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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
Commission File Number: 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 425-7100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b)
OF THE SECURITIES EXCHANGE ACT OF 1934:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value The New York Stock Exchange, Inc.
---------------------------- ---------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act") during the preceding 12 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
--- ---
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 the 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. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes X No
--- ---
The aggregate market value of the common equity held by non-affiliates of
the Registrant was $1,626,398,410 as of June 29, 2003 (assuming, solely for
purposes of this calculation, that all directors and executive officers of the
Registrant were "affiliates").
Number of shares of the Registrant's common stock outstanding
as of March 10, 2004: 34,992,488
Part III of this Form 10-K incorporates by reference certain portions of the
Registrant's Proxy Statement for its Annual Meeting of Stockholders to be filed
within 120 days after December 31, 2003.
TABLE OF CONTENTS
PHARMACEUTICAL RESOURCES, INC.
FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2003
PAGE
----
PART I
Item 1 Business............................................................3
Item 2 Properties.........................................................14
Item 3 Legal Proceedings..................................................15
Item 4 Submission of Matters to a Vote of Security Holders................17
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters...........................................................18
Item 6 Selected Financial Data............................................19
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................20
Item 7A Quantitative and Qualitative Disclosures about Market Risk.........34
Item 8 Consolidated Financial Statements and Supplementary Data...........34
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................34
Item 9A Controls and Procedures............................................35
PART III
Item 10 Directors and Executive Officers of Registrant.....................36
Item 11 Executive Compensation.............................................36
Item 12 Security Ownership of Certain Beneficial Owners and Management.....36
Item 13 Certain Relationships and Related Transactions.....................36
Item 14 Principal Accountant Fees and Services.............................36
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K....37
SIGNATURES
PART I
ITEM 1. BUSINESS.
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GENERAL
Pharmaceutical Resources, Inc. (the "Company" or "PRX") is a Delaware
holding company that, principally through its wholly owned subsidiary, Par
Pharmaceutical, Inc. ("Par"), is in the business of manufacturing and
distributing generic drugs in the United States. In addition, the Company
develops and manufactures, in small quantities, complex synthetic active
pharmaceutical ingredients through its wholly owned subsidiary, FineTech
Laboratories, Ltd. ("FineTech") based in Haifa, Israel. The Company also sells a
limited number of mature brand name drugs through an agreement between Par and
Bristol-Myers Squibb Company ("BMS"). Effective as of June 24, 2003, the Company
changed its state of incorporation from New Jersey to Delaware. The Company's
principal executive offices are located at One Ram Ridge Road, Spring Valley,
New York 10977, and its telephone number is (845) 425-7100. Additional
information concerning the Company can be found on the Company's website at
WWW.PARPHARM.COM. The Company makes its electronic filings with the United
States Securities and Exchange Commission (the "Commission"), including its
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to these reports, available through its website, free of
charge, as soon as practicable after it files or furnishes them with the
Commission. Information on the website is not part of this Form 10-K.
Generic drugs are the pharmaceutical and therapeutic equivalents of brand
name drugs and are usually marketed under their generic (chemical) names rather
than by brand names. Typically, a generic drug may not be marketed until the
expiration of applicable patent(s) on the corresponding brand name drug. Generic
drugs must meet the same governmental standards as brand name drugs, but they
are generally sold at prices below those of the corresponding 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 comprises prescription generic drugs consisting
of 170 products representing various dosage strengths for 71 separate drugs. The
Company's products are manufactured principally in the solid oral dosage form
(tablet, caplet and two-piece hard shell capsule). In addition, the Company
markets an oral suspension product and one product in the semi-solid form of a
cream. The Company develops and manufactures some of its own products. The
Company also has strategic alliances and relationships with several
pharmaceutical and chemical companies that provide it with products for sale
through various distribution, manufacture, development and licensing agreements.
In addition to developing generic equivalents of existing drugs, the
Company has recently expanded its efforts to develop new dosage strengths and
drug delivery forms through a specialty pharmaceutical product line, which it
believes will improve existing pharmaceutical products. The Company believes
that these products may have limited competition and longer product life cycles
than its existing products. In addition, the Company is exploring potential
acquisitions of complementary products and businesses and expects to enter into
additional strategic alliances and relationships.
The Company markets its products primarily to wholesalers, retail drug
store chains, managed health care providers and drug distributors, principally
through its internal sales staff. The Company also promotes the sales efforts of
wholesalers and drug distributors that sell its products to clinics,
governmental agencies and other managed health care organizations.
The Company has adopted a code of ethics that applies to all of its
directors, officers, employees and representatives. This code is publicly
available on the Company's website. Amendments to the code of ethics and any
grant of a waiver from a provision of the code requiring disclosure under
applicable Commission rules will be available on the Company's website. The
Company's corporate governance principles and the charters of the Audit,
Nominating and Corporate Governance and Compensation and Stock Option Committees
of its Board of Directors' (the "Board") are also available on the Company's
website. Any of these materials may also be requested in print by writing to the
Company, Attention: Thomas Haughey, Vice President, General Counsel and
Secretary, at One Ram Ridge Road, Spring Valley, NY 10977.
3
As further described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations", certain statements made 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,
expenditures and future events. Such statements involve risks, uncertainties,
trends and contingencies, many of which are beyond the control of the Company
and which could cause actual results and performance to differ materially from
those stated 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 any 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
stockholder numbers, contained in Parts I and II are in thousands.
FISCAL YEAR 2003 HIGHLIGHTS:
RESULTS OF OPERATIONS. Fiscal year 2003 marked the Company's third
consecutive record year in terms of revenues and earnings. The Company's net
income in 2003 of $122,533 increased $43,079, or 54%, from $79,454 in fiscal
year 2002. In fiscal year 2001, the Company's net income was $53,922. The
earnings improvement in fiscal year 2003 was driven by record revenues of
$661,688, up from $381,603 in fiscal year 2002 and $271,035 in 2001. The revenue
growth in 2003 was largely due to the Company's introduction of paroxetine, the
generic version of GlaxoSmithKline's ("GSK's") Paxil(R), in the United States in
September 2003 through a distribution agreement with GSK, and the introduction
of other products throughout the year. In addition, the Company continued to
have success with megestrol acetate oral suspension, the generic version of
BMS's Megace(R) Oral Suspension, and fluoxetine 40 mg capsules, the generic
version of Eli Lilly and Company's Prozac(R), despite its loss of marketing
exclusivity with respect to both products in January 2002. In fiscal year 2003,
the Company continued to invest in research and development and its
infrastructure in order to better position itself for continued growth.
PRODUCT DEVELOPMENT. The Company recognizes that 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, which
increased 37% in fiscal year 2003 from 2002, and is expected to increase by as
much as 50% in fiscal year 2004 from 2003, reflects its commitment to continue
to develop new products and/or technologies through its internal development
programs, in addition to projects with strategic partners. The Company further
expanded its capabilities in product development by entering into new
development agreements with Nortec Development Associates, Inc. (a Glatt
company) ("Nortec"), Advancis Pharmaceutical Corporation ("Advancis"), and Mead
Johnson & Company ("Mead") and BMS in fiscal year 2003. Together with its
strategic partners, the Company has at least 40 drugs in development and 25
Abbreviated New Drug Applications ("ANDAs") filed with the United States Food
and Drug Administration ("FDA") awaiting approval. Among the 25 ANDAs are
several that the Company believes may represent first-to-file opportunities
entitling the Company, or its strategic partners, up to 180 days of marketing
exclusivity or co-exclusivity. However, it is difficult to determine with
certainty that an ANDA filing has exclusivity, or co-exclusivity, until final
approval is received from the FDA. These products include: olanzapine 20 mg
(Zyprexa(R)); latanoprost (Xalatan(R)); ribavirin (Rebetol(R)); and tramadol
with acetaminophen (Ultracet(R)). Together with its strategic partners, the
Company expects to file as many as 15 additional ANDAs, in which the Company
holds the marketing rights to the potential products, in fiscal year 2004. The
process of bringing new products to market and the costs associated with
research and development involve many uncertainties, including unforeseeable
changes in market conditions and regulatory or legal challenges. As such, no
assurance can be given that the Company will file additional ANDAs with the FDA,
obtain FDA approval or launch any of the products that are currently in
development.
FINANCING: In September 2003, the Company sold an aggregate principal
amount of $200,000 of senior subordinated convertible notes pursuant to Rule
144A under the Securities Act of 1933, as amended. The Company intends to use
the net proceeds from the offering to support the expansion of its business,
including increasing research and development activities, entering into product
license arrangements, possibly acquiring complementary businesses and products
and for general corporate purposes.
