KING PHARMACEUTICALS INC - 10-K Annual Report

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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, 2001

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 27, 2002 is approximately $7.9
billion. (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
27, 2002, Common Stock, no par value, 247,914,137.

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.; King Research and Development, Inc.
(formerly Medco Research, Inc.); Jones Pharma Incorporated (acquired August 31,
2000); and King Pharmaceuticals of Nevada, Inc.

King is a vertically integrated pharmaceutical company that manufactures,
markets and sells primarily branded prescription pharmaceutical products. By
"vertically integrated," we mean that we have the capabilities of a major
pharmaceutical company, including

- sales and marketing,

- manufacturing,

- packaging,

- distribution,

- quality control and assurance,

- regulatory affairs, and

- research and development.

Through a national sales force of approximately 715 representatives and
marketing alliances, we market our branded pharmaceutical products to
general/family practitioners, internal medicine physicians, cardiologists,
endocrinologists, pediatricians, obstetrician/gynecologists, and hospitals
across the United States 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. By "product life cycle
management," we mean, the extension of the life of a product, including seeking
and gaining all necessary related governmental approvals, by such means as:

- securing U.S. Food and Drug Administration approved new label
indications,

- developing and producing different strengths,

- producing different package sizes,

- developing new dosages, and

- developing new product formulations.

We acquire branded products from larger pharmaceutical companies. These
companies sell products for various reasons including limiting their costs or
eliminating duplicate products. We also seek attractive company acquisitions
which add products or products in development, technologies or sales and
marketing capabilities to our key therapeutic areas or that otherwise complement
our operations.

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), Corzide(R), Procanbid(R) and
Thalitone(R)),

- women's health/endocrinology (including Menest(R), Delestrogen(R),
Nordette(R), Levoxyl(R), Cytomel(R), and Triostat(R))

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- anti-infectives (including Lorabid(R), Cortisporin(R), Neosporin(R),
Bicillin(R) and Coly-Mycin M(R)), and

- critical care (including Thrombin-JMI(R) and Brevital(R)).

We acquired from Glaxo Wellcome, Inc., predecessor to GlaxoSmithKline for
$54.0 million, including $3.1 million of assumed liabilities, 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.

In February 1998 we acquired from Warner-Lambert Company (predecessor to
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.

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 report as an "ACE" inhibitor. We refer to this acquisition in
this report as the "Altace Acquisition." We are currently manufacturing and
packaging Altace(R) in our facility in Bristol, Tennessee. Aventis also remains
a supplier of Altace(R). Altace(R) has United States patent protection to 2008.
On October 4, 2000 the U.S. Food and Drug Administration, which we call the
"FDA," approved 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 Wyeth-Ayerst Laboratories, a division of American
Home Products (predecessor to Wyeth Corporation) pursuant to the Co-Promotion
Agreement we entered into in June 2000 described below.

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. As of December 31, 2001, no milestone payments had been made and we do
not currently anticipate any payments. The final contingent payment will be made
if we achieve $140.0 million in annual net sales of Lorabid(R). 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 14.4 million shares of King common
stock for all of the outstanding shares of Medco. Each share of Medco was
exchanged for 1.3514 shares of King common stock. In addition, outstanding Medco
stock options were converted at the same exchange ratio to purchase
approximately 1.4 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.
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On June 23, 2000, we entered into a marketing alliance with Wyeth, 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 Wyeth a quarterly fee based on a
percentage of net sales in exchange for its marketing efforts. Wyeth purchased
$75.0 million of our common stock and paid us $25.0 million in cash upon
execution of the Co-Promotion Agreement. Wyeth paid us an additional $50.0
million in November 2000 as a result of the FDA's final approval on October 4,
2000 of new indications for Altace(R).

On August 31, 2000, we acquired Jones Pharma Incorporated in an all stock
transaction accounted for as a pooling of interests valued at approximately $2.4
billion. We exchanged approximately 98.4 million shares of King common stock for
all of the outstanding shares of Jones. Each share of Jones was exchanged for
1.5 shares of King common stock. In addition, outstanding Jones stock options
were converted at the same exchange ratio to purchase approximately 5.4 million
shares of King common stock. Jones is now one of our wholly-owned subsidiaries.

