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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24425
KING PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 54-1684963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 FIFTH STREET
BRISTOL, TENNESSEE 37620
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (423) 989-8000
Securities registered under Section 12(b) of the Exchange Act:
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
COMMON STOCK NEW YORK STOCK EXCHANGE
Securities registered under Section 12(g) of the Exchange Act:
NONE
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of common stock held by
nonaffiliates of the Registrant as of March 28, 2001 is approximately
$6,158,032,700. (For purposes of this calculation only, all executive officers
and directors are classified as affiliates.)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. Outstanding at March
28, 2001, Common Stock, no par value, 171,255,656.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
King Pharmaceuticals, Inc. was incorporated in the State of Tennessee in
1993. Our principal executive offices are located at 501 Fifth Street, Bristol,
Tennessee 37620. Our telephone number is (423) 989-8000 and our facsimile number
is (423) 274-8677. Our wholly-owned subsidiaries are Monarch Pharmaceuticals,
Inc.; Parkedale Pharmaceuticals, Inc.; Medco Research, Inc. (acquired February
25, 2000 and later renamed "King Pharmaceuticals Research and Development,
Inc."); Jones Pharma Incorporated (acquired August 31, 2000); and King
Pharmaceuticals of Nevada, Inc.
We are a vertically integrated pharmaceutical company that manufactures,
markets and sells primarily branded prescription pharmaceutical products.
Through a national sales force of approximately 520 representatives and
co-promotion arrangements, we market our branded pharmaceutical products to
general/family practitioners, internal medicine physicians, cardiologists,
endocrinologists, pediatricians, obstetrician/gynecologists, and hospitals
across the country and in Puerto Rico.
Our primary business strategy is to acquire established branded
pharmaceutical products and to increase their sales through focused marketing
and promotion and product life cycle management, including, securing new
indications, developing product line extensions and devising new formulations or
dosages. In pursuing product acquisitions, we seek to capitalize on
opportunities in the pharmaceutical industry created by cost containment
initiatives and consolidation among large, global pharmaceutical companies. We
also seek attractive company acquisitions which add products or product
pipelines, technologies or sales and marketing capabilities to our key
therapeutic areas. In addition to branded pharmaceuticals, we also provide
contract manufacturing for a number of the world's leading pharmaceutical and
biotechnology companies, including Warner-Lambert Company, predecessor to
Pfizer, Inc., Centocor, Inc., Santen Incorporated and Hoffman-La Roche Inc.
Unlike many of our competitors, we have a broad therapeutic focus that
provides us with opportunities to purchase a wide variety of products. In
addition, we have well known products in all of our therapeutic categories that
generate high prescription volumes. Our branded pharmaceutical products can be
divided primarily into four therapeutic areas:
- cardiovascular (including Altace(R), Procanbid(R) and Thalitone(R)),
- anti-infectives (including Lorabid(R), Cortisporin(R), Neosporin(R),
Bicillin(R) and Coly-Mycin M(R)),
- critical care (including Thrombin-JMI(R) and Brevital(R)), and
- women's health/endocrinology (including Menest(R), Nordette(R),
Levoxyl(R), Cytomel(R), and Triostat(R)).
We acquired from Glaxo Wellcome, Inc., predecessor to GlaxoSmithKline, the
Cortisporin(R) product line in March 1997, the Viroptic(R) product line in May
1997 and six additional branded products, including Septra(R), and exclusive
licenses, free of royalty obligations, for the prescription formulations of
Neosporin(R) and Polysporin(R) in November 1997. We collectively refer to these
acquisitions as the "Glaxo Acquisition" in this report.
In February 1998 we acquired from Pfizer, 15 branded pharmaceutical
products, the Parkedale facility located in Rochester, Michigan and certain
manufacturing contracts for third parties for $127.9 million, including $2.9
million of assumed liabilities. We refer to this acquisition as the "Sterile
Products Acquisition" in this report.
In June 1998 we launched our new Cortisporin(R)-TC Otic line.
Cortisporin(R)-TC Otic is a product line extension for our Cortisporin(R) Otic
Suspension product.
In December 1998 we acquired from Hoechst Marion Roussel, Inc., predecessor
to Aventis Pharmaceuticals, Inc., for $362.5 million the United States and
Puerto Rico rights to Altace(R) and two other small branded pharmaceutical
products. Altace(R) is an Angiotensin Converting Enzyme inhibitor, which we
refer to in this
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report as an "ACE" inhibitor. We refer to this acquisition in this report as the
"Altace Acquisition." Aventis currently manufactures Altace(R) for us. Altace(R)
has United States patent protection to 2008.
In August 1999, we acquired the antibiotic Lorabid(R) from Eli Lilly and
Company for $91.7 million including acquisition costs plus sales performance
milestones that could bring the total value of the transaction to $158.0
million. The final contingent payment will be made if we achieve $140.0 million
in annual net sales of Lorabid(R). As part of the agreement, we acquired or
licensed all of Lilly's rights in the United States and Puerto Rico to
Lorabid(R) including Lorabid(R)'s new drug applications, investigational new
drug applications, and certain patents and associated United States copyright
and trademark material. Lilly manufactures Lorabid(R) for us. Lorabid(R) has
United States patent protection through December 31, 2005.
On February 25, 2000, we acquired Medco Research, Inc. in an all stock
transaction accounted for as a pooling of interests valued at approximately
$366.0 million. We exchanged approximately 10.8 million shares of King common
stock for all of the outstanding shares of Medco. Each share of Medco was
exchanged for 1.01355 shares of King common stock. In addition, outstanding
Medco stock options were converted at the same exchange ratio to purchase
approximately 1.0 million shares of King common stock. Medco is now one of our
wholly owned subsidiaries and, effective November 1, 2000, was renamed "King
Pharmaceuticals Research and Development, Inc." Through King Research and
Development, we are engaged in product life cycle management to develop new
indications and line extensions for existing and acquired products and the
development and global commercialization of cardiovascular medicines and
adenosine-receptor technologies for multiple indications and markets. These
products in development and the related intellectual property rights are
typically obtained under license from academic or corporate sources who have
received United States patents. We then sponsor and direct any additional
preclinical studies and clinical testing needed for product registration and
marketing approval. These late-stage product development activities are
outsourced to independent clinical research organizations to maximize efficiency
and minimize internal overhead. King Research and Development has successfully
developed two currently marketed adenosine-based products, Adenocard(R) and
Adenoscan(R), the New Drug Applications for which are held by Fujisawa
Healthcare, Inc. We receive a royalty based on the sales of the products.
On June 23, 2000, we entered into a co-promotion agreement with
Wyeth-Ayerst Laboratories, a division of American Home Products Corporation, to
market Altace(R), in the United States and Puerto Rico. We refer to this
agreement in this report as the "Co-Promotion Agreement." Subject to the terms
of the Co-Promotion Agreement, we will pay American Home Products a quarterly
fee based on a percentage of net sales in exchange for its marketing efforts.
American Home Products purchased $75.0 million of our common stock and paid us
$25.0 million in cash upon execution of the Co-Promotion Agreement. American
Home Products paid us an additional $50.0 million in November 2000 as a result
of the United States Food and Drug Administration's final approval on October 4,
2000 of new indications for Altace(R). We refer to the United States Food and
Drug Administration in this report as the "FDA."
On July 7, 2000, we completed the acquisition of rights to the Nordette(R),
Bicillin(R), and Wycillin(R) product lines in the United States and Puerto Rico
from American Home Products as contemplated by the Co-Promotion Agreement
discussed above for $200.0 million. The transaction was financed with a draw of
$10.0 million on a $50.0 million bridge loan, $25.0 million in the form of a
note issued to American Home Products, $37.5 million of the proceeds from the
sale of stock to American Home Products, $25.0 million received in connection
with the Co-Promotion Agreement with American Home Products, $90.0 million from
our revolving credit facility and $12.5 million in cash from operations.
On August 31, 2000, we acquired Jones Pharma Incorporated in an all stock
transaction accounted for as a pooling of interests for approximately $2.4
billion. We exchanged approximately 74.0 million shares of King common stock for
all of the outstanding shares of Jones. Each share of Jones was exchanged for
1.125 shares of King common stock. In addition, outstanding Jones stock options
were converted at the same exchange ratio to purchase approximately 4.0 million
shares of King common stock. Jones is now one of our wholly-owned subsidiaries.
Jones was an emerging specialty pharmaceutical company with a national sales
force of approximately 100 dedicated sales representatives who promoted Jones'
products throughout the United States. Jones' strategy was to build a portfolio
of growing products through the acquisition of under-promoted,
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promotion-sensitive FDA-approved products from other pharmaceutical companies.
About one-half of Jones' sales were generated by the thyroid-disorder drugs
Levoxyl(R), Tapazole(R), Cytomel(R), and Triostat(R). Jones' other products
included Thrombin-JMI(R) for controlling blood loss during surgery; Brevital(R),
an anesthetic; and veterinary pharmaceuticals.
On December 20, 2000, we acquired an exclusive license from Novavax, Inc.
to use its proprietary cell line to develop and potentially commercialize
recombinant human papillomavirus (HPV) virus-like particle (VLP) vaccines.
Pursuant to the license agreement, we have an exclusive worldwide license to
develop, manufacture and market HPV-16 VLP vaccines for the prevention and/or
treatment of HPV infection, except that Novavax retained the right to co-market
the product in the United States, including Puerto Rico. We will pay Novavax
during the term of the license a royalty based on 17% of any net sales, less
cost of goods, of any HPV product successfully developed under the license
agreement. Novavax and we are currently working together on manufacturing HPV-16
VLP vaccines being evaluated by the National Cancer Institute in clinical
trials. The vaccines are designed to prevent and/or treat HPV-16 infection and
associated cervical cancer.
We also acquired an exclusive license from Novavax on January 8, 2001 to
promote, market, distribute and sell Estrasorb(TM), Novavax's topical,
transdermal estrogen replacement therapy, worldwide except in the United States,
Canada, Italy, the Netherlands, Greece, Switzerland and Spain. We will pay
Novavax during the term of the license a royalty based on 7.5% of net sales of
Estrasorb(TM) in any exclusive territory. Novavax and we will co-market
Estrasorb(TM) in the United States and Puerto Rico. Under the co-promotion
agreement, Novavax will pay us an amount equal to 50% of net sales, less cost of
goods, of Estrasorb(TM). Novavax has indicated that it expects to file a New
Drug Application for Estrasorb(TM) in 2001.