4
ADVANCIS: In October 2003, the Company purchased one million shares of the
common stock of Advancis, a pharmaceutical company based in Germantown,
Maryland, in its initial public offering of six million shares on October 16,
2003. The purchase price was $10 per share and the transaction closed on October
22, 2003. The Company's investment represents an ownership position of 4.4% of
the outstanding common stock of Advancis. Advancis has stated that its business
focus is on developing and commercializing pulsatile drug products that fulfill
unmet medical needs in the treatment of infectious disease. Unlike immediate
release antibiotics, Advancis' antibiotics are delivered in three to five
sequential pulses within the first six to eight hours following initial dosing.
In September 2003, Par had also entered into a licensing agreement with
Advancis, to market the antibiotic Clarithromycin XL. Clarithromycin XL is being
developed as a generic equivalent to Abbott Laboratories' ("Abbott") Biaxin
XL(R).
PAROXETINE: In fiscal year 2003, the Company obtained the marketing rights
to paroxetine, the generic version of GSK's Paxil(R), in connection with a
litigation settlement (the "GSK Settlement") between the Company, GSK and
certain of its affiliates, and Pentech Pharmaceuticals, Inc. ("Pentech"). As a
result of the GSK Settlement, Par and GSK entered into an agreement, pursuant to
which Par began marketing paroxetine, supplied and licensed from GSK, in the
United States in September 2003 and the Commonwealth of Puerto Rico in May 2003.
The GSK Settlement provides that the Company's right to distribute paroxetine
will be suspended if at any time there is not another generic version fully
substitutable for Paxil available for purchase in the United States. On
September 8, 2003, another generic drug manufacturer, Apotex Pharmaceutical
Healthcare, Inc. ("Apotex") launched a generic version of Paxil(R). GSK has sued
Apotex for patent infringement and is currently appealing a district court
decision adverse to GSK. In April 2002, GSK launched a longer-lasting, newly
patented version of the drug, Paxil CR(R). The Company expects Paxil CR(R)'s
market share to grow in fiscal year 2004, which may cause the Company's sales
and gross margins in respect of paroxetine tablets to decrease. The Company
understands that other generic drug manufactures have filed ANDAs in respect of
paroxetine and that the marketing exclusivity period thereof ended on March 8,
2004 but, at this time, cannot predict the timing of launches by these
competitors or the potential effects on its sales.
RIBAVIRIN: On July 16, 2003, the Company announced that the United States
District Court for the Central District of California had granted a summary
judgment of non-infringement against ICN Pharmaceuticals, Inc. ("ICN") and in
favor of Three Rivers Pharmaceutical LLC ("Three Rivers") regarding ribavirin,
Three Rivers' generic version of Schering-Plough Pharmaceutical's ("Schering's")
Rebetol(R). The District Court determined that Three Rivers' ribavirin product
does not infringe any of the three patents asserted by ICN in the litigation.
Par has exclusive marketing rights for Three Rivers' ribavirin product. Three
Rivers had earlier reached a settlement of its patent litigation with Schering.
The Company believes that this decision appears to resolve the remaining ongoing
patent barriers to FDA approval of the ANDA filed by Three Rivers in respect of
ribavirin. Such decision by the District Court is subject to affirmance by the
Court of Appeals for the Federal Circuit, and ICN has taken that appeal. The
timing of any launch by Par of this product is uncertain at this time. Three
Rivers has not obtained FDA approval of the ANDA, and the FDA has not determined
whether a generic 180-day exclusivity period will be awarded solely to a generic
competitor involved in the lawsuit or Three Rivers jointly with one or both of
the other two generic competitors involved in the lawsuit.
ORGANIZATION: On September 16, 2003, Scott Tarriff, formerly the Company's
Executive Vice President and the President and Chief Executive Officer of Par,
was selected by the Board as the Company's President and Chief Executive
Officer. Kenneth I. Sawyer, the Company's former Chairman, President and Chief
Executive Officer, had retired effective July 1, 2003 and had resigned as a
member of the Board effective September 16, 2003. Additionally, on September 16,
2003, Mark Auerbach, formerly the Company's lead outside director, was selected
by the Board to be the Executive Chairman of the Board.
On November 13, 2003, Peter W. Williams, Esq. was selected to fill the
vacancy on the Company's Board. On November 24, 2003, the Company entered into
an employment agreement with Thomas Haughey, pursuant to which Mr. Haughey has
agreed to serve in the capacities of Vice President, General Counsel and
Secretary for PRX and Par.
5
REINCORPORATION. In fiscal year 2003, the Company changed its state of
incorporation from New Jersey to Delaware (the "Reincorporation"), effective as
of June 24, 2003. The Reincorporation was 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,
were not affected by the Reincorporation. The surviving corporation of the
Reincorporation retained the name "Pharmaceutical Resources, Inc." and the
Company's common stock continues to be listed and traded on the New York Stock
Exchange (the "NYSE") under the symbol "PRX". In addition to the
Reincorporation, the Company changed 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 80 products, representing various dosage strengths for 29
separate drugs, that are manufactured by the Company and 90 additional products,
representing various dosage strengths for 42 separate drugs, that are
manufactured for it by other companies. Par holds ANDAs for the drugs that it
manufactures. Set forth below is a list of the drugs manufactured and/or
distributed by Par, including the brand name products, Capoten(R), Capozide(R),
Questran(R) and Questran Light(R), and Sumycin(R), that 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
---- ---------------------------
CENTRAL NERVOUS SYSTEM:
Biperiden Hydrochloride Akineton
Benztropine Mesylate Cogentin
Buspirone Hydrochloride BuSpar
Doxepin Hydrochloride Sinequan, Adapin
Fluoxetine Prozac
Fluphenazine Hydrochloride Prolixin
Imipramine Hydrochloride Tofranil
Mercaptopurine Purinethol
Mirtazapine Remeron
Nefazodone Serzone
Paroxetine Paxil
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
Guanfacine Tenex
Hydralazine Hydrochloride Apresoline
Hydra-Zide Apresazide
Indapamide Lozol
Isosorbide Dinitrate Isordil
Lisinopril Zestril
Minoxidil Loniten
Nicardipine Hydrochloride Cardene
Sotalol Hydrochloride Betapace
Torsemide Demadex
6
ANALGESIC/ANTI-INFLAMMATORY:
Aspirin (zero order release) Zorprin
Carisoprodol & Aspirin Soma Compound
Dexamethasone Decadron
Etodolac Lodine
Ibuprofen Advil, Nuprin, Motrin
Orphengesic Norgesic
Orphengesic Forte Norgesic Forte
Oxaprozin Daypro
Tramadol Hydrochloride Ultram
ANTI-BACTERIAL:
Doxycycline Monohydrate Monodox
Minocycline Minocin
Ofloxacin Floxin
Silver Sulfadiazine (SSD) Silvadene
Tetracycline Tablets and Syrup Sumycin
ANTI-DIABETIC:
Metformin Hydrochloride Glucophage
Metformin ER Glucophage XR
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
ANTI-VIRAL:
Acyclovir Zovirax
ANTI-HYPERTHYROID:
Methimazole Tapazole
7
BRONCODILATOR:
Metaproterenol Sulfate Alupent
CHOLESTEROL LOWERING:
Lovastatin Mevacor
Cholestyramine Questran
Cholestyramine Light Questran Light
GENTRO-URINARY (DIURETIC):
Amiloride Hydrochloride Midamor
GLUCORTICOID:
Methylprednisolone Medrol
OVULATION STIMULANT:
Clomiphene Citrate Clomid
From January 1, 2003 to March 1, 2004, the FDA approved ANDAs, filed by
either the Company or its strategic partners, for the following products that
the Company is currently marketing or has the right to market in the future:
benazepril HCL 5 mg, 10 mg, 20 mg and 40 mg tablets; benazepril HCL and HCTZ 5
mg/6.25 mg, 10 mg/12.5 mg, 20 mg/12.5 mg and 20 mg/25 mg tablets; flutamide 125
mg capsules; loratadine 10 mg tablets; mercaptopurine 50 mg tablets; minocycline
50 mg, 75 mg and 100 mg tablets; mirtazapine 15 mg, 30 mg and 45 mg tablets;
nefazodone 50 mg, 100 mg, 150 mg, 200 mg and 250 mg tablets; ofloxacin 200 mg,
300 mg and 400 mg tablets; and torsemide 5 mg, 10 mg, 20 mg and 100 mg tablets.
In fiscal year 2003, the Company also began marketing paroxetine 10 mg, 20 mg,
30 mg and 40 mg tablets through a distribution agreement with GSK. In addition,
the Company began marketing in December 2003 Metformin ER 500 mg tablets as an
authorized generic product through a licensing agreement with BMS. The Company
or its strategic partners received tentative FDA approvals during the same
period for the following drugs: fluconazole tablets 50 mg, 100 mg, 150 mg and
200 mg tablets; and topiramate 25 mg, 100 mg and 200 mg tablets. The Company or
its strategic partners also have tentative FDA approvals, received in prior
periods, for the following products: ciprofloxacin 100 mg, 250 mg, 500 mg and
750 mg tablets; quinapril 5 mg, 10 mg, 20 mg and 40 mg tablets; and zolpidem
tartrate 5 mg and 10 mg tablets.