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.

On January 8, 2001, we entered into a license agreement with Novavax to
promote, market, distribute and sell Estrasorb(TM) worldwide, except in the
United States, Canada, Italy, Netherlands, Greece, Switzerland and Spain. On
June 29, 2001, Novavax submitted to the FDA a New Drug Application for
Estrasorb(TM). Also on June 29, we expanded our January 2001 exclusive license
with Novavax to promote, market, distribute and sell Estrasorb(TM) worldwide,
following approval, except for the United States and Puerto Rico, where we will
together with Novavax market Estrasorb(TM). We will pay Novavax during the term
of the license a royalty based on 9.0% of net sales of Estrasorb(TM) in Canada,
8.0% of net sales of Estrasorb(TM) in Italy, the Netherlands, Greece,
Switzerland, and Spain, and 7.5% of net sales of Estrasorb(TM) in all other
territories except the United States and Puerto Rico. We and Novavax will
together market Estrasorb(TM) in the United States and Puerto Rico and Novavax
will pay King an amount equal to 50% of Estrasorb(TM) margins. We and Novavax
will share equally approved marketing expenses for Estrasorb(TM).

We also agreed to a similar exclusive licensing arrangement with Novavax
for the promotion, marketing, distribution and sale of Androsorb(TM), a topical
testosterone replacement therapy for testosterone deficient women, following
approval. We will pay Novavax a royalty on net sales of Androsorb(TM) based on
the same percentages for the same corresponding territories as described above
for Estrasorb(TM). Likewise, we will exclusively market Androsorb(TM) with
Novavax in the United States and Puerto Rico and receive an amount equal to 50%
of Androsorb(TM) margins. Marketing expenses for Androsorb(TM) approved pursuant
to our agreement will be shared equally by the parties.

We also entered into a co-promotion agreement on January 8, 2001 with
Novavax for Nordette(R). This agreement relating to Nordette(R), as subsequently
amended, provides for us and Novavax to share equally all quarterly net sales
that exceed established baselines that in the aggregate total $25.0 million per
year. We will share equally all expenses associated with net sales of
Nordette(R) that exceed these established baselines.

On May 25, 2001, the FDA approved our previously filed New Drug Application
for Levoxyl(R), our levothyroxine sodium drug product. We had filed this
application as a result of the FDA's August 14, 1997 announcement in the Federal
Register (62 FR 43535) that orally administered levothyroxine sodium drug
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products are new drugs. The notice stated that manufacturers who wish to
continue to market these products must submit applications as required by the
Food, Drug and Cosmetic 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 8, 2001, we acquired three branded pharmaceutical products and a
license to a fourth product from Bristol-Myers Squibb for $285.0 million plus
approximately $1.5 million of expenses. The products acquired include
Bristol-Myers Squibb's rights in the United States to Corzide(R),
Delestrogen(R), and Florinef(R). We also acquired a fully paid license to
Corgard(R) in the United States. Corzide(R), a combination beta blocker and
thiazide diuretic, is indicated for the management of hypertension. Corgard(R),
a beta blocker, is indicated also for the management of hypertension, as well as
long term management of patients with angina pectoris. Delestrogen(R) is an
injectable estrogen replacement therapy. Florinef(R) is a partial replacement
therapy for primary and secondary adrenocortical insufficiency in Addison's
disease and for the treatment of salt-losing adrenogenital syndrome.

On December 13, 2001, the FDA approved our New Drug Application for
Tigan(R) 300mg capsules. Tigan(R) is indicated for the treatment of
post-operative nausea and vomiting and for nausea associated with
gastroenteritis.

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 additional segment information, please see the sections entitled
"Selected Financial Data" and "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

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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), Corzide(R), Thalitone(R)
and Procanbid(R)),

- women's health products/endocrinology products (including Menest(R),
Delestrogen(R), Nordette(R), Levoxyl(R), Cytomel(R), and Triostat(R)).

