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, 2002

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:

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 [ ] No [X]

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. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. [X]

The aggregated market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity as of
June 30, 2003 was $3,143,503,811.

The number of shares of Common Stock, no par value, outstanding at July 24,
2003 was 241,036,135.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

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EXPLANATORY NOTE

This annual report on Form 10-K for the year ended December 31, 2002,
contains the audited consolidated financial statements of King Pharmaceuticals,
Inc. for the year ended December 31, 2002.

On March 31, 2003, we filed a notification of late filing on Form 12b-25,
disclosing that we were delaying the filing of our annual report on Form 10-K
and the issuance of audited consolidated financial statements for the year ended
December 31, 2002 pending completion of an internal review by the Audit
Committee of our Board of Directors of the issues raised by an ongoing SEC
investigation. On April 15, 2003, we filed a Form 8-K containing unaudited
consolidated financial statements for the year ended December 31, 2002. In the
April 15 Form 8-K, we disclosed that our audited consolidated financial
statements for the year ended December 31, 2002, once issued, might contain
material changes from the unaudited consolidated financial statements contained
in that Form 8-K. The Audit Committee completed the internal review on July 28,
2003, enabling us to prepare our audited consolidated financial statements for
the year ended December 31, 2002 and to file this annual report on Form 10-K.

The audited consolidated financial statements contained in this annual
report on Form 10-K reflect three adjustments arising from the internal review
or otherwise based on information that became available subsequent to the
release of the unaudited consolidated financial statements contained in the
April 15 Form 8-K. These are

(1) a $46.5 million adjustment to our accrual for estimated amounts due
under Medicaid and other governmental pricing programs,

(2) an additional $39.8 million charge relating to Lorabid(R), consisting
of a $49.9 million accrual for Lorabid(R) purchase commitments in excess of
expected demand and a $10.0 million reduction (from $76.8 million to $66.8
million) in the previously announced Lorabid(R) intangible asset impairment
charge, and

(3) a deferral of $4.7 million of revenue associated with a purchase of our
products by the King Benevolent Fund, Inc.

The audited consolidated financial statements contained in this annual
report supersede the unaudited consolidated financial statements contained in
the April 15 Form 8-K. You should no longer rely on the unaudited consolidated
financial statements contained in the April 15 Form 8-K.

For additional information on these adjustments, please see the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section under the heading "Recent Developments" in this Form 10-K
and Notes 2 and 8 to the audited consolidated financial statements included in
this Form 10-K.

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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 website is www.kingpharm.com. We have, since November 15,
2002, made available through our website our annual reports on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K and any
amendments as soon as reasonably practical. Our wholly-owned subsidiaries are
Monarch Pharmaceuticals, Inc.; Jones Pharma Incorporated; Meridian Medical
Technologies, Inc.; Parkedale Pharmaceuticals, Inc.; King Pharmaceuticals
Research and Development, Inc.; King Pharmaceuticals of Nevada, Inc.; and
Monarch Pharmaceuticals Ireland Limited.

King is a vertically integrated pharmaceutical company that develops
manufactures, markets and sells 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 1,200 individuals and
marketing alliances, we market our branded pharmaceutical products to
general/family practitioners, internal medicine physicians, cardiologists,
endocrinologists, obstetrician/gynecologists, and hospitals across the United
States and in Puerto Rico.

Our business strategy includes the acquisition of branded pharmaceutical
products and increasing 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, or the "FDA," 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 primarily from larger pharmaceutical companies.
These companies sell products for various reasons including limiting their costs
or eliminating duplicate products.

Our business strategy also includes the development of new branded
prescription pharmaceutical products, including new chemical entities, as well
as the acquisition of compounds already in development, that provide us with
strategic pipeline product opportunities.

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.

1

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 the following therapeutic areas:

- cardiovascular (including Altace(R), Corzide(R), Procanbid(R) and
Thalitone(R)),

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

- orthopedic (Skelaxin(R)),

- critical care (including Thrombin-JMI(R), Brevital(R) and Synercid(R)),

- neurology/central nervous system (Sonata(R)),

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

- respiratory (including Intal(R) and Tilade(R)), and

- biodefense (Atropen(R) and ComboPen(R)).

We acquired from Glaxo Wellcome, Inc., predecessor to GlaxoSmithKline plc,
for $54.0 million, including $3.1 million of assumed liabilities, all rights to
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, Inc.), 15 branded pharmaceutical products, the Parkedale facility
located in Rochester, Michigan and some 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
patents listed in the FDA's Approved Drug Products with Therapeutic Equivalence
Evaluations, which is known as the "Orange Books" that expire in January 2005,
October 2008 and April 2012. On October 4, 2000, the FDA approved the new
indications for Altace(R) requested under a supplemental New Drug Application.
In this report we refer to a supplemental New Drug Application as an "sNDA." 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
Pharmaceuticals, Inc. and by Wyeth pursuant to the Co-Promotion Agreement we
entered into in June 2000 described below.

In August 1999, we acquired the antibiotic Lorabid(R) in the United States
and Puerto Rico 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, 2002, no
milestone payments had been made. We have a supply agreement with Eli Lilly
under which we remain obligated to purchase minimum levels of inventory of
Lorabid(R) through August 2006. During the fourth quarter of 2002, we decided to
divest our rights to Lorabid(R) and reviewed the related intangible assets for
impairment. Prior to that, we considered our supply agreement with Eli Lilly and
the need to evaluate it for the effects of potential excess purchase
commitments. Based on changes in estimated prescription
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trends, we believe the minimum purchase commitments under the supply agreement
are greater than inventory quantities which we will be able to sell to our
customers. As a result, we have recorded a $49.9 million charge related to the
liability associated with the amount of the purchase commitments in excess of
expected demand. Based on our review for impairment of intangible assets, as
updated for management's cash flow expectations for Lorabid(R) as of July 2003,
we determined that the Lorabid(R) intangible assets were impaired and recorded
an impairment charge of $66.8 million. Additionally, we donated $15.2 million of
Lorabid(R) inventory to the King Benevolent Fund, Inc. as a result of the
decision to divest our rights to Lorabid(R).