On July 15, 2003, the U.S. Patent and Trademark Office issued U.S. Patent
Nos. 6,593,318 and 6,593,320 to the Company relating to its unique formulation
of megestrol acetate oral suspension. The Company has two other patents related
to its unique formulation of megestrol acetate oral suspension, U.S. Patent Nos.
6,028,065 and No. 6,268,356, which were granted on February 22, 2000 and July
31, 2001, respectively.
The Company seeks to introduce new products through its internal research
and development program and through joint venture, distribution and other
agreements with pharmaceutical companies located throughout the world. As such,
the Company has pursued and continues to pursue arrangements and relationships
that 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
distribution and supply agreements that it believes are material to its business
are described in "Notes to Consolidated Financial Statements - Note 9 -
Distribution and Supply Agreements". In fiscal year 2003, the Company entered
into several new agreements, which are summarized below.
In connection with the legal settlement referred to in "Notes to
Consolidated Financial Statements - Note 14 - Commitments, Contingencies and
Other Matters-Legal Proceedings", Par and GSK and certain of its affiliates
entered into a license and supply agreement (the "GSK Supply Agreement"), dated
April 16, 2003, pursuant to which Par is marketing paroxetine, supplied and
licensed from GSK, in the United States, including the Commonwealth of Puerto
Rico. Under the GSK Supply Agreement, GSK has agreed to manufacture the product
and Par has agreed to pay GSK a percentage of Par's net sales, as defined in the
agreement. Pursuant to the GSK Supply Agreement, GSK is entitled to suspend
Par's right to distribute paroxetine if at any time another generic version of
Paxil(R) is not being marketed.
8
In November 2002, the Company amended its agreement (the "Pentech Supply
and Marketing Agreement") with Pentech, dated November 2001, to market
paroxetine capsules. Pursuant to the Pentech Supply and Marketing Agreement, the
Company paid all legal expenses up to $2,000, which were expensed as incurred,
to obtain final regulatory approval. Legal expenses in excess of $2,000 were to
be fully creditable against future profit payments to Pentech. The Company had
agreed to reimburse Pentech for its costs associated with the project of up to
$1,300. In fiscal year 2003, the Company paid Pentech $771 of these costs, which
were charged to research and development expenses as incurred. Pursuant to the
Pentech Supply and Marketing Agreement, the Company had agreed to pay Pentech a
percentage of the gross profits, as defined in such agreement, on all its sales
of paroxetine. At this time, the Company is negotiating with Pentech to further
amend the Pentech Supply and Marketing Agreement concerning the gross profits
split, reimbursement of research and development expenses and sharing of legal
expenses related to paroxetine.
RESEARCH AND DEVELOPMENT
The Company's research and development activities consist principally 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 approvals 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; 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 reasons.
The research and development of oral solid and suspension products,
including pre-formulation 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, the 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 to obtain 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 can cost between $100 to $1,000 for each
biostudy. During fiscal year 2003, the Company contracted with outside
laboratories, expending $5,370 to conduct biostudies for 15 potential new
products, and intends to continue to contract for biostudies in the future. In
addition, the Company's share of certain costs for biostudies totaled $1,928 in
fiscal year 2003 for products in development with one if 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
at least 15 products in active development. The Company expects that at least
ten of these products will be the subject of biostudies in fiscal year 2004, 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 unaffiliated
companies for products in various stages of development. Although there can be
no such assurance, annual research and development expenses for fiscal year
2004, including certain payments to unaffiliated companies, are expected to
increase by approximately 50% from fiscal year 2003.
As a result of its internal product development program, the Company
currently has 11 ANDAs pending with the FDA, two of which have received
tentative approval, for potential products that are not subject to any
distribution or profit sharing agreements. In addition, there are 14 ANDAs
pending with the FDA, three of which have received tentative approval, that have
been filed by the Company or its strategic partners for potential products
covered under various distribution agreements. No assurances 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 approvals for any such product, that any
approved product will be produced in commercial quantities or that any approved
product can be sold profitably.
9
In April 2002, the Company purchased FineTech, a research facility based
in Haifa, Israel. 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. FineTech operates as an independent, wholly-owned subsidiary of PRX
and provides immediate chemical synthesis capabilities and strategic
opportunities to the Company and other customers.
In order to supplement its own internal development program, the Company
has entered into development and license agreements with third parties with
respect to the development and marketing of new products and technologies. The
Company's product development agreements that it believes are material to its
business are described in "Notes to Consolidated Financial Statements - Note 8 -
Research and Development Agreements". In fiscal year 2003, the Company (or Par)
entered into the following agreements, which are summarized below.
Par entered into a licensing agreement (the "Advancis Licensing
Agreement"), dated September 4, 2003, with Advancis to market the antibiotic
Clarithromycin XL. Clarithromycin XL is being developed as a generic equivalent
to Abbott's Biaxin XL(R). Pursuant to the Advancis Licensing Agreement, Advancis
will be responsible for the development and manufacture of the product, while
Par will be responsible for marketing, sales and distribution. Provided certain
conditions in the Advancis Licensing Agreement are met, Par agreed to pay
Advancis an aggregate amount of up to $6,000 based on the achievement of certain
milestones contained in the agreement. An ANDA for the product is expected to be
submitted to the FDA in the near future. Pursuant to the Advancis Licensing
Agreement, Par has agreed to pay Advancis a certain percentage of the gross
profits, as defined in the agreement, on all sales if the product is
successfully developed and introduced into the market.
Par and Nortec entered into an agreement, dated October 22, 2003, pursuant
to which the two companies have agreed to develop additional products that are
not part of the two previous agreements between Par and Nortec. During the first
two years of the agreement, Par is obligated to make aggregate initial research
and development payments to Nortec in the amount of $3,000, of which $1,500 was
paid by Par in fiscal year 2003, $1,000 is due in fiscal year 2004 and $500 is
due in fiscal year 2005. On or before October 15, 2005, Par will have the option
to either (i) terminate the arrangement with Nortec, in which case the initial
research and development payments will be credited against any development costs
that Par shall owe Nortec at that time, or (ii) acquire all of the capital stock
of Nortec over the subsequent two years, including the first fifty (50%) percent
of the capital stock of Nortec over the third and fourth years of the agreement
for $4,000, and the remaining capital stock of Nortec from its owners at the end
of the fourth year for an additional $11,000.
On August 6, 2003, Par entered into an agreement with Mead and BMS,
through which Mead agreed to license the use of the Megace(R) trade name in
connection with a potential new product being developed by Par. If successfully
developed, the new product is expected to increase Par's sales of megestrol
acetate oral suspension. Under the terms of the agreement, Par provided funding
to support BMS's active promotion of Megace O/S(R) (megestrol acetate oral
suspension) brand during fiscal year 2003 and agreed to provide funding
throughout 2004 to help retain its brand awareness among physicians. Megace
O/S(R) is indicated for the treatment of anorexia and cachexia, the unexplained
weight loss in patients diagnosed with acquired immune deficiency syndrome
(AIDS). Par also will make certain payments to Mead, including royalties, based
on net sales of the new product.
MARKETING AND CUSTOMERS
The Company markets its products under the Par label principally 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.
10
The Company has approximately 140 customers, some of which are part of
larger buying groups. During fiscal year 2003, the Company's four largest
customers in terms of net sales dollars, Cardinal Health, Inc.,
AmerisourceBergen Corporation, McKesson Drug Co. and Walgreen Co., accounted for
approximately 17%, 13%, 11% and 11%, respectively, of its total revenues. In
fiscal year 2002, the Company's four largest customers in terms of net sales
dollars, McKesson Drug Co., Cardinal Health, Inc., AmerisourceBergen Corporation
and Walgreen Co. accounted for approximately 17%, 16%, 15% and 10%,
respectively, of its total revenues. The Company does not have written
agreements with any of these customers and 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 effect on the Company's operating results,
prospects and financial condition (see "Notes to Consolidated Financial
Statements - Note 3 -Accounts Receivable-Major Customers").
ORDER BACKLOG
The approximate dollar amount of open orders, believed by management to be
firm, at December 31, 2003, was $34,800, as compared to $18,185 at December 31,
2002 and $12,800 at December 31, 2001. Although open orders are subject to
cancellation without penalty, management expects that it will fill substantially
all of such open orders at December 31, 2003 in the near future.