Our strategy is to continue to acquire branded pharmaceutical products and
to increase sales and create value by leveraging our marketing, manufacturing
and product development capabilities. The success of our marketing strategy will
be aided by our having gained approval from the FDA on October 4, 2000 of the
new indications for Altace(R) requested under a supplemental New Drug
Application. In addition to the treatment of hypertension, this approval permits
the promotion of Altace(R) to reduce the risk of stroke, myocardial infarction
(heart attack) and death from cardiovascular causes in patients 55 and over
either with a history of coronary artery disease, stroke or peripheral vascular
disease or with diabetes and one other cardiovascular risk factor (hypertension,
elevated total cholesterol levels, low HDL levels, cigarette smoking or
documented microalbuminuria). Altace(R) is also indicated in stable patients who
have demonstrated clinical signs of congestive heart failure after sustaining
acute myocardial infarction. Altace(R) is marketed by our subsidiary Monarch and
by the Wyeth-Ayerst division of American Home Products pursuant to the
Co-Promotion Agreement we entered into in June 2000.
We manufacture pharmaceutical products for a variety of pharmaceutical and
biotechnology companies under contracts expiring at various times within the
next four years. We intend to enter into additional manufacturing contracts in
cases where we identify contracts that offer significant volumes and attractive
revenues. We have not accepted or renewed manufacturing contracts for third
parties where we perceived insignificant volumes or revenues. In accordance with
our focus on branded pharmaceutical products, we expect that, over time, our
contract manufacturing will continue to decrease as a percentage of revenues.
The following summarizes approximate net revenues by operating segment (in
thousands).
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
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Branded pharmaceuticals................................ $228,493 $434,896 $529,053
Licensed products...................................... 27,544 31,650 41,473
Contract manufacturing................................. 31,931 36,408 42,755
Other.................................................. 6,453 9,511 6,962
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Total........................................ $294,421 $512,465 $620,243
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For additional segment information, please see the section entitled "Selected
Financial Data", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes elsewhere in this report.
INDUSTRY
Growth in the pharmaceutical industry is being driven primarily by:
- the aging population;
- technological breakthroughs which have increased the number of ailments
which can be treated with or prevented by drugs;
- managed care's preference for drug therapy over surgery since drug
therapy is generally less costly; and
- direct-to-consumer television advertising which has increased public
awareness of available drug therapies.
During the past decade, the pharmaceutical industry has been faced with
cost containment initiatives from government and managed care organizations and
has begun to consolidate. Consolidation is being driven by a desire among
pharmaceutical companies to reduce costs through economies of scale and
synergies, to add previously lacking United States or European sales strength or
to add promising product pipelines or manufacturing capabilities in key
therapeutic categories.
Industry consolidation and cost containment pressures have increased the
level of sales necessary for an individual product to justify active marketing
and promotion from large pharmaceutical companies. This has led large
pharmaceutical companies to focus their marketing efforts on drugs with high
volume sales, newer or novel drugs which have the potential for high volume
sales and products which fit within core therapeutic or marketing priorities. As
a result, major pharmaceutical companies have sought to divest relatively small
or non-strategic product lines which can be profitable for emerging
pharmaceutical companies, like us, to manufacture and market.
PRODUCTS AND PRODUCT DEVELOPMENT
We market a variety of branded prescription products primarily over four
therapeutic areas, including
- cardiovascular products (including Altace(R), Thalitone(R) and
Procanbid(R)),
- anti-infective products (including Lorabid(R), Bicillin(R),
Cortisporin(R), Neosporin(R), and Coly-Mycin(R)),
- critical care products (including Thrombin-JMI(R), Brevital(R)); and
- women's health products/endocrinology products (including Menest(R),
Nordette(R), Levoxyl(R), Cytomel(R), and Triostat(R)).
Our branded pharmaceutical products are generally in high volume categories
and are well known for their indications (e.g., Altace(R), Lorabid(R) and
Levoxyl(R)). Additionally, many of our branded products have limited or no
generic competition, including patent protected products, products that are
difficult to formulate (e.g., creams, ophthalmic suspensions) or biologicals
that have no generic equivalent. Branded pharmaceutical products represented
85.0% of our net revenues for each of the years ended December 31, 2000 and
1999.
Cardiovascular products. Altace(R), an ACE inhibitor, is our primary
product within this category. In August 1999, the results of the Heart Outcomes
Prevention Evaluation trial, which we refer to in this report as the "HOPE
trial," were released. The HOPE trial determined that Altace(R) significantly
reduces the rates of death from cardiovascular causes, myocardial infarction,
and stroke in a broad range of high-risk cardiovascular patients. On October 4,
2000, the FDA approved our supplemental New Drug Application. This approval
permits the promotion of Altace(R) to reduce the risk of stroke, myocardial
infarction (heart attack) and death from cardiovascular causes in patients 55
and over either with a history of coronary artery disease, stroke or peripheral
vascular disease or with diabetes and one other cardiovascular risk factor
(hypertension, elevated total cholesterol levels, low HDL levels, cigarette
smoking or documented microalbuminuria. In
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February 1998, we acquired Procanbid(R) from Pfizer. Procanbid(R) is a branded
pharmaceutical product used to treat arrhythmia. Thalitone(R), which we acquired
in December 1996, is a hypertension diuretic tablet indicated for the management
of hypertension with patent protection through 2007.
Anti-infective products. Our anti-infective products are marketed
primarily to general/family practitioners, internal medicine physicians and
pediatricians and are prescribed to treat uncomplicated infections of the
respiratory tract, urinary tract, eyes, ears and skin. Our products are
generally in technologically mature product segments and as a result have
limited product liability risk. Lorabid(R) is our largest product in the
category while Cortisporin(R) has become our second largest product in this
category. Lorabid(R) is indicated for the treatment of patients with mild to
moderate infections caused by susceptible strains of bacteria in the upper and
lower respiratory tract, the skin and the urinary tract.
Critical care products. We have two products in this category which are
marketed primarily to hospitals. Thrombin-JMI(R) aids in controlling minor
bleeding during surgery. Brevital(R) is an anesthetic solution for intravenous
use in adults and for rectal and intramuscular use in pediatric patients.
Brevital(R) is marketed as a short-term and long-term anesthetic because of its
rapid onset of action and quick recovery time. Brevital(R) is used alone and in
combination with other anesthetics. Its rapid onset of action makes it a useful
induction agent prior to the administration of other agents to maintain
anesthesia.
Women's health products/endocrinology products. We have a number of
leading branded pharmaceutical products in this category including Menest(R) and
Nordette(R). In an effort to further strengthen our women's health franchise, we
acquired Menest(R) from GlaxoSmithKline in June 1998. We previously manufactured
this product for GlaxoSmithKline. Menest(R) competes in the growing $2 billion
estrogen replacement category. Our products Levoxyl(R), Cytomel(R), and
Triostat(R) are indicated for the treatment of thyroid disorders.
Certain of our products are described below:
COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
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CARDIOVASCULAR PRODUCTS
Altace(R)(1)...................... Aventis A hard-shell capsule for oral
(December 1998) administration indicated for the
treatment of hypertension,
reduction of the risk of stroke,
myocardial infarction (heart
attack) and death from
cardiovascular causes in patients
55 and over either with a history
of coronary artery disease, stroke
or peripheral vascular disease or
with diabetes and one other
cardiovascular risk factor (such
as elevated cholesterol levels or
cigarette smoking). Altace(R) is
also indicated in stable patients
who have demonstrated clinical
signs of congestive heart failure
after sustaining acute myocardial
infarction.
Thalitone(R)(2)................... Horus Therapeutics, Inc A hypertension-diuretic tablet
(December 1996) indicated for the management of
hypertension, either alone or in
combination with other
antihypertensive drugs, and for
edema associated with congestive
heart failure and various forms of
renal dysfunction.
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COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
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Procanbid(R)...................... Pfizer A procainamide extended-release
(February 1998) tablet indicated for the treatment
of documented ventricular
arrhythmia, such as sustained
ventricular tachycardia, that, in
the judgment of a physician, are
life-threatening.
Adrenalin(R)...................... Pfizer A sterile solution made from the
(February 1998) active principle of the adrenal
medulla used to relieve
respiratory distress and
hypersensitivity reactions and
restore cardiac rhythm in cardiac
arrest due to various causes.
ANTI-INFECTIVE PRODUCTS
Lorabid(R)........................ Eli Lilly Company A capsule and suspension product
(August 1999) indicated for the treatment of
patients with mild to moderate
infections caused by susceptible
strains of bacteria in the upper
and lower respiratory tract, the
skin and the urinary tract.
Bicillin(R)....................... American Home Products A penicillin-based antibiotic
(July 2000) suspension for deep muscular
injection indicated for the
treatment of infections due to
penicillin-G-susceptible
microorganisms that are
susceptible to serum levels common
to this particular dosage form.
Cortisporin(R).................... GlaxoSmithKline (March A full line of prescription
1997) antibiotic and anti-inflammatory
formulations of ophthalmic
ointments and suspensions, otic
solutions and suspensions, and
topical creams and ointments
indicated for the treatment of
corticosteroid-responsive
dermatoses with secondary
infections.
Viroptic(R)....................... GlaxoSmithKline A sterile solution indicated for
(May 1997) the treatment of ocular Herpes
simplex virus,
idoxuridine-resistant Herpes and
vidarabine-resistant Herpes. In
November 1997, the FDA approved
the expanded use of Viroptic(R) to
include pediatric patients, ages
six and above.
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COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
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Neosporin(R)(3)................... GlaxoSmithKline A prescription strength ophthalmic
(November 1997) ointment and solution indicated
for the topical treatment of
ocular infections. It is also
formulated as a prescription
strength genito-urinary
concentrated sterile irrigant
indicated for short-term use as a
continuous irrigant or rinse to
help prevent infections associated
with the use of indwelling
catheters.
Polysporin(R)(3).................. GlaxoSmithKline A prescription strength wide range
(November 1997) antibacterial sterile ointment
indicated for the topical
treatment of superficial ocular
infections.
Vira-A(R)......................... Pfizer An antiviral ointment indicated
(February 1998) for the topical treatment of
ocular infections caused by the
Herpes simplex virus types 1 and
2.
Chloromycetin(R).................. Pfizer A broad spectrum antibiotic
(February 1998) ophthalmic ointment and solution
indicated for the treatment of
serious bacterial infections that
are not responsive to other
antibiotics or when other
antibiotics are contraindicated.
This product is also available in
an otic solution and sterile
injectable form for intravenous
administration in the treatment of
acute infections caused by
salmonella and meningeal
infections.
Septra(R)......................... GlaxoSmithKline An antibiotic indicated for the
(November 1997) treatment of infectious diseases,
including urinary tract
infections, pneumonia, enteritis
and ear infections in adults and
children.