- anti-infective products (including Lorabid(R), Bicillin(R),
Cortisporin(R), Neosporin(R), and Coly-Mycin(R)) and,

- critical care products (including Thrombin-JMI(R) and Brevital(R)).

Our branded pharmaceutical products are generally in high volume categories
and are well known for their indications (e.g., Altace(R) and Levoxyl(R)).
Additionally, many of our branded products have limited or no generic
competition, including patent protected products and products that are difficult
to formulate (e.g., creams, ophthalmic suspensions). Branded pharmaceutical
products represented 91.0% and 85.3% of our net revenues for each of the years
ended December 31, 2001 and 2000.

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 stroke, myocardial infarction (heart attack) and death from
cardiovascular causes 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 August 2001 we acquired
Corzide(R) and a license for Corgard(R) from Bristol-Myers Squibb. Corzide(R) is
a combination beta blocker and thiazide diuretic indicated for the management of
hypertension. Corgard(R) is a beta blocker indicated for the management of
hypertension as well as long term management of patients with angina pectoris.
In 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.

Women's health products/endocrinology products. We have a number of
leading branded pharmaceutical products in this category including Menest(R),
Delestrogen(R), and Nordette(R). Menest(R), which we acquired from
GlaxoSmithKline in June 1998 and Delestrogen(R), which we acquired from Bristol
Myers Squibb in August 2001, compete in the growing $2.0 billion estrogen
replacement category. We previously manufactured Menest(R) for GlaxoSmithKline.
Our products Levoxyl(R), Cytomel(R), and Triostat(R) are indicated for the
treatment of thyroid disorders.

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
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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 followed by Bicillin(R) and Cortisporin(R).

Critical care products. Products in this category are marketed primarily
to hospitals. Our largest two products in this category are Thrombin-JMI(R) and
Brevital(R) . 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.

Certain of our products are described below:

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(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 acquired a fully paid license to this product in the United States.
(4) We have exclusive licenses, free of royalty obligations, to manufacture and
market prescription formulations of these products.

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ROYALTIES

We have successfully developed two currently marketed adenosine-based
products, Adenocard(R) and Adenoscan(R), for which we receive royalty revenues.
Revenues from royalties increased 12.8% to $46.8 million in 2001 from $41.5
million in 2000. Fujisawa is the source for substantially all of our royalty
revenues.

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 the year ended December
31, 2000 and 3.4% for the year ended December 31, 2001 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 715 sales representatives.
We distribute our branded pharmaceutical products primarily through wholesale
pharmaceutical 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, 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. We seek new international markets for product lines for
which we have international rights. The marketing and distribution of these
products in foreign countries generally require the prior registration of the
products in those countries. We generally seek to enter into distribution
agreements with companies with established marketing and distribution
capabilities to distribute the products in foreign countries since we do not
have a distribution mechanism in place for distribution outside the United
States and Puerto Rico.

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. In addition, the number of independent drug stores and
small chains has decreased as retail consolidation has occurred. For the year
ended December 31, 2001, approximately 56.1% of our sales were attributable to
three distributors: McKesson Corporation (20.2%), Cardinal/Bindley (17.5%) and
Amerisource/Bergen (18.4%).

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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), some of the products
acquired from GlaxoSmithKline and Pfizer are manufactured for us by third
parties. As of December 31, 2001, capacity utilization was approximately 65% at
the Bristol facility, approximately 40% at the Parkedale facility located in
Rochester, Michigan, approximately 100% at the Middleton facility, approximately
65% at the St. Petersburg facility and approximately 30% at the St. Louis,
Missouri facility. With the exception of the Middleton facility, we believe our
facilities provide 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. Our Bristol facility is now qualified
in accordance with FDA guidance to manufacture and distribute the finished
dosage form of Altace(R) 2.5mg, 5mg and 10mg capsules.

