Results
for the nine months ended September 30, 2002 included increased spending on
research and development and selling, general and administrative expenses of
$3,154,000 and $11,529,000, respectively, primarily due to increased activity
with outside development partners, and additional personnel costs, marketing
programs, shipping costs and legal fees associated with new product launches.
Additionally, the Company recorded net settlement income of $9,051,000 in the
first quarter of 2002 related to the termination of its litigation with BMS and
other expense of $4,254,000 in connection with its termination of the
acquisition of the entire ISP FineTech fine chemical business based in Haifa,
Israel and Columbus, Ohio. The Company subsequently purchased FineTech based in
Haifa, Israel, from ISP in April 2002. FineTech had revenues of approximately
$6,000,000 in 2001; however, the purchase is not expected to have a material
effect on the Company's earnings in fiscal year 2002.
The Company's net income for the third quarter ended September 30, 2002
decreased $14,089,000 to $19,643,000 compared to $33,732,000 in the third
quarter of the prior year, primarily due to lower sales of products launched in
the prior year with 180-days exclusivity and increased operating expenses. In
addition, net income in the third quarter of 2001 was favorably impacted by the
reversal of the valuation allowance related to NOL carryforwards as described
above. Third quarter 2002 sales and gross margins of $100,237,000 and
$46,952,000 (47% of net sales), respectively, decreased over prior year third
quarter sales and gross margins of $127,924,000 and $51,928,000 (41% of net
sales). The level of sales in last year's third quarter, reflect in part, the
--17--
initial inventory stocking associated with fluoxetine and megestrol acetate oral
suspension. Research and development expenses of $3,653,000 for the most recent
three-month period were comparable to $3,779,000 incurred in the same quarter of
2001. Selling, general and administrative costs of $11,094,000 in the third
quarter of 2002 increased $4,120,000 from the same quarter of the prior year,
primarily due to increased legal fees, and to a lesser extent, shipping and
personnel costs.
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 to
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 mg and 20 mg tablets covered under the Genpharm Additional Product
Agreement. Generic competitors of the Company received 180-days marketing
exclusivity for the generic version of fluoxetine 10 mg and 20 mg capsules,
which the Company also began selling in the first quarter of 2002 following the
end of such other party's exclusivity period. As expected, additional generic
competitors, with comparable products to all three strengths of the Company's
fluoxetine products, began entering the market in the first quarter of 2002,
severely eroding the pricing the Company received during the exclusivity
periods, particularly on the 10 mg and 20 mg strengths. Despite another generic
approval for megestrol acetate oral suspension in the first quarter of 2002, to
date the Company still maintains a significant share of the market for this
product. Although megestrol oral suspension and fluoxetine 40 mg capsules
continue to contribute significantly to the Company's overall performance, the
rapid growth of the Company's product line through new product introductions,
and to a lesser extent, increased sales of certain existing products have
reduced its reliance on each of these key products (see "Notes to Consolidated
Financial Statements-Accounts Receivable" ).
Critical to the continued growth of the Company 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 its internal 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 (see "-Financial Condition-Liquidity
and Capital Resources").
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 or exclusivity period
expirations, diminishing the amount and duration of significant profits from any
one product, (iv) willingness of generic drug customers, including wholesale and
retail customers, to switch among generic pharmaceutical manufacturers and (v)
pricing and product deletions by competitors.