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 (post subsequent stock splits) of King common stock.
In addition, outstanding Medco stock options were converted at the same exchange
ratio to purchase approximately 1.4 million shares (post subsequent stock
splits) 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 working to improve the quality and efficiency
of our manufacturing processes. Additionally, we are engaged in the research and
development of chemical compounds, including new chemical entities, which
provide us with strategic pipeline opportunities that may lead to the
commercialization of new branded prescription pharmaceutical products.

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 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 (post subsequent stock
splits) of King common stock for all of the outstanding shares of Jones. Each
share of Jones was exchanged for 1.5 shares (post subsequent stock splits) of
King common stock. In addition, outstanding Jones stock options were converted
at the same exchange ratio to purchase approximately 5.4 million shares (post
subsequent stock splits) of King common stock. Jones is now one of our
wholly-owned subsidiaries.

On January 8, 2001, we entered into a license agreement with Novavax to
promote, market, distribute and sell Estrasorb(TM), Androsorb(TM) and some other
women's health products which may be developed by Novavax, Inc. Under the terms
of this agreement, as amended by our subsequent agreements with Novavax on June
29, 2001, we have an exclusive license with Novavax to promote, market,
distribute and sell, following approval, these products worldwide, except for
the United States and Puerto Rico, where, under a separate agreement, we will
co-market them with Novavax. During the term of the license, we will pay Novavax
a reasonable royalty on net sales of these products in all territories except
the United States and Puerto Rico. Novavax will pay us an amount equal to 50% of
the net sales derived from the sale of these products in the United States and
Puerto Rico. We will share equally with Novavax approved marketing expenses
related to the promotion of these products in the United States and Puerto Rico,
Estrasorb(TM) is a topical estrogen replacement therapy which employs Novavax's
proprietary micellar nanoparticle technology designed to deliver
17-betaestradiol, a naturally occurring hormone, through the skin when applied
in the form of a lotion. Androsorb(TM) is a topical testosterone replacement
therapy for testosterone deficient women.

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On May 25, 2001, the FDA approved our previously filed New Drug
Application, which we refer to as an "NDA," 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 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 certain rights to three branded
pharmaceutical products and a license to a fourth product from Bristol-Myers
Squibb Company for $285.0 million plus approximately $1.5 million of expenses.
The product rights 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. For information regarding charges related to
Florinef(R), please see the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section.

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

On May 29, 2002, we acquired all rights to Ortho-Prefest(R), a branded
pharmaceutical product, from Ortho-McNeil Pharmaceutical, Inc., a Johnson &
Johnson subsidiary, for $108.0 million, plus approximately $3.3 million of
expenses. During February 2003, we paid Ortho-McNeil an additional $7.0 million
upon receipt of the FDA's approval to rename the product "Prefest." Prefest(R)
is a differentiated combination hormone replacement therapy with an intermittent
progestin administration, together with a continuous administration of estrogen,
that complements and expands our women's health portfolio.

On October 8, 2002, we acquired an exclusive license from BeartownPharma,
Inc. to manufacture, promote, market, distribute and sell Tetrac, currently in
development, as a compound for the suppression of pituitary secretion of thyroid
stimulating hormone in the United States, its territories and possessions,
Canada, Mexico, and all countries in Central America and South America for
approximately $1.0 million and potential milestone payments of up to $9.0
million. We will pay Beartown during the term of the license a reasonable
royalty on net sales in each country in the territory covered by the license.

On December 30, 2002, we licensed or acquired the rights to three branded
pharmaceutical products from Aventis for the initial cash payment of $197.5
million, plus $4.3 million of expenses. The products acquired include all rights
in the United States, Puerto Rico, and Canada to Intal(R) and Tilade(R), inhaled
anti-inflammatory agents for the management of asthma, and worldwide rights,
excluding Japan, to Synercid(R), an injectable antibiotic indicated for
treatment of vancomycin-resistant enterococcus faecium and treatment of some
complicated skin and skin structure infections. As additional consideration for
Synercid(R), we have agreed to potential milestone payments to Aventis totaling
$75.1 million.

On January 8, 2003, we acquired Meridian Medical Technologies, Inc. for
$246.8 million in cash paid to its shareholders in exchange for their shares of
Meridian common stock. Meridian pioneered the development, and is the leading
manufacturer, of auto-injectors for the self-administration of injectable drugs.
An auto-injector is a pre-filled, pen-like device that allows a patient or
caregiver to automatically inject a precise drug dosage quickly, easily, safely
and reliably. Meridian's pharmaceutical products include EpiPen(R), an
auto-injector filled with epinephrine for the emergency treatment of anaphylaxis
resulting from severe or allergic reactions to insect stings or bites, foods,
drugs and other allergens, as well as idiopathic or exercise induced
anaphylaxis. Meridian manufactures EpiPen(R) under a supply agreement with Dey,
L.P., which markets the products. Other products include a nerve gas antidote
utilizing Meridian's

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patented dual chambered auto-injector and injection process, and auto-injectors
filled with morphine for pain management and diazepam for treatment of seizures.