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 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. 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) and Androsorb(TM) worldwide except in the
United States and Puerto Rico. We will exclusively co-market Estrasorb(TM) and
Androsorb(TM) in the United States and Puerto Rico with Novavax. Novavax
submitted a New Drug Application for Estrasorb(TM) in June 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

12

criminal penalties. 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.

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.

The Parkedale facility was inspected by the FDA in December 2001. 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. Our
Parkedale facility received a 483 following this inspection. While no law or
regulation requires us to respond to a 483, we provided the FDA with a written
response to the 483, including action plans to address the observations. The 483
from December 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.

13

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 Biovail Corporation, Elan Corporation
plc, Forest Laboratories, Inc., Galen Holdings, plc, Shire Pharmaceuticals Group
plc, Medicis Pharmaceutical Corporation, Watson Pharmaceuticals, Inc., 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.

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 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 challenging bioequivalence or
complex manufacturing requirements, we are better able to protect market share
and produce sustainable, high margins and cash flows.

14

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) and Adenoscan(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).

Royalties received by us 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. (predecessor to Aderis Pharmaceuticals) 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, Aderis 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,

15

we agreed to pay Aderis licensing fees, development milestones and royalties on
future sales of A2a-agonist products.

We have filed in excess of 20 patent applications related to Levoxyl(R).
The pending patent applications generally cover, among other things, formulation
methodologies and equipment, formulation technologies, biopharmaceutical
characteristics, drug delivery systems, and methods-of-use. If such applications
are granted, the resulting patents will potentially provide us with patent
protection on our FDA-approved new formulation of Levoxyl(R) for 20 years from
the respective filing dates of the applications.

We have filed with the U.S. Patent and Trademark Office applications for
patents covering our new Tigan(R) technology, including our FDA-approved
Tigan(R) 300mg capsules. The pending patent applications are drawn to, among
other things, formulations, dosages, dosage forms, biopharmaceutical
characteristics, methods-of-production, methods-of-use and
methods-of-instruction. If the applications are granted, the resulting patents
will potentially provide us with patent protection for our FDA-approved Tigan(R)
300mg capsules for 20 years from the filing date of the applications.

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 22, 2002, we had no material backlog.

EMPLOYEES

As of March 22, 2002, we employed 1,827 full-time and 16 part-time persons.
Some employees of the Parkedale facility, representing approximately 13.1% 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.

16

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, if any, of our securities
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 32.6% and Levoxyl(R) accounted for
approximately 12.1% of our net sales for the year ended December 31, 2001, and
Altace(R), Levoxyl(R), Thrombin-JMI(R), Lorabid(R), and royalty revenues
collectively accounted for approximately 61.9% 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
WYETH FOR THE PROMOTION OF ALTACE(R).

We entered into the Co-Promotion Agreement with Wyeth for Altace(R)
partially because we believed a larger pharmaceutical company with more sales
representatives and, in our opinion, with substantial experience 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 of us have
incentives to maximize the sales and profits of Altace(R) and to optimize the
marketing of the product by coordinating our promotional activities.

Under the Co-Promotion Agreement, Wyeth 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 Wyeth 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 Wyeth 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 Wyeth 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.

17

IF OUR BRISTOL FACILITY DOES NOT RECEIVE FINAL APPROVAL FROM THE FDA TO
MANUFACTURE AND DISTRIBUTE 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 have qualified our Bristol facility as a manufacturing and packaging
site for Altace(R) in accordance with FDA guidelines and are currently
manufacturing and distributing Altace(R) at that site. Aventis Pharma
Deutscheland GmbH (Germany) will continue to 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
(USA) will remain an alternative or back-up supplier of Altace(R) for us. Any
interruptions or delays in manufacturing or receiving the finished product or
raw material used for the future production of Altace(R) or the failure of the
FDA to issue formal written approval for the continued manufacturing and
distribution of Altace(R) at our Bristol facility 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 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 angiotensin II receptor
blocker, which we refer to as an "ARB" in this report beta-blockers, calcium
channel blockers and diuretics, may be prescribed to treat certain conditions
that Altace(R) is used to treat. New ACE inhibitors or other anti-hypertensive
therapies, 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).

