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United States
Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
June 30, 2003
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Commission file number 0-31475
ANDRX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 65-1013859
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
4955 Orange Drive
Davie, Florida 33314
(Address of principal executive offices) (Zip Code)
(954) 584-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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:
[X] YES [ ] NO
The approximate number of shares outstanding of the issuer's common stock as of
August 1, 2003 is 71,957,000.
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ANDRX CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ANDRX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets -
as of June 30, 2003 (Unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Income -
for the three and six months ended June 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows -
for the six months ended June 30, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6-21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 22-50
Item 4. Controls and Procedures 51
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 52
Item 4. Submission of Matters to a Vote of Security Holders 52
Item 6. Exhibits and Reports on Form 8-K 53
SIGNATURES 54
CERTIFICATIONS 55-57
This Form 10-Q contains trademarks held by Andrx Corporation and third parties.
Andrx Corporation's trademarks, including licensed trademarks, that may be
used in this report include: Altocor(TM), Anexsia(R), Embrex(R), Entex(R),
Metformin XT(TM), and Taztia(TM) XT.
Trademarks held by third parties that may be used in this report include:
Advicor(TM), Cardizem(R) CD, Claritin(R), Dilacor XR(R), Glucophage(R),
K-Dur(R), Naprelan(R), Oruvail(R), Pepcid(R), Prozac(R), Prilosec(R), Tiazac(R),
Trental(R), Ventolin(R), Wellbutrin SR(R), and Zyban(R).
2
ANDRX CORPORATION AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ANDRX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
June 30, December 31,
2003 2002
----------- ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 126,765 $ 35,521
Investments available-for-sale, at market value 31,375 61,873
Accounts receivable, net of allowance for doubtful accounts of $11,046 and
$15,495 at June 30, 2003 and December 31, 2002, respectively 135,741 130,044
Inventories 174,443 147,967
Income taxes receivable -- 33,710
Deferred income tax assets 50,212 68,148
Prepaid and other current assets 20,185 12,371
--------- ---------
Total current assets 538,721 489,634
Property, plant and equipment, net 241,815 233,828
Goodwill 33,981 33,981
Other intangible assets, net 18,419 19,941
Other assets 14,621 12,095
--------- ---------
Total assets $ 847,557 $ 789,479
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 102,874 $ 80,850
Income taxes payable 12,047 --
Accrued expenses and other liabilities 126,781 127,208
--------- ---------
Total current liabilities 241,702 208,058
Deferred income tax liabilities 12,590 12,590
Obligations under capital leases and other liabilities 3,316 3,124
--------- ---------
Total liabilities 257,608 223,772
--------- ---------
Commitments and contingencies
Stockholders' equity
Convertible preferred stock; $0.001 par value, 1,000,000 shares authorized;
none issued and outstanding -- --
Common stocks:
Andrx Group common stock; $0.001 par value, 100,000,000 shares
authorized; issued and outstanding 71,914,000 shares and
71,501,000 shares at June 30, 2003 and December 31, 2002,
respectively 72 72
Cybear Group common stock; $0.001 par value, 12,500,000 shares
authorized; none issued and outstanding -- --
Additional paid-in capital 493,808 487,928
Restricted stock units (8,906) (6,525)
Retained earnings 104,871 84,038
Accumulated other comprehensive income, net of income taxes 104 194
--------- ---------
Total stockholders' equity 589,949 565,707
--------- ---------
Total liabilities and stockholders' equity $ 847,557 $ 789,479
========= =========
The accompanying notes to unaudited condensed consolidated financial
statements are an integral part of these unaudited condensed consolidated
balance sheets.
3
ANDRX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Distributed products $ 161,506 $ 121,502 $ 316,123 $ 248,547
Andrx products 76,679 55,770 125,111 110,306
Licensing and royalties 33,054 102 64,192 216
Other 1,131 3,168 4,129 4,792
------------ ------------ ------------ ------------
Total revenues 272,370 180,542 509,555 363,861
------------ ------------ ------------ ------------
Operating expenses
Cost of goods sold 171,693 129,888 330,726 256,405
Selling, general and administrative 58,212 46,459 113,692 87,744
Research and development 12,484 11,420 25,824 21,342
Litigation settlements and other charges 7,500 60,000 7,500 60,000
------------ ------------ ------------ ------------
Total operating expenses 249,889 247,767 477,742 425,491
------------ ------------ ------------ ------------
Income (loss) from operations 22,481 (67,225) 31,813 (61,630)
Other income (expense)
Equity in earnings of joint ventures 1,176 943 1,624 1,588
Interest income 451 1,622 1,097 3,235
Interest expense (685) (95) (1,296) (122)
Gain on sales of assets 146 4,514 582 4,514
------------ ------------ ------------ ------------
Income (loss) before income taxes 23,569 (60,241) 33,820 (52,415)
Provision (benefit) for income taxes 9,092 (28,907) 12,987 (25,594)
------------ ------------ ------------ ------------
Net income (loss) $ 14,477 $ (31,334) $ 20,833 $ (26,821)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE
ANDRX GROUP COMMON STOCK:
Net income (loss) allocated to Andrx Group
(including Cybear Group commencing May 17, 2002) $ 14,477 $ (29,272) $ 20,833 $ (20,877)
Premium on Conversion of Cybear Group common stock -- (526) -- (526)
------------ ------------ ------------ ------------
Total net income (loss) allocated to Andrx Group $ 14,477 $ (29,798) $ 20,833 $ (21,403)
============ ============ ============ ============
Net income (loss) per share of Andrx Group common stock:
Basic $ 0.20 $ (0.42) $ 0.29 $ (0.30)
============ ============ ============ ============
Diluted $ 0.20 $ (0.42) $ 0.29 $ (0.30)
============ ============ ============ ============
Weighted average shares of Andrx Group common stock outstanding:
Basic 71,879,000 70,699,000 71,739,000 70,625,000
============ ============ ============ ============
Diluted 72,617,000 70,699,000 72,375,000 70,625,000
============ ============ ============ ============
CYBEAR GROUP COMMON STOCK:
Net loss allocated to Cybear Group (through May 17, 2002) $ (2,062) $ (5,944)
Premium on Conversion of Cybear Group common stock 526 526
------------ ------------
Total net loss allocated to Cybear Group $ (1,536) $ (5,418)
============ ============
Basic and diluted net loss per share of
Cybear Group common stock $ (0.23) $ (0.80)
============ ============
Basic and diluted weighted average shares of
Cybear Group common stock outstanding 6,743,000 6,743,000
============ ============
The accompanying notes to unaudited condensed consolidated financial
statements are an integral part of these unaudited condensed consolidated
statements.