COMPETITION
The pharmaceutical industry is highly competitive. Most of the Company's
significant competitors have longer operating histories and greater financial,
research and development, marketing and other resources. Consequently, many of
the Company's competitors may develop products and/or processes competitive
with, or superior to, those of the Company. Furthermore, the Company may not be
able to differentiate its products from its competitors, successfully develop or
introduce new products that are less costly than those of its competitors or
offer purchasers of its products payment and other commercial terms as favorable
as those offered by its competitors. The Company believes its principal generic
competitors are Mylan Laboratories, Inc., Teva Pharmaceutical Industries
Limited, Watson Pharmaceuticals, Inc., Barr Laboratories, Inc., Apotex, Eon
Labs, Inc., Geneva Pharmaceuticals, Inc. and Roxane Laboratories, Inc.
("Roxane"). The Company's principal strategy in addressing its competition is to
offer customers a consistent supply of a broad line of generic drugs at
competitive pricing. There can be no assurance, however, that this strategy will
enable the Company to continue to compete successfully in the industry or that
it will be able to develop and implement any new or additional viable
strategies.
Certain manufacturers of brand name drugs and/or their affiliates have
introduced generic pharmaceutical products equivalent to their brand name drugs
at relatively lower prices or partnered with generic companies to introduce
generic products. Such actions have the effect of reducing the potential market
share and profitability of generic products developed by the Company and may
inhibit it from developing and introducing generic pharmaceutical products
comparable to certain brand name drugs.
The Company also faces significant price competition generally as other
generic manufacturers enter the market, and as a result of consolidation among
wholesalers and retailers and the formation of large buying groups, any of
which, in turn, could result in reductions in sales prices and gross margin.
This increased price competition has led to an increase in customer demand for
downward price adjustments by the manufacturers of generic pharmaceutical
products, including the Company, for certain products that have already been
delivered. There can be no assurance that such price reductions for these
products or others, will not continue, or even increase, with a consequent
material adverse effect on the Company's revenues and gross margin.
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 manufacturer 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, price declines have 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 customer's remaining inventory at the
expiration of the exclusivity period. As a result, the total price protection
that the Company will credit customers at the expiration of an exclusivity
11
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 that customers have at the expiration of the exclusivity period.
The 180-day marketing exclusivity period in respect of fluoxetine 10 mg
and 20 mg tablets, which Par sells pursuant to a distribution agreement with
Genpharm Inc. ("Genpharm"), a Canadian subsidiary of Merck KGaA, and the 180-day
marketing exclusivity period granted in respect of fluoxetine 40 mg capsules,
which Par sells pursuant to an agreement with Dr. Reddy's Laboratories, Ltd.
("Dr. Reddy"), both expired at the end of January 2002. In addition, the 180-day
marketing exclusivity period granted to the Company by the FDA in respect of
megestrol acetate oral suspension, which is not subject to any profit sharing
agreement, expired in mid-January 2002. As the Company expected, additional
generic competitors, with products comparable to all three strengths of its
fluoxetine products, began entering the market in the first quarter of 2002,
eroding the pricing that the Company had received during the exclusivity
periods, particularly on the 10 mg and 20 mg strengths. Nevertheless, the
Company maintained a significant market share for fluoxetine 40 mg capsules and,
despite FDA approvals obtained for two competing generic megestrol acetate oral
suspension products in the first quarter of 2002 and the second quarter of 2003,
the Company also maintained a significant market share for megestrol acetate
oral suspension as of December 31, 2003. Although megestrol acetate oral
suspension and fluoxetine 40 mg capsules are expected to continue to contribute
significantly to the Company's overall performance in fiscal year 2004, the
growth of the Company's product line through new product introductions has
somewhat reduced the Company's reliance on these products.
The Company understands that other generic drug manufactures have filed
ANDAs in respect of paroxetine and that the marketing exclusivity period in
respect thereof ended on March 8, 2004 but, at this time, cannot predict the
timing of launches by these competitors or the potential effects on its sales.
The principal competitive factors in the generic pharmaceutical market
include: (i) introduction of other generic drug manufacturers' products in
direct competition with the Company's products, (ii) consolidation among
distribution outlets through mergers and 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) the willingness of generic drug customers,
including wholesale and retail customers, to switch among pharmaceutical
manufacturers, (v) pricing pressures and product deletions by competitors, (vi)
a company's reputation as a manufacturer of quality products, (vii) a company's
level of service (including maintaining sufficient inventory levels for timely
deliveries), (viii) product appearance and (ix) a company's 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 while a
new supplier becomes qualified by the FDA and its manufacturing process is found
to meet FDA standards could, depending on the particular product, 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 providing for, where economically and otherwise feasible, two or
more suppliers of raw materials for the drugs it manufactures. In addition, the
Company may attempt to enter into a contract with a raw material supplier in an
effort to ensure adequate supply for its products.
EMPLOYEES
At December 31, 2003, the Company had 531 employees compared to 456 and
393, respectively, at December 31, 2002 and 2001. The increased headcount levels
in fiscal years 2003 and 2002, primarily in the research and development and
administrative functions, reflect the continued growth of the Company from
fiscal year 2001.
12
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 (the "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.
Non-compliance 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 applicable government authority to enter into supply contracts or to
approve new drug applications. The FDA also has the authority to withdraw its
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 brand name drug, may 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.
In order 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"). Because the safety and efficacy of listed
drugs 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
anti-fungals), 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
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
13
reduction of the effective market life of the patented drug resulting from the
time spent 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
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 lives to already issued patents, thus delaying FDA approvals of
applications for generic products.
FDA issued a final rule on June 18, 2003, which became effective on August
18, 2003, streamlining the generic drug approval process by limiting a drug
company to only one 30-month stay of a generic drug's entry into the market for
resolution of a patent challenge. This will help maintain a balance between the
innovator companies intellectual property rights and the desire to get generic
drugs on the market in a timely fashion.
The rule clarifies the types of patents that innovators must submit for
listing and prohibits the submission of patents claiming packaging,
intermediates or metabolite innovations. Patents claiming a different
polymorphic form of the active ingredient described in a NDA must be submitted
if the NDA holder has test data demonstrating that the drug product containing
the polymorph will perform in the same way as the drug product described in the
NDA. These changes are consistent with concerns raised in 2002 by the FTC in its
report on generic drugs. The final rule also clarifies the type of patent
information required to be submitted and revises the declaration that NDA
applicants must provide regarding their patents to help ensure that NDA
applicants submit only appropriate patents.
The final rule is intended to make the patent submission and listing
process more efficient, as well as enhance the ANDA and 505(b)(2) application
approval process. The changes are designed to enable consumers to save billions
of dollars each year by making it easier for generic drug manufacturers to get
safe and effective products on the market when the appropriate patent protection
expires.
In addition to the federal government, various 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 its operations are located and/or it conducts
business.
Certain activities of the Company may also be subject to FTC enforcement.
The FTC enforces a variety of antitrust and consumer protection laws designed 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.
As a public company, the Company is subject to the recently enacted
Sarbanes-Oxley Act of 2002 (the "SOX Act"), including regulations to be
promulgated thereunder. The SOX Act contains a variety of provisions affecting
public companies, including the relationship with its auditors, prohibiting
loans to executive officers and requiring an evaluation of its 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 agreements with various states.
ITEM 2. PROPERTIES.
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The Company owns an approximately 92,000 square foot facility built to
Par's specifications that contains its manufacturing and domestic research and
development operations. The building, occupied by Par since fiscal year 1986,
14
also includes packaging and warehouse facilities. The building is located in
Spring Valley, New York, on an approximately 24 acre parcel of land, of which
approximately 15 acres are available for future expansion.
The Company owns another facility in Spring Valley, New York, across the
street from its manufacturing facility, occupying approximately 36,000 square
feet on two acres. This property was acquired in fiscal year 1994 and was
remodeled in fiscal year 2003 for use as research and quality control
laboratories and additional office space.
Par owns a third facility (the "Congers Facility") of approximately 33,000
square feet located on six acres in Congers, New York. In March 1999, Par
entered into an agreement to lease the Congers Facility and related machinery
and equipment to Halsey Drug Co., Inc. ("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 2002 and 1999. The lease
agreement provides for annual fixed rent of $600 per year during its two-year
renewal period.
In fiscal year 2003, the Company moved 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 such 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 in
December 2004. The Company has the option to extend the lease for two additional
five-year periods.
The Company leases office space in Woodcliff Lake, New Jersey covering
approximately 41,000 square feet. The lease expires in January 2010. This
facility houses the majority of the Company's administrative functions.
FineTech entered into a lease in March 2003 covering approximately 11,000
square feet of a building in Nesher, Israel, which contains its laboratories and
administrative offices. The term of the lease is for nine years and 11 months,
with an additional two-year and 11-month renewal period.
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 - Note 14 - Commitments, Contingencies and
Other Matters-Leases").
ITEM 3. LEGAL PROCEEDINGS.
