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, 2004
Commission File Number: 1-10827
PAR PHARMACEUTICAL COMPANIES, 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.)
300 TICE BOULEVARD, WOODCLIFF LAKE, NEW JERSEY 07677
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 802-4000
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.
Preferred Share Purchase Rights The New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934:
None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in a definitive proxy or information
statement 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
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The aggregate market value of the common equity held by non-affiliates of
the Registrant was $1,170,982,543 as of July 3, 2004 (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
7, 2005: 33,957,063
Part III of this Form 10-K incorporates by reference certain portions of the
Registrant's proxy statement for its 2005 Annual Meeting of Stockholders to be
filed within 120 days after December 31, 2004.
TABLE OF CONTENTS
PAR PHARMACEUTICAL COMPANIES, INC.
FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2004
PAGE
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PART I
Item 1 Business...........................................................3
Item 2 Properties........................................................12
Item 3 Legal Proceedings.................................................13
Item 4 Submission of Matters to a Vote of Security Holders...............14
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities...............15
Item 6 Selected Financial Data...........................................17
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................20
Item 7A Quantitative and Qualitative Disclosures about Market Risk........33
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...........................................34
Item 9B Other Information.................................................35
PART III
Item 10 Directors and Executive Officers of the Registrant................36
Item 11 Executive Compensation............................................36
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................36
Item 13 Certain Relationships and Related Transactions....................36
Item 14 Principal Accountant Fees and Services............................36
PART IV
Item 15 Exhibits and Financial Statement Schedules........................37
SIGNATURES...................................................................43
2
PART I
ITEM 1. BUSINESS.
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GENERAL
Par Pharmaceutical Companies, 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. On June 10, 2004, the Company
acquired Kali Laboratories, Inc. ("Kali"), a generic pharmaceutical research and
development company located in Somerset, New Jersey, which has been integrated
with Par's internal research and development program. The Company's principal
executive offices are now located at 300 Tice Boulevard, Woodcliff Lake, NJ
07677, and its telephone number at such address is (201) 802-4000. 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 "SEC"), including the Company's
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and any amendments to these reports, available through its website,
free of charge, as soon as practicable after it files or furnishes them with the
SEC. Information on the website is not, and should not be construed to be, 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 sold generally 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 generic prescription drugs consisting
of 187 products representing various dosage strengths for 80 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 one oral suspension product and one product in the semi-solid form of a
cream. The Company develops and manufactures some of its own products and has
strategic alliances and relationships with several pharmaceutical and chemical
companies that provide the Company with products for sale through various
distribution, manufacturing, development and licensing agreements.
As part of the Company's business plan to sustain future growth, the
Company has recently expanded its efforts in developing new dosage strengths and
drug delivery forms through a specialty pharmaceutical product line it believes
will improve existing pharmaceutical products. The Company believes that these
potential brand products will have limited competition, longer product life
cycles and higher profitability than its existing products. Following this
strategy, the Company submitted its first New Drug Application ("NDA") on June
29, 2004, pursuant to Section 505(b)(2) of the Federal Food, Drug, and Cosmetic
Act (the "FFDC Act"), seeking marketing clearance for megestrol acetate oral
suspension NanoCrystal(R) Dispersion ("NCD") and began to assemble a sales force
to detail its branded drug products. In addition to this strategy, the Company
is continuing its efforts in developing generic equivalents of existing drugs,
exploring potential acquisitions of complementary products and businesses and
seeking 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 the Company's 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 SEC 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 300
Tice Boulevard, Woodcliff Lake, NJ 07677.
3
As further described in Item 7, "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, trends and future events. Such statements involve various risks,
uncertainties 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 as of the date hereof only, 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.
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 distributes 80 products, representing various dosage strengths for 30
separate drugs, that are manufactured by the Company and 107 additional
products, representing various dosage strengths for 50 separate drugs that are
manufactured for it by other companies. Par holds the Abbreviated New Drug
Applications ("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), which the Company sells through an agreement with Bristol-Myers
Squibb Company ("BMS"). The names of all of the drugs under the caption
"Competitive Brand-Name Drug" are trademarked. The holders of the trademarks are
non-affiliated pharmaceutical manufacturers.
Name Competitive Brand Name Drug
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CENTRAL NERVOUS SYSTEM:
Biperiden Hydrochloride Akineton
Benztropine Mesylate Cogentin
Buspirone Hydrochloride BuSpar
Chlordiazepoxide Librium
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
4
Indapamide Lozol
Isosorbide Dinitrate Isordil
Lisinopril Zestril
Minoxidil Loniten
Nicardipine Hydrochloride Cardene
Quinapril Accupril
Sotalol Hydrochloride Betapace
Torsemide Demadex
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:
Ciprofloxacin Tabs Cipro
Doxycycline Monohydrate Monodox
Fluconazole Diflucan
Minocycline Minocin
Nystatin Powder Mycostatin
Ofloxacin Floxin
Silver Sulfadiazine (SSD) Silvadene
Tetracycline Tablets Sumycin
Tetracycline Syrup Sumycin
ANTI-DIABETIC:
Metformin Hydrochloride Glucophage
Metformin ER Glucophage XR
Glyburide & Metformin HCl Glucovance
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
5
ANTI-THROMBOTIC:
Ticlopidine Hydrochloride Ticlid
ANTI-ULCERATIVE:
Ranitidine Hydrochloride Zantac
Famotidine Pepcid
Nizatidine Axid
ANTI-VIRAL:
Acyclovir Zovirax
Ribavarin Rebetol
ANTI-HYPERTHYROID:
Methimazole Tapazole
BRONCODILATOR:
Metaproterenol Sulfate Alupent
CHOLESTEROL LOWERING:
Lovastatin Mevacor
Cholestyramine Questran
Cholestyramine Light Questran Light
DERMATOLOGY:
Hydroquinone HCL Eldoquin
Hydroquinone w/sunscreen Solaquin
GENTRO-URINARY (DIURETIC):
Amiloride Hydrochloride Midamor
GLUCORTICOID:
Methylprednisolone Medrol
OVULATION STIMULANT:
Clomiphene Citrate Clomid
POTASSIUM SUPPLEMENT:
Potassium Chloride K-Dur
From January 1, 2004 to December 31, 2004, the Food and Drug Administration
(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: mercaptopurine tablets 50 mg; benazepril
HCl tablets 5 mg, 10 mg, 20 mg & 40 mg; benazepril HCl & HCTZ tablets 5 mg/6.25
mg, 10 mg/12.5 mg, 20 mg/12.5 mg & 20 mg/25 mg; ribavirin capsules 200 mg;
fluoxetine oral solution 20 mg/5 mL; ciprofloxacin tablets 250 mg, 500 mg & 750
mg; nystatin topical powder 100,000 Units/g; fluconazole tablets 50 mg, 100 mg,
150 mg & 200 mg; potassium chloride extended-release tablets 20 mEq; citalopram
hydrobromide tablets 10 mg, 20 mg & 40 mg; and quinapril HCl tablets 5 mg, 10
mg, 20 mg & 40 mg.