Coly-Mycin(R)..................... Pfizer An antibiotic sterile parenteral
(February 1998) indicated for the treatment of
acute or chronic infections due to
sensitive strains of certain
gram-negative bacteria and a
sterile aqueous suspension for the
treatment of superficial bacterial
infections of the external
auditory canal.
Silvadene(R)(4)................... Aventis A topical antimicrobial cream
(December 1998) indicated as an adjunct for the
prevention and treatment of wound
sepsis in patients with second-and
third-degree burns.
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COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
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CRITICAL CARE PRODUCTS
Thrombin-JMI(R)................... Jones A chromatographically purified
(August 2000) topical (bovine) thrombin solution
indicated as an aid to hemostasis
whenever oozing blood and minor
bleeding from capillaries and
small venules is accessible.
Brevital (R)...................... Jones An anesthetic solution for
(August 2000) intravenous use in adults and for
rectal and intramuscular use only
in pediatric patients.
WOMEN'S HEALTH/ENDOCRINOLOGY
PRODUCTS
Pitocin(R)........................ Pfizer A sterile hormone solution used to
(February 1998) initiate or improve uterine
contractions during labor and to
control bleeding or hemorrhage in
the mother after childbirth.
Menest(R)(4)...................... GlaxoSmithKline A film-coated estrified estrogen
(June 1998) tablet for the treatment of
vasomotor symptoms of menopause,
atrophic vaginitis, kraurosis
vulvae, female hypogonadism,
female castration, primary ovarian
failure, breast cancer and
prostatic carcinoma.
Nordette(R)....................... American Home Products A tablet-form oral contraceptive
(July 2000) indicated for the prevention of
pregnancy.
Anusol-HC(R)...................... Pfizer A suppository and cream indicated
(February 1998) for the relief of inflammation
accompanying hemorrhoids (piles),
post-irradiation proctitis,
cryptitis and other inflammatory
conditions of the anorectum.
Levoxyl(R)........................ Jones Color-coded, potency marked
(August 2000) tablets indicated as replacement
therapy for any form of diminished
or absent thyroid function.
Tapazole(R)....................... Jones A tablet indicated in the medical
(August 2000) treatment of hyperthyroidism.
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COMPANY ACQUIRED FROM
PRODUCT AND DATE OF ACQUISITION PRODUCT DESCRIPTION AND INDICATION
- ---------------------------------- ------------------------ ----------------------------------
Cytomel(R)........................ Jones A tablet indicated in the medical
(August 2000) treatment of hyperthyroidism. The
only commercially available
thyroid hormone tablet containing
T(3) as a single entity.
Triostat(R)....................... Jones A sterile non-pyrogenic aqueous
(August 2000) solution for intravenous
administration indicated in the
treatment of myxedema
coma/precoma.
- ---------------
(1) We acquired licenses for the exclusive rights in the United States under
various patents to the active ingredient in Altace(R).
(2) We acquired the trademark and patents for this product from Boehringer
Ingelheim Pharmaceuticals, Inc.
(3) We have exclusive licenses, free of royalty obligations, to manufacture and
market prescription formulations of these products.
(4) We acquired worldwide rights to these products.
CONTRACT MANUFACTURING
We utilize our excess manufacturing capacity to provide third party
contract manufacturing. We currently provide contract manufacturing for many
pharmaceutical and biotechnology companies, including Pfizer, Centocor, Inc.,
Santen Incorporated and Hoffman-LaRoche Inc. Many of the products that we
contract manufacture are difficult to manufacture and, therefore, do not attract
significant competition. Contract manufacturing as a percentage of sales has
declined from 85% in 1994 to 7.0% of net revenues for each of the years ended
December 31, 2000 and 1999 as we have acquired branded pharmaceuticals products.
We believe contract manufacturing provides the following benefits:
- a stable, recurring source of cash flows;
- a means of absorbing overhead costs, and as such is an efficient
utilization of excess capacity; and
- experience in manufacturing a broad line of formulations which is
advantageous to us in pursuing and integrating acquired products.
SALES AND MARKETING
We have a national sales force of approximately 520 sales representatives.
We distribute our branded pharmaceutical products primarily through wholesale
drug distributors. These products are ordinarily dispensed to the public through
pharmacies on the prescription of a physician. For branded pharmaceutical
products, our marketing and sales promotions principally target general/family
practitioners, internal medicine physicians, cardiologists, endocrinologists,
pediatricians and obstetrician/gynecologists and hospitals through detailing and
sampling to encourage physicians to prescribe more of our products. The sales
force is supported and supplemented by co-promotion arrangements, telemarketing
and direct mail, as well as through advertising in trade publications and
representations at regional and national medical conventions. Our telemarketing
and direct mailing efforts are performed primarily by using a computer sampling
system, which we developed to distribute samples to physicians. We identify and
target physicians through data available from IMS America, Ltd. and Scott-Levin,
suppliers of prescriber prescription data. We intend to seek new markets in
which to promote our product lines and will continue expansion of our field
sales force as product growth or product acquisitions warrant.
Similar to other pharmaceutical companies, our principal customers are
wholesale pharmaceutical distributors. The wholesale distributor network for
pharmaceutical products has in recent years been subject to increasing
consolidation, which has increased our, and other industry participants',
customer concentration.
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In addition, the number of independent drug stores and small chains has
decreased as retail consolidation has occurred. For the year ended December 31,
2000, approximately 43.2% of our sales were attributable to three distributors:
McKesson Corporation (18.1%), Cardinal/Whitmire (14.9%) and Bergen Brunswig
(10.2%).
MANUFACTURING
Our manufacturing facilities are located in Bristol, Tennessee; Rochester,
Michigan; Middleton, Wisconsin; St. Petersburg, Florida and St. Louis, Missouri.
These facilities have in the aggregate approximately 1.5 million square feet of
manufacturing, packaging, laboratory, office and warehouse space. We are
licensed by the Drug Enforcement Agency, known as the "DEA," to procure and
produce controlled substances. We manufacture certain of our own branded
pharmaceutical products as well as products owned by other pharmaceutical
companies under manufacture and supply contracts which expire over periods
ranging from one to four years.
We can produce a broad range of dosage formulations, including sterile
solutions, lyophylized (freeze-dried) products, injectables, tablets and
capsules, liquids, creams and ointments, suppositories and powders. We believe
our manufacturing capabilities allow us to capture higher margins and pursue
product line extensions more efficiently. However, currently all or a part of 26
of our product lines, including Altace(R), Lorabid(R), the product lines
acquired from GlaxoSmithKline and two of the product lines acquired from Pfizer
are manufactured for us by third parties. As of December 31, 2000, capacity
utilization was approximately 50.0% at the Bristol facility, approximately 33.0%
at the Parkedale facility located in Rochester, Michigan, approximately 90.0% at
the Middleton facility, approximately 75.0% at the St. Petersburg facility and
approximately 70.0% at the St. Louis, Missouri facility, providing us with
substantial manufacturing capacity for future growth. We intend to transfer,
when advantageous, production of acquired branded pharmaceutical products and
their product line extensions to our manufacturing facilities as soon as
practicable after regulatory requirements and contract manufacturing
requirements are satisfied.
In addition to manufacturing, we have fully integrated manufacturing
support systems including quality assurance, quality control, regulatory
compliance and inventory control. These support systems enable us to maintain
high standards of quality for our products and simultaneously deliver reliable
services and goods to our customers on a timely basis. Companies that do not
have such support systems in-house must out source these services.
We require a supply of quality raw materials and components to manufacture
and package drug products for us and for third parties with which we have
contracted. Generally we have not had difficulty obtaining raw materials and
components from suppliers in the past. Currently, we rely on more than 500
suppliers to deliver the necessary raw materials and components. We have no
reason to believe we will be unable to procure adequate supplies of raw
materials and components on a timely basis.
RESEARCH AND DEVELOPMENT
We are involved in product development and continually seek to develop
extensions to our product lines and to improve the quality and efficiency of our
manufacturing processes. Our laboratories and product development scientists
have produced several product line extensions to existing branded pharmaceutical
products.
Through King Research and Development, we are engaged in product life cycle
management to develop new indications and line extensions for existing and
acquired products and the development and global commercialization of
cardiovascular medicines and adenosine-receptor technologies, including the
development of Binodisine (MRE0470), a myocardial pharmacologic stress imaging
agent. These products in development and the related intellectual property
rights are typically obtained under license from academic or corporate sources
who have received United States patents. We then sponsor and direct any
additional preclinical studies and clinical testing needed for product
registration and marketing approval. These late-stage product development
activities are outsourced to independent clinical research organizations to
maximize efficiency and minimize internal overhead.
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Additionally, we have entered into licensing arrangements with Novavax to
develop and potentially commercialize HPV-16 VLP vaccines, for which the initial
planned Phase III clinical trial is expected to commence during mid-2001. We
have exclusive worldwide rights to HPV-16 VLP except in the United States and
Puerto Rico which we share with Novavax.
We also acquired an exclusive license from Novavax to promote, market,
distribute and sell Estrasorb(TM) worldwide except in the United States, Canada,
Italy, the Netherlands, Greece, Switzerland and Spain. We will co-market
Estrasorb(TM) in the United States with Novavax. Novavax has indicated it
expects to file a New Drug Application for Estrasorb(TM) in 2001.
GOVERNMENT REGULATION
Our business and our products are subject to extensive and rigorous
regulation at both the federal and state levels. Most importantly, nearly all of
our products are subject to pre-market approval requirements. New drugs are
approved under, and are subject to, the Federal Food, Drug and Cosmetic Act,
known as the "FDC Act," and the respective related regulations. Biological drugs
are subject to both the FDC Act and the Public Health Service Act, known as the
"PHS Act," and the related regulations. Biological drugs are licensed under the
PHS Act.
At the federal level, we are principally regulated by the FDA as well as by
the DEA, the Consumer Product Safety Commission, the Federal Trade Commission,
the U.S. Department of Agriculture, Occupation Safety and Health Administration
and the U.S. Environmental Protection Agency known as the "EPA." The FDC Act,
the regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the development, testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of our products and those manufactured by and for third parties.
Product development and approval within this regulatory framework requires a
number of years and involves the expenditure of substantial resources.