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On September 25, 2003, the Office of the Attorney General of the
Commonwealth of Massachusetts filed a complaint in federal district court in
Boston against Par and 12 other leading generic pharmaceutical companies
alleging principally that Par and such other companies violated, through their
marketing and sales practices, state and federal laws, including allegations of
common law fraud and violations of Massachusetts false statements statutes, by
inflating generic pharmaceutical product prices paid for by the Massachusetts
Medicaid program. The Company has waived service of process with respect to the
complaint. The complaint seeks injunctive relief, treble damages, disgorgement
of excessive profits, civil penalties, reimbursement of investigative and
litigation costs (including experts' fees) and attorneys' fees. In addition, on
September 25, 2003, the Company and a number of other generic and brand
pharmaceutical companies were sued by a New York county, which has alleged
violations of laws (including the Racketeer Influenced and Corrupt Organizations
Act, common law fraud and obtaining funds by false statements), related to
participation in the Medicaid program. The complaint seeks declaratory relief;
actual, statutory and treble damages, with interest; punitive damages; an
accounting; a constructive trust and restitution; attorneys' and experts' fees
and costs. This case was transferred to the District of Massachusetts for
coordinated and consolidated pretrial proceedings. Par and the other defendants
involved in the litigation filed a motion to dismiss on January 29, 2004. Par
intends to defend vigorously the claims asserted in both complaints. The Company
cannot predict with certainty at this time the outcome or the effect on the
Company of such litigations. Accordingly, no assurance can be given that such
litigations or any other similar litigation by other states or jurisdictions, if
instituted, will not have a material adverse effect on the Company's financial
condition, results of operations, prospects or business.
15
In October 2003, Apotex filed a complaint against Par in the United States
District Court for the Eastern District of Pennsylvania alleging violations of
state and federal antitrust laws as a result of the Company's settlement with
GSK and the GSK Supply Agreement. Par filed a motion to dismiss the action in
its entirety in December 2003 and a briefing on that motion is expected to be
completed in April 2004. Par intends to defend vigorously this action, and may
assert counterclaims against Apotex and claims against third parties.
In August 2003, Teva Pharmaceuticals USA, Inc. ("Teva USA") filed a
lawsuit against the Company and Par in the United States District Court for the
District of Delaware, after having received approval from the FDA to launch a
generic version of BMS's Megace(R), which generic product will compete with the
Company's megestrol acetate oral suspension product. In the lawsuit, Teva USA
seeks a declaration that its product has not infringed and will not infringe any
of Par's four patents relating to megestrol acetate oral suspension. On August
22, 2003, Par filed a counterclaim against Teva USA alleging willful
infringement of one of its four patents relating to megestrol acetate oral
suspension and moved to dismiss the action with respect to the other three
patents for lack of subject matter jurisdiction. The Company intends to pursue
its counterclaim against Teva USA and to vigorously defend the lawsuit. A trial
date has been scheduled by the Court for April 2005.
On July 15, 2003, the Company and Par (collectively, "Par") filed a
lawsuit against Roxane in the United States District Court for the District of
New Jersey. Par alleged that Roxane infringed Par's U.S. Patents numbered
6,593,318 and 6,593,320 relating to megestrol acetate oral suspension. Roxane
has denied these allegations and has counterclaimed for declaratory judgments of
non-infringement and invalidity of both patents.
On May 28, 2003, Asahi Glass Company ("Asahi Glass") filed a lawsuit
against Par and several other parties in the United States District Court for
the Northern District of Illinois alleging, among other things, violations of
state and federal antitrust laws relating to the settlement of GSK's patent
action against Pentech in respect of paroxetine. Pentech had granted Par rights
under Pentech's ANDA for paroxetine capsules. Pursuant to the settlement,
reached between the parties on April 18, 2003, Pentech and Par acknowledged that
the patent held by GSK is valid and enforceable and would be infringed by
Pentech's proposed capsule product and GSK agreed to allow Par to distribute in
the Commonwealth of Puerto Rico substitutable generic paroxetine immediate
release tablets supplied and licensed from GSK for a royalty payable to GSK. In
addition, Par was granted the right under the settlement to distribute the drug
in the United States if another generic version fully substitutable for Paxil(R)
became available in the United States. Par denied any wrongdoing in connection
with the Asahi Glass antitrust action and filed a motion to dismiss the
complaint on August 22, 2003. In October 2003, the court dismissed all of the
state and federal antitrust claims against Par. The only remaining claim in this
action involving Par is a state law contract claim relating to the payment of
certain attorneys' fees to Asahi Glass in connection with the prior lawsuit. Par
intends to defend vigorously this claim and may assert counterclaims against
Asahi Glass and claims against third parties.
In February 2003, Abbott, Fornier Industrie et Sante and Laboratoires
Fournier S.A. filed a complaint in the United States District Court for the
District of New Jersey against Par, alleging that Par's generic version of
TriCor(R) (fenofibrate) infringes one or more claims of their patents. The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously this lawsuit and has filed an answer and a counterclaim, alleging
non-infringement and patent invalidity. At this time, it is not possible for the
Company to predict the outcome of this litigation with certainty.
On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil")
filed a lawsuit against Kali Laboratories, Inc. ("Kali") in the United States
District Court for the District of New Jersey. Ortho-McNeil alleged that Kali
infringed U.S. Patent No. 5,336,691 (the "`691 patent") by submitting a
Paragraph IV certification to the FDA for approval of tablets containing
tramadol hydrochloride and acetaminophen. Par is Kali's exclusive marketing
partner for these tablets. Kali has denied Ortho-McNeil's allegation, asserting
that the `691 patent was not infringed and is invalid and/or unenforceable, and
that the lawsuit is barred by unclean hands. Kali also has counterclaimed for
declaratory judgments of non-infringement, invalidity, and unenforceability of
the `691 patent.
Breath Ltd. of the Arrow Group filed an ANDA (currently pending with the
FDA) for latanoprost (Xalatan(R)), which was developed by Breath Ltd. pursuant
to a joint manufacturing and marketing agreement with the Company, seeking
approval to engage in the commercial manufacture, sale and use of one
latanoprost drug product in the United States. Par subsequently acquired
ownership of the ANDA, which includes a Paragraph IV certification that the
patents in connection with Xalatan(R) identified in "Approved Drug Products with
Therapeutic Equivalence Evaluations" are invalid, unenforceable and/or will not
16
be infringed by Par's generic version of Xalatan(R). 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 (collectively, "Pharmacia") and
the Trustees of Columbia University in the City of New York ("Columbia"), filed
a lawsuit against Par 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 enjoining approval of the Company's ANDA and
the marketing of its generic product prior to the expiration of their patents.
On February 8, 2002, Par answered the complaint and filed a counterclaim, which
seeks a declaration that the patents-in-suit are invalid, unenforceable and/or
not infringed by Par's products and that the extension of the term of one of the
patents is invalid. All parties are seeking to recover their respective
attorneys' fees. Discovery in the case has now been completed and a pretrial
conference has been scheduled for March 15, 2004. Par intends to defend
vigorously against the claims and to pursue its counterclaim. At this time, it
is not possible for the Company to predict the outcome of this litigation with
certainty.
Par entered into a licensing agreement with developer Paddock Laboratories
("Paddock") to market a generic version of Unimed Pharmaceuticals, Inc.'s
("Unimed") product Androgel(R). The product will be manufactured by Paddock and
marketed by Par. Paddock has filed an ANDA (which is currently pending with the
FDA) for the testosterone 1% gel product. As a result of the filing of the ANDA,
Unimed and Laboratories Besins Iscovesco ("Besins"), co-assignees of the
patent-in-suit, filed a lawsuit against Paddock in the United States District
Court for the Northern District of Georgia alleging patent infringement on
August 22, 2003. Par has an economic interest in the outcome of this litigation
by virtue of its licensing agreement with Paddock. Unimed and Besins are seeking
an injunction to prevent Paddock from manufacturing the generic product. On
November 18, 2003, Paddock answered the complaint and filed a counterclaim,
which seeks a declaration that the patent-in-suit is invalid and/or not
infringed by Paddock's product. This case is currently in fact discovery. At
this time, it is not possible for the Company to predict the outcome of this
action.
The Company and/or Par are parties to certain other litigation matters,
including product liability and patent actions; the Company believes that these
actions are incidental to the conduct of its business and that their 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 or, in cases where the Company is plaintiff, prosecute these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 2003.
17
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
(ticker symbol: PRX). The following table shows the range of the
closing prices for the Common Stock, as reported by the NYSE, for
each calendar quarter during the Company's two most recent fiscal
years.
