UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Fiscal Year Ended December 31, 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 office) (Zip Code)
Registrant's telephone number, including area code: (845) 425-7100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value The New York Stock Exchange, Inc.
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes X No
--- ---
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant was $1,371,238,982 as of March 21, 2003
(assuming, solely for purposes of this calculation, that all directors and
executive officers of the Registrant are "affiliates").
Number of shares of the Registrant's common stock outstanding
as of March 21, 2003: 32,936,414
DOCUMENTS INCORPORATED BY REFERENCE: None
PART I
ITEM 1. Business.
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GENERAL
Pharmaceutical Resources, Inc. (the "Company" or "PRX") is a holding
company that, through its principal subsidiary, is in the business of
developing, manufacturing and distributing a broad line of generic drugs in the
United States. In addition, the Company develops and manufactures in small
quantities complex synthetic active pharmaceutical ingredients through its
subsidiary, FineTech Laboratories, Ltd. ("FineTech") based in Haifa, Israel and
sells a limited number of mature brand name drugs through an agreement with
Bristol Myers Squibb ("BMS"). PRX operates primarily through its wholly-owned
subsidiary, Par Pharmaceutical, Inc. ("Par"), a manufacturer and distributor of
generic drugs. The Company's executive offices are located at One Ram Ridge
Road, Spring Valley, New York 10977, and its telephone number is (845) 425-7100.
Generic drugs are the pharmaceutical and therapeutic equivalents of brand
name drugs and are usually marketed under their generic (chemical) names rather
than by a brand name. Generally, a generic drug cannot be marketed until the
expiration of applicable patents on the brand name drug. Generic drugs must meet
the same government standards as brand name drugs, but are typically sold at
prices below those of brand name drugs. Generic drugs provide a cost-effective
alternative for consumers while maintaining the safety and effectiveness of the
brand name pharmaceutical product.
The Company's product line consists primarily of prescription generic drugs
consisting of 156 products representing various dosage strengths for 59 drugs.
In addition to manufacturing its own products, the Company has strategic
alliances with several pharmaceutical and chemical companies providing it with
products for sale through distribution, development or licensing agreements (see
"-Product Line Information").
The Company markets its products primarily to wholesalers, retail drug
store chains, managed health care providers and drug distributors, principally
through its own sales staff. The Company promotes the sales efforts of
wholesalers and drug distributors that sell the Company's products to clinics,
government agencies and other managed health care organizations (see "-Marketing
and Customers").
As described in Management's Discussion and Analysis of Financial Condition
and Results of Operations, certain statements in this document 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.
Such statements involve known and unknown risks, uncertainties, trends 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. Any forward-looking statements included in this document 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.
The financial data and share amounts, except per share, employee and
shareholder numbers, contained in Parts I and II are in thousands.
FISCAL YEAR 2002 HIGHLIGHTS:
RESULTS OF OPERATIONS. Fiscal year 2002 marked the Company's second
consecutive historical year in terms of revenues and earnings. The Company's net
income in 2002 of $79,454 increased $25,532, or 47%, from $53,922 for fiscal
year 2001. The significantly improved results reflected record net sales and
gross margins for the Company of $381,603 and $183,290 (48% of net sales),
respectively, primarily attributable to the continued success of megestrol
acetate oral suspension, the generic version of BMS's Megace(R) Oral Suspension,
and the introduction of new products throughout the year. Revenues and gross
margins in fiscal year 2001 of $271,035 and $109,729 (40% of net sales),
respectively, benefited from marketing exclusivity for fluoxetine 10 mg and 20
mg tablets and fluoxetine 40 mg capsules, the generic versions of Eli Lilly and
Company's Prozac(R), which expired in January 2002. The growth was obtained
despite the loss of exclusivity on these key products and a substantially
increased investment in research and development. Research and development
spending in fiscal year 2002 rose 61% to $17,910 from $11,113 for the prior
year.
POSITION FOR FUTURE GROWTH. The Company recognizes that the development of
successful new products is critical to achieving its goal of sustainable growth
over the long term. As such, the Company's investment in research and
development in fiscal year 2002, which is expected to increase again in fiscal
year 2003, reflects its commitment to develop new products or technologies
2
through its internal development programs in addition to projects with strategic
partners. In fiscal year 2002, the Company expanded its capabilities in product
development through its acquisition of FineTech, as well as, entering into new
development agreements with Rhodes Technologies, Inc. ("RTI"), an affiliated
company of Purdue Pharma L.P., Three Rivers Pharmaceuticals, LLC ("Three
Rivers"), Nortec Development Associates, Inc. (a Glatt company) ("Nortec") and
Genpharm Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA. Together with
its strategic partners, PRX currently has over 40 drugs in development and 28
Abbreviated New Drug Applications ("ANDAs") filed with the United States Food
and Drug Administration ("FDA") awaiting approval. Among the 28 ANDAs are
several the Company believes may represent first-to-file opportunities that may
entitle Par, or its strategic partner, up to 180 days of marketing exclusivity
or co-exclusivity. However, it is difficult to know with certainty that an ANDA
filing has exclusivity, or shared exclusivity, until final approval is received
from the FDA. These products include: paroxetine capsules (Paxil(R)); olanzapine
20 mg (Zyprexa(R)); latanoprost (Xalatan(R)); ribavirin (Rebetol(R)); and
tramadol with acetaminophen (Ultracet(R)). The Company expects to file as many
as 18 to 20 more ANDAs in 2003. The process of bringing new products to market
and the cost associated with research and development involves many
uncertainties, including, among other things, unforeseen changes in market
conditions, and regulatory or legal challenges. As such, no assurance can be
given that the Company will file ANDAs with the FDA, obtain FDA approval or
launch any of the products that are currently in development.
PROFIT SHARING ON OMEPRAZOLE. In the fourth quarter of 2002, the Company
began receiving royalty payments as a result of KUDCo's, a subsidiary of Schwarz
Pharma AG of Germany, launch of omeprazole, the generic version of Astra
Zeneca's ("Astra") Prilosec(R). Under terms of its agreement with KUDCo,
Genpharm, PRX's strategic partner, is currently receiving a 15 percent share of
the profits, as defined in their agreement, generated by KUDCo's sales of
omeprazole. Through its partnership agreement with Genpharm, PRX is currently
receiving 25 percent of Genpharm's profit. KUDCo's launch of omeprazole is "at
risk" because Astra appealed the court's patent infringement decision. The full
impact 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 apparent
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. In December 2002, the Company recognized
$755 of revenues related to its share of Genpharm's profits. The December 2002
revenues were significantly reduced as Genpharm recovered out-of-pocket
development and legal expenses incurred during the product development and
litigation process. Unless there is a court ruling that is unfavorable to KUDCo
in the pending appeal by Astra, in which case the Company could be obligated to
return any payments received from Genpharm, the Company anticipates recording
revenues of up to $20,000 in fiscal year 2003 from its share of the profits on
omeprazole.
LEGAL PROCEEDINGS. The Company prevailed against Alpharma USPD, Inc.
("Alpharma") in an interference proceeding before the U.S. Patent and Trademark
Office regarding PRX's patents and applications relating to megestrol acetate
oral suspension formulations. Additionally, PRX filed suit against Alpharma in
the U.S. District Court, Southern District of New York in February 2002.
Alpharma has now entered into a consent judgment and order of permanent
injunction in this matter. Alpharma is now enjoined from making, using, selling
or importing its megestrol oral suspension product. PRX believes these
proceedings validate its strategy of developing products based on patented
science and technology. The Company expects megestrol oral suspension to be a
strong contributor to its earnings in 2003.
In February 2003, Three Rivers reached a final settlement with Schering
Corporation ("Schering") in the patent litigation case of Rebetol(R) brand
ribavirin. Schering has provided a non-exclusive license to Three Rivers for all
its U.S. patents relating to this product. In return, Three Rivers has agreed to
pay Schering a reasonable royalty based upon net sales of Three Rivers' and
Par's generic ribavirin product. Although the license does not remove all
existing legal hurdles to distribute this product, the Company believes it
significantly improves the likelihood of Par and Three Rivers eventually
marketing ribavirin.
ACQUISITION OF FINETECH. On March 15, 2002, the Company terminated its
negotiations with International Specialty Products ("ISP") related to the
Company's purchase of the combined 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 following the announcement of the proposed transaction. Pursuant to the
termination of negotiations, the Company paid ISP a $3,000 break-up fee in March
2002, which was subject to certain credits and offsets, and incurred
approximately $1,262 in related acquisition costs, both of which were included
in acquisition termination charges on the consolidated statements of operations
in fiscal year 2002.
3
The Company subsequently purchased FineTech, based in Haifa, Israel, from
ISP in April 2002 for approximately $32,000 and incurred $1,237 in related
acquisition costs, all of which were financed by its cash-on-hand. The Company
acquired the physical facilities, intellectual property and patents of FineTech
and retained all 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 has
the ability to manufacture in small quantities complex synthetic active
pharmaceutical ingredients at its manufacturing facility in Haifa, Israel. This
facility operates in compliance with FDA current Good Manufacturing Practices
("cGMP") standards. The Company is in the process of transferring a portion of
FineTech's personnel and technological resources to a laboratory facility in
Rhode Island. FineTech is operated as an independent, wholly-owned subsidiary of
PRX and provides immediate chemical synthesis capabilities and strategic
opportunities to the Company and other customers.