When we acquire the right to market an existing approved pharmaceutical
product, both we and the former application holder are required to submit
certain information to the FDA. This information, if adequate, results in the
transfer to us of marketing rights to the pharmaceutical products. We are also
required to advise the FDA about any changes in certain conditions in the
approved application as set forth in the FDA's regulations. Our strategy focuses
on acquiring branded pharmaceutical products and transferring, when
advantageous, their manufacture to our manufacturing facilities as soon as
practicable after regulatory requirements are satisfied. In order to transfer
manufacturing of the acquired branded products, we must demonstrate, by filing
information with the FDA, that we can manufacture the product in accordance with
current Good Manufacturing Practices, which we refer to in this report as
"cGMPs," and the specifications and conditions of the approved marketing
application. For changes requiring prior approval, there can be no assurance
that the FDA will grant such approval in a timely manner, if at all.
The FDA also mandates that drugs be manufactured, packaged and labeled in
conformity with cGMPs. In complying with cGMP regulations, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure that the product meets applicable specifications and
other requirements to ensure product safety and efficacy. The FDA periodically
inspects drug manufacturing facilities to ensure compliance with applicable cGMP
requirements. Failure to comply with the statutory and regulatory requirements
subjects the manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product or voluntary recall of a
product. Adverse experiences with the use of products must be reported to the
FDA and could result in the imposition of market restrictions through labeling
changes or in product removal. Product approvals may be withdrawn if compliance
with regulatory requirements is not maintained or if problems concerning safety
or efficacy of the product occur following approval.
The federal government has extensive enforcement powers over the activities
of pharmaceutical manufacturers, including authority to withdraw product
approvals, commence actions to seize and prohibit the sale of unapproved or
non-complying products, to halt manufacturing operations that are not in
compliance with cGMPs, and to impose or seek injunctions, voluntary recalls, and
civil monetary and criminal penalties.
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Such a restriction or prohibition on sales or withdrawal of approval of products
marketed by us could materially adversely affect our business, financial
condition and results of operations.
Marketing authority for our products is subject to revocation by the
applicable government agencies. In addition, modifications or enhancements of
approved products or changes in manufacturing locations are in many
circumstances subject to additional FDA approvals which may or may not be
received and which may be subject to a lengthy application process. Our
manufacturing facilities are continually subject to inspection by such
governmental agencies and manufacturing operations could be interrupted or
halted in any such facilities if such inspections prove unsatisfactory.
We also manufacture and sell pharmaceutical products which are "controlled
substances" as defined in the Controlled Substances Act and related federal and
state laws, which establish certain security, licensing, record keeping,
reporting and personnel requirements administered by the DEA, a division of the
Department of Justice, and state authorities. The DEA has a dual mission-law
enforcement and regulation. The former deals with the illicit aspects of the
control of abusable substances and the equipment and raw materials used in
making them. The DEA shares enforcement authority with the Federal Bureau of
Investigation, another division of the Department of Justice. The DEA's
regulatory responsibilities are concerned with the control of licensed
manufacturers, distributors and dispensers of controlled substances, the
substances themselves and the equipment and raw materials used in their
manufacture and packaging in order to prevent such articles from being diverted
into illicit channels of commerce. We maintain appropriate licenses and
certificates with the applicable state authorities in order to engage in
pharmaceutical development, manufacturing and distribution of pharmaceutical
products containing controlled substances. We are licensed by the DEA to
manufacture and distribute certain pharmaceutical products containing controlled
substances. We have not experienced license revocations, restriction or fines
for non-compliance with the foregoing regulations but no assurance can be given
that revocations, restriction or fines which could have a material adverse
effect upon our business, financial condition and results of operations will not
be imposed upon us in the future.
The distribution of pharmaceutical products is subject to the Prescription
Drug Marketing Act, known as "PDMA," as part of the FDC Act, which regulates
such activities at both the federal and state level. Under the PDMA and its
implementing regulations, states are permitted to require registration of
manufacturers and distributors who provide pharmaceuticals even if such
manufacturers or distributors have no place of business within the state. States
are also permitted to adopt regulations limiting the distribution of product
samples to licensed practitioners. The PDMA also imposes extensive licensing,
personnel record keeping, packaging, quantity, labeling, product handling and
facility storage and security requirements intended to prevent the sale of
pharmaceutical product samples or other diversions.
Our Parkedale facility, located in Rochester, Michigan, manufactures both
drug and biological pharmaceutical products. Prior to our acquisition of
Parkedale in February 1998, it was one of six Pfizer facilities subject to a
consent decree issued by the U.S. District Court of New Jersey in August 1993.
We plan to petition for relief from the consent decree with respect to the
Parkedale facility when appropriate.
In March 1998, the FDA's Team Biologics began a series of periodic
inspections which continued into 2000 at our Parkedale facility. During these
inspections, the FDA made cGMP observations in written reports provided to us.
These written reports are known as "FDA Form 483s" or simply as a "483." The
observations in a 483 are reported to the manufacturer in order to assist the
manufacturer in complying with the FDC Act and the regulations enforced by the
FDA. Often a pharmaceutical manufacturer receives a 483 after an inspection.
While no law or regulation requires us to respond to a 483, we provided the FDA
with a written response to each of these 483s, including action plans to address
the observations. On September 27, 2000, following the receipt of a written
notification from the FDA, we decided to discontinue Fluogen(R) permanently,
rather than devote additional resources to the product. As a result of our
discontinuance of the product, we did not recognize any revenue from Fluogen(R)
during 2000. We have generally recognized revenue from Fluogen(R) during the
third and fourth quarters of the prior calendar years. As a result of
discontinuing Fluogen(R), we recorded in the year ended December 31, 2000,
extraordinary losses on disposed and impaired assets totaling $43.7 million
before tax benefit of $16.4 million. This extraordinary loss related to
Fluogen(R)
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included the write-off of related property, plant and equipment and intangible
assets and existing product inventory. In addition, we incurred non-recurring
charges totaling $8.6 million related to employee severance by Parkedale in the
year 2000.
The Parkedale facility was inspected by the FDA in February 2001. Our
Parkedale facility received a 483 following this inspection. The 483 from
February 2001 does not require us to delay or discontinue the production of any
products made at the Parkedale facility.
We cannot determine what effect changes in regulations or statutes or legal
interpretation, when and if promulgated or enacted, may have on our business in
the future. Changes could, among other things, require changes to manufacturing
methods, expanded or different labeling, the recall, replacement or
discontinuance of certain products, additional record keeping or expanded
documentation of the properties of certain products and scientific
substantiation. Such changes, or new legislation, could have a material adverse
effect on our business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
Our operations are subject to numerous and increasingly stringent federal,
state and local environmental laws and regulations concerning, among other
things, the generation, handling, storage, transportation, treatment and
disposal of toxic and hazardous substances and the discharge of pollutants into
the air and water. Environmental permits and controls are required for some of
our operations and these permits are subject to modification, renewal and
revocation by the issuing authorities. We believe that our facilities are in
substantial compliance with our permits and environmental laws and regulations
and do not believe that future environmental compliance will have a material
adverse effect on our business, financial condition or results of operations.
Our environmental capital expenditures and costs for environmental compliance
may increase in the future as a result in changes in environmental laws and
regulations or as a result of increased manufacturing activities at any of our
facilities.
Under the Comprehensive Environmental Response, Compensation, and Liability
Act, known as "CERCLA," the EPA can impose liability for the entire cost of
cleanup of contaminated properties upon each or any of the current and former
site owners, site operators or parties who sent waste to the site, regardless of
fault or the legality of the original disposal activity. Many states, including
Tennessee, Michigan, Wisconsin, Florida and Missouri have statutes and
regulatory authorities similar to CERCLA and to the EPA. We have hazardous waste
hauling agreements with licensed third parties to properly dispose of hazardous
wastes. We cannot assure you that we will not be found liable under CERCLA or
any applicable state statute or regulation for the costs of undertaking a clean
up at a site to which our wastes were transported.
COMPETITION
General
We compete with other pharmaceutical companies for product and product line
acquisitions. These competitors include Forest Laboratories, Inc., ALZA
Corporation, Shire Pharmaceuticals Group plc, Watson Pharmaceuticals, Inc.,
Medicis Pharmaceutical Corporation and other companies which also acquire
branded pharmaceutical products and product lines from other pharmaceutical
companies. Additionally, since our products are generally established and
commonly sold, they are subject to competition from products with similar
qualities. Our branded pharmaceutical products may be subject to competition
from alternate therapies during the period of patent protection and thereafter
from generic equivalents. The manufacturers of generic products typically do not
bear the related research and development costs and consequently are able to
offer such products at considerably lower prices than the branded equivalents.
There are, however, a number of factors, which enable products to remain
profitable once patent protection has ceased. These include the establishment of
a strong brand image with the prescriber or the consumer, supported by the
development of a broader range of alternative formulations than the
manufacturers of generic products typically supply.
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Generic Substitutes
Many of our branded pharmaceutical products have either a strong market
niche or competitive position. Some of our branded pharmaceutical products face
competition from generic substitutes. For example, during 2000 the FDA approved
for sale generic substitutes for Tapazole(R). Of our branded pharmaceutical
products that have generic substitutes, we believe that only a small number face
significant competition because many of our branded pharmaceutical products have
sales levels that are too low to attract competition or are too difficult to
manufacture or prove bioequivalence (i.e., the two products produce identical
effects on the body).
For a manufacturer to launch a generic substitute, it must prove to the FDA
when filing an application to make a generic substitute that the branded
pharmaceutical and the generic substitute have bioequivalence. It typically
takes two or three years to prove bioequivalence and receive FDA approval for
many generic substitutes. By focusing our efforts in part on products with
bioequivalence or complex manufacturing requirements, we are better able to
protect market share and produce sustainable, high margins and cash flows.
INTELLECTUAL PROPERTY
Patents, Licenses and Proprietary Rights
We consider the protection of discoveries in connection with our
development activities important to our business. The patent positions of
pharmaceutical firms, including ours, are uncertain and involve legal and
factual questions, which can be difficult to resolve. We intend to seek patent
protection in the United States and selected foreign countries where and when
deemed appropriate.
In connection with the Altace(R) product line, we acquired a license for
the exclusive rights in the United States and Puerto Rico to various Aventis
patents, including the rights to the active ingredients in Altace(R) having
patent protection until 2008. Our rights include the use of the active
ingredients in Altace(R) generally in combination as human therapeutic or human
diagnostic products in the United States. We also own U.S. Patents for
Procanbid(R) and for Novel Chlorthalidone Process and Product, covering the raw
materials used in the manufacture of Thalitone(R). These patents expire in 2014
and 2007, respectively.
In connection with the acquisition of Lorabid(R), we acquired, among other
things, all of Lilly's rights in approximately 30 patents and received a broad
royalty-free non-exclusive license in the U.S. and Puerto Rico to 12 other
patents and associated technology. We also received an exclusive sublicense to 4
other patents for which we must pay a royalty to Lilly if certain sales
thresholds are met. Lorabid(R) has patent protection through 2005.