NET SALES
Net sales of $282,500,000 for the nine-month period ended September 30,
2002 increased $99,575,000, or 54%, from net sales of $182,925,000 for the same
period ended September 29, 2001. The sales increase was primarily due to higher
sales of megestrol acetate oral suspension, introduced in late July 2001, new
products introduced in fiscal year 2002, particularly tizanidine (Zanaflex(R)),
metformin (Glucophage(R)), flecainide (Tambocor(R)) and nizatidine (Axid(R)),
sold under distribution agreements with Reddy or Genpharm, and the addition of
five BMS brand products pursuant to the BMS Asset Purchase Agreement. Net sales
of fluoxetine and megestrol acetate oral suspension for the first nine months of
2002 were approximately $71,635,000 and $62,709,000, respectively, compared to
$84,721,000 and $21,906,000, respectively in the corresponding periods of the
prior year. Net sales of distributed products, which consist of products
manufactured under contract and licensed products, were approximately 59% and
69%, respectively, of the Company's net sales in the nine-month periods ended
September 30, 2002 and September 29, 2001. The Company is substantially
--18--
dependent upon distributed products for its sales, and as the Company introduces
new products under its distribution agreements, it is expected that this trend
will continue. Any inability by suppliers to meet expected demand could
adversely affect future sales.
Third quarter 2002 net sales of $100,237,000 decreased $27,687,000, or
22%, from net sales of $127,924,000 for the corresponding quarter of 2001,
primarily due to much higher sales in last year's quarter from the introduction
of fluoxetine with 180-day exclusivity in August 2001. A decrease of $70,138,000
in fluoxetine net sales, when compared to the same period of the prior year, was
partially offset by the introduction of new products as described above. Net
sales of distributed products were approximately 62% of the Company's total net
sales in the most recent quarter compared to approximately 74% of the total for
the same quarter of last year.
The Company's exclusivity period for fluoxetine ended in late-January
2002. The Company established a price protection reserve with respect to
fluoxetine during the exclusivity period of approximately $34,400,000, based on
its estimate that between eight and ten additional generic manufacturers would
introduce and market comparable products for the 10 mg and 20 mg tablets and
between one and three additional manufacturers would introduce and market a
comparable product for the 40 mg capsules. 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 the Company
charged during the exclusivity period. Accordingly, the Company's sales and
gross margins generated by fluoxetine in fiscal year 2002 have been and will
continue to be adversely affected in future periods (see "Notes to Consolidated
Financial Statements-Accounts Receivable" ).
The Company's exclusivity period for megestrol acetate oral suspension
ended in mid-January 2002. One generic competitor was granted FDA approval to
market another generic version of megestrol acetate oral suspension and began
shipping the product to a limited number of customers in the second quarter of
2002. In addition, a second potential generic competitor entered into a
settlement agreement with BMS pursuant to which the public record states that
the present formulation of the generic company's product infringes a BMS patent.
However, at this time the Company has no information as to whether the
settlement agreement provides for the generic competitor to enter the market at
some point in the future. 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 competitors may be taking the necessary
steps to enter the market, the Company believes it will be difficult for them to
successfully enter this market because of patents owned by BMS or the Company.
Megestrol acetate oral suspension is still anticipated to be a significant
profit contributor for the remainder of fiscal year 2002 and beyond, despite the
potential of competition. Based on these factors, the Company did not record a
price protection reserve for megestrol acetate oral suspension as of September
30, 2002. The Company will continue to evaluate the effect of potential
competition and will record a price protection reserve when it deems necessary.
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 it will continue to introduce new products in
the future while increasing sales of certain existing products to offset the
loss of sales and gross margins 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.
GROSS MARGIN
The gross margin for the nine-month period ended September 30, 2002 of
$132,642,000 (47% of net sales) increased $61,165,000 from $71,477,000 (39% of
net sales) in the corresponding period of the prior year. The gross margin
improvement was achieved primarily through the additional contributions from
sales of higher margin new products, including megestrol acetate oral
suspension, and to a lesser extent, increased sales of certain existing
products.
Megestrol acetate oral suspension contributed approximately $34,515,000 to the
margin improvement in the nine-month period ended September 30, 2002. As
discussed above, additional generic drug manufacturers introduced 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 such
products, particularly the 10 mg and 20 mg strengths. The affects of gross
margin declines from lower pricing on the fluoxetine 40 mg capsule have been
offset, however, by an increase in the Company's profit sharing percentage under
--19--
an agreement with Reddy. Although the aggregate sales of the fluoxetine products
in the comparable nine-month periods has declined, the increased profit sharing
percentage on the 40 mg capsule offset the lower margin contributions from the
10 mg and 20 mg strengths. The Company's gross margin for megestrol acetate oral
suspension could also decline if additional manufacturers enter the market with
comparable generic products.