2003 2002
------------- -------------
QUARTER ENDED (APPROXIMATELY) HIGH LOW HIGH LOW
----------------------------- ----- --- ---- ---
March 31 $42.80 $29.35 $33.20 $16.10
June 30 52.03 37.57 29.00 20.91
September 30 72.30 48.20 28.60 21.85
December 31 74.71 64.30 30.55 20.05
(b) HOLDERS. As of March 10, 2004, there were approximately 1,829 holders
of record of the Company's 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 2003, 2002 and 2001, 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 and is dependent upon many factors, including the Company's
earnings, its capital needs, the terms of any financing agreements
and its financial condition.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
NUMBER OF
SECURITIES TO BE WEIGHTED AVERAGE
ISSUED UPON EXERCISE PRICE
EXERCISE OF OF OUTSTANDING
OUTSTANDING OPTIONS, NUMBER OF SECURITIES
OPTIONS, WARRANTS WARRANTS AND REMAINING AVAILABLE
PLAN CATEGORY AND RIGHTS RIGHTS FOR FUTURE ISSUANCE
-------------- ---------- ------ -------------------
EQUITY COMPENSATION PLANS
APPROVED BY STOCKHOLDERS:
2001 Performance Equity Plan 2,797 $32.45 1,637
1997 Directors Stock Option Plan 139 $25.98 187
1990 Stock Incentive Plan 2 $4.13 -
EQUITY COMPENSATION PLANS NOT
APPROVED BY STOCKHOLDERS:
2000 Performance Equity Plan 438 $6.81 88
--- --
Total 3,376 $28.83 1,912
In fiscal year 2000, the Board 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 stockholder approval. The
2000 Plan provides for the granting of incentive and non-qualified stock
options to employees of the Company and others. The 2000 Plan became
effective on 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% of the total combined voting power of
all the classes of capital stock of the Company.
(e) RECENT STOCK PRICE. On March 10, 2004, the closing price of the
Common Stock on the NYSE was $59.36.
18
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
AS OF AND FOR THE FISCAL YEARS ENDED
12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
-------- -------- -------- -------- --------
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Net product sales $646,023 $380,848 $271,035 $85,022 $80,315
Other product related revenues 15,665 755 - - -
------ ------- ------- ------ ------
Total Revenues 661,688 381,603 271,035 85,022 80,315
Cost of goods sold 378,513 198,313 161,306 62,332 64,140
------- ------- ------- ------ ------
Gross margin 283,175 183,290 109,729 22,690 16,175
------- ------- ------- ------ ------
Operating expenses (income):
Research and development 24,581 17,910 11,113 7,634 6,005
Selling, general and administrative 57,575 40,215 21,878 16,297 13,509
Settlements - (9,051) - - -
Acquisition termination charges - 4,262 - - -
------ ----- ------ ------ ------
Total operating expenses 82,156 53,336 32,991 23,931 19,514
------ ------ ------ ------ ------
Operating income (loss) 201,019 129,954 76,738 (1,241) (3,339)
Other (expense) income (95) (305) (364) 506 906
Interest (expense) income (281) 604 (442) (916) (63)
--- --- --- --- --
Income (loss) before provision
for income taxes 200,643 130,253 75,932 (1,651) (2,496)
Provision for income taxes 78,110 50,799 22,010 - -
------ ------ ------ ----- -----
Net income (loss) $122,533 $79,454 $53,922 $(1,651) $(2,496)
======== ====== ====== ===== =====
Net income (loss) per share of
common stock:
Basic $3.66 $2.46 $1.76 $(.06) $(.08)
===== ==== ==== === ===
Diluted $3.54 $2.40 $1.68 $(.06) $(.08)
===== ==== ==== === ===
Weighted average number of
common shares outstanding:
Basic 33,483 32,337 30,595 29,604 29,461
====== ====== ====== ====== ======
Diluted 34,638 33,051 32,190 29,604 29,461
====== ====== ====== ====== ======
BALANCE SHEET DATA:
Working capital $459,802 $136,305 $102,867 $18,512 $21,221
Property, plant and equipment (net) 46,813 27,055 24,345 23,560 22,681
Total assets 762,812 301,457 216,926 93,844 92,435
Long-term debt, less current portion 200,211 2,426 1,060 163 1,075
Total stockholders' equity 395,081 220,790 138,423 64,779 65,755
19
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, THE INTRODUCTION OF NEW MANUFACTURED, LICENSED AND
DISTRIBUTED PRODUCTS AND RESEARCH AND DEVELOPMENT EXPENDITURES. SUCH STATEMENTS
INVOLVE RISKS, UNCERTAINTIES, TRENDS AND CONTINGENCIES, MANY OF WHICH ARE BEYOND
THE CONTROL OF THE COMPANY AND COULD CAUSE ACTUAL RESULTS AND PERFORMANCE TO
DIFFER MATERIALLY FROM THOSE EXPRESSED HEREIN. THESE STATEMENTS ARE MADE
TYPICALLY BY USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS,"
"ANTICIPATES," "CONTINUING," "COULD," "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, AND THE SUCCESS OF, 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, (x) THE ABILITY OF THE COMPANY TO DIVERSIFY PRODUCT OFFERINGS AND (xi)
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.
THE FINANCIAL DATA CONTAINED IN THIS SECTION IS IN THOUSANDS.
OVERVIEW
Although the Company achieved the most successful year in its history in
fiscal year 2003, there are many industry and economic factors and risks that
can affect the growth of the Company. The most significant of these factors
include: (i) intense competition from brand name and generic manufacturers, (ii)
the Company's introduction of new manufactured and distributed products at
selling prices that generate significant gross margins, (iii) resources and/or
funding available to the Company for the research and development of new
products, (iv) the Company's dependence on a limited number of products and the
duration of those products as significant revenue generators, (v) the actions of
brand name manufacturers to introduce their own generic versions of brand drugs
and to prevent or discourage the use of generic equivalent products or delay
and/or prevent entry of the Company's products into the market through
litigation or other means, (vi) funding available to the Company for litigation
which can be protracted and expensive, (vii) the Company's dependence upon
revenues from products distributed through agreements with third parties and
potential supply disruptions resulting from the inability by third party
suppliers to meet expected demand and (viii) the Company's ability to continue
its licensing of authorized generics from brand companies. As described below,
the Company believes it has a comprehensive business plan in place to address
these challenges and mitigate such risks. In order to secure financing to
support the expansion of its business, the Company obtained additional funds
through the issuance of $200,000 of senior subordinated convertible debt in
September 2003. Implementation of these strategies could also require additional
debt and/or equity financing; there can be no assurance that the Company will be
able to obtain any additional required financing when needed and on terms
acceptable or favorable to it.
The pharmaceutical industry is highly competitive. Many of the Company's
competitors have longer operating histories and greater financial, research and
development, marketing and other resources. Consequently, many of the Company's
competitors may be able to develop products and/or processes competitive with,
or superior to, those of the Company. Furthermore, the Company may not be able
to differentiate its products from those of its competitors, successfully
develop or introduce new products that are less costly than those of its
competitors or offer purchasers of its products payment and other commercial
terms as favorable as those offered by its competitors. The Company's principal
strategy, in addressing its competition, is to offer customers a consistent
supply of a broad line of generic drugs at competitive pricing.
20
Revenues and gross margin derived from generic pharmaceutical products
often follow a pattern based on regulatory and competitive factors believed to
be unique to the generic pharmaceutical industry. As the patent(s) for a brand
name product and the related exclusivity period expires, the first generic
manufacturer to receive regulatory approval for a generic equivalent of the
product is often able to capture a substantial share of the market. However, as
other generic manufacturers receive regulatory approvals for competing products,
that market share, and the price of that product, will typically decline
depending on several factors, including the number of competitors, the price of
the brand product and the pricing strategy of the new competitors. A large
portion of the Company's revenues has been derived from the sales of generic
drugs during the 180-day marketing exclusivity period and from the sale of
generic products where there is limited competition. The Company, through its
internal development program and strategic alliances and relationships, is
committed to developing new products that have limited competition and longer
product life cycles. In addition to expected new product introductions as part
of its various strategic alliances and relationships, the Company plans to
continue to invest significantly in its internal research and development
efforts while, at the same time, seeking additional products for sale through
new and existing distribution agreements or acquisitions of complementary
products and businesses, additional first-to-file opportunities, selective
vertical integration with raw material suppliers and unique dosage forms to
differentiate its products in the marketplace.
In addition to its own product development program, the Company has
several strategic alliances through which it co-develops and distributes
products. These strategic alliances offer the Company many advantages including
additional resources for increased activity, expertise for dissimilar products
or technologies, and a sharing of both the costs and risks of new product
development. As a result of its internal program and these strategic alliances,
the Company's pipeline of potential products includes 25 ANDAs (five of which
have been tentatively approved), pending with, and awaiting approval from, the
FDA. The Company pays a percentage of the gross profits or sales to its
strategic partners on sales of products covered by its distribution agreements.
Generally, products that the Company develops internally, without having to
split any profits with its strategic partners, contribute higher gross margins
than products covered under distribution agreements. The Company is engaged in
efforts, subject to FDA approval and other factors, to introduce new products
through its research and development efforts and distribution and development
agreements with third parties.