REINCORPORATION. In fiscal year 2003, the Company intends to submit for
shareholder approval a proposal to change its state of incorporation from New
Jersey to Delaware (the "Reincorporation"). The Reincorporation will be effected
by the merger of the Company with and into a wholly-owned Delaware subsidiary of
the Company formed solely for the purpose of consummating the Reincorporation.
The operations, business, assets and liabilities of the Company, as well as its
directors and officers, will be unaffected by the Reincorporation. The surviving
corporation of the Reincorporation shall retain the name "Pharmaceutical
Resources, Inc." and the Company's common stock will continue to be listed and
traded on the New York Stock Exchange ("NYSE") under the symbol "PRX". In
addition to the Reincorporation, the Company expects to shortly change the state
of incorporation of Par from New Jersey to Delaware.
PRODUCT LINE INFORMATION
The Company operates in one industry segment, namely the manufacture and
distribution of generic pharmaceuticals. Products are marketed principally in
solid oral dosage form consisting of tablets, caplets and two-piece hard-shell
capsules. The Company also distributes one product in the semi-solid form of a
cream and one oral suspension product.
Par markets 69 products, representing various dosage strengths for 25 drugs
that are manufactured by the Company and 87 additional products, representing
various dosage strengths for 34 drugs that are manufactured for it by other
companies. Par holds ANDAs for the drugs it manufactures. Below is a list of
drugs manufactured and/or distributed by Par, including several brand-name
products, Capoten(R), Capozide(R), Questran(R) and Questran Light(R), and
Sumycin(R), the Company sells through an agreement with BMS. The names of all of
the drugs under the caption "Competitive Brand-Name Drug" are trademarked. The
holders of the trademarks are non-affiliated pharmaceutical manufacturers.
NAME COMPETITIVE BRAND-NAME DRUG
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CENTRAL NERVOUS SYSTEM:
Biperiden Hydrochloride Akineton
Benztropine Mesylate Cogentin
Buspirone Hydrochloride BuSpar
Doxepin Hydrochloride Sinequan, Adapin
Fluoxetine Prozac
Fluphenazine Hydrochloride Prolixin
Imipramine Hydrochloride Tofranil
Tizanidine Hydrochloride Zanaflex
Triazolam Halcion
CARDIOVASCULAR:
Acebutolol Hydrochloride Sectral
Amiodarone Hydrochloride Cordarone
Captopril Capoten
Captopril & HCTZ Capozide
Doxazosin Mesylate Cardura
Enalapril Maleate Vasotec
Enalapril Maleate & HCTZ Vaseretic
Flecainide Acetate Tambocor
4
Guanfacine Tenex
Hydralazine Hydrochloride Apresoline
Hydra-Zide Apresazide
Indapamide Lozol
Isosorbide Dinitrate Isordil
Lisinopril Zestril
Minoxidil Loniten
Nicardipine Hydrochloride Cardene
Sotalol Hydrochloride Betapace
ANALGESIC/ANTI-INFLAMMATORY:
Aspirin (zero order release) Zorprin
Carisoprodol & Aspirin Soma Compound
Dexamethasone Decadron
Etodolac Lodine
Ibuprofen Advil, Nuprin, Motrin
Orphengesic/Orphengesic Forte Norgesic/Norgesic Forte
Oxaprozin Daypro
Tramadol Hydrochloride Ultram
ANTI-BACTERIAL:
Doxycycline Monohydrate Monodox
Silver Sulfadiazine (SSD) Silvadene
Tetracycline Sumycin
ANTI-DIABETIC:
Metformin Hydrochloride Glucophage
ANTI-DIARRHEAL:
Diphenoxylate Hydrochloride & Atropine Sulfate Lomotil
ANTIEMETIC:
Meclizine Hydrochloride Antivert
Prochlorperazine Maleate Compazine
ANTI-GOUT:
Allopurinol Zyloprim
ANTI-HISTAMINIC:
Cyproheptadine Hydrochloride Periactin
ANTI-NEOPLASTIC:
Hydroxyurea Hydrea
Megestrol Acetate Megace
Megestrol Acetate Oral Suspension Megace Oral Suspension
ANTI-PARKINSON:
Selegiline Hydrochloride Eldepryl
ANTI-THROMBOTIC:
Ticlopidine Hydrochloride Ticlid
ANTI-ULCERATIVE:
Ranitidine Hydrochloride Zantac
Famotidine Pepcid
Nizatidine Axid
5
ANTI-VIRAL:
Acyclovir Zovirax
ANTI-HYPERTHYROID:
Methimazole Tapazole
BRONCODILATOR:
Metaproterenol Sulfate Alupent
CHOLESTEROL LOWERING:
Lovastatin Mevacor
Cholestyramine Questran
GENTRO-URINARY (DIURETIC):
Amiloride Hydrochloride Midamor
GLUCORTICOID:
Methylprednisolone Medrol
OVULATION STIMULANT:
Clomiphene Citrate Clomid
From January 1, 2002 to March 1, 2003, the FDA approved ANDAs filed by
either the Company or its strategic partners for the following drugs: buspirone
5 mg, 10 mg and 15 mg tablets; ciprofloxacin 100 mg, 250 mg, 500 mg and 750 mg;
doxycycline 75 mg; fluoxetine 10 mg and 20 mg capsules; lisinopril 2.5 mg, 5 mg,
10 mg, 20 mg, 30 mg and 40 mg tablets; metformin hydrochloride 500 mg, 850 mg
and 1,000 mg tablets; nizatidine 150 mg and 300 mg capsules; tizanidine 2 mg and
4 mg tablets; and tramadol 50 mg tablets. In addition, the Company or its
strategic partners received tentative FDA approval in the same period for the
following drugs: loratadine 10 mg tablets; mirtazapine 15 mg, 30 mg and 45 mg
tablets; omeprazole delayed release 10 mg and 20 mg capsules; quinapril 5 mg, 10
mg, 20 mg and 40 mg tablets; torsemide 5 mg, 10 mg, 20 mg and 100 mg tablets;
and zolpidem tartrate 5 mg and 10 mg tablets.
The Company has two patents related to its unique formulation of megestrol
acetate oral suspension. The U.S. Patent and Trademark Office granted the
patents, United States Patent No. 6,028,065 and No. 6,268,356, on March 1, 2000
and July 31, 2001, respectively.
The Company seeks to introduce new products not only through its internal
research and development program, but also through joint venture, distribution
and other agreements with pharmaceutical companies located throughout the world.
As part of that strategy, the Company has pursued and continues to pursue
arrangements and affiliations which it believes could provide access to raw
materials at favorable prices, share development costs, generate profits from
jointly-developed products and expand distribution channels for new and existing
products. The Company's existing material distribution and supply agreements are
described in Notes to Consolidated Financial Statements - Distribution and
Supply Agreements. In fiscal year 2002, the Company entered into several new
agreements, which are described below.
The Company is selling five of BMS's brand products, the antihypertensives
Capoten(R) and Capozide(R), the cholesterol-lowering medications Questran(R) and
Questran Light(R), and Sumycin(R), an antibiotic, through the BMS Asset Purchase
Agreement, dated March 5, 2002. The Company obtained the right to sell these
products manufactured by BMS through a legal settlement and began selling the
products in March 2002.
In December 2002, the Company entered in a supply and distribution
agreement with Genpharm and Leiner Health Products, LLC. ("Leiner") related to
the recent switch of loratadine 10 mg tablets (Claritin(R)) from prescription to
over-the counter. Pursuant to the agreement, Genpharm has agreed to manufacture
the product and Leiner has agreed to market and engage in over-the-counter
distribution of the product in the United States and its territories for Par.
The Company is to receive a portion of installment payments made to Genpharm by
Leiner in fiscal year 2003 totaling $594 in addition to a percentage of the net
profit attributable to Leiner sales.
6
RESEARCH AND DEVELOPMENT
The Company's research and development activities consist of (i)
identifying and conducting patent and market research on brand name drugs for
which patent protection has expired or is expected to expire in the near future,
(ii) researching and developing new product formulations based upon such drugs,
(iii) obtaining approval from the FDA for such new product formulations, and
(iv) introducing technology to improve production efficiency and enhance product
quality. The scientific process of developing new products and obtaining FDA
approval is complex, costly and time consuming and there can be no assurance
that any products will be developed despite the amount of time and money spent
on research and development. The development of products may be curtailed in the
early or later stages of development due to the introduction of competing
generic products or for other strategic reasons.
The research and development of oral solid and suspension products,
including preformulation research, process and formulation development, required
studies and FDA review and approval, has historically taken approximately two to
three years. Accordingly, Par typically selects for development products that it
intends to market several years in the future. However, the length of time
necessary to bring a product to market can vary significantly and depends on,
among other things, availability of funding, problems relating to formulation
and safety or efficacy or patent issues associated with the product.