The gross margin for the third quarter of 2002 was $46,952,000 (47% of net
sales) compared to $51,928,000 (41% of net sales) in the corresponding quarter
of the prior year. Additional gross margin contributions from higher margin new
products partially offset a decrease of $22,504,000 in the aggregate margin
contribution from all strengths of fluoxetine.
Inventory write-offs amounted to $3,085,000 and $343,000 for the
nine-month and three-month periods ended September 30, 2002, respectively,
compared to $1,195,000 and $729,000 in the corresponding periods of the prior
year. The increases were primarily attributable to normally occurring write-offs
resulting from increased production to meet higher sales and inventory levels.
In addition, the nine-month period included both the write-off of inventory for
a product whose launch was delayed due to unexpected patent issues and certain
raw material not meeting the Company's quality control standards. The inventory
write-offs, taken in the normal course of business, are related primarily to
work in process inventory not meeting the Company's quality control standards
and the disposal of finished products due to short shelf lives.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and development expenses of $10,590,000 for the nine months ended
September 30, 2002 increased $3,154,000, or 42%, from $7,436,000 for the
corresponding period of the prior year. The increased costs were primarily
attributable to additional payments of $3,445,000 for development work performed
for the Company by unaffiliated companies, particularly Elan, related to the
development of a clonidine transdermal patch and other products and, to a lesser
extent, higher costs for personnel and the acquisition of FineTech. These
expenses were partially offset by lower biostudy costs related to products
co-developed with Genpharm in fiscal year 2001.
Total research and development costs for fiscal year 2002 are expected to
exceed the total for fiscal year 2001 by approximately 35%. The Company expects
that as a result of its purchase of FineTech, increased internal development
activity and projects with third parties, research and development expenses will
continue to increase in fiscal year 2003.
For the three-month period ended September 30, 2002, research and
development expenses of $3,653,000 were comparable to $3,779,000 for the same
three-month period of the prior year. Increased costs for outside development
work and the acquisition FineTech were offset by lower costs for bio-studies
related to products co-developed with Genpharm in fiscal year 2001.
The Company purchased FineTech, based in Haifa, Israel, from ISP in April
2002. The Company has enjoyed a long-standing relationship with FineTech for
more than seven years. One of the Company's potential first-to-file products,
latanoprost, resulted from the Company's relationship with FineTech. In
addition, the Company and FineTech are currently collaborating on two additional
products of which ANDAs have already been filed with the FDA (see "Notes to
Consolidated Financial Statements-Acquisition of FineTech").
The Company currently has nine ANDAs for potential products (three
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 two additional products during the
remainder of fiscal year 2002.
Under the Genpharm 11 Product Agreement, Genpharm will develop the
products, submit all corresponding ANDAs to the FDA and subsequently manufacture
the products. Par will serve as exclusive U.S. marketer and distributor of the
products, pay a share of the costs, including development and legal expenses
incurred to obtain final regulatory approval, and pay Genpharm a percentage of
the gross profits on all sales of products covered under this agreement.
Currently there are three ANDA's for potential products covered under the
Genpharm 11 Product Agreement, two of which have been tentatively approved,
pending with, and awaiting approval from, the FDA (see "Notes to Consolidated
Financial Statements-Other Assets").
--20--
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 seven ANDAs for potential products
(two tentatively approved) that are covered by the Genpharm Distribution
Agreement pending with, and awaiting approval from, the FDA. To date, the
Company is marketing 18 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 and
the Company began marketing the product in June 2002 (see "Notes to Consolidated
Financial Statements-Distribution and Supply Agreements-Genpharm, Inc.").
Genpharm and the Company share the costs of developing the products
covered under the Genpharm Additional Product Agreement. To date, the Company is
marketing two products under the Genpharm Additional Product Agreement (see
"Notes to Consolidated Financial Statements-Distribution and Supply
Agreements-Genpharm, Inc.").