4
ANDRX CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
-----------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 20,833 $ (26,821)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 13,655 10,352
Provision for doubtful accounts 4,284 5,637
Gain on sales of assets (582) (4,514)
Asset writedowns at aerosol manufacturing facilities 8,177 --
Compensation expense on amortization of restricted stock units 663 38
Equity in earnings of joint ventures (1,624) (1,588)
Income tax benefits on exercises of Andrx Group stock options 848 2,534
Changes in operating assets and liabilities:
Accounts receivable, net (10,106) 26,127
Inventories (29,470) (27,971)
Prepaid and other assets (8,715) (3,621)
Income tax refund (payment) 51,695 (816)
Other income taxes 12,047 (28,107)
Accounts payable and accrued expenses and other
liabilities 20,326 57,663
--------- ---------
Net cash provided by operating activities 82,031 8,913
--------- ---------
Cash flows from investing activities:
Maturities of investments available-for-sale, net 30,359 59,014
Purchases of property, plant and equipment (22,981) (44,953)
Proceeds from sales of assets 250 1,425
--------- ---------
Net cash provided by investing activities 7,628 15,486
--------- ---------
Cash flows from financing activities:
Proceeds from exercises of Andrx Group stock options 1,411 1,728
Proceeds from issuances of Andrx Group shares
under the employee stock purchase plan 578 1,141
Principal payments on capital lease obligations (404) --
--------- ---------
Net cash provided by financing activities 1,585 2,869
--------- ---------
Net increase in cash and cash equivalents 91,244 27,268
Cash and cash equivalents, beginning of period 35,521 62,311
--------- ---------
Cash and cash equivalents, end of period $ 126,765 $ 89,579
========= =========
Supplemental disclosure of cash paid (received) during the period for:
Interest $ 552 $ 122
========= =========
Income taxes $ (51,695) $ 816
========= =========
Supplemental disclosure of non-cash investing and financing activities:
Assets acquired through capital leases $ 1,234 $ --
========= =========
The accompanying notes to unaudited condensed consolidated financial
statements are an integral part of these unaudited condensed consolidated
statements.
5
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
1. GENERAL
The accompanying unaudited condensed consolidated financial statements
for each period include the condensed consolidated balance sheets, statements of
income and cash flows of Andrx Corporation and subsidiaries ("Andrx" or the
"Company"). All significant intercompany items and transactions have been
eliminated in consolidation. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted, as
permitted by SEC rules and regulations. However, in the opinion of management,
the disclosures contained herein are not misleading, and the unaudited condensed
consolidated financial statements reflect all material adjustments (which
include normal recurring adjustments) necessary to present fairly the Company's
unaudited financial position, results of operations and cash flows. The
unaudited results of operations for the three and six months ended June 30, 2003
and cash flows for the six months ended June 30, 2003, are not necessarily
indicative of the results of operations or cash flows that may be expected for
the remainder of 2003. The unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes thereto included in Andrx's Annual Report on Form 10-K for the
year ended December 31, 2002, and its quarterly report on Form 10-Q for the
quarter ended March 31, 2003. The December 31, 2002 Consolidated Balance Sheet
included herein was extracted from the December 31, 2002 Audited Consolidated
Balance Sheet included in the Form 10-K for the year ended December 31, 2002.
EQUITY REORGANIZATION AND CONVERSION
On September 7, 2000, Andrx completed an equity reorganization (the
"Reorganization") whereby it acquired the outstanding equity of its Cybear, Inc.
subsidiary ("Cybear") that it did not own, reincorporated in Delaware, and
created two new classes of common stock: (i) Andrx Group common stock ("Andrx
Common Stock") to track the performance of Andrx Group, and (ii) Cybear Group
common stock ("Cybear Common Stock") to track the performance of Cybear Group.
On May 17, 2002, each share of Cybear Common Stock was converted into
0.00964 of a share of Andrx Common Stock resulting in the issuance of
approximately 65,000 shares of common stock (the "Conversion"). The Conversion
included a 25% premium on the value of Cybear Common Stock as provided by the
terms of Andrx's Certificate of Incorporation. Subsequent to the Conversion,
Andrx has only one class of common stock outstanding.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
6
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Guarantor's Accounting and Disclosure Requirements for
Guarantees
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". The provisions of FIN 45 require that a liability be recorded in the
guarantor's balance sheet at fair value upon issuance of a guarantee. The
recognition provisions of FIN 45 are effective for guarantees issued or modified
after December 31, 2002. Adoption of the provisions of FIN 45 had no impact on
the Company's consolidated financial statements.
Accounting for Stock-Based Compensation - Transition and Disclosure
In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure". The provisions of SFAS No. 148 amend SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation, and to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. SFAS No. 148 does not amend SFAS No.
123 to require companies to account for their employee stock-based awards using
the fair value method. However, the disclosure provisions are required for all
companies with stock-based employee compensation, regardless of whether they
utilize the fair value method of accounting described in SFAS No. 123 or the
intrinsic value method described in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees." The disclosure requirements
of SFAS No. 148 are included herein. The Company currently intends to continue
to account for employee stock-based compensation in accordance with APB No. 25.
The Company accounts for its stock-based compensation plans under the
recognition and measurement principles of APB No. 25 and related
interpretations. Options granted under those plans are to employees or members
of the Board of Directors with an exercise price equal to the market value of
the underlying common stock on the date of grant. Accordingly, no stock-based
employee compensation expense is reflected in the Consolidated Statements of
Income for stock options. For restricted stock unit grants, the fair value on
the date of the grant is fixed and is amortized on a straight-line basis over
the related period of service and such amortization expense is included in
Selling, general and administrative ("SG&A") expenses.