On June 12, 2003, we acquired the primary care business of Elan
Corporation, plc and of some of its subsidiaries in the United States and Puerto
Rico, which includes the rights to two branded prescription pharmaceutical
products, including rights to potential new formulations, of Sonata(R) and
Skelaxin(R), together with Elan's United States primary care field sales force.
Product rights subject to the agreement include those related to Sonata(R), a
nonbenzodiazepine treatment for insomnia, and Skelaxin(R), a muscle relaxant, in
the United States, its territories and possessions, and Puerto Rico. Under the
terms of the agreement, Elan's sale of Skelaxin(R) included related NDAs,
copyrights, trademarks, patents and U.S. rights to potential new formulations of
Skelaxin(R). Elan's sale of Sonata(R) included its rights to the product, as
well as certain related copyrights. We also acquired certain intellectual
property, regulatory, and other assets relating to Sonata(R) directly from
Wyeth. Under the terms of the agreement, we secured an exclusive license to the
intellectual property rights, in this territory, of both Wyeth and Elan to the
extent they relate to new formulations of Sonata(R), other than for use in
animals. We paid approximately $750.0 million at closing. The $750.0 million
purchase price included the transfer of inventory with a value of approximately
$40.0 million. We also

- will pay royalties on the current formulation of Skelaxin(R) from the
date of closing and up to $71.0 million if Elan achieves certain
milestones in connection with the development of a reformulated version
of Sonata(R);

- have a potential milestone payment of $15.0 million if annual net sales
of a reformulation version of Sonata(R) exceed $100.0 million; and

- will pay an additional $25.0 million milestone payment to Elan relating
to the ongoing exclusivity of Skelaxin(R) on January 2, 2004.

Prior to the closing of this transaction, we had received a letter on March 13,
2003 from the Federal Trade Commission, which we refer to as the "FTC," stating
that it was conducting an investigation to determine whether any person has
engaged in unfair methods of competition with respect to Elan's product
Skelaxin(R). The focus of this investigation was Elan's listing in the FDA's
Orange Book of at least one patent claiming a method of using metaxalone, and
other actions with regard to FDA regulatory processes. As a result of this new
information, we commenced an investigation and asked Elan to provide additional
information. On March 17, 2003, Elan filed a lawsuit in the Supreme Court of the
State of New York seeking to compel us to close the transaction. On May 8, 2003,
the FTC advised Elan that it was discontinuing a portion of its investigation
with respect to this method of use patent. On May 20, 2003, we reached an
agreement with Elan that restructured the terms of the transaction as described
above, and, as a result, the litigation has since been dismissed.

On April 29, 2003, we received the first patent on our FDA-approved
Levoxyl(R), U.S. Patent No. 6,555,581, a utility patent with composition of
matter claims. We have submitted in excess of 40 patent applications relating to
our novel quick-dissolving formulation of Levoxyl(R).

On June 19, 2003, we received FDA approval of our sNDA covering pediatric
and adult formulations of our nerve gas antidote AtroPen(R). This is the first
time that pediatric formulations of this homeland security product have been
approved for use in the United States. AtroPen(R) utilizes the auto-injector
technology we acquired in our January 2003 acquisition of Meridian. We do not
anticipate being able to distribute pediatric formulations of this product
before the first quarter of 2004.

We manufacture pharmaceutical products under contracts with a variety of
pharmaceutical and biotechnology companies. 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.

5

The following summarizes net revenues by operating segment (in thousands).

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(1) Branded pharmaceuticals segment net revenues for 2002 reflect (a) a $22,113
charge for corrections of immaterial errors related to underpayments of
amounts due under Medicaid and other governmental pricing programs for the
years 1998 to 2001, (b) a $12,399 charge for corrections of immaterial
errors related to underpayments of amounts due under Medicaid and other
governmental pricing programs related to 2002 and recorded in the fourth
quarter of 2002, and (c) an $11,970 charge arising from changes in
accounting estimates related to Medicaid and other governmental pricing
programs. For additional information, see the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section under the
heading "Recent Developments" and Note 2 to our audited consolidated
financial statements.

INDUSTRY

Growth in the pharmaceutical industry is being driven primarily by:

- the aging population,

- technological breakthroughs that 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 advertising which has increased public awareness of
available drug therapies.

During the past decade, the pharmaceutical industry has been faced with
cost containment initiatives from government and managed care organizations and
has begun to consolidate. Consolidation is being driven by a desire among
pharmaceutical companies to reduce costs through economies of scale and
synergies, to add previously lacking United States or European sales strength
and 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.

BRANDED PRODUCTS

We market a variety of branded prescription products that primarily can be
divided into the following therapeutic areas:

- cardiovascular (including Altace(R), Corzide(R), Thalitone(R) and
Procanbid(R)),

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

6

- orthopedic (Skelaxin(R)),

- critical care (including Thrombin-JMI(R), Synercid(R) and Brevital(R)),

- neurology/central nervous system (Sonata(R)),

- anti-infective (including Bicillin(R), Cortisporin(R), Neosporin(R) and
Coly-MycinM(R)),

- respiratory (including Intal(R) and Tilade(R)) and

- biodefense (Atropen(R) and ComboPen(R)).

Our branded pharmaceutical products are generally in high volume
therapeutic categories and are well known for their indications (for example,
Altace(R), Skelaxin(R), Levoxyl(R) and Sonata(R)). Additionally, many of our
branded products have limited or no generic competition, including patent
protected products and products that are difficult to formulate. Branded
pharmaceutical products represented 91.5% and 91.0% of total net revenues for
each of the years ended December 31, 2002 and 2001.

Cardiovascular. 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 SNDA. 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). 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. Procanbid(R) is a branded
pharmaceutical product used to treat arrhythmia with a patent listed in the FDA
Orange Book that expire in August 2014. Thalitone(R) is a hypertension diuretic
tablet indicated for the management of hypertension with a patent listed in the
FDA Orange Book that expires in June 2007. These products are marketed primarily
to primary care physicians and cardiologists.