The Company contracts with outside laboratories to conduct biostudies,
which, in the case of oral solids, generally are required for FDA approval.
Biostudies are used to demonstrate that the rate and extent of absorption of a
generic drug are not significantly different from the corresponding brand name
drug and currently cost between $100 to $500 for each biostudy. During fiscal
year 2002, the Company contracted with outside laboratories, expending $1,502 to
conduct biostudies for four potential new products, and will continue to do so
in the future. In addition, the Company shared in certain costs for biostudies
totaling $630 for products in development with its strategic partners.
Biostudies must be conducted and documented in conformity with FDA standards
(see "-Government Regulation").
As part of its internal research and development program, the Company has
approximately 15 products in active development. The Company expects that
approximately ten of these products will be the subject of biostudies in fiscal
year 2003, but has not filed any ANDAs with respect to such potential products.
In addition, the Company from time to time enters into agreements with third
parties with respect to the development of new products and technologies. To
date, the Company has entered into agreements and advanced funds to several
non-affiliated companies for products in various stages of development. Although
there can be no assurance, annual research and development expenses for fiscal
year 2003, including certain payments to non-affiliated companies, are expected
to increase by approximately 30% to 40% from fiscal year 2002.
As a result of its internal product development program, the Company
currently has nine ANDAs pending with the FDA, three of which have received
tentative approval, for potential products that are not subject to any
distribution or profit sharing agreements. In addition, there are 19 ANDAs
pending with the FDA, four of which have received tentative approval, that have
been filed by the Company or one of its strategic partners, for potential
products covered under various distribution agreements. No assurance can be
given that the Company or any of its strategic partners will successfully
complete the development of products either under development or proposed for
development, that they will obtain regulatory approval for any such product,
that any approved product will be produced in commercial quantities or that any
approved product can be sold at a profit.
To supplement its own internal development program, the Company enters into
development and license agreements with third parties with respect to the
development and marketing of new products and technologies. The Company's
existing material product development agreements are described in Notes to
Consolidated Financial Statements - Research and Development Agreements and
Research and Development Ventures. In fiscal year 2002, the Company entered into
the following new agreements, which are described below.
In November 2002, the Company amended its agreement (the "Supply and
Marketing Agreement") with Pentech Pharmaceuticals, Inc. ("Pentech"), dated
November 2001, to market paroxetine hydrochloride capsules. Pursuant to the
Supply and Marketing Agreement, as amended, Par has the exclusive right to
market, sell and distribute the product in the United States and its territories
and will pay Pentech a percentage of the gross profit from sales on the product.
Paroxetine hydrochloride is the generic version of GlaxoSmithKline's Paxil(R).
Currently, GlaxoSmithKline markets Paxil(R) only in tablet form. Paxil(R), a
selective serotonin reuptake inhibitor, is indicated for the treatment of
7
depression and other disorders. Par believes that its ANDA submission for
paroxetine hydrochloride capsules is the first to be filed with a paragraph IV
certification. The Company believes that another generic drug company has
first-to-file status for the tablet form of this product. Par intends to market
a capsule form of the product. Pursuant to the Supply and Marketing Agreement
with Pentech, Par is responsible for payment of all legal expenses up to $2,000,
which have been expensed as incurred, to obtain final regulatory approval. Legal
expenses in excess of $2,000 are fully creditable against future profit
payments. In fiscal year 2003, Par will be responsible for Pentech costs
associated with the project up to $1,300, which will be charged to research and
development expenses as incurred.
The Company and Three Rivers entered into a license and distribution
agreement in July 2002 (the "Three Rivers Distribution Agreement"), which was
amended in October 2002, 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, which according to the Company's market
research, is suffered by approximately four 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, which was charged
to research and development expenses in fiscal year 2002, and agreed to pay
Three Rivers $500 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.
In May 2002, the Company entered into an agreement with 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 drug delivery system technology in
its ANDA submission for the potential product covered in the agreement. If
formulation and development are successful, the ANDA for the drug could be
submitted to the FDA in 2004 and will include a Paragraph IV certification. The
Company and Nortec have agreed to collaborate on the formulation, while Par has
agreed to 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 drug delivery system
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 has agreed to 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, which were charged to research and development
expenses in fiscal year 2002. The Company also agreed to pay a total of $800 in
various installments related to the achievement of certain milestones in the
development of the two potential products and $600 for each product on the day
of its 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.
In April 2002, the Company entered into an agreement (the "Genpharm 11
Product Agreement") with Genpharm, to expand its strategic product partnership.
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, as defined in the agreement, on all sales of
products covered under this agreement. In the second quarter of 2002, the
Company paid Genpharm a non-refundable fee of $2,000 for two products,
loratadine 10 mg tablets and mirtazapine tablets, which have been tentatively
approved by the FDA. Although there can be no assurance, the Company anticipates
bringing the two products to market in fiscal year 2003. The Company will also
be required to pay an additional non-refundable fee of up to $414 based upon FDA
acceptance of filings for six of the nine remaining products. There are ANDA's
for three of these potential products covered under the Genpharm 11 Product
Agreement, pending with, and awaiting approval from, the FDA.
8
In April 2002, the Company entered into an agreement with RTI to establish
a joint venture partnership in the United States. The new joint venture was
named SVC Pharma and is 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 has agreed to provide scientific and technological
expertise in the development of non-infringing, complex molecules. In addition
to providing chemical synthesis capabilities, RTI has agreed to provide the
manufacturing capacity for sophisticated intermediate and active pharmaceutical
ingredients. Par has agreed to provide development expertise in dosage
formulation and will be responsible for marketing, sales and distribution. The
companies have agreed to 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 late in fiscal year 2004. The Company's
funding of $952, related to the first project, began in the fourth quarter of
fiscal year 2002. The Company accounts for its share of the expenses of SVC
Pharma with a charge to research and development as incurred.
For fiscal year 2002, the Company increased research and development
spending to $17,910 from $11,113 and $7,634, respectively, in fiscal years 2001
and 2000. The increase in 2002 reflects payments to Elan related to the
development of a clonidine transdermal patch and other products; external
development costs as described above and, to a lesser extent, increased
personnel costs and the acquisition of FineTech.
MARKETING AND CUSTOMERS
The Company primarily markets its products under the Par label to
wholesalers, retail drug store chains, managed health care providers,
distributors and, to a lesser extent, drug manufacturers and government
agencies, primarily through its own sales staff. Some of the Company's
wholesalers and distributors purchase products that are warehoused for certain
drug chains, independent pharmacies and managed health care organizations.
Customers in the managed health care market include health maintenance
organizations, nursing homes, hospitals, clinics, pharmacy benefit management
companies and mail order customers. The Company promotes its products primarily
through incentive programs with its customers, at trade shows and through
advertisements in trade journals.
The Company has approximately 140 customers, some of which are part of
larger buying groups. In fiscal year 2002, the Company's three largest customers
in terms of net sales dollars, McKesson Drug Co., Cardinal Health, Inc., and
Walgreen Co. accounted for approximately 17%, 16% and 10%, respectively, of its
net sales. The loss of any one or more of these customers or the substantial
reduction in orders from any of such customers could have a material adverse
affect on the Company's operating results, prospects and financial condition
(see "Notes to Consolidated Financial Statements-Accounts Receivable-Major
Customers").
ORDER BACKLOG
The approximate dollar amount of open orders, believed by management to be
firm, as of December 31, 2002 was $18,185, as compared to $12,800 at December
31, 2001 and $4,400 at December 31, 2000. Although open orders are subject to
cancellation without penalty, management expects to substantially fill all of
such orders in the near future.
COMPETITION
The generic pharmaceutical industry is highly competitive due principally
to the number of competitors in the market along with the consolidation of the
Company's distribution outlets through mergers, acquisitions and the formation
of buying groups. The Company has identified at least ten principal competitors,
and experiences varying degrees of competition from numerous other companies in
the health care industry. The Company also experiences competition from certain
manufacturers of brand name drugs and/or their affiliates introducing generic
pharmaceuticals comparable to certain of the Company's products.
When other manufacturers introduce generic products in competition with the
Company's existing products, its market share and prices with respect to such
existing products typically decline, sometimes substantially, depending largely
on, among other things, the number of competitors entering the market.
Similarly, the Company's potential for profits is significantly reduced, if not
eliminated, as competitors introduce products before the Company. In addition,
the Company believes that the shrinking number of significant distribution
channels over the past years through consolidation among wholesalers and
retailers and the formation of large buying groups have resulted in further
9
pricing pressures. Accordingly, the level of revenues and gross profit generated
by the Company's current and prospective products depend, in large part, on the
number and timing of introductions of competing products and the Company's
timely development and introduction of new products.