7
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
The following table summarizes the pro forma consolidated results of
operations of Andrx as though the provisions of the fair value-based accounting
method of accounting for employee stock-based compensation of SFAS No. 123 had
been used:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
ANDRX GROUP 2003 2002 2003 2002
----------- ----------- ----------- ----------
Net income (loss) allocated to Andrx Group
(including Cybear Group commencing May 17, 2002)
As reported $ 14,477 $ (29,798) $ 20,833 $ (21,403)
Add: stock-based employee compensation expense included
in reported net income (loss), net of related tax effect 177 24 411 24
Deduct: total stock-based employee compensation expense
determined under the fair value-based method for all
awards, net of related tax effect (6,637) (4,073) (11,514) (10,841)
----------- ----------- ----------- ----------
Pro forma net income (loss) $ 8,017 $ (33,847) $ 9,730 $ (32,220)
=========== =========== =========== ==========
Basic net income (loss) per Andrx Group common share
As reported $ 0.20 $ (0.42) $ 0.29 $ (0.30)
=========== =========== =========== ==========
Pro forma $ 0.11 $ (0.48) $ 0.14 $ (0.46)
=========== =========== =========== ==========
Diluted net income (loss) per Andrx Group common share
As reported $ 0.20 $ (0.42) $ 0.29 $ (0.30)
=========== =========== =========== ==========
Pro forma $ 0.11 $ (0.48) $ 0.13 $ (0.46)
=========== =========== =========== ==========
The fair value of Andrx options was estimated using the Black-Scholes
option pricing model and the following assumptions:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
2003 2002 2003 2002
---- ----- ---- ----
Risk-free interest rate 3.2% 2.8% 3.0% 3.2%
Average life of options (years) 5.5 5.7 5.5 5.9
Average volatility 81% 91% 90% 83%
Dividend yield -- -- -- --
The range of fair values per share of Andrx options as of the
respective dates of grant was $7.28 to $16.33, and $3.81 to $23.49, for stock
options granted during the three and six months ended June 30, 2003,
respectively, and $26.28 to $36.68 and $14.19 to $36.68 for the three and six
months ended June 30, 2002, respectively.
8
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
2002
--------------------------
April 1, January 1,
Through Through
May 17, May 17,
CYBEAR GROUP ------- ---------
Net loss allocated to Cybear Group
As reported $(1,536) $(5,418)
Deduct: total stock-based employee compensation expense determined
under the fair value-based method for all awards (410) (1,230)
------- -------
Pro forma $(1,946) $(6,648)
======= =======
Basic and diluted net loss per Cybear Group
common share
As reported $ (0.23) $ (0.80)
======= =======
Pro forma $ (0.29) $ (0.99)
======= =======
As no Cybear options were awarded during the 2002 periods presented, no
related Black-Scholes option pricing model assumptions are provided herein.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model, like all
option valuation models, requires highly subjective assumptions including the
expected stock price volatility. As the Company's employee stock options have
characteristics significantly different than those of traded options, and
changes in the assumptions can materially affect the fair value estimate, in
management's opinion, the option pricing models do not necessarily provide a
reliable measure of the fair value of its employee stock options.
In June 2003, Andrx received approval from its stockholders to amend
the 2000 stock option plan (the "2000 Plan"). The 2000 Plan was amended, for
among other things, (i) to allow for the granting of restricted stock units,
stock appreciation rights, and other performance-based awards (collectively,
"Other Awards"), in addition to stock options and (ii) to prohibit option
re-pricing and the issuance of options at per share exercise prices less than
fair market value. Other Awards may not in the aggregate, exceed 1,500,000
shares of Andrx Common Stock. The June 2003 amendment did not affect the
12,000,000 shares authorized for issuance under the 2000 Plan, approved by
stockholders in September 2000.
9
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). The provisions of FIN No. 46
clarify the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated support from other parties. The provisions of FIN No. 46
require a variable interest entity ("VIE") to be consolidated by a company if
that company is subject to a majority of the risk of loss from the activities or
entitled to receive a majority of the entity's residual returns or both. The
provisions of FIN No. 46 also require disclosures about VIEs that the company is
not required to consolidate but in which it has a significant variable interest.
The consolidation requirements of FIN No. 46 apply immediately to VIEs created
after January 31, 2003 and to existing VIEs in the first interim or annual
period beginning after June 15, 2003. The Company believes that the adoption of
the provisions of FIN No. 46 will not have a material impact on its consolidated
financial statements.
Amendment of SFAS No. 133 on Derivative Instruments and Hedging
Activities
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". The provisions of SFAS
No. 149 amend and clarify financial accounting and reporting for derivative
instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The provisions of SFAS No. 149
are effective for contracts entered into or modified after June 30, 2003, except
under certain circumstances as contained in SFAS No. 149. The Company believes
that adoption of the provisions of SFAS No. 149 will not have a material impact
on its consolidated financial statements, since the Company does not have any
derivative financial instruments or engage in hedging activities.
Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". The
provisions of SFAS No. 150 establish standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability or an asset in some circumstances. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003, and otherwise are effective at the beginning of
the first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of non-public entities. The Company believes
that the adoption of SFAS No. 150 will not have a material impact on its
consolidated financial statements.
10
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
2. EARNINGS (LOSS) PER SHARE
As a result of the Reorganization, Andrx's operating results for the
period from April 1, 2002 through May 17, 2002 and January 1, 2002 through May
17, 2002 have been allocated to each class of common stock. Subsequent to the
May 17, 2002 Conversion, operating results and basic and diluted net income
(loss) per share of Andrx Common Stock include the operating results of Cybear.
ANDRX
For all the periods presented, the shares used in computing basic net
income (loss) per share of Andrx Common Stock are based on the weighted average
shares of Andrx Common Stock outstanding and for the 2003 periods also include
the vested portion of restricted stock units. Diluted per share calculations for
the 2003 periods include weighted average shares of common stock outstanding, as
well as dilutive common stock equivalents, which consist of stock options and
restricted stock units as computed using the treasury stock method. For the 2003
periods, the anti-dilutive common stock equivalents include stock options and
the unvested portion of restricted stock units in which the exercise price or
the issuance price, respectively, exceeded the average market price for such
shares during the respective three and six month periods. For the 2002 periods
all potential shares were excluded from the diluted share computation as the
Company reported a net loss and, accordingly, such potential common shares were
anti-dilutive. The 2002 periods also exclude the unamortized restricted stock
units, which were also anti-dilutive.