The Company also seeks to introduce new products through its internal
research and development program and through joint venture, distribution and
other agreements, including licensing of authorized generics, with
pharmaceutical companies located in various parts of the world. As such, the
Company has pursued and continues to pursue arrangements and relationships that
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 the "Notes to Consolidated Financial Statements - Note 10 -
Distribution and Supply Agreements". In fiscal year 2004, the Company entered
into several new agreements, which are summarized below.
6
In December 2004, the Company entered into an agreement with FSC
Laboratories, Inc. ("FSC") and purchased the NDA for Isoptin(R) SR for $15,000.
The Company and FSC have entered into an economic sharing agreement related to
sales of Isoptin(R) SR and other verapamil hydrochloride sustained release
products.
In December 2004, the Company entered into a purchase agreement in which it
agreed to acquire a 5% partnership interest in Abrika Pharmaceuticals, LLLP
("Abrika"), a privately-held specialty generic pharmaceutical company located in
Sunrise, Florida. The companies also agreed to collaborate on the marketing of
five products to be developed by Abrika. The first product is expected to be a
transdermal fentanyl patch for the management of chronic pain. Under the
agreement, Abrika is to market, sell and distribute the patch under the Abrika
label and Par will receive a share of the profits. This patch is a generic
version of Duragesic(R), marketed by Janssen Pharmaceutica Products, L.P., a
division of Johnson & Johnson that according to the Company's marketing
estimates, achieved U.S. sales of more than $1.0 billion in 2004.
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) identifying and conducting patent and market research on brand name
drugs for which the Company believes the patents are invalid or the Company can
develop a non-infringing formulation, (iii) researching and developing new
product formulations based upon such drugs, (iv) identifying and conducting
research to improve existing products for FDA approval of Section 505(b)(2)
applications submitted under the FFDC Act (v) obtaining approvals from the FDA
for such new product formulations and (vi) 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
regardless of 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 other
reasons.
The research and development of the Company's pharmaceutical products,
including pre-formulation research, process and formulation development,
required studies and FDA review and approval, have historically taken
approximately two to three years to complete. 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, safety or efficacy and 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 in order to obtain FDA
approval. These 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 2004, the Company contracted with outside
laboratories, expending $10,642 to conduct biostudies for 33 potential new
products. The Company intends to continue to contract for additional biostudies
in the future. In addition, the Company's share of certain costs for biostudies
totaled approximately $1,000 in fiscal year 2004 for products in development
with one of its strategic partners. Biostudies are required to be conducted and
documented in conformity with FDA standards (see "Government Regulation").
As a result of its product development program, the Company currently has
15 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 34 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 these
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.
In order to further grow its research and development program, the Company
acquired the capital stock of Kali for $145,391 in cash and warrants on June 10,
2004. Kali is a generic pharmaceutical research and development company located
in Somerset, New Jersey. With 59 employees in Kali's research and development
group at the date of acquisition, the addition of Kali more than doubled the
Company's research and development organization. All results and product
information reported in this filing include Kali from the date of acquisition.
7
In addition to its own internal development program, the Company, from time
to time, enters into development and license agreements with various 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 9 - Research and Development Agreements". Pursuant to these
agreements, the Company has 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 2005, including payments to be made to unaffiliated
companies, are expected to increase by approximately 20% from fiscal year 2004.
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 internal sales staff. Some of the Company's
wholesalers and distributors purchase products and warehouse those products for
certain retail drug store 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 has approximately 150 customers, some of which are part of
larger buying groups. In fiscal year 2004, 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 15%,
13%, 13% and 9%, respectively, of its total revenues. In 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. The Company does not have written agreements with any of these major
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 4 - Accounts
Receivable-Major Customers").
ORDER BACKLOG
The approximate dollar amount of open orders, believed by management to be
firm, at December 31, 2004, was $8,381, as compared to $34,800 at December 31,
2003, and $18,185 at December 31, 2002. Although open orders are subject to
cancellation without penalty, management expects that it will fill substantially
all of such open orders at December 31, 2004 in the near future.
COMPETITION
The pharmaceutical industry is highly competitive. At times, 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
that its principal generic competitors are Mylan Laboratories, Inc., Teva
Pharmaceutical Industries Limited, Watson Pharmaceuticals, Inc., Barr
Laboratories, Inc., Apotex Pharmaceutical Healthcare, Inc. ("Apotex"), Eon Labs,
Inc., Sandoz Pharmaceuticals, Inc., Roxane Laboratories, Inc. ("Roxane") and
Ivax Corporation. 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.
Competition in the generic drug industry has also increased due to the
proliferation of authorized generics, which occurs when manufacturers of brand
name drugs and/or their affiliates introduce generic pharmaceutical products
equivalent to their brand name drugs at relatively lower prices or partner with
generic companies to introduce generic products. This is a significant source of
competition for the Company because brand-name companies do not face any
8
regulatory barriers when attempting to introduce a generic version of their
proprietary brand and authorized generics may be sold during the Company's
exclusivity period significantly affecting the profits the Company could receive
as an exclusive marketer of a product. 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 corresponding to certain brand name drugs. The Company
has also marketed authorized generics including metformin ER (Glucophage XR(R))
and glyburide & metformin HCl (Glucovance(R)) licensed through BMS, during the
exclusivity period of competitors.
In addition to the introduction of competing products, price competition
has also resulted from consolidation among wholesalers and retailers and the
formation of large buying groups resulting in reductions in sales prices and
gross margin. This competitive environment has led to an increase in customer
demand for downward price adjustments from 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 the product for a period of time before any other generic manufacturer
may enter the market. At the expiration of such exclusivity period, 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
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 hold at the expiration of the exclusivity period.
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) introduction of authorized
generic products in direct competition with the Company's products, particularly
during exclusivity periods, (iii) consolidation among distribution outlets
through mergers and acquisitions and the formation of buying groups, (iv)
ability of generic competitors to quickly enter the market after the expiration
of patents or exclusivity periods, diminishing the amount and duration of
significant profits, (v) the willingness of generic drug customers, including
wholesale and retail customers, to switch among pharmaceutical manufacturers,
(vi) pricing pressures and product deletions by competitors, (vii) a company's
reputation as a manufacturer and distributor of quality products, (viii) a
company's level of service (including maintaining sufficient inventory levels
for timely deliveries), (ix) product appearance and labeling and (x) a company's
breadth of product offerings.
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 difficulties 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
determined 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 mitigate the potential
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.
9
EMPLOYEES
At December 31, 2004, the Company had 656 employees compared to 531 and
456, respectively, at December 31, 2003 and 2002. The increased headcount level
in fiscal year 2004 was primarily due to the acquisition of Kali. The increased
headcount level in 2003, was primarily in the research and development and
administrative functions, and reflected the continued growth of the Company from
fiscal year 2002.