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs of $27,457,000 for the
nine-month period ended September 30, 2002 increased $11,529,000 from
$15,928,000 in the corresponding period ended September 29, 2001. The increase
as a percentage of net sales however, represents only a 1% increase to 10% of
net sales in the current nine-month period from 9% in last year's nine-month
period. The increase in the current nine-month period was primarily attributable
to additional legal fees, marketing programs, personnel and shipping costs
associated with new product introductions and higher sales volumes. 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"). Although there can be no
assurance, selling, general and administrative costs in fiscal year 2003 are not
expected to increase substantially from fiscal year 2002.
For the third quarter of 2002, selling, general and administrative costs
of $11,094,000 (11% of net sales) increased $4,120,000 from $6,974,000 (5% of
net sales) for the corresponding quarter of the prior year primarily due to
higher legal fees, and to a lesser extent, increased shipping and personnel
costs.
SETTLEMENTS
On March 5, 2002 the Company entered into the BMS Asset Purchase Agreement
and acquired the United States 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, which based on the Company's market research, are
expected to generate annual net sales of approximately $10,000,000. To obtain
the rights to the five products, the Company paid approximately $1,024,000 in
March 2002 and agreed to make an additional payment of approximately $1,025,000
in the first quarter of 2003. The Company also agreed to terminate its
outstanding litigation against BMS involving megestrol acetate oral suspension
and buspirone. The Company determined, through an independent third party
appraisal, the fair value of the BMS Asset Purchase Agreement to be $11,700,000,
which exceeded the cash consideration of $2,049,000 and associated costs of
$600,000 by $9,051,000. The $9,051,000 value was assigned to the litigation
settlements and included in settlement income in the first quarter of 2002 (see
"Notes to Consolidated Financial Statements-Intangible Assets").
OTHER EXPENSE/INCOME
Other expenses were $4,492,000 and $112,000 for the nine-month and
three-month periods ended September 30, 2002, respectively, compared to other
income of $431,000 and $67,000 in the corresponding periods of 2001. Other
expenses in the current nine-month period included approximately $4,254,000
incurred in connection with the terminated acquisition of the entire ISP
FineTech fine chemical business in March 2002.
INTEREST INCOME/EXPENSE
Interest income of $490,000 and $109,000 for the nine-month and
three-month periods ended September 30, 2002, respectively, was primarily
derived from money market and other short-term investments. Interest expense of
$580,000 and $138,000, respectively, in the corresponding nine and three-month
periods of 2001 was due to outstanding balances on the Company's line of credit
with GECC in the prior year.
--21--
INCOME TAXES
The Company recorded provisions for income taxes of $38,861,000 and
$10,532,000, respectively, and $12,559,000 and $7,372,000, respectively, for the
nine-month and three-month periods ended September 30, 2002 and September 29,
2001 based on applicable federal and state tax rates. The provisions in both
periods of fiscal year 2001 were net of tax benefits of $9,092,000 related to
previously unrecognized NOL carryforwards (see "Notes to Consolidated Financial
Statements-Income Taxes").
CRITICAL ACCOUNTING POLICIES ESTIMATES AND RISKS
The Company's critical accounting policies are set forth in it's Annual
0eport on Form 10-K for the year ended December 31, 2001. There has been no
change, update or revision to the Company's critical accounting policies
subsequent to the filing of the Company's Form 10-K for the year ended December
31, 2001.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $33,782,000 at September 30, 2002 decreased
$33,960,000 from $67,742,000 at December 31, 2001 due primarily to the Company's
use of funds to finance the acquisition of FineTech and, to a lesser extent, to
fund other capital projects. Working capital, which includes cash and cash
equivalents increased to $115,218,000 at September 30, 2002 from $102,867,000 at
December 31, 2001. The working capital ratio of 2.40x at September 30, 2002 was
comparable to 2.41x at December 31, 2001.