A reconciliation of the denominators of basic and diluted earnings
(loss) per share of Andrx Common Stock is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic weighted average shares of common stock
outstanding 71,879,000 70,699,000 71,739,000 70,625,000
Effect of dilutive items:
Stock options and restricted stock units 738,000 -- 636,000 --
---------- ---------- ---------- ----------
Diluted weighted average shares of common stock
outstanding 72,617,000 70,699,000 72,375,000 70,625,000
========== ========== ========== ==========
Anti-dilutive common stock equivalents 4,411,000 3,623,000 6,142,000 3,460,000
========== ========== ========== ==========
CYBEAR
The shares used in computing net loss per share of Cybear Common Stock
were based on the weighted average shares of Cybear Common Stock outstanding for
the period from April 1, 2002 through May 17, 2002 and January 1, 2002 through
May 17, 2002. As Cybear incurred a net loss for such periods, all Cybear Common
Stock equivalents were excluded from the Cybear diluted share computation, since
the effects were anti-dilutive.
11
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
2003 2002
---------- ------------
Raw materials $ 43,371 $ 32,866
Work in process 17,575 8,176
Finished goods 113,497 106,925
---------- ------------
$ 174,443 $ 147,967
========== ============
As of June 30, 2003, the Company had approximately $9,457 in
inventories, primarily raw materials, relating to products pending launch
while the Company awaits receipt of final Food and Drug Administration ("FDA"),
marketing approval and/or satisfactory resolution of patent infringement
litigation.
For the six months ended June 30, 2003, cost of goods sold includes
$10,322 in charges related to the production of the Company's products and
product commercialization activities, including a provision of $5,723
related to pre-launch production of Andrx's bioequivalent versions of Wellbutrin
SR/Zyban placed into production after December 31, 2002. The Company is
continuing to work towards resolving the FDA and USP issues that affect its
Abbreviated New Drug Application ("ANDA") for bioequivalent versions of
Wellbutrin SR/Zyban.
For the three months ended June 30, 2003 the Company recorded charges
of $8,177 included in cost of goods sold related to the writedown of certain
assets ($2,994 for inventories and $5,183 for property, plant and equipment) of
the Company's Massachusetts aerosol facility, which the Company is seeking to
possibly divest. For the three and six months ended June 30, 2003, cost of goods
sold included $1,263 and $2,693, respectively, relating primarily to under
utilization and inefficiencies at the Company's Massachusetts aerosol
facilities. During the three and six months ended June 30, 2003, Andrx also
recorded charges directly to cost of goods sold of $1,132 and $2,731,
respectively, associated with its manufacturing facilities in Weston, Florida
(which is in the start-up phase), Morrisville, North Carolina (which the Company
plans to renovate) and Davie, Florida (related to under utilization and
inefficiencies). During the three and six months ended June 30, 2002, cost of
goods sold included $2,558 and $4,472, respectively, related to excess
capacities at its Massachusetts aerosol facility and $1,149 and $3,136 for the
three and six months of 2002, respectively, relating to under utilization and
inefficiencies at the Andrx Park manufacturing facility.
12
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
4. LICENSING REVENUES
The licensing rate earned by Andrx from its agreement with Kremers
Urban Development Company ("KUDCo") decreased from 15% to 9% on June 9, 2003 in
conjunction with the related agreement. In August 2003, Mylan Laboratories, Inc.
("Mylan") launched its bioequivalent versions of the 10mg and 20mg strengths of
Omeprazole (generic Prilosec). This competition could lead to reduced sales for
KUDCo's version of Prilosec, which in turn would lead to reduced licensing
revenues for Andrx.
The Company has entered into an arrangement with L. Perrigo Company
("Perrigo") under which Andrx and Perrigo will share in the risks and rewards
associated with the sale of the Company's version of Loratadine-D12,
Loratadine-D24 and Loratadine Quick Dissolve Tabs that are bioequivalent to the
related Claritin family of brand products. In June 2003, Perrigo launched
Andrx's OTC version of Claritin-D24 and recognized $3,965 in revenues, which
includes initial stocking. Andrx will manufacture and Perrigo will package and
market all of these OTC products. Under the terms of the arrangement, Andrx and
Perrigo share the net profits, as defined, from product sales. The net profits
reported by Andrx are subject to numerous estimates by Perrigo such as returns
and other sales allowances and certain related expenses.
5. GAIN ON SALES OF ASSETS
Internet Assets
On July 31, 2002, Andrx sold its Dr. Chart and @Rx applications,
licensed its patents for the Internet transmission of prescriptions, and entered
into a two-year marketing agreement with a business unit of Aventis S.A.
relating to Andrx's Physicians' Online ("POL") web portal. Andrx is entitled to
receive approximately $6,000 through April 2004 in connection with these
transactions. Though the $6,000 is generally non-refundable and partially paid
in advance, the payments will be recognized as Other revenues in the
Consolidated Statements of Income as services are rendered or otherwise earned.
Due to the related nature of the transactions, $1,348 of Gain on sales of assets
was deferred, to be recognized ratably in the same period as the revenues are
earned under the marketing agreement. During the three and six months ended June
30, 2003, $546 and $1,700, respectively, was recorded as Other revenues and $146
and $457, respectively, was recognized as a Gain on sale of assets in the
Unaudited Condensed Consolidated Statements of Income related to this
transaction. Through June 30, 2003, the Company has received $3,500 in cash from
these agreements.
Histex Product Line
On June 28, 2002, the Company sold its Histex cough and cold line of
products, recognizing $4,514 as a Gain on sales of assets in the three and six
months ended June 30, 2002 in the Unaudited Condensed Consolidated Statements of
Income. For the six months ended June 30, 2003, the Company recognized $125 of
gain included in Gain on sales of assets related to this transaction, which was
previously deferred.
13
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
6. PROVISION (BENEFIT) FOR INCOME TAXES
For the three and six months ended June 30, 2003, the Company recorded
a provision for income taxes of $9,092 and $12,987, or 39% and 38%,
respectively, of income before income taxes. For the three and six months ended
June 30, 2003, the Company provided for income taxes in excess of the expected
annual effective federal statutory rate of 35% primarily due to the effect of
state income taxes. For the three and six months ended June 30, 2002, the
Company recorded an income tax benefit of $28,907 and $25,594 or 48% and 49%,
respectively, of loss before income taxes, which included the reversal of a
$7,249 valuation allowance on deferred tax assets which related to certain net
operating loss carryforwards.
During the six months ended June 30, 2003 the Company received $51,695
from income tax refunds.