Endocrinology/women's health. We have a number of leading branded
pharmaceutical products in this category including Levoxyl(R), Cytomel(R),
Triostat(R), Prefest(R), Menest(R), Delestrogen(R) and Nordette(R). Our products
Levoxyl(R), Cytomel(R) and Triostat(R) are indicated for the treatment of
thyroid disorders. Prefest(R) is a combination hormone replacement therapy.
Menest(R), which we acquired from GlaxoSmithKline in June 1998, and
Delestrogen(R), which we acquired from Bristol-Myers Squibb in August 2001, are
estrogen replacement therapies. These products are marketed primarily to primary
care physicians, endocrinologists and obstetrician/gynecologists.

Orthopedic. Skelaxin(R) is a muscle relaxant indicated for the relief of
discomforts associated with acute, painful musculoskeletal conditions. This
product is marketed primarily to primary care physicians and orthopedic
surgeons.

Critical care. Products in this category are marketed primarily to
hospitals. Our largest products in this category are Thrombin-JMI(R),
Synercid(R) and Brevital(R). Thrombin-JMI(R) aids in controlling minor bleeding
during surgery. Synercid(R) is an injectable antibiotic, primarily administered
in hospitals, indicated for treatment of vancomycin-resistant enterococcus
faecium and treatment of some complicated skin and skin structure infections.
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.

Neurology/central nervous system. Sonata(R) is a nonbenzodiazepine
treatment for insomnia. This product is promoted primarily to primary care
physicians, neurologists, and psychiatrists.

7

Anti-infective. Our anti-infective products are marketed primarily to
general/family practitioners and internal medicine physicians and are prescribed
to treat uncomplicated infections of the respiratory tract, urinary tract, eyes,
ears and skin. These products are generally in technologically mature product
segments and as a result have limited product liability risk. Bicillin(R) is our
largest product in the category.

Respiratory. Our respiratory products are marketed primarily to primary
care physicians and respiratory specialists. Our primary products in this area
include Intal(R) and Tilade(R). Intal(R) and Tilade(R) are oral multi-dose
inhalers of non-steroidal anti-inflammatory agents indicated for the preventive
management of asthma.

Biodefense. Our biodefense products are AtroPen(R) and ComboPen(R). These
products, which utilize our auto-injector technology, can be used in combination
as a treatment for poisoning due to exposure to specified nerve agents or
insecticides.

Some of our branded prescription products are described below:

- ---------------

(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 Thalitone(R) from Boehringer
Ingelheim Pharmaceuticals, Inc.
(3) We acquired a fully paid license to Corgard(R) in the United States.
(4) We have exclusive licenses, free of royalty obligations, to manufacture and
market prescription formulations of Neosporin(R) and Polysporin(R).

Net sales of many of our branded prescription products for the year ended
December 31, 2002 are set forth in the table below. Products in our other
therapeutic categories, orthopedic, neurology/central nervous system and
biodefense, are not included in the table below as they were acquired on
December 30, 2002 or thereafter.

12

- ---------------

(1) Includes net sales for Prefest(R) following its acquisition on May 28, 2002.

Net sales in the table above reflect (a) a $22.1 million charge for
corrections of immaterial errors related to underpayments of amounts due under
Medicaid and other governmental pricing programs for the years 1998 to 2001, (b)
a $12.4 million charge for corrections of immaterial errors related to
underpayments of amounts due under Medicaid and other governmental pricing
programs related to 2002 and recorded in the fourth quarter of 2002, and (c) a
$12.0 million charge arising from changes in accounting estimates related to
Medicaid and other governmental pricing programs. For additional information,
see the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" section under the heading "Recent Developments" and Note 2 to our
audited consolidated financial statements.

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 24.8% to $58.4 million in 2002 from $46.8
million in 2001. Fujisawa Healthcare, Inc. is the source of substantially all of
our royalty revenues. For additional information on our royalty agreements, see
the "Intellectual Property" section.

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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 Dey, L.P., 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 3% for the year ended
December 31, 2002 as we have acquired and increased the sales of branded
pharmaceutical 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.

We also manufacture the EpiPen(R) auto-injector, a product we acquired in
our acquisition of Meridian, pursuant to a supply agreement with Dey, L.P. which
markets the product.

SALES AND MARKETING

We have a national sales force of approximately 1,200 individuals, which
includes the primary care sales force of approximately 350 individuals which we
acquired as part of our acquisition of Elan's primary care business. We
distribute our branded pharmaceutical products primarily through wholesale
pharmaceutical distributors. These products are ordinarily dispensed to the
public through pharmacies by prescription. Our marketing and sales promotions
for branded pharmaceutical products, principally target general/family
practitioners, internal medicine physicians, cardiologists, endocrinologists,
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
representation 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, product acquisitions or product approvals
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, 2002, approximately 78.4% of our sales were attributable to
three wholesalers: Cardinal/Bindley (32.9%) and Amerisource/Bergen (24.0%) and
McKesson Corporation (21.5%).

MANUFACTURING

Our manufacturing facilities are located in Bristol, Tennessee; Rochester,
Michigan; Middleton, Wisconsin; St. Petersburg, Florida; and St. Louis,
Missouri. These facilities have 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

14

branded pharmaceutical products, as well as products owned by other
pharmaceutical companies under manufacture and supply contracts.

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 a portion of our
product lines, including Altace(R), Skelaxin(R), Sonata(R), Bicillin(R),
Prefest(R), Delestrogen(R), Corgard(R), Intal(R), Tilade(R), Synercid(R) and
Cortisporin(R) are manufactured for us by third parties. As of December 31,
2002, capacity utilization was approximately 70% at the Bristol facility,
approximately 25% at the Parkedale facility located in Rochester, Michigan,
approximately 95% at the Middleton facility, approximately 85% at the St.
Petersburg facility and approximately 30% at the St. Louis, Missouri facility.
With the exception of the Middleton and St. Petersburg facilities, we believe
our facilities provide us with substantial manufacturing capacity for future
growth. Thrombin-JMI(R) is the only product we manufacture at our Middleton
facility. We are currently working on long-term strategies to expand our
capacity for Thrombin-JMI(R), which should potentially be completed in the next
two to three years. These long-term strategies may further expand our
manufacturing capacity for Thrombin-JMI(R) upon completion. 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. We manufacture and distribute the finished dosage
form of our largest product, Altace(R), at our Bristol facility.