In fiscal year 2003, the Company obtained the marketing rights to
paroxetine, the generic version of GSK's Paxil(R), in connection with the GSK
Settlement between the Company, GSK and certain of its affiliates, and Pentech.
As a result of the settlement, Par and GSK entered into the GSK Supply
Agreement, pursuant to which Par began marketing paroxetine, supplied and
licensed from GSK, in the United States in September 2003 and the Commonwealth
of Puerto Rico in May 2003. The GSK Settlement also provides that the Company's
right to distribute paroxetine will be suspended if at any time there is not
another generic version fully substitutable for Paxil available for purchase in
the United States. On September 8, 2003, another generic drug manufacturer,
Apotex, launched a generic version of Paxil(R). GSK has sued Apotex for patent
infringement and is currently appealing a district court decision adverse to
GSK. In April 2002, GSK launched a longer-lasting, newly patented version of the
drug, Paxil CR(R). The Company expects Paxil CR(R)'s market share to continue to
grow in fiscal year 2004, which may cause the Company's sales of paroxetine
tablets to decrease. The Company understands that other generic drug
manufactures have filed ANDAs in respect of paroxetine and that the marketing
exclusivity period ended on March 8, 2004 but, at this time, cannot predict the
timing of launches by these competitors or the potential effect of such
competition on its sales.
The 180-day marketing exclusivity period in respect of fluoxetine 10 mg
and 20 mg tablets, which Par sells pursuant to a distribution agreement with
Genpharm, and the 180-day marketing exclusivity period granted in respect of
fluoxetine 40 mg capsules, which Par sells pursuant to a development and supply
agreement with Dr. Reddy, both expired at the end of January 2002. In addition,
the 180-day marketing exclusivity period granted to the Company by the FDA in
respect of megestrol acetate oral suspension, which is not subject to any profit
sharing agreement, expired in mid-January 2002. As the Company expected,
additional generic competitors, with products comparable to all three strengths
of its fluoxetine products, began entering the market in the first quarter of
2002, eroding the pricing that the Company had received during the exclusivity
periods, particularly on the 10 mg and 20 mg strengths. Nevertheless, the
Company maintained a significant market share for fluoxetine 40 mg capsules and,
despite FDA approvals for two competing generic megestrol acetate oral
suspension products received in the first quarter of 2002 and the second quarter
of 2003, the Company also maintained a significant share of the market for
megestrol acetate oral suspension as of December 31, 2003. Although megestrol
acetate oral suspension and fluoxetine 40 mg capsules are expected to continue
to contribute significantly to the Company's overall performance in fiscal year
21
2004, the growth of the Company's product line through new product introductions
has somewhat reduced the Company's reliance on these products.
In fiscal year 2003, the Company's top four selling products accounted for
approximately 61% of its total revenues, as compared to 56% and 70%,
respectively, of its total revenues in fiscal years 2002 and 2001. One of the
products, paroxetine, which the Company began marketing in fiscal year 2003, was
not one of the top four products in either of the preceding years and accounted
for approximately 29% of the Company's total 2003 revenues and a significant
portion of its gross margin. The aggregate net sales and gross margins generated
by two other products, fluoxetine and megestrol acetate oral suspension,
accounted for a significant portion of the Company's overall revenues and gross
margins in all three fiscal years and any reduction in pricing for these
products, without the addition of new products, could adversely affect the
Company's overall financial performance. The percentage of the Company's total
revenues that these two products represent, excluding paroxetine, has decreased
to 38% in fiscal year 2003 from 44% and 61%, respectively in fiscal years 2002
and 2001. Although there can be no such assurance, the Company anticipates
continuing to introduce new products in fiscal year 2004 while seeking to
increase sales of certain existing products in an effort to offset sales and
gross margin declines resulting from competition on any of its significant
products. The Company seeks to reduce its financial dependence with respect to
the top four products, by adding additional products through, its internal
development program, new and existing distribution agreements or acquisitions of
complementary products or businesses.
Litigation concerning patents and proprietary rights is often protracted
and expensive. Pharmaceutical companies with patented brand products are
increasingly suing companies that produce generic forms of their patented brand
name products for alleged patent infringement or other violations of
intellectual property rights, which may delay or prevent the entry of such
generic products into the market. Generally, a generic drug may not be marketed
until the applicable patent(s) on the brand name drug expires. When an ANDA is
filed with the FDA for approval of a generic drug, the filing person may either
certify that the patent listed by the FDA as covering the generic product is
about to expire, in which case the ANDA will not become effective until the
expiration of such patent, or that the patent listed as covering the generic
drug is invalid or will not be infringed by the manufacture, sale or use of the
new drug for which the ANDA is filed. Under either circumstance, there is a risk
that a branded pharmaceutical company may sue the filing person for alleged
patent infringement or other violations of intellectual property rights. Also,
other companies that compete with the Company by manufacturing, developing
and/or selling the same generic pharmaceutical products may similarly file
lawsuits against the Company or its strategic partners claiming patent
infringement or invalidity. Because substantially all of the Company's business
involves the marketing and development of off-patent products, the threat of
litigation, the outcome of which is inherently uncertain, is always present.
Such litigation is often costly and time consuming, and could result in a
substantial delay in, or prevent, the introduction and/or marketing of products,
which could have a material adverse effect on the Company's business, condition
(financial and other), prospects and results of operations.
The Company's strategy to broaden its product line also includes the
licensing of authorized generic products from brand companies. On November 28,
2003, the Company commenced shipment of substitutable generic metformin
hydrochloride extended-release tablets supplied and licensed from BMS. Release
of the metformin hydrochloride extended-release tablets occurred simultaneously
with the release of this product by another generic company. Metformin
hydrochloride extended-release tablets are the generic version of BMS's
Glucophage XR(R) tablets, which is used in the treatment of type 2 diabetes.
The Company has broadened its product line by entering into distribution
and marketing agreements, as well as contract manufacturing agreements, through
which it distributes generic pharmaceutical products manufactured by others. The
Company has entered into distribution agreements with several companies to
develop, distribute and promote such generic pharmaceutical products. The
Company cannot give assurance that the efforts of its contractual partners will
continue to be successful or that it will be able to renew such agreements or
that it will be able to enter into new agreements with additional companies. Any
alteration to or termination of the Company's current material distribution and
marketing agreements, or any failure to enter into new and similar agreements,
could materially adversely affect its business, condition (financial and other),
prospects or results of operations. The Company seeks to mitigate potential
supply issues from its third-party suppliers through regular communication and
planning or entering into contracts when possible.
22
RESULTS OF OPERATIONS
GENERAL
The Company's net income of $122,533 in fiscal year 2003 increased $43,079
from $79,454 in fiscal year 2002. Total revenues of $661,688 in 2003 increased
$280,085 from $381,603 in fiscal year 2002, driven primarily by additional net
sales of new products introduced in 2003. The revenue growth produced higher
gross margin dollars in 2003, which increased $99,885 to $283,175, from $183,290
in fiscal year 2002. In addition, the Company continued to invest significantly
in its research and development activities and infrastructure. Spending of
$24,581 on research and development for fiscal year 2003 increased 37% from
$17,910 for fiscal year 2002, while selling, general and administrative costs of
$57,575 for fiscal year 2003 increased $17,360 from the prior year. The Company
believes that the increased costs will be required to support its future growth.
In addition, the Company recorded a charge of $3,712 in selling, general and
administrative expenses in 2003 related to a retirement package for the
Company's former chairman, president and chief executive officer. Fiscal year
2002 results include income from settlements of $9,051 related to the Company's
termination of its litigation with BMS and acquisition termination charges of
$4,262 in connection with its termination of negotiations with International
Specialty Products ("ISP") related to the Company's then proposed purchase of
the combined ISP FineTech fine chemical business based in Haifa, Israel and
Columbus, Ohio.
The Company also 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 fiscal year 2002 increased $25,532 from $53,922 for fiscal year
2001. Net income in 2001 included the favorable impact on the tax provision
related to the reversal of a previously established valuation allowance of
$9,092 related to net operating loss ("NOL") carryforwards. Net sales of
$381,603 in fiscal year 2002 increased $110,568, or 41%, from fiscal year 2001.
The increased revenues were primarily the result of new product introductions in
fiscal year 2002 combined with the success of megestrol acetate oral suspension,
introduced in the third quarter of 2001. The increase in revenues was achieved
despite lower sales of fluoxetine 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
development partners, and additional legal fees, personnel costs, product
liability insurance and shipping costs associated with new product launches.
Sales and gross margins of the Company's products are principally
dependent upon (i) the pricing practices of competitors or their removal of
competing products from the market, (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) the approval of ANDAs and
introduction of new manufactured products, (ix) the granting of potential
marketing exclusivity periods, (x) the extent of market penetration for the
existing product line and (xi) the level and amount of customer service (see
"Business-Competition").