GOVERNMENT REGULATION
Pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally the FDA, and as applicable, the Drug Enforcement
Administration, Federal Trade Commission (the "FTC") and state and local
governments. The FFDC 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 an 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 current Good Manufacturing Practices ("cGMP") regulations. The
FDA may inspect the manufacturer's facilities to ensure such compliance prior to
approval or at any other reasonable time. The manufacturer must comply with 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 such drug. There currently are two
basic ways to satisfy the FDA's safety and effectiveness requirements:
1. NEW DRUG APPLICATIONS: Unless the procedure discussed in paragraph 2
below is permitted under the FFDC 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 brand name 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 requirement 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
10
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 for certain patents covering drugs to compensate the patent holder
for the reduction in 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 in order 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 extend
the patent life of already issued patents, thus delaying FDA approvals of
applications for generic products.
The FDA issued a final rule (the "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 final 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 was intended to make the patent submission and listing
process more efficient, as well as to enhance the ANDA and 505(b)(2) application
approval process. The changes were 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.
Section 505(b)(2) was added to the FFDC Act by the Hatch-Waxman amendments.
This provision permits the FDA to rely, for approval of an NDA, on data not
developed by the applicant. A 505(b)(2) application must include identification
of the listed drug for which the FDA has made a finding of safety and
effectiveness and on which finding the applicant relies in seeking approval of
its proposed drug product. A 505(b)(2) application may rely on studies published
in scientific literature or an FDA finding of safety and/or efficacy for an
approved product for support, in addition to clinical studies performed by the
applicant.
The approval of a 505(b)(2) application may result in three years of
exclusivity under the Hatch-Waxman amendments if one or more of the clinical
studies (other than bioavailability/bioequivalency studies) were essential to
the approval of the application and was conducted by the applicant. The approval
of a 505(b)(2) application may result in 5 years of exclusivity if it is for a
new chemical entity. Such approvals have the potential to be delayed due to
patent and exclusivity rights that apply to the listed drug.
In addition to the federal government, various states and localities 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 and localities in which its operations are located
and/or it conducts business.
11
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, health and safety, and equal employment opportunity.
As a public company, the Company is subject to the Sarbanes-Oxley Act of
2002 (the "SOX Act"), including the regulations 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 U.S. 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 Centers for
Medicare and Medicaid Services, formerly 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.
- ------ ----------
The Company owns an approximately 92,000 square foot facility built to
Par's specifications that contains manufacturing and research and development
operations. The building, occupied by Par since 1986, also includes packaging
and warehouse facilities. The facility 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 a second 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 1994 and was remodeled in 2003
for use as research and quality control laboratories and additional office
space.
In 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 2014.
The Company leases office space in Woodcliff Lake, New Jersey covering
approximately 53,000 square feet. The lease expires in March 2011. This facility
houses the majority of the Company's administrative functions.
FineTech Laboratories, Ltd. ("Finetech") a wholly owned subsidiary based in
Israel, 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 two-year and 11-month renewal periods.
Kali leases, with a purchase option, a 45,000 square foot facility used for
research and development and manufacturing located in Somerset, New Jersey. The
building is subject to a triple net lease between VGS Holdings, Inc. and Kali
that terminates on June 9, 2006. In June 2004, the lease was assigned to Par.
In 2004, Kali executed a lease for an additional 27,000 square foot
research and development facility located in Franklin, New Jersey. The facility
is currently being renovated and the Company is not planning on occupying the
space until the second half of 2005. The lease expires in July 2010.
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 15 - Commitments, Contingencies and
Other Matters-Leases").
12
ITEM 3. LEGAL PROCEEDINGS.
- ------ -----------------
On November 1, 2004, Morton Grove Pharmaceuticals, Inc. ("Morton Grove")
filed a lawsuit against the Company in the United States District Court for the
Northern District of Illinois, seeking a declaratory judgment that four Par
patents relating to megestrol acetate oral suspension are invalid, unenforceable
and not infringed by a Morton Grove product that was launched in the fourth
quarter of 2004. The Company intends to defend vigorously this action and has
asserted counterclaims against Morton Grove.
On May 3, 2004, Pentech Pharmaceuticals, Inc. ("Pentech") filed an action
against the Company in the United States District Court for the Northern
District of Illinois. This action alleges that the Company breached its contract
with Pentech relating to the supply and marketing of paroxetine. The Company and
Pentech are in dispute over the amount of gross profit share. The Company
intends to defend vigorously this action. This case is currently in discovery.
At this time the Company is not able to predict with certainty the outcome of
this litigation.
On March 9, 2004, the Congress of California Seniors brought an action
against GlaxoSmithKline, plc ("GSK") and the Company concerning the sale of
paroxetine in the State of California. This action alleges that the sale of
paroxetine by GSK and the Company in California constitutes, among other things,
unfair business practices. The Company intends to defend vigorously this action.
On September 10, 2003, Par and a number of other generic and brand
pharmaceutical companies were sued by a New York State county (the suit has
since been joined by three additional New York counties), 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 and disgorgement of any illegal profits; a constructive trust and
restitution; and attorneys' and experts' fees and costs. This case was
transferred to the United States District Court for the District of
Massachusetts for coordinated and consolidated pre-trial proceedings. In
addition, on September 25, 2003, the Office of the Attorney General of the
Commonwealth of Massachusetts filed a complaint in the District of Massachusetts
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. Par 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. On January 29, 2004, Par and the
other defendants involved in the litigation brought by the Office of the
Attorney General of the Commonwealth of Massachusetts filed a motion to dismiss,
which has not yet been ruled on. On August 4, 2004, Par and a number of other
generic and brand pharmaceutical companies were also sued by the City of New
York, which has alleged violations of laws (including common law fraud and
obtaining funds by false statements) related to participation in its Medicaid
program. The complaint seeks declaratory relief; actual, statutory and treble
damages, with interest; punitive damages; an accounting and disgorgement of any
illegal profits; a constructive trust and restitution; and attorneys' and
experts' fees and costs. This case was transferred to the U.S. District Court
for the District of Massachusetts for coordinated and consolidated pre-trial
proceedings. In addition to Massachusetts, the Commonwealth of Kentucky, the
State of Illinois and the State of Alabama have filed similar suits in their
respective jurisdictions. Par intends to defend vigorously these actions.
On July 15, 2003, the Company and Par filed a lawsuit against Roxane in the
United States District Court for the District of New Jersey. The Company and Par
alleged that Roxane had 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. In addition, Roxane has recently filed an
amended complaint asserting that Par's patents in the litigation are
unenforceable due to inequitable conduct before the U.S. Patent Office. Par
intends to defend vigorously this action.