In addition to manufacturing, we have fully integrated manufacturing
support systems including quality assurance, quality control, regulatory
compliance and logistics. 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 outsource 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

With our acquisition of Medco Research on February 25, 2000, which we have
since renamed "King Pharmaceuticals Research and Development," King established
the foundation for our research and development capability. Today, King Research
and Development's activities are responsible for the discovery and development
of chemical compounds, including new chemical entities, which provide us with
strategic pipeline opportunities for the commercialization of new branded
prescription pharmaceutical products. In addition to discovering and developing
new chemical compounds, we pursue means of enhancing the value of existing
products through new uses and formulations that may provide additional benefits
to patients, and improvements in the quality and efficiency of our manufacturing
processes.

We invest in research and development because we believe it is important to
our long-term growth. We presently employ approximately 50 people in research
and development, which include pre-clinical and toxicology experts, medical
affairs personnel, statisticians and project managers. Our research and
development expenses were $24.8 million in 2000, $26.5 million in 2001 and $40.2
million in 2002.

In the conduct of our research and development, we utilize a project
management model that provides us with substantial flexibility, with a goal of
maximizing efficiency and minimizing internal fixed costs. Utilizing this model,
we supplement our internal efforts by collaborating with independent research
organizations, including educational institutions and research-based
pharmaceutical and biotechnology companies, and contracting with others for the
performance of research in their facilities. We use the services of physicians,
hospitals, medical schools and other research organizations worldwide to conduct
15

clinical trials to establish the safety and effectiveness of new products. We
seek out investments in external research and technologies that hold the promise
to complement and strengthen our own research efforts. These investments can
take many forms, including in-licensing arrangements, co-development and co-
marketing agreements, joint ventures, and the acquisition of products in
development.

Drug development is time-consuming, expensive and risky. On average, only a
small percentage of chemical compounds discovered by researchers proves to be
both medically effective and safe enough to become an approved medicine. The
process from discovery to regulatory approval typically takes 10 to 15 years or
longer. Drug candidates can fail at any stage of the process, and even
late-stage product candidates sometimes fail to receive regulatory approval.
Potential products of ours which currently have applications under review by the
FDA are:

- Estrasorb(TM), a topical estrogen replacement therapy in a unique lotion
formulation;

- a new Intal(R) inhaler formulation utilizing hydrofluoroalkane, which we
call "HFA," an environmentally friendly propellant;

- and our diazepam-filled auto-injector, which is an adjunctive injectable
therapy for the emergency treatment of status epilepticus and severe
recurrent convulsive seizures associated with epilepsy.

Other pipeline products of ours in various stages of development include
binodenoson, our next generation cardiac pharmacologic stress-imaging agent and
a modified-release formulation of Altace(R) utilizing SkyePharma's patented oral
drug delivery technology Geomatrix(R). We are also investigating new uses,
formulations and manufacturing processes for several of our currently marketed
products, such as Levoxyl(R), Thrombin-JMI(R) and Tigan(R).

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 related regulations. Biological drugs are subject to
both the FDC Act and the Public Health Service Act, known as the "PHS Act," and
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 FTC, the U.S. Department of
Agriculture, the 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 business
strategy includes 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.

16

The FDA also mandates that drugs be manufactured, packaged and labeled in
conformity with cGMPs. In complying with cGMP regulations, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure that the product meets applicable specifications and
other requirements to ensure product safety and efficacy. The FDA periodically
inspects drug manufacturing facilities to ensure compliance with applicable cGMP
requirements. Failure to comply with the statutory and regulatory requirements
subjects the manufacturer to possible legal or regulatory action, such as
suspension of manufacturing, seizure of product or voluntary recall of a
product. Adverse experiences with the use of products must be reported to the
FDA and could result in the imposition of market restrictions through labeling
changes or in product removal. Product approvals may be withdrawn if compliance
with regulatory requirements is not maintained or if problems concerning safety
or efficacy of the product occur following approval.

The federal government has extensive enforcement powers over the activities
of pharmaceutical manufacturers, including authority to withdraw product
approvals, commence actions to seize and prohibit the sale of unapproved or
non-complying products, to halt manufacturing operations that are not in
compliance with cGMPs, and to impose or seek injunctions, voluntary recalls, and
civil monetary and criminal penalties. 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 governmental 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 of 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.

17

The Parkedale facility was inspected by the FDA in March 2003. During this
inspection, the FDA made cGMP observations in a written report provided to us.
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.
While no law or regulation requires us to respond to a 483, we provided the FDA
with a written response to the 483 related to the March 2003 inspection of the
Parkedale facility, including action plans to address the observations. The 483
from March 2003 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. These changes, or new legislation, could have a material adverse
effect on our business, financial condition and results of operations.