We have exclusive licenses expiring June 2036 for the prescription
formulations of Neosporin(R) and Polysporin(R) and a license expiring February
2038 for the prescription formulation of Anusol-HC(R). Such licenses are subject
to early termination in the event we fail to meet specified quality control
standards, including cGMP regulations with respect to the products, or commit a
material breach of other terms and conditions of the licenses which would have a
significant adverse effect on the uses of the licensed products retained by the
licensor, which would include among other things, marketing products under these
trade names outside the prescription field.
We are party to an agreement under which Fujisawa Healthcare, Inc.,
manufactures and markets Adenocard(R) in the United States and Canada in
exchange for royalties. We are also party to an agreement with
Sanofi-Synthelabo, France, for the manufacture and marketing of Adenocard(R) in
countries other than the United States, Canada and Japan in exchange for
royalties. We are party to an agreement under which Suntory manufactures and
markets Adenocard(R) and Adenoscan(R) in Japan. We pay one-half of all royalties
received from Adenocard(R) sales to the University of Virginia Alumni Patents
Foundation from which we acquired rights to Adenocard(R).
We are also party to an agreement with Fujisawa that grants to Fujisawa
manufacturing and marketing rights to such products in the United States and
Canada and entitles us to royalties. Royalties received by us
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from sales outside of the United States and Canada are shared equally with
Fujisawa. Fujisawa, on its own behalf and ours, obtained a license to additional
intellectual property rights for intravenous adenosine in cardiac imaging and
the right to use intravenous adenosine as a cardioprotectant in combination with
thrombolytic therapy, balloon angioplasty and coronary bypass surgery and
secured intellectual property rights to extend the exclusivity of Adenoscan(R)
until 2015.
We have licensed exclusive rights to Sanofi to manufacture and market
Adenoscan(R) worldwide except in the United States, Canada, Japan, Korea and
Taiwan. Sanofi has received marketing approval for Adenoscan(R) in a number of
different countries.
We are party to a Development and Commercialization Agreement with
Discovery Therapeutics, Inc. dedicated to the discovery, development and
commercialization of compounds that stimulate the A2a subfamily of adenosine
receptors which we call "A2a-agonists". Under the terms of that agreement,
Discovery Therapeutics granted us an exclusive license under certain U.S. and
foreign patents and pending applications relating to A2a-agonists. We have
exclusive rights under this license to market and sell developed compounds,
either directly or through sublicense. In exchange for these rights, we agreed
to pay Discovery Therapeutics licensing fees, development milestones and
royalties on future sales of A2a-agonist products.
We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation, where patent protection is not believed to
be appropriate or attainable, to develop and sustain our competitive position.
There can be no assurance that others will not independently develop
substantially equivalent proprietary technology and techniques or otherwise gain
access to our trade secrets or disclose the technology or that we can adequately
protect our trade secrets.
Trademarks
We sell our branded products under a variety of trademarks. While we
believe that we have valid proprietary interests in all currently used
trademarks, only some of the trademarks are registered with the U.S. government,
or foreign governmental entities, including those for our principal branded
pharmaceutical products registered in the United States.
BACKLOG
As of March 23, 2001, we had no material backlog.
EMPLOYEES
As of March 23, 2001, we employed 1,642 full-time and 14 part-time persons.
Some employees of the Parkedale facility, representing approximately 14.8% of
our employees, are covered by a collective bargaining agreement with the Oil,
Chemical & Atomic Workers, International Union which expires February 28, 2003.
We believe our employee relations are good. We employ two full-time Chaplains
and offer as part of our employee benefits package access to additional
counseling services.
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RISK FACTORS
Before you purchase our securities, you should carefully consider the risks
described below and the other information contained in this report, including
our financial statements and related notes. The risks described below are not
the only ones facing our company. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business operations. If
any of the adverse events described in this risk factors section actually
occurs, our business, results of operations and financial condition could be
materially adversely affected, the trading price of our common stock could
decline and you might lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
IF SALES OF OUR MAJOR PRODUCTS OR ROYALTY PAYMENTS TO US DECREASE, OUR RESULTS
OF OPERATIONS COULD BE ADVERSELY AFFECTED.
Altace(R) accounted for approximately 26.1% of our net sales for the year
ended December 31, 2000, and Altace(R), Lorabid(R), Levoxyl(R), Thrombin-JMI(R),
and royalty revenues collectively accounted for approximately 56.5% of our net
sales during the same period. We believe that sales of these products will
continue to constitute a significant portion of our total revenues for the
foreseeable future. Accordingly, any factor adversely affecting sales of any of
these products or products for which we receive royalty payments could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.
WE MAY NOT ACHIEVE OUR INTENDED BENEFITS FROM THE CO-PROMOTION AGREEMENT WITH
AMERICAN HOME PRODUCTS CORPORATION FOR THE PROMOTION OF ALTACE(R).
We entered into the Co-Promotion Agreement for Altace(R) with American Home
Products Corporation partially because we believed a larger pharmaceutical
company with more sales representatives and with more experience and expertise
in the promotion of pharmaceutical products to physicians would significantly
increase the sales revenue potential of Altace(R). By efficiently co-marketing
the new indications for Altace(R) which were approved by the FDA on October 4,
2000, we intend to increase the demand for the product. In the agreement, both
parties have incentives to maximize the sales and profits of Altace(R) and to
optimize the marketing of the product by coordinating their promotional
activities.
Under the Co-Promotion Agreement, American Home Products and we agreed to
establish an annual budget of marketing expenses to cover, among other things,
direct-to-consumer advertising, such as television advertisements and
advertisements in popular magazines and professional journals. One of the goals
of the direct-to-consumer advertising campaign is to encourage the targeted
audience to ask their own physicians about Altace(R) and whether it might be of
benefit for them. The direct-to-consumer campaign may not be effective in
achieving this goal. Physicians may not prescribe Altace(R) for their patients
to the extent we might otherwise hope if patients for whom Altace(R) is
indicated do not ask their physicians about Altace(R).
It is possible that we or American Home Products or both of us will not be
successful in effectively promoting Altace(R) or in optimizing its sales. The
content of agreed-upon promotional messages for Altace(R) may not sufficiently
convey the merits of Altace(R) and may not be successful in convincing
physicians to prescribe Altace(R) instead of other ACE inhibitors or competing
therapies. The targets for sales force staffing, the number and frequency of
details to physicians and the physicians who are called upon may be inadequate
to realize our expectations for the revenues from Altace(R). Neither we nor
American Home Products may be able to overcome the perception by physicians of a
class effect, which we discuss below. Further, developments in technologies, the
introduction of other products or new therapies may make it more attractive for
American Home Products to concentrate on the promotion of a product or products
other than Altace(R) or to lessen their emphasis on the marketing of Altace(R).
Our strategic decisions in dealing with managed health care organizations may
not prove to be correct and we could consequently lose sales in this market to
competing ACE inhibitor products or alternative therapies. If any of these
situations occurred, they could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
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IF OUR BRISTOL FACILITY IS NOT QUALIFIED AS A MANUFACTURING AND PACKAGING SITE
FOR ALTACE(R) OR IF THERE IS AN INTERRUPTION IN THE SUPPLY OF RAW MATERIAL FOR
ALTACE(R), THE DISTRIBUTION, MARKETING AND SUBSEQUENT SALES OF THE PRODUCT COULD
BE ADVERSELY AFFECTED.
We are currently working to qualify our Bristol facility as a manufacturing
and packaging site for Altace(R). While Aventis will remain as a supplier of the
finished Altace(R) product to us, we intend our Bristol facility to ultimately
be the primary source for the manufacture and packaging of Altace(R) for us. If
we are unable to secure the approval of our Bristol facility as a manufacturing
and packaging site or do not do so in a timely manner, we may not be able to
meet the anticipated demand for Altace(R). While Aventis will remain an
alternative or back-up supplier of Altace(R), if we encounter delays or
difficulties with the approval of our Bristol facility as a site for the
manufacture and packaging of Altace(R), the distribution, marketing and
subsequent sales of Altace(R) nonetheless could be adversely affected. If we are
delayed or unsuccessful in securing approval of the Bristol facility as a
supplier, we might not be able to make alternative supply arrangements for
additional amounts of the finished product at commercially reasonable rates, if
at all.
When we have qualified our Bristol facility as a manufacturing and
packaging site for Altace(R), Aventis will be our single supplier of ramipril,
the active ingredient in Altace(R). Because the manufacture of ramipril is a
patented process, we cannot secure the raw material from another source. Aventis
currently manufactures and packages Altace(R) for us for sales in the United
States and for itself for distribution outside of the United States. Any
interruptions or delays in receiving the finished product or raw material used
for the future production of Altace(R) could have a material adverse effect on
our business, financial condition, results of operations and cash flows. We have
entered into a supply agreement with Aventis and we believe that it adequately
protects our supply of raw material, but there can be no guarantee that there
will not be interruptions or delays in the supply of the raw material.
SALES OF ALTACE(R) MAY BE AFFECTED BY THE PERCEPTION OF A CLASS EFFECT, AND
ALTACE(R) AND OUR OTHER PRODUCTS MAY BE SUBJECT TO VARIOUS SOURCES OF
COMPETITION FROM ALTERNATE THERAPIES.
Although the FDA has approved new indications for Altace(R), we may be
unable to meet investors' expectations regarding sales of Altace(R) due to a
perceived class effect or the inability to market Altace(R)'s new uses and
indications effectively.
All prescription drugs currently marketed by pharmaceutical companies may
be grouped into existing drug classes, but the criteria for inclusion vary from
class to class. For some classes, specific biochemical properties may be the
defining characteristic. For example, Altace(R) (ramipril) is a member of a
class of products known as ACE inhibitors because ramipril is one of several
chemicals that inhibits the production of enzymes that convert angiotensin,
which could otherwise lead to hypertension.
When one drug from a class is demonstrated to have a particularly
beneficial or previously undemonstrated effect (e.g., the benefit of Altace(R)
as shown by the Heart Outcomes Prevention Evaluation, which we refer to as the
"HOPE trial"), marketers of other drugs in the same class (for example, other
ACE inhibitors) will represent that their products offer the same benefit simply
by virtue of membership in the same drug class. Consequently, other companies
with ACE inhibitors that compete with Altace(R) will represent that their
products are equivalent to Altace(R). By doing so, these companies will
represent that their products offer the same efficacious results demonstrated by
the HOPE trial. Regulatory agencies do not decide whether products within a
class are quantitatively equivalent in terms of efficacy or safety. Because
comparative data among products in the same drug class are rare, marketing
forces often dictate a physician's decision to use one ACE inhibitor over
another. We may not be able to overcome other companies' representations that
their ACE inhibitors will offer the same benefits as Altace(R) as demonstrated
by the HOPE trial. As a result, sales of Altace(R) may suffer from the
perception of a class effect.