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, some of which are described below, are expected to total
approximately $15,000,000 for fiscal year 2002.
In July 2002, the Company and Three Rivers entered into the Three Rivers
Distribution Agreement, as amended, to market and distribute ribavirin 200 mg
capsules, the generic version of Schering-Plough's Rebetol(R). Under the terms
of the Three Rivers Distribution Agreement, Three Rivers will supply the product
and be responsible for managing the regulatory process and ongoing patent
litigation. Par will have the exclusive right to sell the product in
non-hospital markets upon FDA approval and final marketing clearance and pay
Three Rivers a percentage of the gross profits as defined in the agreement. The
Company paid Three Rivers $1,000,000 in November 2002 and agreed to pay Three
Rivers $500,000 at such time Par commercially launches the product.
The Company made non-refundable payments totaling $1,000,000 pursuant to
its agreements with Nortec entered into in the second quarter of 2002, which
were charged to research and development expenses during the period. In
addition, the Company agreed to pay a total of $800,000 in various installments
related to the achievement of certain milestones in the development of the two
potential products and $600,000 for each product on the day of the first
commercial sale.
In April 2002, the Company entered into the Genpharm 11 Product Agreement
pursuant to which Genpharm has agreed to develop products, submit all
corresponding ANDAs to the FDA and subsequently manufacture the products. Par
has agreed to serve as exclusive U.S. marketer and distributor of the products,
pay a share of the costs, including development and legal expenses incurred to
obtain final regulatory approval, and pay Genpharm a percentage of the gross
profits, as defined in the agreement, on all sales of the products covered under
this agreement. Pursuant to the Genpharm 11 Product Agreement, the Company paid
Genpharm a non-refundable fee of $2,000,000 in the second quarter of 2002 for
two of the products. In addition, the Company will be required to pay an
additional non-refundable fee of up to $414,000 based upon FDA acceptance of
filings for six of the nine remaining products.
--22--
On March 15, 2002, the Company announced the termination of negotiations
with ISP related to the purchase of the entire ISP FineTech fine chemical
business, based in Haifa, Israel and Columbus, Ohio. At that time, the Company
discontinued negotiations with ISP as a result of various events and
circumstances that 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 was subject to certain credits and offsets,
and incurred approximately $1,254,000 in related acquisition costs, both of
which were included in other expense in the first quarter of 2002. The Company
subsequently purchased FineTech, a portion of ISP's fine chemical business based
in Haifa, Israel, from ISP in April 2002 for approximately $32,000,000 and
$1,217,000 in related acquisition costs financed by its cash-on-hand (see-"Notes
to Consolidated Financial Statements-Acquisition of FineTech").
As of September 30, 2002 the Company had payables due to distribution
agreement partners of $19,251,000, related primarily to amounts due pursuant to
profit sharing agreements with strategic partners. The Company expects to pay
these amounts out of its working capital in the fourth 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 on the date of
the commencement of the development program for each product. The Company paid
Elan $1,000,000 for products covered under this agreement in the first nine
months of 2002.
In December 2001, the Company made the first installment of a total agreed
equity investment of up to $2,437,000 to be made over a period of time in
HighRapids. HighRapids will utilize the Company's cash infusion for working
capital and operating expenses. Through September 30, 2002, the Company had
invested $591,000 of its planned investment. The remainder of the investment is
subject to the Company's ongoing evaluation of HighRapids operations (see-"Notes
to Consolidated Financial Statements-Commitments, Contingencies and Other
Matters-Other Matters").
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 an
additional $2,500,000 in the first quarter of 2002.
In November 2001, the Company entered into a license agreement with
Pentech Pharmaceuticals, Inc. ("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 the achievement of certain
milestones. In addition, Par will pay all legal expenses up to $2,000,000 and a
share thereafter, as provided in the agreement, incurred in connection with
Paragraph IV litigation related to the product.
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 paid Elan $1,167,000 in fiscal year 2001 and $833,000 in the
nine-month ended September 30, 2002. In addition, Par will pay Elan $1,000,000
upon FDA approval of the product and a royalty on all sales of the product.