ENVIRONMENTAL MATTERS

Our operations are subject to numerous and increasingly stringent federal,
state and local environmental laws and regulations concerning, among other
things, the generation, handling, storage, transportation, treatment and
disposal of toxic and hazardous substances and the discharge of pollutants into
the air and water. Environmental permits and controls are required for some of
our operations and these permits are subject to modification, renewal and
revocation by the issuing authorities. We believe that our facilities are in
substantial compliance with our permits and environmental laws and regulations
and do not believe that future compliance with current environmental law 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 of 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. In addition, many
states, including Tennessee, Michigan, Wisconsin, Florida and Missouri have
statutes and regulatory authorities similar to CERCLA and to the EPA. We have
entered into 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 other applicable state statutes or regulations 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 products and product
line acquisitions. Competitors include Biovail Corporation, 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

18

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

Due to recent regulatory changes effective August 18, 2003, the FDA may
approve generic substitutes of our branded pharmaceutical products in a shorter
period of time. Previously, the FDA required that generic applicants claiming
patent invalidity or non-infringement give us notice each time either an
abbreviated new drug application, which we refer to as an "ANDA," was submitted
or amended to claim invalidity or non-infringement of newly listed patents. If
we filed a patent infringement suit against the generic applicant within 45 days
of receiving such notice, the FDA was barred from approving the ANDA for 30
months unless specific events occurred sooner. To avoid multiple 30-month stays
for the same branded drug, the FDA's new regulations now only require one such
notice. Under the new regulations, if an ANDA applicant had already provided
patent invalidity or non-infringement notice to us about a particular branded
drug, we will not get a second notice or opportunity for another stay for that
drug. As a result generic substitutes of our branded pharmaceutical products
could be approved sooner.

The FDA's new regulations also significantly change patent listing
requirements in the FDA's Orange Book. Only patents listed in the FDA's Orange
Book are eligible for protection by a 30-month stay. We are now required to list
all patents that claim a composition of matter relating to drug or a method of
using a drug. Previously, this provision was interpreted broadly, allowing the
listing of many drug patents. The FDA's new regulations prohibit listing of
certain types of patents, including patents claiming certain metabolites (the
active moiety that results from the body's metabolism of the drug substance),
intermediates (namely, substances not present in the finished product), certain
methods of use, or patents claiming certain product packaging. As such, some
patents that may issue in the future may not be eligible for listing in the
FDA's Orange Book and thus not eligible for protection by a 30-month stay.

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
patents listed in the FDA Orange Book that expire in January 2005, October 2008
and April 2012. 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. For a discussion of a challenge to our patent by
a generic drug manufacturer, please see the section entitled "Risk Factors -- If
we cannot successfully enforce our rights under the patents relating to three of
our largest products, Altace(R), Levoxyl(R) and Skelaxin(R), against generic
drug manufacturers, our results of operations could be materially adversely
affected." We also own U.S. patents listed in the FDA's Orange Book that expire
in August 2014 for Procanbid(R). Additionally, we own a U.S. patent for
Thalitone(R), which is listed in the FDA's Orange Book and expires in June 2007.

19

In connection with the acquisition of Lorabid(R), we acquired, among other
things, all of Eli Lilly's rights in approximately 30 patents and received a
broad royalty-free non-exclusive license in the United States and Puerto Rico to
12 other patents and associated technology. We also received an exclusive
sublicense to four other patents for which we must pay a royalty to Eli 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). These 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.

In connection with the acquisition of the rights to Prefest(R) on May 29,
2002, we acquired a pharmaceutical preparation patent listed in the FDA's Orange
Book that expires in January 2012, as well as a second Orange Book listed patent
that expires in April 2009.

In connection with the acquisition of Meridian on January 8, 2003, we
acquired the intellectual property rights associated with Meridian's
dual-chambered auto-injector and injection process, which has a patent that
expires in 2010.

In connection with our acquisition of the rights to Intal(R), Tilade(R),
and Synercid(R) on December 30, 2002, we acquired associated intellectual
property rights, including a patent in the United States related to the HFA
formulation of Intal(R) until September 2017, a composition of matter patent in
the United States for Tilade(R) until October 2006 and a formulation patent in
the United States for Synercid(R) until November 2017.

Skelaxin(R) has a method of use patent listed in the FDA's Orange Book,
which does not expire until December 2021. For a discussion of challenges to our
patent by generic drug manufacturers, please see the "Risk Factors" section
under the heading "If we cannot successfully enforce our rights under the
patents relating to three of our largest products, Altace(R), Levoxyl(R), and
Skelaxin(R), against generic drug manufacturers, our results of operations could
be materially adversely affected."

Sonata(R) has a composition of matter patent listed in the FDA's Orange
Book through June 2008.

We are party to an agreement under which Fujisawa manufactures and markets
Adenocard(R) and Adenoscan(R) in the United States and Canada in exchange for
royalties. We have licensed exclusive rights to Sanofi-Synthelabo, France, to
manufacture and market Adenocard(R) in countries other than the United States,
Canada and Japan in exchange for royalties. We have licensed exclusive rights to
Sanofi to manufacture and market Adenoscan(R) worldwide except in the United
States, Canada, Japan, Korea and Taiwan in exchange for royalties. Sanofi has
received marketing approval for Adenoscan(R) in a number of different countries.
We have licensed exclusive rights to Suntory to manufacture and market
Adenocard(R) and Adenoscan(R) in Japan in exchange for royalties. 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 of Adenocard(R) and Adenoscan(R)
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 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."

20

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

We have filed in excess of 40 patent applications related to Levoxyl(R).
The first U.S. patent on Levoxyl(R), U.S. Patent No. 6,555,581, a utility patent
with composition of matter claims, listed in the FDA's Orange Book was issued on
April 29, 2003 and extends through February 15, 2022. The other pending patent
applications generally cover, among other things, formulation methodologies and
equipment, formulation technologies, biopharmaceutical characteristics, drug
delivery systems and methods-of-use. If these other applications are granted,
the resulting patents will potentially provide us with additional patent
protection on our FDA-approved novel formulation of Levoxyl(R). For a discussion
of a challenge to our patent by a generic drug manufacture, please see the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section under the heading "Overview."

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

We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation 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. We believe that
we have valid proprietary interests in all currently used trademarks, including
those for our principal branded pharmaceutical products registered in the United
States.

BACKLOG

As of July 23, 2003, we had no material backlog.