18

OUR CO-PROMOTION AGREEMENT FOR ALTACE(R) WITH WYETH COULD BE TERMINATED BEFORE
WE REALIZE ALL OF THE BENEFITS OF THE AGREEMENT OR IT COULD BE ASSIGNED TO
ANOTHER COMPANY BY WYETH OR WYETH COULD MARKET A COMPETING PRODUCT.

Our exclusive Co-Promotion Agreement for Altace(R) with Wyeth could be
terminated before we realize all of the benefits of the agreement. Wyeth 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 Wyeth 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 we must unwind our marketing alliance 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 Wyeth's voting securities or more than half of its
total assets, then Wyeth 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 Wyeth under the Co-Promotion Agreement before the rights of Wyeth
were assigned to it. Another party might not market Altace(R) as effectively or
efficiently as Wyeth did. Also, a company which acquires Wyeth 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 Wyeth 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, Wyeth 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 ARB, 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 Wyeth 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 Wyeth
through a merger with or acquisition by a third party and the product was no
longer actively promoted by Wyeth or its successor through detailing the product
to physicians.

Once we have been notified in writing of Wyeth's intent to market, sell or
distribute a competing product, then Wyeth has 90 days to inform us as to
whether it intends to divest its interest in the competing product. If Wyeth
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 Wyeth 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, Wyeth 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 Wyeth for the co-promotion of Altace(R). If Wyeth and we are unable to
establish acceptable terms under 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
Wyeth. In the event we decided to reacquire all the marketing rights to
Altace(R) we would be obligated to pay Wyeth 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. The foregoing could have a material effect on our
business, financial condition, results of operations and cash flows.

19

OUR SALES OF LEVOXYL(R) COULD BE AFFECTED BY FUTURE ACTIONS OF THE FDA AND BY
UNCERTAINTY IN THE LEVOTHYROXINE SODIUM PRODUCT MARKET.

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 May 25, 2001, the FDA approved our previously filed New Drug Application
for Levoxyl(R), our levothyroxine sodium drug product. Other manufacturers of
levothyroxine sodium drug products have filed New Drug Applications for their
levothyroxine sodium products. Jerome Stevens, Inc. has also received approval
for its levothyroxine sodium product Unithroid. Jerome Stevens, Inc. has
licensed Unithroid to Watson Pharmaceuticals. The FDA has announced that after
August 14, 2001, it will not accept New Drug Applications for levothyroxine
sodium drug products. However, the FDA has stated it will continue to review
applications which were submitted by August 14, 2001. Further, the FDA is
requiring a phasing-out of the distribution of levothyroxine sodium products for
which New Drug Applications were pending but not approved by August 14, 2001.
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 (in
other words, the two products produce identical effects on the body) to the
Jerome Stevens product. 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).

To further protect against the possibility of generic substitution, during
2001 we filed with the U.S. Patent and Trademark Office in excess of 20
applications for U.S. patents concerning our FDA-approved new formulation of
Levoxyl(R). The pending patent applications generally cover, among other things,
formulation methodologies and equipment, formulation technologies,
biopharmaceutical characteristics, drug delivery systems, and methods-of-use. If
such applications are granted, the resulting patents will potentially provide us
with patent protection on our FDA-approved new formulation of Levoxyl(R) for 20
years from the respective filing dates of the applications. However, we cannot
assure you that any or all of the patent applications will be granted, or
whether any or all of the resulting patents will provide Levoxyl(R) with
protection from possible generic substitution.

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 because we believe that the prior owner was not actively promoting the
product. Increased sales of Lorabid(R) depend upon effective marketing to
physicians which leads them to write prescriptions for our product. Since the
antibiotic market is very competitive, we cannot assure you that sales of
Lorabid(R) will increase in the future. Lilly manufactures Lorabid(R) for us
under a supply agreement containing minimum purchase requirements. If Lorabid(R)
sales continue to decrease, there may be a material adverse effect upon our
results of operations and cash flows.