7. COMPREHENSIVE INCOME (LOSS)
The components of the Company's comprehensive income (loss) are as follows:
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) $ 14,477 $(31,334) $ 20,833 $(26,821)
Investments available-for-sale
Unrealized gain (loss), net (80) 213 (139) (74)
Income tax benefit (expense) 30 (79) 49 28
-------- -------- -------- --------
(50) 134 (90) (46)
-------- -------- -------- --------
Comprehensive income (loss) $ 14,427 $(31,200) $ 20,743 $(26,867)
======== ======== ======== ========
8. BUSINESS SEGMENTS
See the Company's Form 10-K for the year ended December 31, 2002 for a
discussion of its business segments.
The following table represents unaudited financial information by
business segment:
As of or for the Three Months Ended
June 30, 2003
---------------------------------------------------------------------------------
Distributed Bioequivalent Brand Corporate
Products Products Products & Other Consolidated
----------- ------------- -------- --------- ------------
Revenues $ 161,506 $ 99,142 $ 11,722 $ -- $ 272,370
Income (loss) from operations 8,055 50,213 (17,545) (18,242) 22,481
Equity in earnings of joint ventures -- 1,176 -- -- 1,176
Interest income -- -- -- 451 451
Interest expense -- -- 41 644 685
Gain on sales of assets -- -- 146 -- 146
Depreciation and amortization 1,382 3,959 1,261 130 6,732
Purchases of property, plant and
equipment 1,828 8,800 9 40 10,677
Total assets, end of period 244,774 317,883 72,691 212,209 847,557
14
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
As of or for the Three Months Ended
June 30, 2002
-----------------------------------------------------------------------------------
Distributed Bioequivalent Brand Corporate
Products Products Products & Other Consolidated
----------- ------------- --------- ---------- ----------
Revenues $ 121,502 $ 50,661 $ 8,379 $ -- $ 180,542
Income (loss) from operations 2,527 11,228 (12,981) (67,999) (67,225)
Equity in earnings of joint ventures -- 943 -- -- 943
Interest income -- -- -- 1,622 1,622
Interest expense -- -- -- 95 95
Gain on sales of assets -- -- 4,514 -- 4,514
Depreciation and amortization 619 2,963 1,625 18 5,225
Purchases of property, plant and
equipment 5,161 23,637 281 311 29,390
Total assets, end of period 267,492 231,826 78,374 244,997 822,689
Six Months Ended
June 30, 2003
-----------------------------------------------------------------------------------
Distributed Bioequivalent Brand Corporate
Products Products Products & Other Consolidated
----------- ------------- --------- ---------- ----------
Revenues $316,123 $171,984 $ 21,448 $ -- $ 509,555
Income (loss) from operations 18,949 79,015 (36,804) (29,347) 31,813
Equity in earnings of joint ventures -- 1,624 -- -- 1,624
Interest income -- -- -- 1,097 1,097
Interest expense -- -- 68 1,228 1,296
Gain on sales of assets -- -- 582 -- 582
Depreciation and amortization 2,726 8,245 2,541 143 13,655
Purchases of property, plant and
equipment 3,106 19,440 124 311 22,981
Six Months Ended
June 30, 2002
-----------------------------------------------------------------------------------
Distributed Bioequivalent Brand Corporate
Products Products Products & Other Consolidated
----------- ------------- --------- ---------- ----------
Revenues $ 248,547 $ 100,492 $ 14,822 $ -- $ 363,861
Income (loss) from operations 13,192 31,170 (30,513) (75,479) (61,630)
Equity in earnings of joint ventures -- 1,588 -- -- 1,588
Interest income -- -- -- 3,235 3,235
Interest expense -- -- -- 122 122
Gain on sales of assets -- -- 4,514 -- 4,514
Depreciation and amortization 1,248 5,633 3,435 36 10,352
Purchases of property, plant and
equipment 6,584 37,223 632 514 44,953
In August 2002, Andrx management learned that an employee had made
numerous improper entries that affected the adequacy of the Company's allowance
for doubtful accounts receivable. Management determined that the Company's
provision for doubtful accounts receivable (included in SG&A) was understated
during 1999, 2000, 2001 and the first quarter of 2002, by the aggregate amount
of $4,902. The understatement to the allowance for doubtful accounts receivable
applicable to the three months ended March 31, 2002 unaudited period was $888,
of which $803 was attributable to the Distributed Products Segment and $85 was
attributable to the Bioequivalent Products Segment. After consideration of all
of the facts and circumstances, the Company recognized the entire $4,902 prior
period misstatement amount in the second quarter of 2002, as the Company
believed it was not material to any period affected.
15
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
9. LITIGATION AND CONTINGENCIES
For the three and six months ended June 30, 2003, the Company recorded
a charge of $7,500 related to various previously disclosed legal claims,
including a negotiated settlement of an obligation to one of the Company's law
firms with respect to Andrx's bioequivalent version of Tiazac. The three and six
month periods ended June 30, 2002 include a litigation settlements charge of
$60,000 related to the Company's Cardizem CD antitrust litigation.
Tiazac Related Securities Claims
Several securities fraud class action complaints were filed on or about
March 2002 alleging that Andrx and certain of its officers and directors engaged
in securities fraud and/or made material misrepresentations regarding the
regulatory status of the Company's ANDA for a bioequivalent version of Tiazac.
The amended class action complaint sought a class period for those persons or
institutions that acquired Andrx Common Stock from April 30, 2001 through
February 21, 2002. In November 2002, the U.S. District Court for the Southern
District of Florida granted in part Andrx's motion to dismiss the amended
consolidated class action complaint and determined that all but one of the
statements allegedly made in violation of the federal securities laws should be
dismissed as a matter of law. The Court's decision reduced the class period to
six weeks commencing January 9, 2002 and ending February 21, 2002. The Court
later granted Andrx's motion to strike all allegations of insider trading from
the complaint. Though the Company believes that the plaintiffs are unlikely to
prevail in their claims, an adverse judgment could have a material adverse
effect on the Company's business and consolidated financial statements.