EMPLOYEES

As of July 24, 2003, we employed 2,733 full-time and 52 part-time persons.
Approximately 230 employees of the Parkedale facility are covered by a
collective bargaining agreement with the Paper, Allied Industrial, Chemical &
Energy Workers, International Union (PACE), Local No. 60178, which expires on
February 28, 2006. Approximately 270 employees of the Meridian facility in St.
Louis, Missouri are covered by a collective bargaining agreement with the
International Brotherhood of Teamsters Chaffeurs, Warehousemen and Helpers of
America Union, Local No. 688, which expires February 28, 2005. We believe our
employee relations are good. We employ two full-time Chaplains for the benefit
of our employees.

21

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 audited consolidated 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 or other sections of this report 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

THE SEC INVESTIGATION, OTHER POSSIBLE GOVERNMENTAL INVESTIGATIONS, AND
SECURITIES LITIGATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

On March 10, 2003, we received a subpoena duces tecum from the SEC with
respect to an SEC investigation of King. The subpoena requested the production
of documents focusing on the years 1999 and 2000 and included all documents
related to sales of our products to VitaRx and Prison Health Services during
1999 and 2000, our "best price" lists, all documents related to the pricing of
our pharmaceutical products provided to any governmental Medicaid agency during
1999, the accrual and payment of rebates on Altace(R) from 2000 to the present,
and other general requests. On May 14, 2003, the SEC issued another subpoena
duces tecum, requesting additional documents pertaining to the products
Fluogen(R) and Lorabid(R), the King Benevolent Fund, our calculations related to
Medicaid rebates, and our Audit Committee's internal review of issues raised by
the SEC investigation. We have cooperated, and will continue to cooperate, in
providing information to the SEC.

In connection with our determination that we have underpaid amounts due
under Medicaid and other governmental pricing programs during the period from
1998 to 2002, we have contacted the Centers for Medicare and Medicaid Services,
the Office of Inspector General at the Department of Health and Human Services,
and the Department of Justice. We expect to engage in more detailed discussions
with these and other appropriate agencies in order to determine the precise
amount of the underpayments. We currently expect to make the requisite payments
in the third or fourth quarter of 2003. The SEC, the Centers for Medicare and
Medicaid Services, the Office of Inspector General, the Department of Justice
and other governmental agencies that might be investigating or might commence an
investigation of us could impose, based on a claim of a violation of fraud and
false claims laws or otherwise, civil and/or criminal sanctions, including
fines, penalties and possible exclusion from federal health care programs
(including Medicaid and Medicare). Some of these laws may impose liability even
in the absence of specific intent to defraud. We cannot predict or reasonably
estimate the likelihood or magnitude of any such sanctions at this time. For
additional information, please see this "Risk Factors" section under the heading
"If we fail to comply with our reporting and payment obligations under the
Medicaid rebate program or other governmental pricing programs, we could be
subject to additional reimbursements, penalties, sanctions and fines which could
have a material adverse effect on our business" and the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section under the
heading "Recent Developments -- SEC Investigation, Medicaid and Other
Governmental Program Accrual Adjustment, and Related Matters."

Subsequent to the announcement of the SEC investigation described above,
beginning in March 2003, 22 purported class action complaints have been filed by
holders of our securities against us, our directors, former directors, executive
officers and former executive officers in the United States District Court for
the Eastern District of Tennessee, alleging violations of the Securities Act of
1933 and/or the Securities Exchange Act of 1934. Plaintiffs allege that we,
through some of our executive officers, former executive officers, directors and
former directors, made false or misleading statements concerning our business,
financial condition and results of operations during periods beginning March 31,
1999 and continuing until March 11, 2003. Additionally, seven purported
shareholder derivative complaints have been filed in federal and state courts in
Tennessee alleging a breach of fiduciary duty, among other things, by some of
our

22

officers and directors. The allegations in these lawsuits are similar to those
in the class action litigation described above. We intend to defend these
lawsuits vigorously but are unable currently to predict the outcome or
reasonably estimate the range of potential loss, if any.

If any governmental sanctions are imposed, or if we were not to prevail in
the securities litigation, neither of which we can predict or reasonably
estimate at this time, our business, financial condition, results of operations
and cash flows could be materially adversely affected. Responding to the SEC in
its investigation, resolving the amounts owed to governmental agencies in
connection with the underpayments and defending King in the securities
litigation has resulted, and is expected to continue to result, in a significant
diversion of management's attention and resources and an increase in
professional fees.

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 39.9% and Levoxyl(R) accounted for
approximately 15.0% of our total revenues for the year ended December 31, 2002,
and Altace(R), Levoxyl(R), Thrombin-JMI(R), and royalty revenues collectively
accounted for approximately 68.6% of our total revenues during the same period.
In addition, we acquired Sonata(R) and Skelaxin(R) on June 12, 2003, which
together had net sales in the United States and Puerto Rico of approximately
$238.0 million in 2002. We believe that sales of these products may constitute a
significant portion of our 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.

IF WE CANNOT SUCCESSFULLY ENFORCE OUR RIGHTS UNDER THE PATENTS RELATING TO
THREE OF OUR LARGEST PRODUCTS, ALTACE(R), LEVOXYL(R) AND SKELAXIN(R), AGAINST
GENERIC DRUG MANUFACTURERS, OUR RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED.