Currently, there is no generic form of Altace(R) available. That is, there
is no product that has the same active ingredient as Altace(R). Although no
generic substitute for Altace(R) has been approved by the FDA, there are other
ACE inhibitors whose patents have expired or will expire in the next few years
and there are generic forms of other ACE inhibitors. Also, there are different
therapeutic agents that may be used to treat certain conditions treated by
Altace(R). For example, the group of products known as beta-blockers, calcium
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channel blockers and diuretics, may be prescribed to treat certain conditions
that Altace(R) is used to treat. New ACE inhibitors, increased sales of generic
forms of other ACE inhibitors or of other therapeutic agents that compete with
Altace(R) may adversely affect the sales of Altace(R).
OUR CO-PROMOTION AGREEMENT FOR ALTACE(R) WITH AMERICAN HOME PRODUCTS CORPORATION
COULD BE TERMINATED BEFORE WE REALIZE ALL OF THE BENEFITS OF THE AGREEMENT OR IT
COULD BE ASSIGNED TO ANOTHER COMPANY BY AMERICAN HOME PRODUCTS OR AMERICAN HOME
PRODUCTS COULD MARKET A COMPETING PRODUCT.
Our exclusive Co-Promotion Agreement for Altace(R) with the Wyeth-Ayerst
Laboratories, a division of American Home Products Corporation, could be
terminated before we realize all of the benefits of the agreement. American Home
Products and we each have the right to terminate the agreement if annualized net
sales of Altace(R) have not reached $300.0 million by October 4, 2003. There are
other reasons why either American Home products or we could terminate the
Co-Promotion Agreement. If the Co-Promotion Agreement is terminated for any
reason, we may not realize increased sales which we believe may result from the
expanded promotion of Altace(R). If the Co-Promotion Agreement is terminated, we
must return some of the money previously paid to us by American Home Products
upon the signing of the Co-Promotion Agreement, and American Home Products will
have the rights to reacquire its interests in Nordette(R) for a fixed sum. If we
must unwind our co-promotion efforts because of the reasons mentioned above,
there may be a material adverse effect on the sales of Altace(R).
If another company were to acquire, directly or indirectly, over 50% of the
combined voting power of American Home Products' voting securities or more than
half of its total assets, then American Home Products could assign its rights
and obligations under the Altace(R) Co-Promotion Agreement to a successor
without our prior consent. However, a successor would be required to first
assume in writing the obligations of American Home Products under the
Co-Promotion Agreement before the rights of American Home Products were assigned
to it. Another party might not market Altace(R) as effectively or efficiently as
American Home Products did. Also, a company which acquires American Home
Products might not place as much emphasis on the Co-Promotion Agreement, might
expend fewer marketing resources, such as a fewer number of sales
representatives, than American Home Products did, or might have less experience
or expertise in marketing pharmaceutical products to physicians. In any of these
cases, there may be a material adverse effect on the sales of Altace(R).
When feasible, American Home Products must give us six months' written
notice of its intent to sell, market or distribute any product competitive with
Altace(R). Under the Co-Promotion Agreement, a product competes with Altace(R)
if it is an ACE inhibitor, an angiotensin II receptor blocker, which we refer to
as an "ARB" in this report, or an ACE inhibitor or ARB in combination with other
cardiovascular agents in a single product. However, an ARB alone or in
combination with other cardiovascular agents competes with Altace(R) only if the
level of promotional effort used by American Home Products for the ARB is
greater than 50% of that applied to Altace(R). A product would not compete with
Altace(R) if in the last 12 months it had net sales of less than $100.0 million
or 15% of net sales of Altace(R), whichever was higher. Also, a product would
not compete with Altace(R) under the Co-Promotion Agreement if the product were
acquired by American Home Products through a merger with or acquisition by a
third party and the product was no longer actively promoted by American Home
Products or its successor through detailing the product to physicians.
Once we have been notified in writing of American Home Products' intent to
market, sell or distribute a competing product, then American Home Products has
90 days to inform us as to whether it intends to divest its interest in the
competing product. If American Home Products elects to divest the competing
product, it must try to identify a purchaser and to enter into a definitive
agreement with the purchaser as soon as practicable. If American Home Products
elects not to divest the competing product or fails to divest the product within
one year of providing notice to us of its plan to divest the competing product,
then both of us must attempt to establish acceptable terms under which we would
co-promote the competing product for the remaining term of our Altace(R)
Co-Promotion Agreement. Alternatively, American Home Products and we could agree
upon another commercial relationship, such as royalties payable to us for the
sale of the competing product, or we could agree to adjust the promotion fee we
pay to American Home Products for the co-promotion of Altace(R). If American
Home Products and we are unable to establish acceptable terms under
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any of these options, then we have the option at our sole discretion to
reacquire all the marketing rights to Altace(R) and terminate the Co-Promotion
Agreement upon 180 days' prior written notice to American Home Products. In the
event we decided to reacquire all the marketing rights to Altace(R) we would be
obligated to pay American Home Products an amount of cash equal to twice the net
sales of Altace(R) in the United States for the 12 month period preceding the
reacquisition. Such a decision could have a material effect on our business,
financial condition, the results of our operations and, cash flows.
OUR SALES OF LEVOXYL(R) COULD BE ADVERSELY IMPACTED IF OUR NEW DRUG APPLICATION
IS NOT APPROVED IN A TIMELY MANNER.
On August 14, 1997, the FDA announced in the Federal Register (62 FR 43535)
that orally administered levothyroxine sodium drug products are new drugs. The
notice stated that manufacturers who wish to continue to market these products
must submit applications as required by the FDC Act by August 14, 2000. On April
26, 2000, the FDA issued a second Federal Register notice extending the deadline
for filing these applications until August 14, 2001.
On August 1, 2000, we submitted a New Drug Application for Levoxyl(R), our
levothyroxine sodium drug product. The application is currently under review by
the FDA, but there can be no guarantee that our application will be approved in
a timely manner or at all. It is possible that other manufacturers of
levothyroxine sodium drug products have filed or will file other New Drug
Applications for their levothyroxine sodium products. It is also possible that
the applications of other manufacturers could be approved before ours is
approved which could result in a loss of sales of Levoxyl(R) or adversely affect
our market share. Jerome Stevens, Inc. has already received approval for its
levothyroxine sodium product Unithroid. After August 14, 2001, the FDA will
refuse to accept a New Drug Application for a levothyroxine sodium drug product
that is pharmaceutically equivalent to an approved product. Other manufacturers
who wish to submit an application for an equivalent product after August 14,
2001 must submit an Abbreviated New Drug Application. Also, since the Jerome
Stevens product has been approved, a manufacturer could submit an Abbreviated
New Drug Application demonstrating in vivo bioequivalence to the Jerome Stevens.
If the FDA were to determine that another levothyroxine sodium product is
bioequivalent to Levoxyl(R), generic substitution for Levoxyl(R) may become
possible which could result in a decrease in sales of our product Levoxyl(R).
WE CANNOT ASSURE YOU THAT SALES OF LORABID(R) WILL INCREASE IN THE FUTURE. IF
SALES DO NOT INCREASE, THERE MAY BE A MATERIAL ADVERSE EFFECT UPON OUR RESULTS
OF OPERATIONS.
Prior to our acquisition of Lorabid(R), sales of that product were on the
decline. Increased sales of Lorabid(R) depend upon effective marketing to
physicians which leads them to write prescriptions for our product. We cannot
assure you that sales of Lorabid(R) will increase in the future. If Lorabid(R)
sales do not increase or if they decrease, there may be a material adverse
effect upon our results of operations and cash flow.
IF WE CANNOT IMPLEMENT OUR STRATEGY TO GROW OUR BUSINESS THROUGH INCREASED SALES
AND ACQUISITIONS, OUR COMPETITIVE POSITION IN THE PHARMACEUTICAL INDUSTRY MAY
SUFFER.
We have historically increased our sales and net income through strategic
acquisitions and related internal growth initiatives intended to develop
marketing opportunities with respect to acquired product lines. Our strategy is
focused on increasing sales and enhancing our competitive standing through
acquisitions that complement our business and enable us to promote and sell new
products through existing marketing and distribution channels. Moreover, since
we engage in limited proprietary research activity with respect to product
development, we rely heavily on purchasing product lines from other companies.
Other companies, many of which have substantially greater financial,
marketing and sales resources than we do, compete with us for the acquisition of
products or companies. We may not be able to acquire rights to additional
products or companies on acceptable terms, if at all, or be able to obtain
future financing for acquisitions on acceptable terms, if at all. The inability
to effect acquisitions of additional branded products could limit the overall
growth of our business. Furthermore, even if we obtain rights to a
pharmaceutical product or acquire a company, we may not be able to generate
sales sufficient to create a profit or otherwise
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avoid a loss. For example, our marketing strategy, distribution channels and
levels of competition with respect to acquired products may be different than
those of our current products, limiting our ability to compete favorably in
those product categories.
IF WE CANNOT INTEGRATE THE BUSINESS OF COMPANIES OR PRODUCTS WE ACQUIRE, OUR
BUSINESS MAY SUFFER.
We anticipate that the integration of newly acquired companies and products
into our business will require significant management attention and expansion of
our sales force. In order to manage our acquisitions effectively, we must
maintain adequate operational, financial and management information systems and
motivate and effectively manage an increasing number of employees. Our recent
acquisitions, including the acquisition of Jones Pharma Incorporated, have
significantly expanded our product offerings, operations and number of
employees. Our future success will also depend in part on our ability to retain
or hire qualified employees to operate our expanding facilities efficiently in
accordance with applicable regulatory standards. If we cannot integrate our
acquisitions successfully, these changes and acquisitions could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
IF WE ARE NOT ABLE TO DEVELOP OR LICENSE NEW PRODUCTS, OUR BUSINESS MAY SUFFER.
We compete with other pharmaceutical companies, including large
pharmaceutical companies with financial resources and capabilities substantially
greater than ours, in the development and licensing of new products. We cannot
assure you that we will be able to
- engage in product life cycle management to develop new indications and
line extensions for existing and acquired products;
- develop, license or successfully commercialize new products on a timely
basis or at all; or
- develop or license new products in a cost effective manner.