Wellbutrin SR/Zyban Related Securities Claims
Seven putative securities fraud class action complaints have been filed
against Andrx and certain of its officers and directors for alleged violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5. These complaints generally allege that, during the class period,
Andrx made a series of misrepresentations and/or positive statements regarding
FDA approval of its generic Wellbutrin SR/Zyban product and failed to disclose
dating issues with respect to its product and product inventory. Six of these
complaints purport to bring the suit on behalf of all persons or institutions
who acquired Andrx Common Stock from October 31, 2002 through March 4, 2003, and
focus solely on Andrx's bioequivalent version of Wellbutrin SR. The remaining
suit alleges a class period from March 1, 2002 through March 4, 2003 and also
contains allegations regarding Andrx's bioequivalent version of Zyban. The
Company is not in a position to determine the ultimate outcome of this
litigation, but an adverse judgment could have a material adverse effect on the
Company's business and consolidated financial statements.
16
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
Cardizem CD Antitrust Litigation
Beginning in August 1998, several putative class action lawsuits were
filed against Andrx and Aventis arising from a 1997 stipulation (the "1997
Stipulation") entered into between Andrx and Aventis in connection with a patent
infringement suit brought by Aventis with regard to its product, Cardizem CD.
The actions pending in federal court have been consolidated for multi-district
litigation purposes in the U.S. District Court for the Eastern District of
Michigan. The complaint in each action alleges that Andrx and Aventis, by way of
the 1997 Stipulation, have engaged in alleged state antitrust and other
statutory and common law violations that allegedly gave Aventis and Andrx a near
monopoly in the U.S. market for Cardizem CD and a bioequivalent version of that
pharmaceutical product. According to the complaints, the monopoly possessed by
the defendants enables Aventis to perpetuate its ability to fix the price of
Cardizem CD at an artificially high price, free from generic competition, with
the result that direct purchasers such as pharmacies, as well as indirect
purchasers such as medical patients who have been issued prescriptions for
Cardizem CD are forced to overpay for the drug. Each complaint seeks
compensatory damages on behalf of each class member in an unspecified amount
and, in some cases, treble damages, as well as costs and counsel fees,
disgorgement, injunctive relief and other remedies. In June 2000, the District
Court granted summary judgment to plaintiffs finding that the 1997 Stipulation
was a per se violation of antitrust laws. Aventis and Andrx appealed the
judgment and on June 13, 2003, the U.S. Court of Appeals for the Sixth Circuit
affirmed the district court's opinion finding that the 1997 Stipulation was a
per se violation of the federal antitrust laws. Andrx is considering its legal
options which include legal review by the U.S. Supreme Court.
On May 14, 2001, the State Attorney Generals for the States of New York
and Michigan, joined by 13 additional states and the District of Columbia, filed
suit against Andrx and Aventis in the same federal court in which the above
described consolidated Cardizem CD antitrust class action litigation is being
conducted. The attorney generals' suit is brought on behalf of their government
entities and consumers resident in their jurisdictions who allegedly were
damaged as a result of the 1997 Stipulation. Subsequently, an amended complaint
was filed adding twelve additional states and Puerto Rico to the action. The
lawsuit essentially reiterates the claims asserted against Andrx in the
aforementioned Cardizem CD antitrust class action litigation and seeks the same
relief sought in that litigation.
On July 26, 2001, Blue Cross Blue Shield of Michigan, joined by three
other Blue Cross Blue Shield plans (one in Minnesota and two in New York), filed
suit against Andrx and Aventis in the U.S. District Court for the Eastern
District of Michigan on behalf of themselves and as claim adjustors for their
self-funded customers to recover damages allegedly caused by the 1997
Stipulation. The complaint essentially repeats the claims asserted against Andrx
that are being litigated in the above-described consolidated Cardizem CD
antitrust class action litigation and seeks substantially the same relief sought
in that litigation.
In addition to the consolidated proceedings in the U.S. District Court
for the Eastern District of Michigan, there are two actions pending in state
courts in Florida, and two actions pending in state courts in Kansas. These
actions are currently stayed.
17
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
On November 26, 2002, the Court approved a settlement between the
direct purchasers and Andrx and Aventis. In January 2003, Andrx announced it had
reached a settlement with the indirect purchasers and state attorney generals.
Discovery is still ongoing for the remaining group of litigants, including those
who timely chose to opt out of the settlements described above. If not settled,
Andrx anticipates that these matters may take several years to be resolved but
an adverse judgment could have a material adverse effect on the Company's
business and consolidated financial statements.
Alpharma Recall Claims
In March 2002, Alpharma USPD, Inc. ("Alpharma"), for whom Andrx's
aerosol manufacturing facility provided contract manufacturing of Epinephrine
Mist, notified Andrx that the product was subject to a recall. Alpharma claims
that Armstrong breached its manufacturing agreement and has requested
indemnification for the full amount of its losses arising from the recall.
Alpharma presently estimates its losses at approximately $11,250. Andrx is
investigating this matter, but has disputed both the basis for liability and the
amount of damages owed. Andrx believes that at least part of the cause of the
recall is attributable to Alpharma, and that indemnification for at least part
of these claims may be owed by Medeva Pharmaceuticals, Inc., from whom Andrx
purchased these operations in March 2001. An adverse outcome to this claim could
have a material adverse affect on the Company's business and consolidated
financial statements.
Claritin D-24 Patent Litigation
In March 2000, Schering Corporation ("Schering") filed suit against
Andrx in the United States District Court for the District of New Jersey
alleging that the Company's bioequivalent version of Claritin D-24 infringed
both a metabolite patent and a formulation patent. On August 8, 2002, the U.S.
District Court for the District of New Jersey entered an order granting Andrx's
Motion for Summary Judgment with respect to the metabolite patent (U.S. Patent
No. 4,659,716) and ruled that claims 1 and 3 of the metabolite patent were
invalid. On August 1, 2003, the U.S. Court of Appeals affirmed the district
court's order finding that the claims asserted against Andrx were invalid.
Schering's claims against Andrx with respect to the formulation patent remain
pending. In June 2003, the Company commenced marketing its bioequivalent version
of Claritin D-24 as an over the counter medication through its agreement with
Perrigo. Though the Company believes that Schering is unlikely to prevail in its
claims, an adverse judgment could have a material adverse effect on the
Company's business and consolidated financial statements.
18
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
Naprelan Patent Litigation
In October 1998, Elan Corporation, plc ("Elan") filed suit against
Andrx in the U.S. District Court for the Southern District of Florida alleging
that the Company's bioequivalent version of Naprelan infringed its patent. On
March 14, 2002, the Court issued an order of final judgment in favor of Andrx
invalidating the patent in issue. In March 2003, the U.S. District Court for the
Southern District of Florida issued an order denying Elan's motion for
reconsideration and its motion to amend and supplement the findings of fact and
also denying Andrx's motion asking the court for a ruling on its defenses of
non-infringement. On April 22, 2003, Elan filed a Notice of Appeal of the
Court's final judgment of invalidity and its order denying its motion for
reconsideration. Andrx cross-appealed for all issues that could be appealed.