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

20

activity with respect to product development, we rely heavily on purchasing
product lines from other companies.

Other companies, some 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 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
acquisitions, 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

- in exclusive license agreements with Novavax to promote, market,
distribute and sell Estrasorb(TM), a topical transdermal estrogen
replacement therapy, and Androsorb(TM), a topical testosterone
replacement therapy for testosterone deficient women, upon their approval
by the FDA;

- engaged in the development of MRE0470, a myocardial pharmacologic stress
imaging agent; and

- in a licensing agreement with Novavax to develop recombinant human
papillomavirus (HPC) virus-like particle (VLP) vaccines.

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,

21

- 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 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.
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.

A portion or all of 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. DSM Pharmaceuticals, Inc. (formerly
DSM Catalytica Pharmaceuticals, Inc.), one of our third-party manufacturers,
informed us on November 21, 2001, that they ceased operations at their sterile
manufacturing facilities in Greenville, North Carolina, as a result of FDA
concerns relating to compliance issues. Due to the compliance issues, DSM
Pharmaceuticals recommended that we initiate a voluntary recall of all products
that they manufacture for us. As a result, we initiated a voluntary recall of
these products on December 18, 2001. The products affected are Cortisporin(R)
Otic Suspension, Cortisporin(R) Otic Solution, Cortisporin(R) Ophthalmic
Suspension, Pediotic(R) Otic Suspension, Septra(R) IV Infusion, and Neosporin(R)
GU Irrigant. DSM Pharmaceuticals has since notified us that it has addressed the
compliance issues and has resumed production of our products. Based on this
assurance, we have resumed distribution of some of the affected products during
the first quarter of 2002 and we expect to resume distribution of the remaining
affected products during the first half of 2002. However, we cannot assure you
that we will resume distribution as planned or that additional product recalls
will not occur in the future. The failure of DSM Pharmaceuticals to adequately
address the compliance issues at its sterile manufacturing facilities in
Greenville, North Carolina, and recommence production of our products in a
manner that allows us to resume distribution in accordance with its written
assurances to us or additional product recalls could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.

22

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 December 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
December 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 December 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 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 December 2001 does not require us to delay or discontinue the
production of any products made at the Parkedale facility.

WE ARE AT 100% OF CAPACITY AT OUR MIDDLETON FACILITY WHICH WILL LIMIT OUR
ABILITY TO INCREASE PRODUCTION OF THROMBIN-JMI(R).

Our inability to expand our production capacity at our Middleton facility
will limit our ability to increase production of Thrombin-JMI(R) thereby
limiting our unit sales growth for this product.

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 $60.0 million for aggregate annual claims with a
$100,000 deductible per incident and a $1,000,000 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.

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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. From time to time, we may recall products for
various reasons. To date, however, these recalls have not been significant and
have not had a material adverse effect on our business, financial condition,
results of operations and cash flows. However, we cannot assure you that the
number and significance of recalls will not increase in the future.

Although product returns were approximately 2.4% of gross sales for the
year ended December 31, 2001, we cannot assure you that actual levels of returns
will not increase or significantly exceed the amounts we have anticipated.

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
906 multi-defendant lawsuits involving the manufacture and sale of
dexfenfluramine, fenfluramine and phentermine, which is usually referred to as
"fen/phen." In 1996, Jones acted as a distributor of Obenix(R), a branded
phentermine product. Jones also distributed a generic phentermine product. We
believe that Jones' 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.

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 from outside the United States
may be of some concern because of potential transmission of Bovine Spongiform
Encephalopathy, or BSE. However, 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 FDA-approved sources in 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

24

States, the manufacture and sale of Thrombin-JMI(R) and our business, financial
condition and results of operations could be materially and adversely affected.

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, including generic 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 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.

25

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.

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

26

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 and that advertising and marketing
materials and campaigns are in compliance with FDA regulations. 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.

We cannot determine what effect changes in regulations, enforcement
positions, statutes or legal interpretation, when and if promulgated, adopted or
enacted