For example, we are engaged in the development of Binodisine (MRE0470), a
myocardial pharmacologic stress imaging agent; under a licensing agreement with
Novavax we are developing HPV-16 VLP vaccines; and under an exclusive license
with Novavax we anticipate promoting marketing, distributing and selling
Estrasorb(TM) upon its approval by the FDA. However, we cannot assure you that
we will be successful in any or all of these projects.
Further, other companies may license or develop products or may acquire
technologies for the development of products that are the same as or similar to
the products we have in development or that we license. Because there is rapid
technological change in the industry and because many other companies may have
more financial resources than we do, other companies may
- develop or license their products more rapidly than we can,
- complete any applicable regulatory approval process sooner than we can,
- market or license their products before we can market or license our
products, or
- offer their newly developed or licensed products at prices lower than our
prices,
and thereby have a negative impact on the sales of our newly developed or
licensed products. Technological developments or the FDA's approval of new
therapeutic indications for existing products may make our existing products or
those products we are licensing or developing obsolete or may make them more
difficult to market successfully, which could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
WE DO NOT HAVE PROPRIETARY PROTECTION FOR MOST OF OUR BRANDED PHARMACEUTICAL
PRODUCTS, AND OUR SALES COULD SUFFER FROM COMPETITION BY GENERIC SUBSTITUTES.
Although most of our revenue is generated by products not subject to
competition from generic products, there is no proprietary protection for most
of our branded pharmaceutical products, and generic substitutes
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for most of these products are sold by other pharmaceutical companies. In
addition, governmental and other pressure to reduce pharmaceutical costs may
result in physicians prescribing products for which there are generic
substitutes. Increased competition from the sale of generic pharmaceutical
products may cause a decrease in revenue from our branded products and could
have a material adverse effect on our business, financial condition and results
of operations. For example, Tapazole(R), with net sales of $26.5 million in
1999, began to face generic competition in 2000 and had net sales of $29.0
million in 2000 although net sales declined in the last six months of 2000. In
addition, our branded products for which there is no generic form available may
face competition from different therapeutic agents used for the same indications
for which our branded products are used.
THIRD PARTIES MANUFACTURE OR SUPPLY MATERIALS FOR MANY OF OUR PRODUCTS, AND ANY
DELAYS OR DIFFICULTIES EXPERIENCED BY THEM MAY REDUCE OUR PROFIT MARGINS AND
REVENUES OR HARM OUR REPUTATION.
Many of our product lines, including Altace(R), Lorabid(R) and
Cortisporin(R), are currently manufactured by third parties. Our dependence upon
third parties for the manufacture of our products may adversely impact our
profit margins or may result in unforeseen delays or other problems beyond our
control. If for any reason we are unable to obtain or retain third-party
manufacturers on commercially acceptable terms, we may not be able to distribute
our products as planned. If we encounter delays or difficulties with contract
manufacturers in producing or packaging our products, the distribution,
marketing and subsequent sales of these products would be adversely affected,
and we may have to seek alternative sources of supply or abandon or sell product
lines on unsatisfactory terms. We might not be able to enter into alternative
supply arrangements at commercially acceptable rates, if at all. We also cannot
assure you that the manufacturers we utilize will be able to provide us with
sufficient quantities of our products or that the products supplied to us will
meet our specifications.
We require a supply of quality raw materials and components to manufacture
and package pharmaceutical products for us and for third parties with which we
have contracted. Generally, we have not had difficulty obtaining raw materials
and components from suppliers in the past. Currently, we rely on over 500
suppliers to deliver the necessary raw materials and components. We have no
reason to believe that we will be unable to procure adequate supplies of raw
materials and components on a timely basis. However, if we are unable to obtain
sufficient quantities of any of the raw materials or components required to
produce and package our products, we may not be able to distribute our products
as planned. In this case, our business, financial condition and results of
operations could be materially and adversely affected.
OUR PARKEDALE FACILITY HAS BEEN THE SUBJECT OF FDA CONCERNS. IF WE CANNOT
ADEQUATELY ADDRESS THE FDA'S CONCERNS, WE MAY BE UNABLE TO OPERATE THE PARKEDALE
FACILITY AND, ACCORDINGLY, OUR BUSINESS MAY SUFFER.
Our Parkedale facility, located in Rochester, Michigan, manufactures both
drug and biological pharmaceutical products. Prior to our acquisition of the
Parkedale facility in February 1998, it was one of six Pfizer facilities subject
to a consent decree issued by the U.S. District Court of New Jersey in August
1993 as a result of FDA concerns about compliance issues within Pfizer
facilities in the period before the decree was entered.
The Parkedale facility was inspected by the FDA in February 2001. When an
FDA inspector completes an authorized inspection of a manufacturing facility,
the FDC Act mandates that the inspector give to the owner/operator of the
facility a written report listing the inspector's observations of objectionable
conditions and practices. This written report is known as an "FDA Form 483" or
simply as a "483." The observations in a 483 are reported to the manufacturer in
order to assist the manufacturer in complying with the FDC Act and the
regulations enforced by the FDA. Often a pharmaceutical manufacturer receives a
483 after an inspection and our Parkedale facility received a 483 following the
February 2001 inspection. While no law or regulation requires us to respond to a
483 we have submitted a written response detailing our plan of action with
respect to each of the observations made on the February 483 and our commitment
to correct the objectionable practice or condition. The risk to us of a 483, if
left uncorrected, could include, among other things, the imposition of civil
monetary penalties, the commencement of actions to seize or prohibit the sale of
unapproved or non-complying products, or the cessation of manufacturing
operations at the Parkedale facility
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that are not in compliance with cGMP. While we believe the receipt of the 483
will not have a material adverse effect on our business, financial condition,
results of operation and cash flows, we cannot assure you that future
inspections may not result in adverse regulatory actions. The 483 from February
2001 does not require us to delay or discontinue the production of any products
made at the Parkedale facility.
OUR QUARTERLY RESULTS MAY FLUCTUATE, AND THESE FLUCTUATIONS MAY ADVERSELY AFFECT
OUR PROFITABILITY.
Our results of operations may vary from quarter to quarter due to many
factors. These factors include expenditures related to the acquisition, sale and
promotion of pharmaceutical products, a changing customer base, the availability
and cost of raw materials, interruptions in supply by third-party manufacturers,
new products introduced by us or our competitors, the mix of products we sell,
seasonality of certain product sales, changes in sales due to anticipated price
increases, changes in sales and marketing expenditures, competitive pricing
pressures and general economic and industry conditions that may affect customer
demand. For example, in advance of an anticipated or announced price increase,
many of our customers may order pharmaceutical products in larger than normal
quantities. The ordering of excess quantities in any quarter could cause sales
of some of our branded pharmaceutical products to be lower in the subsequent
quarter than they would have been otherwise. We cannot assure you that we will
be successful in maintaining or improving our profitability or avoiding losses
in any future period.
AN INCREASE IN PRODUCT LIABILITY CLAIMS, PRODUCT RECALLS OR PRODUCT RETURNS
COULD HARM OUR BUSINESS.
We face an inherent business risk of exposure to product liability claims
in the event that the use of our technologies or products are alleged to have
resulted in adverse effects. These risks will exist for those products in
clinical development and with respect to those products that receive regulatory
approval for commercial sale. While we have taken, and will continue to take,
what we believe are appropriate precautions, we may not be able to avoid
significant product liability exposure. We currently have product liability
insurance in the amount of $75.0 million for aggregate annual claims with a
$50,000 deductible per incident and a $500,000 aggregate annual deductible;
however, we cannot assure you that the level or breadth of any insurance
coverage will be sufficient to cover fully all potential claims. Also, adequate
insurance coverage might not be available in the future at acceptable costs, if
at all.
Product recalls may be issued at our discretion or at the discretion of the
FDA, other government agencies or other companies having regulatory authority
for pharmaceutical product sales. In February 2000, American Pharmaceutical
Partners, Inc., which manufacturers Adenoscan(R), initiated a Class II recall
for 30 mL single-dose vials used only for intravenous infusion because of
chipped and leaking vials and the possible presence of glass particles in vials.
A Class II recall is one in which the use of, or exposure to, the product may
cause temporary or medically reversible adverse health consequences or where the
probability of serious adverse health consequences is remote. The FDA estimated
that 100,000 vials remained on the market at the time of the recall. In April
2000, we initiated a voluntary Class II recall for one lot of Vira-A(R)
ophthalmic ointment, as a result of leaking tubes. We cannot assure you that
additional product recalls will not occur in the future. Any product recalls
could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
Although product returns were approximately 2.4% of gross sales for the
year ended December 31, 2000, we cannot assure you that actual levels of returns
will not increase or significantly exceed the amounts we have anticipated.
SALES OF THROMBIN-JMI(R) MAY BE AFFECTED BY THE PERCEPTION OF RISKS ASSOCIATED
WITH SOME OF THE RAW MATERIALS USED IN ITS MANUFACTURE.
The source material for our product Thrombin-JMI(R) comes from bovine
plasma and lung tissue. Bovine-sourced materials are of some concern because of
potential transmission of Bovine Spongiform En-
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cephalopathy, or BSE. We have taken precautions to minimize the risks of
contamination from BSE in our source materials including, primarily, the use of
bovine materials only from the United States. Although no BSE has been
documented in the United States, the United States is considered a Category II
BSE-risk country, meaning that the United States is probably BSE-free but has
some history of importing cattle from the United Kingdom.
We receive the bovine raw materials from a single vendor and any
interruption or delay in the supply of that material could adversely affect the
sales of Thrombin-JMI(R). In addition to other actions taken by us and our
vendor to minimize the risk of BSE, we are developing steps to further purify
the material of other contaminants. While we believe that our procedures and
those of our vendor for the supply, testing and handling of the bovine material
comply with all federal, state, and local regulations, we cannot eliminate the
risk of contamination or injury from these materials. We will continue
surveillance of the source and believe that the risk of BSE-contamination in the
source materials for Thrombin-JMI(R) is very low. There are high levels of
global public concern about BSE. Physicians could determine not to administer
Thrombin-JMI(R) because of the perceived risk which could adversely affect our
sales of the product. Any injuries resulting from BSE contamination could expose
us to extensive liability. Also there is currently no alternative to the bovine-
sourced materials for Thrombin-JMI(R). If BSE spreads to the United States, we
could be forced to discontinue the manufacture and sale of Thrombin-JMI(R) which
could materially and adversely affect our business, financial condition and
results of operations.
THE LOSS OF OUR KEY PERSONNEL COULD HARM OUR BUSINESS.