In the generic drug industry, when a company first introduces a generic
drug, it may, under certain circumstances, be granted exclusivity by the FDA to
market a product for a period of time before any other generic manufacturers may
enter the market. At the expiration of such exclusivity periods, other generic
manufacturers may enter the market, and as a result the price of the drug may
decline significantly (in some instances a price decline has exceeded 90%). As a
result of the expected price decline upon the expiration of a marketing
exclusivity period, it has become common in the industry for generic
pharmaceutical manufacturers, like the Company, that have been granted such
exclusivity periods to offer price protection to their customers. Under such
price protection arrangements, the Company will generally provide a credit to
its customers for the difference between the Company's new price at the
expiration of the exclusivity period and the price at which the Company sold the
customers the product with respect to the quantity remaining in the customer's
inventory at the expiration of the exclusivity period. As a result, the total
price protection the Company will credit customers at the expiration of an
exclusivity period will depend on the amount by which the price declines as the
result of the introduction of comparable generic products by additional
manufacturers, and the inventory customers have at the expiration of the
exclusivity period.
In July 2001 and August 2001, the Company began marketing megestrol acetate
oral suspension, and 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. 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 began selling in the
first quarter of 2002, following the expiration of such other party's
exclusivity period. As expected, additional generic competitors, with products
comparable to all three strengths of the Company's fluoxetine products, began
entering the market in the first quarter of 2002, eroding the pricing the
Company received during the exclusivity period, 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 are expected to 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 somewhat reduced its
reliance on each of these key products.
The principal competitive factors in the generic pharmaceutical market,
include, among other things: (i) introduction of other generic drug
manufacturer's products in direct competition with the Company's products, (ii)
consolidation among distribution outlets through mergers, acquisitions and the
formation of buying groups, (iii) ability of generic competitors to quickly
enter the market after patent expiration or exclusivity periods, diminishing the
amount and duration of significant profits, (iv) willingness of generic drug
customers, including wholesale and retail customers, to switch among
pharmaceutical manufacturers, (v) pricing pressures and product deletions by
competitors, (vi) reputation as a manufacturer of quality products, (vii) level
of service (including maintaining sufficient inventory levels for timely
deliveries), (viii) product appearance, and (ix) breadth of product line.
RAW MATERIALS
The raw materials essential to the Company's manufacturing business are
purchased primarily from United States distributors of bulk pharmaceutical
chemicals manufactured by foreign companies. To date, the Company has
experienced no significant difficulty in obtaining raw materials and expects
that raw materials will generally continue to be available in the future.
However, since the federal drug application process requires specification of
raw material suppliers, if raw materials from a specified supplier were to
become unavailable, FDA approval of a new supplier would be required. A delay of
six months or more in the manufacture and marketing of the drug involved could
result, while a new supplier becomes qualified by the FDA and its manufacturing
process is judged to meet FDA standards, which, depending on the particular
product, could have a material adverse effect on the Company's results of
operations and financial condition. Generally the Company attempts to minimize
the effects of any such situation by specifying, where economically and
otherwise feasible, two or more suppliers of raw materials for the drugs it
manufactures.
10
EMPLOYEES
As of December 31, 2002 the Company had approximately 456 employees
compared to 393 and 297, respectively, at December 31, 2001 and 2000. The
increased headcount levels in fiscal year 2002, primarily in research and
development and administrative functions, reflect the continued growth of the
Company from fiscal year 2001.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by the
Federal government, principally the FDA and, as appropriate, the Drug
Enforcement Administration, Federal Trade Commission ("FTC"), and state and
local governments. The Federal Food, Drug, and Cosmetic Act (the "Act"), the
Controlled Substances Act, and other Federal statutes and regulations govern the
development, testing, manufacture, safety/effectiveness, labeling, storage,
record keeping, approval, advertising and promotion of the Company's products.
Noncompliance with applicable regulations can result in judicially and/or
administratively imposed sanctions, including the initiation of product
seizures, injunction actions, fines and criminal prosecutions. Administrative
enforcement measures may involve the recall of products, as well as the refusal
of the government to enter into supply contracts or to approve new drug
applications. The FDA also has the authority to withdraw approval of drugs in
accordance with regulatory due process procedures.
FDA approval is required before any new drug, including a generic
equivalent of a previously approved proprietary drug, can be marketed. To obtain
FDA approval for a new drug, a prospective manufacturer must, among other things
as discussed below, demonstrate that its manufacturing facilities comply with
the FDA's cGMP regulations. The FDA may inspect the manufacturer's facilities to
assure such compliance prior to approval or at any other reasonable time. The
manufacturer must follow cGMP regulations at all times during the manufacture
and processing of drugs. To comply with the standards set forth in these
regulations, the Company must continue to expend significant time, money and
effort in the areas of production, quality control and quality assurance.
To obtain FDA approval of a new drug, a manufacturer must demonstrate the
safety and effectiveness of the proposed drug. There are currently two basic
ways to satisfy the FDA's safety and effectiveness requirements:
1. NEW DRUG APPLICATIONS ("NDA"): Unless the procedure discussed in
paragraph 2 below is permitted under the Act, a prospective
manufacturer must submit to the FDA an NDA containing complete
pre-clinical and clinical safety and efficacy data or a right of
reference to such data. The pre-clinical data must provide an adequate
basis for evaluating the safety and scientific rationale for the
initiation of clinical trials. Clinical trials are conducted in three
sequential phases and may take several years to complete. At times,
the phases may overlap. Data from pre-clinical testing and clinical
trials is submitted to the FDA as an NDA for marketing approval.
2. ABBREVIATED NEW DRUG APPLICATIONS: The Hatch-Waxman amendments
established a statutory procedure for submission, FDA review and
approval of ANDAs for generic versions of drugs previously approved by
the FDA (such previously approved drugs are hereinafter referred to as
"listed drugs"). As the safety and efficacy have already been
established by the innovator company, the FDA waives the need for
complete clinical trials. However, a generic manufacturer is typically
required to conduct bioavailability/bioequivalence studies of its test
product against the listed drug. The bioavailability/bioequivalence
studies assess the rate and extent of absorption and concentration
levels of a drug in the blood stream required to produce a therapeutic
effect. Bioequivalence is established when the rate of absorption and
concentration levels of a generic product are substantially equivalent
to the listed drug. For some drugs (e.g., topical antifungals), other
means of demonstrating bioequivalence may be required by the FDA,
especially where rate and/or extent of absorption are difficult or
impossible to measure. In addition to the bioequivalence data, an ANDA
must contain patent certifications, chemistry, manufacturing, labeling
and stability data.
The Hatch-Waxman amendments also established certain statutory protections
for listed drugs. Under the Hatch-Waxman amendments, approval of an ANDA for a
generic drug may not be made effective for interstate marketing until all
relevant patents for the listed drug have expired or been determined to be
invalid or not infringed by the generic drug. Prior to enactment of the
Hatch-Waxman amendments, the FDA did not consider the patent status of a
previously approved drug. In addition, under the Hatch-Waxman amendments,
statutory non-patent exclusivity periods are established following approval of
11
certain listed drugs, where specific criteria are met by the drug. If
exclusivity is applicable to a particular listed drug, the effective date of
approval of ANDAs (and, in at least one case, submission of an ANDA) for the
generic version of the listed drug is usually delayed until the expiration of
the exclusivity period, which, for newly approved drugs, can be either three or
five years. The Hatch-Waxman amendments also provide for extensions of up to
five years of certain patents covering drugs to compensate the patent holder for
reduction of the effective market life of the patented drug resulting from the
time involved in the Federal regulatory review process.
During 1995, patent terms for a number of listed drugs were extended when
the Uruguay Round Agreements Act (the "URAA") went into effect to implement the
latest General Agreement on Tariffs and Trade (the "GATT") to which the United
States became a treaty signatory in 1994. Under GATT, the term of patents was
established as 20 years from the date of patent application. In the United
States, the patent terms historically have been calculated at 17 years from the
date of patent grant. The URAA provided that the term of issued patents be
either the existing 17 years from the date of patent grant or 20 years from the
date of application, whichever was longer. The effect generally was to add
patent life to already issued patents, thus delaying FDA approvals of
applications for generic products.
In addition to the Federal government, states have laws regulating the
manufacture and distribution of pharmaceuticals, as well as regulations dealing
with the substitution of generic drugs for brand-name drugs. The Company's
operations are also subject to regulation, licensing requirements and inspection
by the states in which they are located and/or conduct business.
Certain activities of the Company may also be subject to FTC enforcement.
The FTC enforces a variety of antitrust and consumer protection laws to ensure
that the nation's markets function competitively, are vigorous, efficient and
free of undue restrictions.
The Company also is governed by Federal and state laws of general
applicability, including laws regulating matters of environmental quality,
working conditions, and equal employment opportunity.
The Company is also subject to the recently enacted Sarbanes-Oxley Act (the
"SOX Act"), including regulations to be promulgated thereunder. The SOX Act
contains a variety of provisions affecting public reporting companies, such as
the Company, including its relationship with its auditors, prohibiting loans to
executive officers and requiring the evaluations of a company's internal
disclosure controls and procedures.
The Federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA").
Generally, OBRA provides that a generic drug manufacturer must offer the states
an 11% rebate on drugs dispensed under the Medicaid program and must enter into
a formal drug rebate agreement, as the Company has, with the Federal Health Care
Financing Administration. Although not required under OBRA, the Company has also
entered into similar state agreements.
ITEM 2. PROPERTIES.