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 funded $788,000 for fiscal year 2001 and $577,000 for the first nine
months of fiscal year 2002, fulfilling their funding requirements through
September 30, 2002. Under the Development Agreement, Generics is not required to
fund more than $1,000,000 in any one calendar year (see "Notes to Consolidated
Financial Statements-Research and Development Agreements").
--23--
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 with GECC, if
and to the extent available (see "-Financing"). Although there can be no
assurance, the Company anticipates it will continue to introduce new products,
while increasing sales of certain existing products to offset the loss of sales
and gross margins 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.
FINANCING
At September 30, 2002, the Company's total outstanding long-term debt,
including the current portion, amounted to $1,129,000. The amount consists
primarily of an outstanding mortgage loan with a bank and capital leases for
computer equipment.
In December 1996, Par entered into the Loan Agreement with GECC. The Loan
Agreement, as amended, provides Par with a revolving line of credit expiring
March 2005. 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)
$30,000,000. 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. As of September 30, 2002, the borrowing base was approximately
$27,000,000. 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 collateralized
by the assets of Par, PRX and certain subsidiaries, other than real property,
and is guaranteed by PRX and certain of its subsidiaries. In connection with
such facility, Par, PRX and their subsidiaries have established a cash
management system pursuant to which all cash and cash equivalents received by
any of such entities are deposited into a lockbox account over which GECC has
sole operating control if there are 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. In November 2002,
GECC waived certain events of default related to financial covenants and amended
the financial covenants in the Loan Agreement. To date, no debt is outstanding
under the Loan Agreement.
SUBSEQUENT EVENTS:
The Company has prevailed against Alpharma in an interference proceeding
before the United States Patent and Trademark Office concerning the Company's
patents and applications relating to megestrol acetate oral suspension
formulations. The decision was issued on October 18, 2002 by a three-judge panel
of the Patent Office Board of Patent Appeals and Interferences. In the
interference proceeding, Alpharma was alleging earlier invention of subject
matter described and claimed in the Company's issued U.S. Patent Nos. 6,028,065,
and 6,268,356 and related patent application. The interference was declared
earlier this year based on a competing patent application filed by Alpharma. The
Patent Office Board determined that the Company had priority of the invention
over Alpharma. The Company's patents relating to its megestrol acetate
formulation remain valid and in force. On February 7, 2002, the Company
commenced a lawsuit against Alpharma for infringement of the Company's patents
in the United States District Court for the Southern District of New York.
Alpharma does not currently have FDA approval and is not currently marketing a
megestrol oral suspension.
In November 2001, the FDA granted Genpharm, a strategic partner of the
Company, 180 days' marketing co-exclusivity for 10 and 20 mg doses of
omeprazole, the generic version of Astra's Prilosec(R). The exclusivity allowed
only Genpharm and/or Andrx to enter the market during the exclusivity period.
Under a profit sharing agreement with Genpharm, the Company was entitled to
receive at least 30% of profits generated by Genpharm based on the sale of
omeprazole. The timing and value of the arrangement depended on the final
outcome of litigation between Genpharm and Astra, among other factors.
In November 2002, the Company announced that Genpharm and Andrx in
conjunction with KUDCo, a subsidiary of Schwarz Pharma AG of Germany, had
relinquished its exclusivity rights for 10 mg and 20 mg doses of omeprazole
allowing KUDCo to enter the market with a generic version of Prilosec(R). As a
result, KUDCo has received final ANDA approval from the FDA for its generic
version of Prilosec(R). The terms of the agreement initially provide Genpharm a
15% share of KUDCo's profits with a subsequent reduction over a period of time
based on a number of factors. The Company reduced its share of Genpharm's profit
derived from omeprazole from 30% to 25%. KUDCo has announced that they plan to
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launch omeprazole "at risk" before the end of fiscal year 2002 because Astra is
appealing the court's patent infringement decision. The full extent of KUDCo's