Andrx has commenced selling its bioequivalent version of Naprelan. Though the
Company believes that Elan is unlikely to prevail in its claims of infringement,
a final court determination that Elan's patent is valid and that the Andrx
product infringes claims thereof could have a material adverse effect on the
Company's business and consolidated financial statements.
Lemelson Patent Litigation
On November 23, 2001, the Lemelson Medical, Education & Research
Foundation, LP filed an action in the United States District Court for the
District of Arizona alleging patent infringement against Andrx and others
involving "machine vision" or "computer image analysis." On March 20, 2002, the
Court entered an Order of Stay in the proceedings, pending the resolution of
another suit that involves the same patents, but does not involve Andrx. The
Company is not in a position to determine the ultimate outcome of this matter.
Entex Line of Products
On February 25, 2003, the FDA announced that it intends to publish a
Federal Register notice to describe its enforcement policy with respect to
products such as the Entex line of products that are presently on the market and
sold by prescription without an approved ANDA or NDA. As a result of the Federal
Register notice, Andrx may be required to seek FDA approval for marketing the
Entex line of products and may be required to market some or all of these
products as over-the-counter ("OTC") products. Upon issuance of definitive
guidance on this matter, Andrx will assess the unamortized portion of its Entex
product rights ($11,758 as of June 30, 2003) and Entex inventories ($259 as of
June 30, 2003) for any resulting impairment.
Altocor Trademark Opposition
In May 2002, Kos Pharmaceuticals ("KOS") filed a notice of opposition
to Andrx's application for a registered trademark for Altocor alleging a
likelihood of confusion between their trademark, Advicor, and Altocor. Andrx has
also recently learned that KOS has filed a lawsuit against Andrx in the United
States District Court for the District of New Jersey. If KOS were to prevail in
the litigation to enjoin the sale of Andrx's product under the Altocor name or
recover damages as a result thereof, this could have a material adverse effect
on the Company's business and consolidated financial statements. The Company is
not in a position to determine the ultimate outcome of this matter.
19
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
Omeprazole (Prilosec)
On January 2, 2002, Andrx entered into an agreement with a law firm
(the "Law Firm") it utilizes on matters relating to, among other things, its
efforts to market its bioequivalent versions of Prilosec. Under the terms of and
as defined in the agreement, Andrx shall pay the Law Firm (i) up to 2.75% of net
sales of the product directly or indirectly resulting from the ANDA Andrx filed
for a bioequivalent version of Prilosec, with this amount declining to not less
than 1.75% following achievement of certain cumulative net sales amounts, and
(ii) up to 2.5% of the value created by any settlement or agreement with
AstraZeneca or any other party concerning bioequivalent Prilosec, in each case
if certain conditions stated in the agreement occur. The Law Firm is not
entitled to receive payment on revenues generated from the Company's agreement
with KUDCo. Upon the occurrence of any of the events entitling the Law Firm to
the aforementioned payments, Andrx will estimate the present value of the
aggregate payments the Law Firm is entitled to receive under the agreement and
recognize such amount as an expense and a liability. Such estimate will be
evaluated periodically and adjusted as necessary. Andrx is currently not able to
estimate the present value of the potential obligations under this agreement.
However, the amount of this potential obligation and the adjustments which could
result from future changes in the Company's estimate of the remaining present
value of those potential payments could be significant.
The Company negotiated a settlement of its commitment to the Law Firm
relating to revenues to be derived from Andrx's bioequivalent version of Tiazac.
The settlement amount was recorded in the three months ended June 30, 2003 and
is included in Litigation settlements and other charges in the Unaudited
Condensed Consolidated Statements of Income.
Insurance Programs
The Company maintains self-insured retentions and deductibles for some
of its insurance programs and limits its exposure to claims by maintaining
stop-loss and/or aggregate liability coverages. The estimate of the Company's
claims liability, which may be material, contains uncertainty since management
must use judgment to estimate the ultimate costs that will be incurred to settle
reported claims and unreported claims for incidents incurred but not reported as
of the balance sheet date. When estimating the Company's liability for such
claims, management considers a number of factors, including, but not limited to,
self-insured retentions, deductibles, historical claim experience, demographic
factors, severity factors and maximum claims exposure. If actual claims exceed
these estimates, additional charges may be required.
20
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(in thousands, except share and per share amounts)
10. SUBSEQUENT EVENT
In July 2003, the Company entered into an Exclusivity Transfer
Agreement ("Exclusivity Agreement") with Impax Corporation ("Impax") and a
subsidiary of Teva Pharmaceutical Industries Ltd ("Teva") pertaining to pending
ANDAs for bioequivalent versions of Wellbutrin SR and Zyban 100mg and 150mg
extended-release tablets filed by Andrx and by Impax. The Exclusivity Agreement
provides, among other things, that while Andrx will continue to seek to launch
its own versions of these ANDA products, if it is unable to do so within a
defined period of time, and Impax is able to market these ANDA products, Andrx
will enable Impax to launch the Impax products through Teva. Impax and Teva will
then share certain payments with Andrx relating to the sale of the Impax
products for a 180-day period. Should Andrx launch its own products prior to the
launch of the Impax products, Andrx will share with Impax and Teva certain
payments relating to the sale of the Andrx products for a 180-day period. To
date, neither the Andrx nor the Impax ANDAs for these products have been
approved by the FDA, and the appellate court has not ruled on GlaxoSmithKline's
appeal of the favorable lower court decisions received by both Andrx and Impax
in their respective patent infringement litigations. The Exclusivity Agreement
may be subject to the approval of certain various governmental agencies.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Andrx Corporation and subsidiaries ("Andrx" or the "Company"):
o develops and commercializes bioequivalent versions of
(i) controlled-release pharmaceutical products,
using its proprietary drug delivery
technologies,
(ii) specialty, niche and immediate-release
pharmaceutical products, including oral
contraceptives,
o develops and commercializes brand name
pharmaceuticals where it believes that the
application of Andrx's drug delivery technologies may
improve the efficacy or other characteristics of
existing pharmaceutical products, and
o distributes pharmaceutical products manufactured by
third parties, primarily generics, to independent
pharmacies, pharmacy chains which do not maintain
their own central warehousing facilities, pharmacy
buying groups and, to a lesser extent, physicians'
offices.