In February 2003, Abbott, Fournier Industrie et Sante and Laboratoires
Fournier S.A. filed a lawsuit 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 action and has filed an answer and a counterclaim, alleging
non-infringement and patent invalidity.
13
On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil")
filed a lawsuit against Kali, a wholly-owned subsidiary of the Company, 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 through an agreement entered into before the
Company's acquisition of Kali. 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. Summary judgment papers were served on
opposing counsel on May 28, 2004. The referenced summary judgment motion was
fully briefed and submitted to the Court as of August 23, 2004. The Court has
stated that it will hold oral argument, which has not as of yet been scheduled.
The Company intends to defend vigorously against this action.
As a result of Par's filing of the ANDA for latanoprost (Xalatan(R)),
Pharmacia Corporation and the Trustees of Columbia University (collectively, the
"Plaintiffs") filed a lawsuit against Par on December 21, 2001 in the United
States District Court for the District of New Jersey, alleging patent
infringement. The Plaintiffs sought 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 sought 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 was invalid. The trial concluded in March 2004
and on July 6, 2004 the Court issued an opinion and order ordering that judgment
be entered in favor of the Plaintiffs on their claims of infringement of U.S.
Patent Nos. 4,599,353 (expires July 28, 2006) and 5,296,504 (expires March 22,
2011); that the effective date of approval of Par's ANDA shall be a date which
is not earlier than the dates of expiration of those patents; and that Par is
enjoined from engaging in the commercial manufacture, use, offer to sell, or
sale within the United States, or importation into the United States, of any
drug product covered by, or the use of which is covered by, those two patents.
As to the third patent asserted by the Plaintiffs, U.S. Patent No. 5,422,368,
the Court dismissed the Plaintiffs' infringement claims and declared that the
patent is unenforceable due to inequitable conduct. The Court further dismissed
all of the parties' claims for attorneys' fees. Both Par and the Plaintiffs have
filed notices of appeal which are pending in the United States Court of Appeals
for the Federal Circuit. Par is appealing the Court's decision only insofar as
it relates to U.S. Patent No. 5,296,504.
Par entered into a licensing agreement with developer Paddock Laboratories,
Inc. ("Paddock") to market testosterone 1% gel, a generic version of Unimed
Pharmaceuticals, Inc.'s ("Unimed") product Androgel(R). The product, if
successfully brought to market, would be manufactured by Paddock and marketed by
Par. Paddock has filed an ANDA (that is 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 discovery. The Company intends to defend
vigorously against this action.
The Company cannot predict with certainty at this time the outcome or the
effects on the Company of the above listed actions. Accordingly, no assurances
can be given that such actions will not have a material adverse effect on the
Company's financial condition, results of operations, prospects or business.
The Company and/or Par are, from time to time, parties to certain other
litigations, including product liability and patent actions. The Company
believes that these actions are part of the ordinary course of its business and
that their ultimate resolution 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, to 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, 2004.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
- ------ ----------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES.
-------------------------------------
(a) MARKET INFORMATION. The Company's Common Stock is traded on the New
York Stock Exchange (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 fiscal quarter during the Company's two
most recent fiscal years.
2004 2003
--------------- --------------
QUARTER ENDED (APPROXIMATELY) HIGH LOW HIGH LOW
----------------------------- ----- --- ---- ---
March 31 $66.30 $54.57 $42.80 $29.35
June 30 61.20 34.03 52.03 37.57
September 30 42.37 32.22 72.30 48.20
December 31 43.04 34.36 74.71 64.30
(b) HOLDERS. As of March 7, 2005, there were approximately 1,749 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 2004, 2003 and 2002, 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 WEIGHTED AVERAGE
TO BE ISSUED UPON EXERCISE PRICE OF
EXERCISE OF OUTSTANDING NUMBER OF SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS REMAINING AVAILABLE FOR
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS FUTURE ISSUANCE
------------- ------------------- ---------- ---------------
EQUITY COMPENSATION PLANS
APPROVED BY STOCKHOLDERS:
2004 Performance Equity Plan 219 $36.47 1,519
2001 Performance Equity Plan 3,460 40.95 102
1997 Directors Stock Option Plan 200 36.52 120
1990 Stock Incentive Plan 1 4.13 -
EQUITY COMPENSATION PLANS NOT
APPROVED BY STOCKHOLDERS:
2000 Performance Equity Plan 337 6.90 97
----- -----
Total 4,217 37.78 1,838
===== =====
Included in the total number of securities remaining available for future
issuance are 1,485 shares available for the issuance of stock options and 353
shares available for the issuance of restricted stock and restricted stock
units.
In 2000, the Board of Directors adopted the Company's 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 earlier terminated. 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 classes of the capital stock of the Company.
15
(e) PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
TOTAL TOTAL NUMBER OF APPROXIMATE DOLLAR
NUMBER OF AVERAGE SHARES REPURCHASED VALUE THAT MAY
SHARES PRICE PAID AS PART OF A PUBLICLY YET BE REPURCHASED
REPURCHASED(a) PER SHARE(b) ANNOUNCED PLAN(c) UNDER THE PLAN(d)
-------------- ------------ ----------------- -----------------
October 3, 2004 through October 30, 2004 - - - $17,974
October 31, 2004 through November 27, 2004 - - - $17,974
November 28, 2004 through December 31, 2004 - - $17,974
----- ----- -----
Total - - -
===== ===== =====
(f) RECENT STOCK PRICE. On March 7, 2005, the closing price of the Common
Stock on the NYSE was $38.31.
16
ITEM 6. SELECTED FINANCIAL DATA.
- ------ -----------------------
AS OF AND FOR THE FISCAL YEARS ENDED
------------------------------------
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
-------- -------- -------- -------- --------
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Net product sales $687,570 $646,023 $380,848 $271,035 $85,022
Other product related revenues 2,446 15,665 755 - -
----- ------ --- ------- ------
Total revenues 690,016 661,688 381,603 271,035 85,022
Cost of goods sold 443,958 378,513 198,313 161,306 62,332
------- ------- ------- ------- ------
Gross margin 246,058 283,175 183,290 109,729 22,690
Operating expenses (income):
Research and development 50,517 24,581 17,910 11,113 7,634
Acquired in-process research and development 84,000 - - - -
Selling, general and administrative 69,735 57,575 40,215 21,878 16,297
Settlements, net (2,846) - (9,051) - -
Gain on sale of facility (2,812) - - - -
Acquisition termination charges - - 4,262 - -
------ ------ ------- ------- -------
Total operating expenses 198,594 82,156 53,336 32,991 23,931
------- ------- ------- ------ ------
Operating income (loss) 47,464 201,019 129,954 76,738 (1,241)
Other (expense) income, net (313) (95) (305) (364) 506
Interest (expense) income, net (1,048) (281) 604 (442) (916)
----- --- --- --- ---
Income (loss) before provision for income taxes 46,103 200,643 130,253 75,932 (1,651)
Provision for income taxes 16,857 78,110 50,799 22,010 -
------ -------- ------ ------ -----
Net income (loss) $29,246 $122,533 $79,454 $53,922 $(1,651)
====== ======= ====== ====== =====
Net income (loss) per share of common stock:
Basic $0.86 $3.66 $2.46 $1.76 $(.06)
==== ==== ==== ==== ===
Diluted $0.84 $3.54 $2.40 $1.68 $(.06)
==== ==== ==== ==== ===
Weighted average number of common shares outstanding:
Basic 34,142 33,483 32,337 30,595 29,604
====== ====== ====== ====== ======
Diluted 34,873 34,638 33,051 32,190 29,604
====== ====== ====== ====== ======
BALANCE SHEET DATA:
Working capital $339,238 $459,802 $136,305 $102,867 $18,512
Property, plant and equipment (net) 66,642 46,813 27,055 24,345 23,560
Total assets 769,004 762,812 301,457 216,926 93,844
Long-term debt, less current portion 200,275 200,211 2,426 1,060 163
Total stockholders' equity 413,590 395,081 220,790 138,423 64,779
17
Management Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company's principal executive and financial officers and
effected by the Company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
o Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with due
authorizations of management and directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect certain misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004. In making
this assessment, the Company's management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.