Cobalt Pharmaceuticals, Inc., a generic drug manufacturer located in
Mississauga, Ontario, Canada, has filed an ANDA with the FDA seeking permission
to market a generic version of Altace(R) prior to the expiration of U.S. Patent
No. 5,061,722, the '722 patent, a "composition of matter patent" relating to
Altace(R) which is listed in the FDA's Orange Book. King also recently listed
U.S. Patent No. 5,403,856, the '856 patent, a "method of use patent" relating to
Altace(R) in the FDA's Orange Book. The '722 patent does not expire until
October 2008 and the '856 patent does not expire until April 2012. Under the
federal Hatch-Waxman Act of 1984, Cobalt has filed an ANDA alleging that the
'722 patent is invalid. This allegation is commonly known as a "Paragraph IV
certification." Under the terms of the Hatch-Waxman legislation, any generic
manufacturer may file an ANDA with a Paragraph IV certification after the
pioneer company, or its successor in interest, has marketed a new chemical
entity for four years. Regulations do not require Cobalt to certify against the
'856 patent. If the '722 and '856 patents are successfully challenged, Cobalt
may market a generic equivalent of Altace(R) prior to October 2008, but not
before January 2005, the expiration date of U.S. Patent No. 4,587,258, the '258
patent. The '258 patent is another composition of matter patent that relates to
and is listed in the FDA's Orange Book for Altace(R), but which has not been
challenged by Cobalt. We have filed suit to enforce our rights under the '722
and '856 patents. The filing of the suit provides us an automatic stay of FDA
approval of the ANDA for 30 months. However, should the court grant Cobalt
summary judgment on the '722 patent, we would not receive the benefit of the
automatic stay. Moreover, we have recently amended our complaint, without
opposition, to include an allegation of infringement of the '856 patent by
Cobalt. While we intend to vigorously enforce our rights under the '722 and '856
patents being challenged, we cannot assure you that we will be successful. If we
are not successful in enforcing our patents, our business, financial condition,
results of operations and cash flows could be materially adversely affected.

Mylan Pharmaceuticals, Inc., a generic drug manufacturer, filed an ANDA
with the FDA seeking permission to market a generic version of Levoxyl(R) prior
to the expiration of U.S. Patent No. 6555581, the '581 patent, which was issued
to us on April 29, 2003, relating to Levoxyl(R). We received notice of this
Paragraph IV certification alleging non-infringement no earlier than April 30,
2003. Additionally, on June 24, 2003, we received a notice of Paragraph IV
certification related to the '581 patent from KV
23

Pharmaceutical Company. We intend to enforce our rights under the '581 patent to
the full extent of the law. If we are unsuccessful in enforcing our patent, our
business, financial condition, results of operations and cash flows could be
materially adversely affected.

Eon Labs and CorePharma have each filed an ANDA with the FDA seeking
permission to market a generic version of Skelaxin(R) prior to the expiration of
U.S. Patent No. 6,407,128, the '128 patent, that is listed in the FDA's Orange
Book which does not expire until December 6, 2021. Eon Labs and CorePharma have
each filed Paragraph IV certifications relating to the '128 patent. We intend to
enforce our rights under this patent. If we are unsuccessful in enforcing this
patent, our business financial condition, results of operations and cash flows
could be materially adversely affected.

ALTHOUGH WE HAVE AN OBLIGATION TO INDEMNIFY OUR OFFICERS AND DIRECTORS, WE MAY
NOT HAVE SUFFICIENT INSURANCE COVERAGE AVAILABLE FOR THIS PURPOSE AND MAY BE
FORCED TO PAY THESE INDEMNIFICATION COSTS DIRECTLY AND WE MAY NOT BE ABLE TO
MAINTAIN EXISTING LEVELS OF COVERAGE, WHICH COULD MAKE IT DIFFICULT TO ATTRACT
OR RETAIN QUALIFIED DIRECTORS AND OFFICERS.

Our charter and bylaws require that we indemnify our directors and officers
to the fullest extent provided by applicable law. Although we have purchased
directors and officers liability insurance to fund such obligations, if our
insurance carrier should deny coverage, or if the indemnification costs exceed
the insurance coverage, we would be forced to bear these indemnification costs
directly, which could be substantial and may have an adverse effect on our
business, financial condition, results of operations and cash flows. If the cost
of this insurance increases significantly, we may not be able to maintain or
increase our levels of insurance coverage for our directors and officers. This
could make it difficult to attract or retain qualified directors and officers.

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 effectively co-marketing the new
indications for Altace(R) that 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 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

24

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.

IF OUR BRISTOL FACILITY AND THE AVENTIS (USA) FACILITY DO NOT REMAIN
FDA-APPROVED MANUFACTURING AND PACKAGING SITES FOR ALTACE(R) OR IF THERE IS AN
INTERRUPTION IN THE SUPPLY OF RAW MATERIAL FOR ALTACE(R) OR OF THE FINISHED
PRODUCT, THE DISTRIBUTION, MARKETING AND SUBSEQUENT SALES OF THE PRODUCT COULD
BE ADVERSELY AFFECTED.

Our Bristol facility is an FDA-approved manufacturing and packaging site
for Altace(R). Aventis (USA) in Kansas City, Missouri, is our alternative or
back-up FDA-approved manufacturing and packaging site for Altace(R). Aventis
Pharma Deutscheland GmbH (Germany) is 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. We have
entered into a long-term supply agreement with Aventis (Germany) for ramipril
and we believe that it adequately protects our supply of raw material, but there
can be no guarantee that there will be no interruptions or delays in the supply
of the raw material. 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 to maintain our Bristol facility and the Aventis (USA) facility
as FDA-approved manufacturing and packaging sites for Altace(R) could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.

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 indications for Altace(R) that are unique
among ACE inhibitors, 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 differentiating 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 although Cobalt
Pharmaceuticals has filed a Paragraph IV certification pertaining to Altace(R)
which we have described above. That is, there is no product that has the same
active ingredient, ramipril, 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 blockers, which we refer to
as an "ARB," 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

25

ACE inhibitors or of other therapeutic agents that compete with Altace(R) may
adversely affect the sales of Altace(R). In these events, our business,
financial condition, results of operations and cash flows could be materially
adversely affected.

OUR CO-PROMOTION AGREEMENT FOR ALTACE(R) WITH WYETH COULD BE TERMINATED BEFORE
WE REALIZE ALL OF THE BENEFITS OF THE AGREEMENT, 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) are not equal to or greater than $300.0 million on 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 that 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 m