- ------ ----------
The Company owns an approximately 92,000 square foot facility built to
Par's specifications which contain its executive offices, and manufacturing and
domestic research and development operations. The building, occupied by Par
since fiscal year 1986, also includes research and quality control laboratories,
as well as packaging and warehouse facilities. The building is located in Spring
Valley, New York, on a parcel of land of approximately 24 acres, of which
approximately 15 acres are available for future expansion.
The Company owns another building in Spring Valley, New York, across the
street from its executive offices, occupying approximately 36,000 square feet on
two acres. This property was acquired in fiscal year 1994 and is used for
offices and warehousing. The Company is currently in the process of converting
the warehouse and some of the office space into new research and quality control
laboratories. The capital project is expected to be completed in fiscal year
2003. The purchase of the land and building was financed by a mortgage loan,
which was paid in full in February 2003.
Par owns a third facility (the "Congers Facility") of approximately 33,000
square feet located on six acres in Congers, New York. The Company has
outsourced the operations previously performed at the Congers Facility to BASF
and the Halsey Drug Co., Inc. ("Halsey"). In March 1999, Par entered into an
agreement to lease the Congers Facility and related machinery and equipment to
12
Halsey. The lease agreement had an initial term of three years, with an
additional two-year renewal period and contains purchase options permitting
Halsey to purchase the Congers Facility and substantially all the equipment
thereof at any time during the lease terms for a specified amount. Pursuant to
the lease agreement, Halsey paid the purchase options of $150 and $100,
respectively, in March of 2002 and 1999. The lease agreement provides for annual
fixed rent of $600 per year during the two-year renewal period.
In fiscal year 2002, the Company leased additional office space in
Woodcliff Lake, New Jersey. The lease, as amended in December 2002, covers
approximately 41,000 square feet and expires in January 2010. The Company moved
certain of its administrative personnel to the facility in July 2002. In the
first quarter of 2003, the Company moved additional administrative functions to
this location.
In fiscal year 2003, the Company is planning to move its primary
warehousing operation to a facility in Montebello, New York. In August 2002, the
Company entered into a ten-year lease expiring in September 2012 to occupy
approximately 190,000 square feet of the facility.
Par occupies approximately 47,000 square feet in a building located in
Spring Valley, New York for warehouse space under a lease that expires December
2004. The Company has the option to extend the lease for two additional
five-year periods.
FineTech is currently leasing approximately 8,600 square feet at three
locations in Nesher and Technion, Israel, which contain its laboratories and
administrative offices. The terms of the lease are for ten years and 11 months,
with an additional two-year and 11 month renewal period. In fiscal year 2003,
FineTech is planning on moving its laboratories from Technion to Nesher,
expanding its space under the current lease by approximately 8,600 additional
square feet. FineTech also leases approximately 2,500 square feet of laboratory
space in Coventry, Rhode Island. The lease expires in December 2007 and may be
extended up to an additional five-year period.
Israel Pharmaceutical Resources L.P. ("IPR"), a research and development
operation owned by the Company, leased approximately 13,000 square feet at
Yaacobi House in Even Yehuda, Israel. The term of the lease was to expire in
April 2005, and the Company guaranteed IPR's obligations under the lease. In
fiscal year 2002, the Company sold the assets of IPR and the lessor of the
facility agreed to terminate the lease subject to the fulfillment of certain
conditions, including the payment of a $75 fee.
The Company believes that its owned and leased properties are sufficient in
size, scope and nature to meet its anticipated needs for the reasonably
foreseeable future (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Financial Condition" and "Notes to
Consolidated Financial Statements-Long-Term Debt" and "-Commitments,
Contingencies and Other Matters-Leases").
ITEM 3. LEGAL PROCEEDINGS.
- ------ -----------------
Par has filed an ANDA (currently pending with the FDA) for latanoprost
(Xalatan(R)), which was developed by Breath Ltd. of the Arrow Group pursuant to
a joint manufacturing and marketing agreement with the Company, seeking approval
to engage in the commercial manufacture, sale and use of the latanoprost product
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 believes 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 is also seeking 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.
13
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 lawsuits. While the outcome of litigation is
never certain, Par believes that it will prevail in these lawsuits.
The Company prevailed against Alpharma in an interference proceeding before
the U.S. Patent and Trademark Office regarding PRX's patents and applications
relating to megestrol acetate oral suspension formulations. Additionally, PRX
filed suit against Alpharma in the U.S. District Court, Southern District of New
York in February 2002. Alpharma has now entered into a consent judgment and
order of permanent injunction in this matter. Alpharma is hereby enjoined from
making, using, selling or importing its megestrol oral suspension product.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2002.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------ ---------------------------------------------------------------------
(a) MARKET INFORMATION. The Company's Common Stock is traded on the NYSE.
The following table shows the range of closing prices for the Common
Stock as reported by the NYSE for each calendar quarter during the
Company's two most recent fiscal years.
YEAR ENDED IN
2002 2001
--------------- ----------------
QUARTER ENDED APPROXIMATELY HIGH LOW HIGH LOW
--------------------------- ----- --- ---- --- -
March 31 $33.20 $16.10 $13.41 $6.63
June 30 29.00 20.91 30.69 12.35
September 30 28.60 21.85 41.50 29.91
December 31 30.55 20.05 39.06 29.40
(b) HOLDERS. As of March 21, 2003, there were approximately 2,200 holders
of record of the Common Stock. The Company believes that, in addition,
there are a significant number of beneficial owners of its Common
Stock whose shares are held in "street name".
(c) DIVIDENDS. During fiscal years 2002, 2001 and 2000, the Company did
not pay any cash dividends on its Common Stock. The payment of future
dividends on its Common Stock is subject to the discretion of the
Board of Directors and is dependent upon many factors, including the
Company's earnings, its capital needs, the terms of its financing
agreements and its general financial condition. The Company's current
loan agreement with General Electric Capital Corporation ("GECC")
prohibits the declaration or payment of any dividend, or the making of
any distribution, to any of the Company's stockholders (see "Notes to
Consolidated Financial Statements-Short-Term Debt").
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
NUMBER OF
SECURITIES TO WEIGHTED
TO BE ISSUED AVERAGE NUMBER OF
UPON EXERCISE EXERCISE PRICE OF SECURITIES
OF OUTSTANDING OF OUTSTANDING REMAINING
OPTIONS, WARRANTS OPTIONS, WARRANTS AVAILABLE FOR
PLAN CATEGORY AND RIGHTS AND RIGHTS FUTURE ISSUANCE
------------- ----------------- ----------------- ---------------
EQUITY COMPENSATION
PLANS APPROVED BY
SECURITY HOLDERS:
2001 Performance Equity
Plan 2,751 $28.56 1,249
1997 Directors Stock
Option Plan 138 $18.81 27
1990 Stock Incentive
Plan 134 $3.54 -
EQUITY COMPENSATION
PLANS NOT APPROVED BY
SECURITY HOLDERS:
2000 Performance Equity
Plan 741 $6.87 54
----- -----
Total 3,764 $23.04 1,330
In fiscal year 2000, the Company's Board of Directors adopted the 2000
Performance Equity Plan (the "2000 Plan") which plan was subsequently
amended, making it a non-qualified, broad-based plan not subject to
shareholder approval. The 2000 Plan provides for the granting of incentive
and nonqualified stock options to employees of the Company and to others.
The 2000 Plan became effective March 23, 2000 and will continue until March
22, 2010 unless terminated sooner. The Company reserved 1,025 shares of
Common Stock for issuance under the 2000 Plan. The maximum term of an
option under the 2000 Plan is ten years. Vesting and option terms are
determined in each case by the Compensation and Stock Option Committee of
the Board. The maximum term of the option is reduced to five years if an
incentive stock option is granted to a holder of more than 10% in the
Company (see "Notes to Consolidated Financial Statements-Short-Term Debt").
(e) RECENT STOCK PRICE. On March 21, 2003, the closing price of a share of
the Common Stock on the NYSE was $41.71 per share.
15
ITEM 6. SELECTED FINANCIAL DATA.