Based on our assessment, management believes that, as of December 31, 2004,
the Company's internal control over financial reporting is effective based on
those criteria.
The Company's independent auditors have issued an audit report on our
assessment of the Company's internal control over financial reporting. This
report appears on page 19.
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Par Pharmaceutical Companies, Inc.:
We have audited management's assessment, included in the accompanying
Management Report on Internal Control Over Financial Reporting, that Par
Pharmaceutical Companies, Inc. and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 31, 2004
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended
December 31, 2004 of the Company and our report dated March 15, 2005 expressed
an unqualified opinion on those financial statements and financial statement
schedule.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 15, 2005
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, TRENDS AND FUTURE EVENTS, PARTICULARLY RELATING TO
SALES OF CURRENT PRODUCTS AND THE INTRODUCTION OF NEW MANUFACTURED AND
DISTRIBUTED PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE
COMPANY, WHICH COULD CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM
THOSE EXPRESSED HEREIN. THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE
TYPICALLY BY USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS,"
"ANTICIPATES," "CONTINUING," "ONGOING," "EXPECTS," "INTENDS," "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
(PARTICULARLY UPON COMPLETION OF EXCLUSIVITY PERIODS), (ii) PRICING PRESSURES
RESULTING FROM THE CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION
CHANNELS, (iii) THE AMOUNT OF FUNDS AVAILABLE FOR INTERNAL RESEARCH AND
DEVELOPMENT, AND RESEARCH AND DEVELOPMENT JOINT VENTURES, (iv) RESEARCH AND
DEVELOPMENT PROJECT DELAYS OR DELAYS AND UNANTICIPATED COSTS IN OBTAINING
REGULATORY APPROVALS, (v) CONTINUATION OF DISTRIBUTION RIGHTS UNDER SIGNIFICANT
AGREEMENTS, (vi) THE CONTINUED ABILITY OF DISTRIBUTED PRODUCT SUPPLIERS TO MEET
FUTURE DEMAND, (vii) THE COSTS, DELAYS INVOLVED IN AND OUTCOME OF ANY THREATENED
OR PENDING LITIGATIONS, INCLUDING PATENT AND INFRINGEMENT CLAIMS, (viii)
UNANTICIPATED COSTS, DELAYS AND LIABILITIES IN INTEGRATING ACQUISITIONS, (ix)
OBTAINING OR LOSING 180-DAY MARKETING EXCLUSIVITY ON PRODUCTS AND (x) GENERAL
INDUSTRY AND ECONOMIC CONDITIONS. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN
THIS DOCUMENT ARE MADE AS OF THE DATE HEREOF ONLY, 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
Revenues for fiscal year 2004 increased 4.3% from the corresponding period
of 2003; however, continued increased competition has lowered pricing and sales
of the Company's key products leading to lower gross margins. Also, the
Company's increased spending on research and development, legal fees related to
the potential launch of new products and sales and marketing, along with the
write-off of acquired in-process research and development related to the
acquisition of Kali, contributed to decreased earnings when comparing fiscal
years 2004 and 2003. The Company will continue its efforts to introduce new
products during fiscal year 2005 and beyond in order to offset sales and gross
margin declines resulting from competition involving certain of its significant
products and it plans to continue to invest in research and development. The
Company is seeking to reduce its dependence on its present top selling products
by adding additional products through its internal development program, through
new and existing distribution agreements and/or acquisitions of complementary
products or businesses.
As part of the Company's business plan, its strategy is to enter the
branded drug market in an effort to market products with longer life cycles and
higher profitability. On June 29, 2004, the Company submitted its first NDA,
pursuant to Section 505(b)(2) of the FFDC Act, seeking marketing clearance for
megestrol acetate oral suspension NanoCrystal(R) Dispersion ("NCD"). The new NCD
formulation is a line extension of Par's currently marketed megestrol acetate
oral suspension. This advanced formulation utilizes NCD technology to improve
the bioavailability of the drug as compared to currently available formulations
of the product. NCD is a trademark of Elan Corporation, plc, Dublin Ireland. If
cleared for marketing, megestrol acetate oral suspension NCD is expected to be
indicated for the treatment of anorexia, cachexia, or any unexplained
significant weight loss in patients with a diagnosis of acquired
immunodeficiency syndrome ("AIDS") and will utilize the Megace(R) brand name,
which Par has licensed from BMS.
The Company's brand market business strategy also includes a potential
505(b)(2) NDA submission planned for late 2005 through Advancis Pharmaceutical
Corporation ("Advancis"). The Company has an agreement with Advancis to develop
and market a low dose pulsatile form of the antibiotic amoxicillin, utilizing
Advancis' proprietary PULSYS(TM) technology. If successfully developed,
amoxicillin PULSYS(TM) would be a once-daily version of the antibiotic
amoxicillin that is administered for fewer days with improved therapeutic
effect. In addition, the parties signed an amendment to this agreement in
December of 2004. The amendment adds a new formulation of amoxicillin to treat
otitis media in pediatrics to the original agreement.
20
Net sales and gross margins derived from generic pharmaceutical products
often follow a pattern based on regulatory and competitive factors that are
believed by management to be unique to the generic pharmaceutical industry. As
the patent(s) for a brand name product and the related exclusivity period
expire, the first generic manufacturer to receive regulatory approval from the
FDA for a generic equivalent of the product is often able to capture a
substantial share of the market. At that time, however, the branded company may
license an authorized generic product to a competing generic company. As
additional generic manufacturers receive regulatory approvals for competing
products, the market share and the price of that product have typically
declined, often significantly, depending on several factors including the number
of competitors, the price of the brand product and the pricing strategy of the
new competitors. Recently, a large portion of the Company's revenue growth has
been derived from sales of generic drugs during the 180-day marketing
exclusivity period and from the sale of generic products where there is limited
competition. These drugs include paroxetine tablets (Paxil(R)), megestrol
acetate oral suspension (Megace Oral Suspension(R)), and fluoxetine (Prozac(R)).