We are highly dependent on the principal members of our management staff,
the loss of whose services might impede the achievement of our acquisition and
development objectives. Although we believe that we are adequately staffed in
key positions and that we will be successful in retaining skilled and
experienced management, operational, scientific and development personnel, we
cannot assure you that we will be able to attract and retain key personnel on
acceptable terms. The loss of the services of key personnel could have a
material adverse effect on us, especially in light of our recent growth. We do
not maintain key-person life insurance on any of our employees. In addition, we
do not have employment agreements with any of our key employees.
IF WE ARE UNABLE TO SECURE OR ENFORCE PATENT RIGHTS, TRADEMARKS, TRADE SECRETS
OR OTHER INTELLECTUAL PROPERTY, OUR BUSINESS COULD BE HARMED.
We may not be successful in securing or maintaining proprietary patent
protection for products we develop or technologies we license. In addition, our
competitors may develop products similar to ours using methods and technologies
that are beyond the scope of our intellectual property protection, which could
reduce our sales. The validity of patents can be subject to expensive
litigation. We can give you no assurance that our patents will not be
challenged. Competitors may be able to develop similar or competitive products
outside the scope of our patents which could have a material adverse effect on
sales of our products or the amounts of royalty revenues we receive.
We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation, where patent protection is not believed to
be appropriate or attainable, in order to maintain our competitive position. We
cannot assure you that others will not independently develop substantially
equivalent proprietary technology and techniques or otherwise gain access to our
trade secrets or disclose the technology, or that we can adequately protect our
trade secrets.
OUR WHOLLY OWNED SUBSIDIARY, JONES PHARMA INCORPORATED, IS A DEFENDANT IN
LITIGATION WHICH IS CURRENTLY BEING HANDLED BY ITS INSURANCE CARRIERS. SHOULD
THIS COVERAGE BE INADEQUATE OR SUBSEQUENTLY DENIED OR WERE WE TO LOSE SOME OF
THESE LAWSUITS, OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
Our wholly owned subsidiary, Jones Pharma Incorporated, is a defendant in
more than 2,500 multi-defendant lawsuits involving the manufacture and sale of
dexfenfluramine, fenfluramine and phentermine, which is usually referred to as
"fen/phen." Following Jones' acquisition of this product in 1996, Jones acted as
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a distributor of Obenix(R), a branded phentermine product. Jones also
distributed a generic phentermine product. Jones believes that its phentermine
products have been identified in less than 100 of the foregoing cases. The
plaintiffs in these cases claim injury as a result of ingesting a combination of
these weight-loss drugs. They seek compensatory and punitive damages as well as
medical care and court-supervised medical monitoring. The plaintiffs claim
liability based on a variety of theories including but not limited to, product
liability, strict liability, negligence, breach of warranties and
misrepresentation. These suits are filed in various jurisdictions throughout the
United States, and in each of these suits Jones is one of many defendants,
including manufacturers and other distributors of these drugs. Jones denies any
liability incident to the distribution of its phentermine product and intends to
pursue all defenses available to it. Jones has tendered defense of these
lawsuits to its insurance carriers for handling and they are currently defending
Jones in these suits. In the event that insurance coverage is inadequate to
satisfy any resulting liability, Jones will have to resume defense of these
lawsuits and be responsible for the damages, if any, that are awarded against
it.
OUR SHAREHOLDER RIGHTS PLAN AND BYLAWS DISCOURAGE UNSOLICITED TAKEOVER PROPOSALS
AND COULD PREVENT SHAREHOLDERS FROM REALIZING A PREMIUM ON THEIR COMMON STOCK.
We have a shareholder rights plan that may have the effect of discouraging
unsolicited takeover proposals. The rights issued under the shareholder rights
plan would cause substantial dilution to a person or group which attempts to
acquire us on terms not approved in advance by our board of directors. In
addition, our charter and bylaws contain provisions that may discourage
unsolicited takeover proposals that shareholders may consider to be in their
best interests. These provisions include:
- a classified board of directors;
- the ability of the board of directors to designate the terms of and issue
new series of preferred stock;
- advance notice requirements for nominations for election to the board of
directors; and
- special voting requirements for the amendment of our charter and bylaws.
We are also subject to anti-takeover provisions under Tennessee laws, each of
which could delay or prevent a change of control. Together these provisions and
the rights plan may discourage transactions that otherwise could involve payment
of a premium over prevailing market prices for common stock.
OUR STOCK PRICE IS VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES.
The trading price of our common stock is likely to be volatile. The stock
market in general and the market for emerging growth companies, such as King in
particular, have experienced extreme volatility. Many factors contribute to this
volatility, including
- general market conditions.
- perceptions about market conditions in the pharmaceutical industry,
- announcements of technological innovations,
- changes in marketing, product pricing and sales strategies or development
of new products by us or out competitors,
- changes in domestic or foreign governmental regulations or regulatory
approval processes, and
- variations in our results of operations,
This volatility may have a significant impact on the market price of our common
stock. Moreover, the possibility exists that the stock market (and in particular
the securities of emerging growth companies such as King) could experience
extreme price and volume fluctuations unrelated to operating performance. The
volatility of our common stock imposes a greater risk of capital losses on our
shareholders than would a less volatile stock. In addition, such volatility
makes it difficult to ascribe a stable valuation to a shareholder's holdings of
our common stock.
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RISKS RELATED TO OUR INDUSTRY
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD AFFECT OUR ABILITY TO
OPERATE OUR BUSINESS.
Virtually all aspects of our activities are regulated by federal and state
statutes and government agencies. The manufacturing, processing, formulation,
packaging, labeling, distribution and advertising of our products, and disposal
of waste products arising from these activities, are subject to regulation by
one or more federal agencies, including the FDA, the DEA, the Federal Trade
Commission, the Consumer Product Safety Commission, the U.S. Department of
Agriculture, the Occupational Safety and Health Administration and the EPA, as
well as by foreign governments in countries where we distribute some of our
products.
Noncompliance with applicable FDA policies or requirements could subject us
to enforcement actions, such as suspensions of manufacturing or distribution,
seizure of products, product recalls, fines, criminal penalties, injunctions,
failure to approve pending drug product applications or withdrawal of product
marketing approvals. Similar civil or criminal penalties could be imposed by
other government agencies, such as the DEA, the EPA or various agencies of the
states and localities in which our products are manufactured, sold or
distributed and could have ramifications for our contracts with government
agencies such as the Veteran's Administration or the Department of Defense.
These enforcement actions could have a material adverse effect on our business,
financial condition and results of operations.
All manufacturers of human pharmaceutical products are subject to
regulation by the FDA under the authority of the FDC Act or the PHS Act or both.
New drugs, as defined in the FDC Act, and new human biological drugs, as defined
in the PHS Act, must be the subject of an FDA-approved new drug or biologic
license application before they may be marketed in the United States. Some
prescription and other drugs are not the subject of an approved marketing
application but, rather, are marketed subject to the FDA's regulatory discretion
and/or enforcement policies. Any change in the FDA's enforcement discretion
and/or policies could have a material adverse effect on our business, financial
condition and results of operations.
We manufacture some pharmaceutical products containing controlled
substances and, therefore, are also subject to statutes and regulations enforced
by the DEA and similar state agencies which impose security, record keeping,
reporting and personnel requirements on us. Additionally, we manufacture
biological drug products for human use and are subject to regulatory burdens as
a result of these aspects of our business. There are additional FDA and other
regulatory policies and requirements covering issues such as advertising,
commercially distributing, selling, sampling and reporting adverse events
associated with our products with which we must continuously comply.
Noncompliance with any of these policies or requirements could result in
enforcement actions which could have a material adverse effect on our business,
financial condition and results of operations.
The FDA has the authority and discretion to withdraw existing marketing
approvals and to review the regulatory status of marketed products at any time.
For example, the FDA may require an approved marketing application for any drug
product marketed if new information reveals questions about a drug's safety or
efficacy. All drugs must be manufactured in conformity with cGMP requirements,
and drug products subject to an approved application must be manufactured,
processed, packaged, held and labeled in accordance with information contained
in the approved application.
While we believe that all of our currently marketed pharmaceutical products
comply with FDA enforcement policies, have approval pending or have received the
requisite agency approvals, our marketing is subject to challenge by the FDA at
any time. Through various enforcement mechanisms, the FDA can ensure that
noncomplying drugs are no longer marketed. In addition, modifications,
enhancements, or changes in manufacturing sites of approved products are in many
circumstances subject to additional FDA approvals which may or may not be
received and which may be subject to a lengthy FDA review process. Our
manufacturing facilities and those of our third-party manufacturers are
continually subject to inspection by governmental agencies. Manufacturing
operations could be interrupted or halted in any of those facilities if a
government or regulatory authority is unsatisfied with the results of an
inspection. Any interruptions of this type could have a material adverse effect
on our business, financial condition, results of operations and cash flows.
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We cannot determine what effect changes in regulations, enforcement
positions, statutes or legal interpretation, when and if promulgated, adopted or
enacted, may have on our business in the future. Changes could, among other
things, require changes to manufacturing methods or facilities, expanded or
different labeling, new approvals, the recall, replacement or discontinuance of
certain products, additional record keeping and expanded documentation of the
properties of certain products and scientific substantiation. These changes, or
new legislation, could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
ANY REDUCTION IN REIMBURSEMENT LEVELS BY MANAGED CARE ORGANIZATIONS OR OTHER
THIRD-PARTY PAYORS MAY HAVE AN ADVERSE EFFECT ON OUR REVENUES.
Commercial success in producing, marketing and selling products depends, in
part, on the availability of adequate reimbursement from third-party health care
payors, such as government and private health insurers and managed care
organizations. Third-party payors are increasingly challenging the pricing of
medical products and services. For example, many managed health care
organizations are now controlling the pharmaceutical products that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has reduced prices across the
industry. In addition, many managed care organizations are considering formulary
contracts primarily with those pharmaceutical companies that can offer a full
line of products for a given therapy sector or disease state. We cannot assure
you that our products will be included on the formulary lists of managed care
organizations or that downward pricing pressures in the industry generally will
not negatively impact our operations.
NEW LEGISLATION OR REGULATORY PROPOSALS MAY ADVERSELY AFFECT OUR REVENUES.
A number of legislative and regulatory proposals aimed at changing the
health care system, including the cost of prescription products, reimportation
of prescription products and changes in the levels at which pharmaceutical
companies are reimbursed for sales of their products, have been proposed. While
we cannot predict when or whether any of these proposals will be adopted or the
effect these proposals may have on our business, the pending nature of these
proposals, as well as the adoption of any proposal, may exace