REVENUES
Total revenues of $661,688 for fiscal year 2003 increased $280,085, or
73%, from $381,603 for fiscal year 2002. The revenue growth in 2003 was driven
largely by the September 2003 introduction of paroxetine in the United States,
sold through the GSK Supply Agreement, which totaled approximately $192,500 in
net sales for fiscal year 2003. Additionally, net sales of other new products,
including metformin ER (Glucophage XR(R)), introduced in December 2003 and sold
under a distribution agreement with BMS, tizanidine (Zanaflex(R)), introduced in
July 2002 and sold under a distribution agreement with Dr. Reddy, torsemide
(Demadex(R)) and minocycline (Minocin(R)), introduced in the second quarter of
2003 and manufactured by the Company, contributed to the revenue growth in 2003.
Net sales of fluoxetine and megestrol acetate oral suspension were approximately
$91,100 and $88,200, respectively, for the most recent year, reflecting a small
increase over the prior fiscal year. Net sales of distributed products, which
consist of products manufactured under contract and licensed products, were
23
approximately 69% and 60%, respectively, of the Company's total revenues in
fiscal years 2003 and 2002. The Company is substantially dependent upon
distributed products for its overall sales and, as the Company continues to
introduce new products under its distribution agreements, it expects that this
dependence will continue. Any inability by suppliers to meet expected demand
could adversely affect the Company's future sales.
At this time, it is difficult to predict with accuracy the effects of
potential competition on future sales of paroxetine. Several market
uncertainties currently exist including the possibility and timing of additional
generic competitors entering the market or the ability of GSK, under the GSK
Supply Agreement, to suspend Par's right to distribute paroxetine if at any time
another generic version of Paxil(R) is not being marketed.
Two generic competitors have been granted FDA approval to market generic
versions of megestrol acetate oral suspension since the expiration of the
Company's 180-day marketing exclusivity period, but, as of December 31, 2003,
did not have a significant effect on the Company's net sales of the product. At
this time, the Company cannot accurately predict the effect the generic
competition will have on future periods; however, the Company believes that
megestrol acetate oral suspension will be a significant sales and gross margin
contributor in fiscal year 2004, despite the competition. The Company will
continue to evaluate the effects of such competition and will record a price
protection reserve when, if and to the extent it deems necessary.
As a result of generic competition beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing exclusivity period,
the sales price for fluoxetine had substantially declined from the price that
the Company had charged during the exclusivity period. Accordingly, the
Company's sales and gross margins generated by fluoxetine following the
expiration of the exclusivity period were adversely affected. Despite pricing
declines, fluoxetine 40 mg continued to be a significant sales and gross margin
contributor in fiscal year 2003. If additional competitors enter the market in
fiscal year 2004, the Company expects that its sales and gross margins for the
product will decline.
Pursuant to an agreement with Genpharm, the Company receives a portion of
the profits, as defined in the agreement, generated from Kremers Urban
Development Co.'s ("KUDCo"), a subsidiary of Schwarz Pharma AG of Germany, sale
of omeprazole, the generic version of Astra Zeneca's Prilosec(R). In the third
quarter of 2003, two generic competitors began selling forms of omeprazole that
also compete with the prescription form of Prilosec(R), significantly reducing
the Company's share of profits related to omeprazole from approximately $12,800
for the first six months of fiscal year 2003 to $2,900 for the remainder of the
year. The Company expects that the impact of this competition will continue to
have an adverse effect on its omeprazole revenues in future periods.
Total revenues of $381,603 for fiscal year 2002 increased $110,568, or
41%, from total revenues in fiscal year 2001. The revenue increase was primarily
due to higher net sales of megestrol acetate oral suspension, introduced in late
July 2001, new products introduced in fiscal year 2002, particularly tizanidine
(Zanaflex(R)), metformin (Glucophage(R)), flecainide (Tambocor(R)) and
nizatidine (Axid(R)), sold under distribution agreements with Reddy or Genpharm,
and the addition of five BMS brand products, sold pursuant to an agreement with
BMS. Net sales of fluoxetine and megestrol acetate oral suspension in fiscal
year 2002 were $85,800 and $83,000, respectively, compared to $122,300 and
$43,900, respectively, in the prior year. Net sales of distributed products
represented approximately 60% and 66%, respectively, of the Company's total
revenues in fiscal years 2002 and 2001.
GROSS MARGINS
The Company's gross margin of $283,175 (43% of total revenues) for fiscal
year 2003 increased $99,885 from $183,290 (48% of total revenues) for fiscal
year 2002. The gross margin dollar increase was achieved primarily as a result
of contributions from sales of new products, as described above, and, to a
lesser extent, higher sales of certain existing products and additional revenues
from omeprazole pursuant to an agreement with Genpharm. In accordance with the
GSK Settlement and the Pentech Supply and Marketing Agreement, Par pays
royalties to GSK and Pentech on sales of paroxetine. As a result of these
arrangements, the gross margin as a percentage of total revenues declined as net
sales of paroxetine after profit splits yielded a significantly lower gross
margin percentage than the Company's average gross margin as a percentage of
total revenues of its other products over the last three fiscal years.
24
In fiscal year 2003, a higher gross margin contribution from fluoxetine 40
mg due to increases in net sales and in the Company's profit sharing percentage
under its agreement with Dr. Reddy following the end of the Company's
exclusivity period more than offset lower gross margin contributions from
fluoxetine 10 mg and 20 mg tablets, which are subject to profit sharing
agreements with Genpharm. As discussed above, additional generic manufacturers
introduced and began marketing comparable fluoxetine products following the
expiration of the Company's exclusivity period in January 2002, adversely
effecting the Company's sales volumes, selling prices and gross margins for the
products, particularly the 10 mg and 20 mg strengths. The Company's gross margin
for paroxetine, megestrol acetate oral suspension and fluoxetine 40 mg could
also decline when, and as, additional manufacturers introduce and market
comparable generic products.
The Company's gross margin for fiscal year 2002 of $183,290 (48% of total
revenues) increased $73,561 from $109,729 (40% of total revenues) 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 approximately
$33,600 in additional gross margin for fiscal year 2002 when compared to fiscal
year 2001. The effects of gross margin declines resulting from lower pricing on
the fluoxetine 40 mg capsule were partially offset by an increase in the
Company's profit sharing percentage under an agreement with Dr. Reddy. Although
net 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 tablets.
Inventory write-offs were $3,059, $3,096 and $1,790, respectively, for
fiscal years 2003, 2002 and 2001. The inventory write-offs, taken in the normal
course of business, were related primarily to the disposal of finished products
due to short shelf lives and work in process inventory not meeting the Company's
quality control standards. The write-offs in fiscal year 2002 included the
write-off of inventory for a product whose launch was delayed due to unexpected
patent issues and certain raw material not meeting the Company's quality control
standards. The increase from fiscal year 2001 was primarily attributable to
normally occurring write-offs resulting from increased production required to
meet higher sales and inventory levels. The Company maintains inventory levels
that it believes are appropriate to optimize customer service.
OPERATING EXPENSES/INCOME
RESEARCH AND DEVELOPMENT
Research and development expenses of $24,581 for fiscal year 2003
increased $6,671, or 37%, from $17,910 for fiscal year 2002. The higher expenses
were primarily attributable to biostudies, including the Company's share of
Genpharm's biostudy costs for products covered under their distribution
agreements. In addition, higher costs were incurred for raw material and
additional personnel to support increased research and development activity in
fiscal year 2003 and in the future.
Although there can be no such assurance, the Company expects its total
annual research and development expenses for fiscal year 2004 to exceed the
total for fiscal year 2003 by approximately 50%. The increase is expected as a
result of increased internal development activity, third-party projects and
research and development joint venture activity.
The Company currently has 11 ANDAs for potential products (two tentatively
approved) pending with, and awaiting approval from, the FDA as a result of its
own product development program. In fiscal year 2004, the Company expects that
at least ten of the potential products in active development will be the
subjects of biostudies throughout fiscal year 2004.
The Company and Genpharm have entered into a distribution agreement (the
"Genpharm 11 Product Agreement"), dated April 2002, pursuant to which Genpharm
is developing products and submitting the corresponding ANDAs to the FDA and,
subsequently, has agreed to manufacture the potential products covered under the
Agreement. Par will serve as the 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 by this Agreement. Currently,
there is one ANDA for a potential product that is covered by the Genpharm 11
Product Agreement pending with, and awaiting approval from, the FDA. The Company
is currently marketing one product and receiving royalties on another product
covered under the Genpharm 11 Product Agreement.
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The Company and Genpharm have also entered into a distribution agreement
(the "Genpharm Distribution Agreement"), dated March 25, 1998. Under the
Genpharm Distribution Agreement, Genpharm pays the research and development
costs