In fiscal year 2003, Par obtained the marketing rights to paroxetine, the
generic version of GSK's Paxil(R), in connection with an agreement with GSK.
Pursuant to this agreement, Par began marketing paroxetine supplied and licensed
from GSK. The GSK agreement 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). Additionally, in April 2002, GSK
launched a longer-lasting, newly patented version of the drug, Paxil CR(R).
Since that time, Paxil CR(R)'s market share has grown causing, among other
factors, the total market for paroxetine tablets to decrease. The marketing
exclusivity period in respect of paroxetine ended on March 8, 2004 and two
additional competitors launched competing paroxetine products in the second
quarter of 2004. The additional competition had an adverse effect on the
Company's revenues and gross margins derived from paroxetine in the third and
fourth quarters of 2004, which will continue in subsequent periods. Due to both
pricing and volume declines, Paroxetine sales in the fourth quarter of 2004 have
decreased to $13,300 from $104,600, $77,300, and $26,800 respectively, in the
first, second and third quarters of 2004.
The Company's exclusivity period for megestrol acetate oral suspension
expired in mid-January 2002. Through October 3, 2004, two generic competitors
had been granted FDA approval to market generic versions of megestrol acetate
oral suspension and launched products that compete with the Company's product.
In July 2004, Par entered into a settlement with one of the competitors, Teva
USA pursuant to which Par granted a license to Teva USA for a limited number of
units and Par is to receive a royalty on Teva USA's net sales of megestrol
acetate oral suspension in the United States. In the fourth quarter 2004, an
additional competitor received approval from the FDA and launched a generic
version of megestrol acetate oral suspension that also competed with the
Company's product. Sales and gross margins for megestrol acetate oral suspension
declined in fiscal year 2004 due principally to the effects of competition on
pricing and volume. Megestrol acetate oral suspension net sales were
approximately $67,800 for fiscal year 2004 compared to approximately $88,200 for
fiscal year 2003.
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 prices for fluoxetine 10 mg and 20 mg tablets and 40 mg capsules
substantially declined from the prices that the Company had charged during the
exclusivity period. Despite pricing declines, fluoxetine 40 mg capsules was a
significant sales and gross margin contributor in fiscal years 2002 and 2003.
Beginning in the first quarter of 2004, however, additional competitors led to
further pricing pressure on fluoxetine 40 mg capsules, resulting in
significantly lower net sales and gross margins. Currently, there are three
competitors in the market with products that compete with the Company's
fluoxetine 40 mg product and a fourth potential competitor received FDA approval
for a competing product in the fourth quarter of 2004. Net sales of fluoxetine
10 mg and 20 mg tablets and 40 mg capsules were approximately $46,600 for fiscal
year 2004 compared to approximately $91,100 for fiscal year 2003.
In April 2004, a marketing partner of the Company, Three Rivers
Pharmaceutical LLC ("Three Rivers"), received final approval from the FDA for
its ribavirin 200 mg capsules, the generic version of Schering-Plough
Corporation's ("Schering") Rebetol(R), which is indicated for the treatment of
chronic hepatitis. Three Rivers was granted 180 days of shared marketing
exclusivity, commencing at launch, for being the first to file an ANDA
containing a Paragraph IV certification. Under the terms of its agreement with
Three Rivers, Par has the exclusive marketing right to sell Three Rivers'
ribavirin product, which Par launched in early April 2004. The launch of this
ribavirin product has not been successful. Several factors contributed to the
unsuccessful launch of ribavirin, which the Company had anticipated would
21
replace a portion of the revenues that it lost from competition on other
products in fiscal year 2004. In addition to the competitor with shared
exclusivity, Warrick Pharmaceuticals Corp., a subsidiary of Schering, launched
an authorized generic ribavirin product in the United States in April 2004. As a
result of launching the product, Schering is not receiving a royalty from Three
Rivers on sales of Three Rivers' and Par's generic ribavirin. Due to the
additional competition, the pricing pressure on ribavirin at launch was more
substantial than the Company had previously anticipated. Additionally, the
market size for Rebetol(R) has declined due to the success of Copegus(R), a new
product introduced by Hoffman La-Roche Inc. in 2003, which has taken significant
market share away from Rebetol(R). The Company's marketing exclusivity period
ended in October 2004 and one additional competitor has since launched a
competing product. These principal factors have contributed to the lower than
expected ribavirin sales of $6,100 by the Company for fiscal year 2004.
Generic drug pricing at the wholesale level can create significant
differences between invoice price and the Company's net selling price. Wholesale
customers purchase product from the Company at invoice price, then resell the
product to specific healthcare providers on the basis of prices negotiated
between the Company and the providers, and the wholesaler submits a chargeback
credit to the Company for that difference. The Company records estimates for
these chargebacks, along with estimates for sales returns, rebates or other
sales allowances for all its customers at the time of sale, as reductions to
invoice price, with corresponding adjustments to its accounts receivable
allowances.
The Company generally will offer price protection for sales of generic
drugs for which the market exclusivity period has expired because the prices of
such drugs will typically decline, sometimes substantially, when additional
generic manufacturers introduce and market comparable generic products. In
addition, the Company may offer price protection with respect to products for
which it anticipates significant price erosion through increased competition.
Such price protection plans, which are common in the Company's industry,
generally provide for shelf-stock adjustments or lower contract pricing to the
wholesalers, which could result in an increased chargeback per unit on existing
inventory levels. In the fourth quarter of 2004, the Company provided for and
issued price protection credits of approximately $10,300 primarily due to
competition with respect to paroxetine, megestrol acetate oral suspension and
glyburide & metformin HCl.
The Company has the historical experience and access to information,
including rebate agreements with each customer, resales by its customers to
end-users having contracts with the Company, the total demand for each drug that
the Company manufactures or distributes, the Company's market share, recent or
pending new drug introductions and inventory practices of the Company's
customers, it believes is necessary to reasonably estimate the amounts of such
reductions to invoice price. Some of the assumptions used by the Company for
certain of its estimates are based on information received from third parties,
such as customers' inventories at a particular point in time and market data, or
other market factors beyond the Company's control. The Company regularly reviews
the information related to these estimates and adjusts its reserves accordingly,
if and when actual experience differs from previous estimates. There were no
material changes to the underlying assumptions used by the Company to estimate
such sales returns, rebates, chargebacks, price adjustments or other sales
allowances for fiscal years 2004, 2003 and 2002. The Company's aggregate
reserves related to the items described above as of December 31, 2004, 2003 and
2002 totaled $144,923, $139,748 and $113,008, respectively.