- ------ -----------------------
THREE TWELVE
FOR THE YEARS ENDED MONTHS MONTHS
------------------------------------------ ENDED ENDED
(*RESTATED)(*RESTATED)(*RESTATED)(*RESTATED)
12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 9/30/98
-------- -------- -------- -------- -------- -------
INCOME STATEMENT DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales $381,603 $271,035 $85,022 $80,315 $16,775 $59,705
Cost of goods sold 198,313 161,306 62,332 64,140 17,105 56,135
-------- -------- -------- ------- ------- -------
Gross margin 183,290 109,729 22,690 16,175 (330) 3,570
Operating expenses (income):
Research and development 17,910 11,113 7,634 6,005 1,125 5,775
Selling, general and
administrative 40,215 21,878 16,297 13,509 3,792 12,271
Settlements (9,051) - - - - -
Acquisition termination
charges 4,262 - - - - -
Asset impairment/restructuring
charge - - - - 1,906 1,212
-------- -------- -------- ------- ------- -------
Total operating expenses 53,336 32,991 23,931 19,514 6,823 19,258
-------- -------- -------- ------- ------- -------
Operating income (loss) 129,954 76,738 (1,241) (3,339) (7,153) (15,688)
Other (expense) income (305) (364) 506 906 1 6,261
Interest income (expense) 604 (442) (916) (63) 89 (382)
-------- -------- -------- ------- ------- -------
Income (loss) before provision
for income taxes 130,253 75,932 (1,651) (2,496) (7,063) (9,809)
Provision for income taxes 50,799 22,010 - - - -
-------- -------- -------- ------- ------- -------
Net income (loss) $79,454 $53,922 $(1,651) $(2,496) $(7,063) $(9,809)
======== ======== ======== ======= ======= =======
Net income (loss) per share of
common stock:
Basic $2.46 $1.76 $(.06) $(.08) $(.24) $(.46)
======== ======== ======== ======= ======= =======
Diluted $2.40 $1.68 $(.06) $(.08) $(.24) $(.46)
======== ======== ======== ======= ======= =======
Weighted average number of
common shares
outstanding:
Basic 32,337 30,595 29,604 29,461 29,320 21,521
======== ======== ======== ======= ======= =======
Diluted 33,051 32,190 29,604 29,461 29,320 21,521
======== ======== ======== ======= ======= =======
BALANCE SHEET DATA
Working capital $136,305 $102,867 $18,512 $21,221 $24,208 $29,124
Property, plant and equipment
(net) 27,055 24,345 23,560 22,681 22,789 24,283
Total assets 301,457 216,926 93,844 92,435 88,418 93,576
Long-term debt, less current
portion 2,426 1,060 163 1,075 1,102 1,143
Shareholders' equity 220,790 138,423 64,779 65,755 67,329 74,328
* Restated as described in Notes to Consolidated Financial Statements.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS.
-------------
CERTAIN STATEMENTS IN THIS DOCUMENT 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, TRENDS
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
DOCUMENT INCLUDE (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 ACQUISITIONS (ix) OBTAINING OR
LOSING 180-DAY EXCLUSIVITY ON PRODUCTS AND (x) GENERAL INDUSTRY AND ECONOMIC
CONDITIONS. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT 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.
FISCAL YEAR 2000 RESULTS GIVE EFFECT TO THE RESTATEMENT DESCRIBED IN THE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. THE FINANCIAL DATA CONTAINED IN THIS
SECTION IS IN THOUSANDS.
RESULTS OF OPERATIONS
GENERAL
The Company experienced significant sales, gross margin and net income
growth in fiscal year 2002 when compared to fiscal year 2001. Net income of
$79,454 for the year ended December 31, 2002 increased $25,532 from $53,922 for
the year ended December 31, 2001. Net income in 2001 included the favorable
impact from the reversal of a previously established valuation allowance of
$9,092 related to net operating loss ("NOL") carryforwards. Net sales reached a
historical high of $381,603 in 2002, an increase of $110,568, or 41%, from 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 increase was 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 experienced severe price competition in fiscal year 2002. The sales
growth generated increased gross margins of $183,290, or 48% of net sales, in
fiscal year 2002, compared to $109,729, or 40% of net sales, in 2001. Results
for fiscal year 2002 included increased spending on research and development and
selling, general and administrative expenses of $6,797 and $18,337,
respectively, primarily due to increased activity with outside development
partners, and additional legal fees, personnel costs, product liability
insurance and shipping costs associated with new product launches. Additionally,
the Company recorded income from settlements of $9,051 in the first quarter of
2002 related to the termination of its litigation with BMS and acquisition
termination charges of $4,262 in connection with its termination of the
acquisition of the combined 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. The purchase of FineTech did not have a
material effect on the Company's earnings for fiscal year 2002.
The Company's net income of $53,922 for fiscal year 2001, which included
the reversal of a previously established valuation allowance related to NOL
carryforwards, increased $55,573 from a net loss of $1,651 for fiscal year 2000.
The Company did not recognize a tax benefit for its losses in fiscal year 2000.
The revenue increase of $186,013, or 219%, in 2001 from revenues generated
during 2000, reflected the successful launch of three products that benefited
from marketing exclusivity in fiscal year 2001, fluoxetine 10 mg and 20 mg
tablets, fluoxetine 40 mg capsules and megestrol acetate oral suspension. Net
sales were $271,035 for fiscal year 2001 compared to net sales of $85,022 in
fiscal year 2000. Accompanying the sales growth, the gross margins increased to
$109,729, or 40% of net sales, in 2001, from $22,690, or 27% of net sales, in
2000. The improved results included an increased investment in research and
17
development, which totaled $11,113 for fiscal year 2001, an increase of $3,479
from fiscal year 2000. In fiscal year 2001, selling, general and administrative
costs were $21,878, an increase of $5,581 from the previous year, primarily due
to additional marketing programs, shipping costs and legal fees associated with
new product launches.
In addition to its own product development program, the Company has several
strategic alliances through which it co-develops and distributes products. As a
result of its internal program and these strategic alliances, the Company's
pipeline of potential products includes 28 ANDAs (seven of which have been
tentatively approved), pending with, and awaiting approval from, the FDA. The
Company pays a percentage of the gross profits to its strategic partners on
sales of products covered by its distribution agreements. Generally, products
that the Company develops internally, without having to split gross profits with
its strategic partners, would contribute higher gross margins than products
covered under distribution agreements (see "Notes to Consolidated Financial
Statements-Research and Development Agreements" and "-Distribution and Supply
Agreements").
In July 2001 and August 2001, the FDA granted approvals for three ANDA
submissions, one each by Par, Dr. Reddy's Laboratories Ltd. ("Reddy") and
Alphapharm Pty Ltd., an Australian subsidiary of Merck KGaA, 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 a distribution agreement with Reddy and
fluoxetine 10 mg and 20 mg tablets covered under a distribution agreement with
Genpharm. 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 began selling in the first quarter of 2002 following the
expiration of such other party's exclusivity period. As expected, additional
generic competitors, with products comparable to all three strengths of the
Company's fluoxetine products, began entering the market in the first quarter of
2002, 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 are expected to
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.
Critical to the continued growth of the Company is the introduction of new
manufactured and distributed products at selling prices that generate
significant gross margins. 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.
Sales and gross margins of the Company's products are principally dependent
upon (i) pricing and product deletions by competitors, (ii) the introduction of
other generic drug manufacturers' products in direct competition with the
Company's significant products, (iii) the 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) the continuation of existing distribution agreements, (v) the introduction
of new distributed products, (vi) the consolidation among distribution outlets
through mergers, acquisitions and the formation of buying groups, (vii) the
willingness of generic drug customers, including wholesale and retail customers,
to switch among generic pharmaceutical manufacturers, (viii) approval of ANDAs
and introduction of new manufactured products, (ix) granting of potential
exclusivity periods, (x) market penetration for the existing product line and
(xi) the level of customer service (see "Business-Competition").
NET SALES
Net sales of $381,603 for fiscal year 2002 increased $110,568, or 41%, from
net sales in fiscal year 2001. The sales increase was primarily due to higher
sales of megestrol acetate oral suspension, introduced in late July 2001, new
18
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, sold pursuant to an agreement with BMS. Net sales of
fluoxetine and megestrol acetate oral suspension in fiscal year 2002 were
$89,952 and $83,022, respectively, compared to $122,270 and $43,869,
respectively, in the prior year. Net sales of distributed products, which
consist of products manufactured under contract and licensed products, were
approximately 60% and 66%, respectively, of the Company's net sales in fiscal
years 2002 and 2001. The Company is substantially dependent upon distributed
products for its overall sales, and as the Company introduces new products under
its distribution agreements, it is expected that this dependence will continue.
Any inability by suppliers to meet expected demand could adversely affect future
sales.
The Company's exclusivity period for fluoxetine expired in late-January
2002. The Company established a price protection reserve with respect to
fluoxetine during the exclusivity period of approximately $34,400, 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. In fiscal year 2002, the Company
issued price protection credits totaling approximately $27,400 and eliminated
the price protection reserve it believed was no longer necessary. Pursuant to
distribution agreements with strategic partners, the elimination of the
remaining reserve had a favorable impact on the Company's gross margin of
approximately $1,800 in fiscal year 2002. 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 were and will continue
to be adversely affected (see "Notes to Consolidated Financial
Statements-Accounts Receivable").
The Company's exclusivity period for megestrol acetate oral suspension
expired 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 take steps necessary to protect its intellectual property
rights. Although competitors may be taking the steps necessary 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 by the Company to be a significant profit
contributor for fiscal year 2003, despite the potential of competition. In
accordance with the Company's accounting policies, the Company did not record a
price protection reserve for megestrol acetate oral suspension as of December
31, 2002. The Company will continue to evaluate the effect of potential
competition and will record a price protection reserve when and as it deems
necessary.