Critical to the growth of the Company is its introduction of new
manufactured and distributed products at selling prices that generate adequate
gross margins. The Company, through its internal development program and various
strategic alliances and relationships, is seeking to introduce 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 in its internal research
and development efforts and brand marketing strategy in fiscal year 2005 and
beyond. Also, the Company will continue seeking additional products for sale
through new and existing distribution agreements or acquisitions of
complementary products and businesses, additional first-to-file opportunities
and unique dosage forms to differentiate its products in the marketplace.
22
In June 2004, the Company acquired all of the capital stock of Kali for a
purchase price of $142,861 in cash and warrants to purchase 150,000 shares of
the Company's common stock valued at $2,530. The allocation of the purchase
price includes $84,000 valued as acquired in-process research and development
that was written off in the three-month period ended October 3, 2004 in
accordance with purchase accounting for acquisitions. The Kali acquisition has
expanded the Company's research and development capabilities and increased its
product portfolio. The acquisition also diversifies the Company's development
pipeline and provided what the Company believes to be three additional
first-to-file product opportunities, enhancing its prospects for sustained
long-term growth. Included as part of the Company's purchase of Kali is a lease,
with a purchase option, of a 45,000 square foot manufacturing facility in
Somerset, New Jersey. The former Kali stockholders are entitled to up to an
additional $10,000 if certain product-related performance criteria are met over
the next four years. As of December 31, 2004, the former Kali stockholders had
earned $2,500 of these contingent payments and the Company recorded this amount
as additional goodwill on the accompanying balance sheet. The Company paid the
$2,500 in January 2005.
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 afford the Company many advantages, including additional
resources for increased activity, expertise on dissimilar products or
technologies, and a sharing of both the costs and risks of new product
development. As a result of its internal program, including the integration of
Kali, and these strategic alliances, the Company's pipeline of potential
products includes 49 ANDAs (five of which have been tentatively approved),
pending with, and awaiting approval from, the FDA. The ANDAs include seven for
potential products that would be marketed by other companies through licensing
agreements entered into with Kali before the Company's acquisition, pursuant to
which the Company would be due royalty income if successfully launched by third
parties. The Company pays a percentage of the gross profits or of sales to its
strategic partners on sales of products covered by its distribution agreements.
Generally, products that the Company develops internally, and to which it is not
required to split any profits with its strategic partners, contribute higher
gross margins than products covered under distribution agreements. The Company
is engaged in various efforts, subject to FDA approval and other factors, to
introduce new products through its research and development efforts and through
distribution and development agreements with third parties.
In addition to the substantial costs of product development, the Company
may incur significant legal costs in bringing certain products to market.
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 branded 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 branded
drug is invalid or will not be infringed by the manufacture, sale or use of the
new drug for which the ANDA is filed. In 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. Because
substantially all of the Company's current business involves the marketing and
development of generic versions of brand 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, financial condition,
prospects and results of operations.
RESULTS OF OPERATIONS
GENERAL
The Company's net income of $29,246 for the fiscal year ended December 31,
2004 decreased $93,287, from $122,533 for the fiscal year ended December 31,
2003. Although total revenues of $690,016 in 2004 increased from $661,688 in
2003, gross margin dollars decreased as higher sales from lower margin new
products were not enough to offset lower sales of the Company's key products due
to continued pricing pressures from competition. Research and development
spending in 2004 of $50,517 increased $25,936, or 105.5%, from $24,581 in the
prior year. In fiscal year 2005, the Company expects to continue to spend at a
higher rate on research and development than it did in 2004. The allocation of
the purchase price for Kali resulted in $84,000 valued as acquired in-process
research and development, which was written off in the third quarter of 2004.
Selling, general and administrative costs in fiscal year 2004 were $69,735
compared to $57,575 in fiscal year 2003. The Company increased spending for
sales and marketing in the latter part of 2004 as it prepared for the potential
launch of a new branded product in fiscal year 2005. Fiscal year 2004 net income
includes net settlement income of $2,846, recorded in the second quarter of
23
2004, resulting primarily from the settlement of claims against Akzo Nobel NV
and Organon USA Inc. relating to anti-competitive practices that delayed the
availability of mirtazapine, a generic version of Remeron(R) and a $2,812 gain
on the sale of the Company's facility in Congers, New York (the "Congers
Facility").
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. Spending of $24,581 on research and development for fiscal
year 2003 increased 37.2% 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. Included in selling, general and administrative
expenses in 2003 was a charge of $3,712 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.
Sales and gross margins of the Company's products are principally dependent
upon the (i) introduction of other generic drug manufacturers' products in
direct competition with the Company's significant products, (ii) ability of
generic competitors to quickly enter the market after patent or exclusivity
period expirations, diminishing the amount and duration of significant profits
to the Company from any one product, (iii) pricing practices of competitors and
any removal of competing products from the market, (iv) continuation of existing
distribution agreements, (v) introduction of new distributed products, (vi)
consolidation among distribution outlets through mergers, acquisitions and the
formation of buying groups, (vii) willingness of generic drug customers,
including wholesale and retail customers, to switch among generic pharmaceutical
manufacturers, (viii) approval of ANDAs and introduction of new manufactured
products, (ix) granting of potential marketing exclusivity periods, (x) extent
of market penetration for the existing product line and (xi) level, quality and
amount of customer service.
REVENUES
Total revenues for year ended December 31, 2004 were $690,016, increasing
$28,328, or 4.3%, from total revenues of $661,688 for the year ended December
31, 2003, primarily due to additional sales of new products sold under various
distribution agreements, including $38,100 of glyburide and metformin HCl,
introduced in May 2004 and $25,000 of mercaptopurine (Purinethol(R)), introduced
in February 2004. Also contributing to the increase in revenues were net sales
of paroxetine, which the Company launched in September 2003 in the United States
and is sold through a supply agreement with GSK, which totaled approximately
$222,000 in 2004, increasing $29,500 from $192,500 in 2003 and sales of
lovastatin (Mevacor(R)), distributed pursuant to an agreement with Genpharm,
Inc. ("Genpharm"), which increased $17,100 to $30,000 primarily due to a new
customer. These sales were partially offset by lower sales of certain existing
distributed products, particularly fluoxetine, which decreased $44,500 and
tizanidine (Zanaflex(R)) which decreased $20,900. The Company's top selling
manufactured product, megestrol acetate oral suspension also decreased $20,400.
Net sales of distributed products, which consist of products manufactured
under contract and licensed products, were approximately $504,400, or 73.1% of
the Company's total revenues in 2004, and $456,200, or 68.9% of the Company's
total revenues in 2003. Presently, the Company is substantially dependent upon
distributed products for its overall sales and, because the Company continues to
introduce new products under its distribution agreements, it expects that this
dependence will continue. Any inability by its suppliers to meet demand could
adversely affect the Company's future sales.