Pursuant to a profit sharing agreement with Genpharm (the "Genpharm Profit
Sharing Agreement"), the Company will receive a portion of the profits generated
from the sale of omeprazole, the generic version of Astra Zeneca's ("Astra")
Prilosec(R). In November 2001, the FDA granted Genpharm 180 days' marketing
co-exclusivity for 10 mg and 20 mg doses of omeprazole. The exclusivity would
have allowed only Genpharm and/or Andrx Corporation ("Andrx") "), a
pharmaceutical company located in Fort Lauderdale, Florida, to enter the market
during the exclusivity period. Under the Genpharm Profit Sharing Agreement, the
Company was entitled to receive at least 30% of profits generated by Genpharm
based on the sale of omeprazole. In November 2002, the Company announced that
Genpharm and Andrx, in conjunction with KUDCo, a subsidiary of Schwarz Pharma AG
of Germany, had relinquished exclusivity rights for 10 mg and 20 mg doses of
omeprazole, thereby allowing KUDCo to enter the market with a generic version of
Prilosec(R). As a result, KUDCo received final ANDA approval from the FDA for
its generic version of Prilosec(R). The terms of the agreement provide Genpharm
with an initial 15% share of KUDCo's profits, as defined in their agreement,
with a subsequent reduction over time based on a number of factors. The Company
reduced its share of Genpharm's profit derived from omeprazole pursuant to the
Genpharm Profit Sharing Agreement from 30% to 25%. In December 2002, KUDCo
launched omeprazole "at risk" because Astra appealed the court's patent
infringement decision. The full impact of KUDCo's omeprazole launch on the
Company's revenues is presently unclear since, among other things, Astra has
introduced a new drug, Nexium(R), in an apparent 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. In December 2002, the Company recognized $755 of revenues related
19
to its share of Genpharm profits, which were significantly reduced as Genpharm
recovered out-of-pocket development and legal expenses incurred during the
product development and litigation process. These expenses were substantially
recovered by Genpharm in 2002. Unless there is a court ruling that is
unfavorable to KUDCo in the pending appeal by Astra, in which case the Company
could be obligated to return any payments received from Genpharm, the Company
anticipates recording revenues of up to $20,000 in fiscal year 2003 from its
share of the profits on omeprazole.
Net sales for fiscal year 2001 of $271,035 increased $186,013, or 219%,
from net sales of $85,022 for fiscal year 2000. The sales increase was primarily
due to the launch in the third quarter of 2001 of fluoxetine 10 mg and 20 mg
tablets sold under a distribution agreement with Genpharm, fluoxetine 40 mg
capsules sold under a distribution agreement with Reddy, and megestrol acetate
oral suspension manufactured by the Company. Net sales of distributed products
represented approximately 66% and 64%, respectively, of the Company's net sales
in fiscal years 2001 and 2000.
GROSS MARGINS
The gross margin for fiscal year 2002 of $183,290 (48% of net sales)
increased $73,561 from $109,729 (40% of net sales) in 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 an additional $33,552 in
fiscal year 2002 to the gross margin improvement when compared to fiscal year
2001. As previously discussed, additional generic drug manufacturers introduced
comparable fluoxetine products at the expiration of the Company's exclusivity
period that adversely affected the Company's sales volumes, selling prices and
gross margins for such products, particularly the 10 mg and 20 mg strengths. The
effects of gross margin declines from lower pricing on the fluoxetine 40 mg
capsule have been partially offset, however, by an increase in the Company's
profit sharing percentage under an agreement with Reddy. Although aggregate
sales of the fluoxetine products declined in 2002, the increased profits on the
40 mg capsule lessened the impact of 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 of $109,729 (40% of net sales) for fiscal year 2001
increased $87,039 from $22,690 (27% of net sales) in fiscal year 2000. The gross
margin improvement was achieved through additional contributions from sales of
higher margin new products and, to a lesser extent, increased sales of certain
existing products and more favorable manufacturing overhead variances. For
fiscal year 2001, fluoxetine, which is subject to profit sharing agreements with
Genpharm and Reddy, contributed approximately $38,736 to the gross margin
improvement while megestrol acetate oral suspension contributed approximately
$34,613.
Inventory write-offs amounted to $3,096 for fiscal year 2002 compared to
$1,790 in fiscal year 2001. The increase was primarily attributable to normally
occurring write-offs resulting from increased production required to meet higher
sales and inventory levels. 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. In addition, the Company experienced 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 in
fiscal year 2002.
Inventory write-offs of $1,790 for fiscal year 2001 were comparable to
$1,645 in fiscal year 2000. In addition to write-offs taken in the normal course
of business, inventory write-offs in fiscal year 2001 included the disposal of
validation batches related to manufacturing process improvements.
In fiscal year 2002, the Company's top four selling products accounted for
approximately 57% of net sales compared to 70% and 45%, respectively, of net
sales in fiscal years 2001 and 2000. One of the products, tizanidine, was not
one of the top four products in either of the preceding periods and accounted
for approximately 6% of the Company's total 2002 net sales. The aggregate sales
and gross margins generated by fluoxetine and megestrol acetate oral suspension
continued to account for a significant portion of the Company's overall sales
and gross margins in both fiscal years 2002 and 2001 and any further reductions
in pricing for these products will continue to reduce future contributions of
these products to the Company's overall financial performance. Although there
can be no such assurance, the Company anticipates continuing to introduce new
products in fiscal year 2003 and attempt to increase sales of certain existing
products in an effort to offset the sales and gross margin declines resulting
from competition on any of its significant products. The Company will also try
20
to reduce the overall impact of the top four products, by adding additional
products through new and existing distribution agreements and seeking to gain
efficiencies through manufacturing process improvements.
OPERATING EXPENSES/INCOME
RESEARCH AND DEVELOPMENT
Research and development expenses of $17,910 for fiscal year 2002 increased
$6,797, or 61%, from $11,113 for the prior year. The increased costs were
primarily attributable to additional payments of approximately $7,100 for
development work performed for the Company by unaffiliated companies,
particularly Elan Transdermal Technologies, Inc. ("Elan"), related to the
development of a clonidine transdermal patch and other products and, to a lesser
extent, higher costs for personnel, the acquisition of FineTech and funding of
SVC Pharma, the Company's joint venture partnership. These expenses were
partially offset by lower biostudy costs, primarily related to products covered
under distribution agreements with Genpharm, in fiscal year 2001.
Total research and development costs for fiscal year 2003 are expected to
exceed the total for fiscal year 2002 by approximately 30% to 40%. The increase
is expected as a result of increased internal development activity and projects
with third parties, increased research and development venture activity and the
inclusion of FineTech activities for the full year.
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 for which ANDAs have already been filed with the FDA (see "Notes to
Consolidated Financial Statements-Acquisition of FineTech").
In April 2002, the Company entered into an agreement with RTI to establish
a joint venture partnership in the United States. The new joint venture was
named SVC Pharma and is 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 has agreed to provide scientific and technological
expertise in the development of non-infringing, complex molecules. In addition
to providing chemical synthesis capabilities, RTI has agreed to provide the
manufacturing capacity for sophisticated intermediate and active pharmaceutical
ingredients. Par has agreed to provide development expertise in dosage
formulation and will be responsible for marketing, sales and distribution. The
companies have agreed to 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 late in fiscal year 2004. The Company's
funding of $952 related to the first project began in the fourth quarter of
fiscal year 2002 and was charged to research and development expenses. The
Company accounts for its share of the expenses of SVC Pharma with a charge to
research and development as incurred.
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 ten additional products during
fiscal year 2003.
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 five ANDAs for potential products (two tentatively
approved) covered under the Genpharm 11 Product Agreement pending with, and
awaiting approval from, the FDA (see "Notes to Consolidated Financial
Statements-Research and Development Agreements").
The Company and Genpharm entered into a distribution agreement (the
"Genpharm Distribution Agreement"), dated March 1998. 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. The Company is currently marketing 19
products under the Genpharm Distribution Agreement (see "Notes to Consolidated
Financial Statements-Distribution and Supply Agreements-Genpharm, Inc.").
21
Genpharm and the Company share the costs of developing products covered
under an agreement (the "Genpharm Additional Product Agreement"), dated November
27, 2000. The Company is currently marketing two products under the Genpharm
Additional Product Agreement (see "Notes to Consolidated Financial
Statements-Distribution and Supply Agreements-Genpharm, Inc.").
In fiscal year 2001, the Company incurred research and development expenses
of $11,113 compared to $7,634 for fiscal year 2000. The increased costs were
primarily attributable to payments to Elan related to the development of a
clonidine transdermal patch and higher costs for raw material, biostudies,
including those related to products developed by Genpharm, personnel and
additional payments for formulation development work performed for the Company
by unaffiliated companies.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs of $40,215 (11% of net sales) for
fiscal year 2002 increased $18,337 from $21,878 (8% of net sales) in fiscal year
2001. The increase in 2002 was primarily attributable to additional legal fees
of $6,029, personnel costs of $4,247 and, to a lesser extent, product liability
insurance and distribution costs associated with new product introductions and
higher sales volumes. Distribution costs include those related to shipping
product to the Company's customers, primarily through the use of a common
carrier or an external distribution service. Shipping costs totaled $2,838 in
fiscal year 2002, an increase of $1,489 from the prior year. The Company
anticipates it will continue to incur a high level of legal expenses related to
the costs of litigation connected with potential new product introductions (see
"Notes to Consolidated Financial Statements-Commitments, Contingencies and Other
Matters-Legal Proceedings"). Although there can be no such assurance, selling,
general and administrative costs in fiscal year 2003 are expected to increase by
approximately 10% from fiscal year 2002.