The Company's gross revenues before deductions for chargebacks, rebates
(including rebates paid under Federal and State government Medicaid drug
reimbursement programs), price adjustments, sales returns or other sales
allowances were $1,558,220 in 2004 compared to $1,157,332 in 2003. Deductions
from gross revenues were $868,204 in 2004 and $495,644 in 2003. These deductions
are discussed in "Notes to Consolidated Financial Statements - Note 4 - Accounts
Receivable." The gross-to-net revenue percentage spread increased to 55.7% in
fiscal year 2004 compared to 42.8% in fiscal year 2003, primarily due to the
ribavirin launch in April 2004 and competition on paroxetine. The Company had
committed to spend promotional dollars on ribavirin in an effort to obtain
market share and, due to a rapid drop in price after launch, the net selling
price was much lower than expected for a new product. The effect of price
24
declines for both ribavirin and paroxetine increased the chargeback amounts
issued to wholesalers during 2004.
The Company's other product related revenues of $2,446 in 2004 decreased
significantly from $15,665 in 2003. The Company records other product related
revenues pursuant to an agreement with Genpharm, where the Company receives a
portion of the profits, as defined in the agreement, generated from Kremers
Urban Development Co.'s, a subsidiary of Schwarz Pharma AG of Germany, sales 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
significantly reducing the Company's share of profits related to omeprazole. The
revenues related to this agreement are expected to continue to decrease in
future periods.
As discussed above, net sales of megestrol acetate oral suspension and of
fluoxetine 40 mg capsules have decreased as a result of increased generic
competition and its effect on pricing and market share. When competition enters
the market, there are circumstances under which the Company may determine to not
afford price protection to certain customers and consequently, as a matter of
business strategy, lose volume to competitors rather than reduce its pricing.
When there is general market pressure for lower pricing due to many competitors
entering the market at the same time, the Company decides which customers will
be afforded price protection and a price protection reserve is established based
on estimated or actual existing customer inventories. Competitors on these two
products have been entering the market over an extended period of time, thereby
reducing the need for broad price protection and material price protection
reserves at the end of any one reporting period. Although the Company has
lowered the pricing on these products over time and price protection credits
were granted and processed within the reporting periods, including the fourth
quarter of 2004, the Company did not have material reserves for additional price
protection as of December 31, 2004 because it did not believe that there would
be any additional significant price protection credits to be issued with respect
to sales of these products through that date. The Company will continue to
evaluate the effects of competition and will record a price protection reserve
when, if and to the extent that it deems necessary.
As a result of competition, the Company has also issued significant price
protection credits for paroxetine, metformin ER and glyburide and metformin HCl
during the latter part of 2004. The Company will continue to evaluate the
effects of competition and will record a price protection reserve when, if and
to the extent that it deems it necessary.
Total revenues of $661,688 for fiscal year 2003 increased $280,085, or
73.4%, from $381,603 for fiscal year 2002. The revenue growth in 2003 was driven
largely by the September 2003 introduction of paroxetine. Additionally, net
sales of other new products in 2003, including metformin ER, introduced in
December 2003 and sold under a distribution agreement with BMS, tizanidine,
introduced in July 2002 and sold under a distribution agreement with Dr. Reddy's
Laboratories Limited ("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 fiscal year 2003, 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 approximately 68.9% and
59.0%, respectively, of the Company's total revenues in fiscal years 2003 and
2002.
The Company's gross revenues before deductions for chargebacks, rebates
(including rebates paid under Federal and state government Medicaid drug
reimbursement programs), price adjustments, sales returns or other sales
allowances were $1,157,332 in 2003 compared to $826,554 in 2002. Deductions from
gross revenues were $495,644 in 2003 and $444,951 in 2002. The gross-to-net
revenue percentage spread decreased to 42.8% for year ended 2003 compared to
53.8% for the year ended 2002, primarily due to the paroxetine launch in
September 2003, which had a lower gross-to-net spread than the average of the
Company's other products.
GROSS MARGIN
The Company's gross margin of $246,058 (35.7% of total revenues) in fiscal
year 2004 decreased $37,117 from $283,175 (42.8% of total revenues) in the
corresponding period of 2003. Increased revenues had a negligible effect on
gross margin dollars as the increases were generated primarily from lower margin
new products and were not enough to offset lower sales of the Company's key
higher margin products. A significant portion of the sales increase was
generated from products sold under the distribution agreements with GSK, Pentech
and BMS, where the Company splits profits with its contract partners. As a
result of these agreements, the Company's gross margin as a percentage of its
25
total revenues in 2004 declined principally because net sales of these products,
after the allocation of profit splits, yielded a significantly lower gross
margin percentage than the Company's average gross margin as a percentage of
total revenues for its other products in 2003. In addition, Par's gross margin
was also negatively impacted by the decline in other product related revenues.
The gross margin for the year ended December 31, 2004 included an income
adjustment to cost of goods sold of $6,200, which was recorded in the second
quarter of 2004 and related to sales of paroxetine during the period from
September 2003 to June 2004, that reflects a change in accounting estimate used
in the calculation of the profit split due to Pentech. The change in accounting
estimate has effectively reduced payables due under Par's agreement with Pentech
relating to the supply and marketing of paroxetine. The change in accounting
estimate followed Pentech's filing of an action against Par during the second
quarter of 2004.
The Company's gross margin of $283,175 (42.8% of total revenues) for fiscal
year 2003 increased $99,885 from $183,290 (48.0% 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 and, to a lesser extent, higher
sales of certain existing products and additional revenues from omeprazole
pursuant to an agreement with Genpharm.
In fiscal year 2003, a higher gross margin contribution from fluoxetine 40
mg due to increases in its 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. Also, additional generic manufacturers introduced and
began marketing comparable fluoxetine products following the expiration of the
Company's exclusivity period in January 2002, adversely affecting the Company's
sales volumes, selling prices and gross margins for the products, particularly
the 10 mg and 20 mg strengths.
Inventory write-offs were $8,643, $3,059 and $3,096, respectively, for
fiscal years 2004, 2003 and 2002. 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 that did not meet the
Company's quality control standards. The increased write-offs in fiscal year
2004 included the write-off of inventory for a product whose launch was delayed.
The Company maintains inventory levels that it believes are appropriate to
optimize its customer service.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
The Company's research and development expenses of $50,517 for the year
ended December 31, 2004 increased $25,936, or 105.5%, from fiscal year 2003. The
increase was primarily attributable to payments of $14,000 to Advancis in order
to fund the development of a novel formulation of the antibiotic amoxicillin,
increased biostudies costs of $4,400 and increased personnel costs of $3,600,
including such costs related to the acquisition of Kali. As previously
discussed, the Company acquired Kali in June 2004. The Company expects to
utilize Kali to develop additional products for its own product pipeline.
The allocat