Although selling, general and administrative costs of $21,878 for fiscal
year 2001 increased $5,581, or 34%, over the preceding year, the cost as a
percentage of net sales in the respective periods decreased to 8% in 2001 from
19% in 2000. The higher dollar amount in fiscal year 2001 was primarily
attributable to additional marketing programs, distribution costs and legal fees
associated with new product introductions and, to a lesser extent, increased
personnel costs. In fiscal year 2001, shipping costs of $1,349 increased $575
from $774 in fiscal year 2000.
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. To obtain the rights to the five products, the
Company agreed to terminate its outstanding litigation against BMS involving
megestrol acetate oral suspension and buspirone, paid approximately $1,024 in
March 2002 and agreed to make an additional payment of approximately $1,025 in
the first quarter of 2003. The Company determined, through an independent third
party appraisal, the fair value of the product rights received to be $11,700,
which exceeded the cash consideration of $2,049 and associated costs of $600 by
$9,051. The $9,051 value was assigned to the litigation settlements and included
in settlement income in the first quarter of 2002. The fair value of the product
rights received is being amortized on a straight-line basis over seven years
beginning in March 2002, with the net amount included in intangible assets on
the consolidated balance sheets.
ACQUISITION TERMINATION CHARGES
On March 15, 2002, the Company terminated its negotiations with ISP related
to the Company's purchase of the combined 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 following the announcement of the proposed
transaction. Pursuant to the termination of negotiations, the Company paid ISP a
$3,000 break-up fee in March 2002, which was subject to certain credits and
offsets, and incurred $1,262 in related acquisition costs, both of which were
included in acquisition termination charges on the consolidated statements of
operations in fiscal year 2002.
22
OTHER EXPENSE/INCOME
Other expense of $305 for fiscal year 2002 was comparable to $364 in fiscal
year 2001. Other income of $506 in fiscal year 2000 included payments from
strategic partners to reimburse the Company for research costs incurred in prior
periods.
INTEREST INCOME/EXPENSE
Net interest income of $604 in fiscal year 2002 was primarily derived from
money market and other short-term investments. Net interest expense of $442 and
$916 in fiscal years 2001 and 2000, respectively, was primarily due to
outstanding balances on the Company's line of credit with GECC during the
periods.
INCOME TAXES
The Company recorded provisions for income taxes of $50,799 and $22,010,
respectively, for the years ended December 31, 2002 and 2001 based on the
applicable federal and state tax rates for those periods. The provision in
fiscal year 2001 was net of tax benefits of $9,092 related to previously
unrecognized NOL carryforwards. The Company did not recognize a benefit for its
operating losses for fiscal year 2000 (see "Notes to Consolidated Financial
Statements-Income Taxes").
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $65,121 at December 31, 2002 decreased $2,621
from $67,742 at December 31, 2001. In fiscal year 2002, the Company funded the
acquisition of FineTech and capital projects primarily through its operating
activities. Working capital, which includes cash and cash equivalents, increased
to $136,305 at December 31, 2002 from $102,867 at December 31, 2001, primarily
from increases in inventory and accounts receivable due to the Company's sales
growth, as well as, maintaining customer service levels. The working capital
ratio of 2.83x at December 31, 2002 improved from 2.41x at December 31, 2001.
A summary of the Company's contractual obligations and commercial
commitments as of December 31, 2002 were as follows:
AMOUNTS DUE IN FISCAL YEARS
---------------------------
TOTAL 2005 AND
OBLIGATION OBLIGATION 2003 2004 THEREAFTER
---------- ---------- ---- ---- ----------
Operating leases $21,054 $2,812 $2,927 $15,315
Industrial revenue bond 2,000 397 384 1,219
Mortgage loan 809 39 39 731
Other 213 164 49 -
------- ------ ------ -------
Total obligations $24,076 $3,412 $3,399 $17,265
======= ====== ====== =======
In addition to its internal research and development costs, 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, the most
significant of which are described below, are either capitalized or expensed
according to the Company's accounting policies.
Pursuant to the Genpharm Profit Sharing Agreement, Genpharm will pay the
Company its share of profits related to KUDCo's sale of omeprazole 60 days after
the month in which the product was sold. The terms of the agreement provide
Genpharm with an initial 15% share of KUDCo's profits, as defined in their
agreement, with a subsequent reduction over time based on a number of factors.
The Company reduced its share of Genpharm's profit derived from omeprazole
pursuant to the Genpharm Profit Sharing Agreement from 30% to 25%. In December
2002, KUDCo launched omeprazole "at risk" because Astra appealed the court's
patent infringement decision. In December 2002, the Company recognized $755 of
revenues related to its share of Genpharm profits. Unless there is a court
ruling that is unfavorable to KUDCo in the pending appeal by Astra, in which
case the Company could be obligated to return any payments received from
23
Genpharm, the Company anticipates receiving up to $17,000 in cash in fiscal year
2003 from its share of the profits on omeprazole.
In November 2002, the Company amended the Supply and Marketing Agreement
with Pentech, dated November 2001, to market paroxetine hydrochloride capsules.
Pursuant to the Supply and Marketing Agreement, Par is responsible for all legal
expenses up to $2,000, which have been expensed as incurred, to obtain final
regulatory approval. Legal expenses in excess of $2,000 are fully creditable
against future profit payments. In fiscal year 2003, Par will also be
responsible for Pentech costs associated with the project up to $1,300, which
will be charged to research and development expenses as incurred.
Pursuant to its joint venture partnership with RTI named SVC Pharma, the
Company agreed to share equally in expenses and profits of the partnership. The
Company's funding of $952 related to the first project began in the fourth
quarter of fiscal year 2002. The Company accounts for its share of the expenses
of SVC Pharma with a charge to research and development as incurred.
In July 2002, the Company and Three Rivers entered into the Three Rivers
Distribution Agreement, which was amended in October 2002, 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 in November 2002, which was
charged to research and development during the period, and agreed to pay Three
Rivers $500 at such time Par commercially launches the product.
The Company made non-refundable payments totaling $1,000 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 in various installments related to the
achievement of certain milestones in the development of two potential products
and $600 for each product on the day of the first commercial sale (see-"Notes to
Consolidated Financial Statements-Research and Development Agreements").
In April 2002, the Company entered into the Genpharm 11 Product Agreement
pursuant to which Genpharm agreed to develop the products, submit all
corresponding ANDAs to the FDA and subsequently manufacture the products. Par
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, included in intangible assets on the
consolidated balance sheets, 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 based upon FDA acceptance of filings for six of
the nine remaining products.
In April 2002, the Company purchased FineTech, a portion of ISP's fine
chemical business based in Haifa, Israel, from ISP for approximately $32,000 and
$1,237 in related acquisition costs, all of which were financed by its
cash-on-hand (see "Notes to Consolidated Financial Statements-Acquisition of
FineTech").
As of December 31, 2002 the Company had payables due to distribution
agreement partners of $18,163, 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 first quarter of 2003.
In December 2002, the Company and Elan terminated an agreement (the
"Development, License and Supply Agreement"), dated December 2001, to develop
several modified release drugs over the next five years. The Company paid Elan
$1,902 in fiscal years 2002 and 2003, which was charged to research and
development expenses, for a product covered under the Development, License and
Supply Agreement, thereby completing its obligations pursuant to the agreement.
In December 2001, the Company made the first payment of a potential equity
investment of up to $2,438 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. Pursuant to an
agreement between the Company and HighRapids, effective December 1, 2001, the
Company, subject to its ongoing evaluation of HighRapids' operations, has agreed
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to purchase units, consisting of secured debt, evidenced by 7% secured
promissory notes, up to an aggregate principal amount of $2,425 and up to an
aggregate 1,330 shares of the common stock of HighRapids. 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 December 31, 2002, the Company had
invested $768 of its potential investment. Due to HighRapids current operating
losses and the Company's evaluation of its short-term prospects for
profitability, the investment was expensed as incurred in fiscal years 2002 and
2001 and included in other expense on the consolidated statements of operations
(see-"Notes to Consolidated Financial Statements-Commitments, Contingencies and
Other Matters-Other Matters").
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% (Xalatan(R)). Pursuant to
this agreement, Par paid Breath Ltd. $2,500 in fiscal year 2001 and an
additional $2,500 in the first quarter of 2002, which are included in intangible
assets on the consolidated balance sheets.
The Company paid FineTech a total of $2,000 from September 2000 through
September 2001, which is included in intangible assets on the consolidated
balance sheets, pursuant to an agreement with FineTech in April 1999, which was
later modified in August 2000, for the right to use a process for a
pharmaceutical bulk active latanoprost together with its technology transfer
package, DMF and patent filings. FineTech paid all costs and expenses associated
with the development of the process, exclusive of patent prosecution and
maintenance, which shall be at the Company's expense.
In 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