Equity Reorganization and Conversion
On September 7, 2000, Andrx completed an equity reorganization (the
"Reorganization") whereby it acquired the outstanding equity of its Cybear Inc.
subsidiary ("Cybear") that it did not own, reincorporated in Delaware, and
created two new classes of common stock: (i) Andrx Group common stock ("Andrx
Common Stock") to track the performance of Andrx Group, and (ii) Cybear Group
common stock ("Cybear Common Stock") to track the performance of Cybear Group.
On May 17, 2002, each share of Cybear Common Stock was converted into
0.00964 of a share of Andrx Common Stock resulting in the issuance of
approximately 65,000 shares of common stock (the "Conversion"). The Conversion
included a 25% premium on the value of Cybear Common Stock as provided by the
terms of Andrx's Certificate of Incorporation. Subsequent to the Conversion,
Andrx has only one class of common stock outstanding.
Forward Looking Statements
Forward-looking statements (statements which are not historical facts)
in this release are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. For this purpose, any statements
contained herein or which are otherwise made by or on behalf of the Company that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "will," "to," " plan," "expect," "believe," "anticipate," "intend,"
"could," "would," "estimate," or "continue" or the negative other variations
thereof or comparable terminology are intended to identify forward-looking
statements. Investors are cautioned that all forward-looking statements involve
risk and uncertainties, including but not limited to, the Company's dependence
on a relatively small number of products; licensing revenues; the timing and
outcome of patent and antitrust litigation and future product launches; whether
the Company will be awarded any market exclusivity period and, if so, the
precise dates thereof; government regulation generally; competition;
manufacturing capacities and output; the Company's ability to develop and
successfully commercialize new products; the loss of revenues from existing
products; development and marketing expenses that may not result in commercially
successful products; Andrx's inability to obtain, or the high cost of obtaining,
licenses for third party technologies; commercial obstacles to the successful
introduction of brand products generally; exclusion of Andrx's brand products
from formularies; the consolidation or loss of customers; Andrx's relationship
to our suppliers; the success of Andrx's joint ventures; difficulties in
integrating, and potentially significant charges
22
associated with, acquisitions of technologies, products and businesses; the
inability to obtain sufficient supplies from key suppliers; the impact of
returns, allowances and chargebacks; product liability claims; rising costs and
limited availability of product liability and other insurance; the loss of key
personnel; failure to comply with environmental laws; and the absence of
certainty regarding the receipt of required regulatory approvals or the timing
or terms of such approvals. Andrx Corporation is also subject to other risks
detailed herein or detailed from time to time in its filings with the U.S.
Securities and Exchange Commission ("SEC"), including, but not limited to, the
Company's Annual Report on Form 10-K for the year ended December 31, 2002 and
Form 10-Q for the quarter ended March 31, 2003.
Critical Accounting Policies and Estimates
The preparation of its consolidated financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including but not limited to, those related to:
o allowance for doubtful accounts receivable,
o inventories,
o sales returns and allowances,
o useful life or impairment of goodwill and other intangible
assets,
o deferred income tax asset valuation allowance,
o licensing revenues and royalties,
o litigation settlements and related accruals, and
o insurance programs.
The Company bases its estimates on, among other things, historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Estimates may differ if different assumptions or
conditions are utilized, and actual results may differ from these estimates.
The Company believes that the following critical accounting policies
reflect the more significant judgments and estimates used in the preparation of
its consolidated financial statements:
Allowance for Doubtful Accounts Receivable
The Company maintains an allowance for doubtful accounts receivable for
estimated losses resulting from the Company's inability to collect from certain
customers. As of June 30, 2003, the Company's net accounts receivable totaling
$135.7 million, includes an allowance for doubtful accounts receivable of $11.0
million. Accounts receivable generated from the Company's distribution
operations are principally due from independent pharmacies, pharmacy chains
which do not maintain their own central warehousing facilities, pharmacy buying
groups and, to a lesser extent, physicians' offices. Accounts receivable
generated from the Company's bioequivalent and brand product sales are
principally due from large warehousing pharmacy chains, wholesalers and large
managed care customers. In extending credit, the Company attempts to evaluate
the customer's financial condition, both initially and on an ongoing basis.
Collateral is generally not required. In evaluating the adequacy of its
allowance for doubtful accounts receivable, management primarily analyzes
accounts receivable balances, the percentage of accounts receivable by aging
category, and historical bad debts, but also considers, among other things,
customer concentrations, customer credit-worthiness, and changes in customer
payment terms or payment patterns. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments or the
23
Company's ability to collect, an increase to the allowance may be required.
Also, should actual collections of accounts receivable be different than the
Company's estimates included in the determination of its allowance, the
allowance would be increased or decreased through charges or credits to Selling,
general and administrative expenses ("SG&A") in the Consolidated Statements of
Income in the period in which such changes in collection become known. If
conditions change in future periods, additional allowances or reversals may be
required. Such additional allowances could be significant.
In August 2002, Andrx management learned that an employee had made
numerous improper entries that affected the adequacy of the Company's allowance
for doubtful accounts receivable. Management determined that the Company's
provision for doubtful accounts receivable was understated during 1999, 2000,
2001 and the first quarter of 2002, by an aggregate amount of $4.9 million.
After consideration of all of the facts and circumstances, the Company
recognized the full $4.9 million prior period misstatement amount in the second
quarter of 2002, as the Company believed it was not material to any period
affected. The Company notified the SEC of this matter promptly upon discovery.
Inventories
Inventories consist primarily of finished goods held for distribution,
and raw materials, work in process and finished goods of Andrx bioequivalent and
brand products. As of June 30, 2003, the Company had $174.4 million in
inventories. Inventories are stated at the lower of cost (first-in, first-out)
or market. Cost of inventories held for distribution is based on purchase price,
net of vendor discounts, rebates and other allowances, but excludes shipping,
warehousing and distribution costs, which are expensed as incurred and reported
as SG&A in the Unaudited Condensed Consolidated Statements of Income. In
evaluating whether inventories are stated at the lower of cost or market,
management considers such factors as the amount of inventory on hand and in the
distribution channel, the estimated time required to sell such inventory,
remaining shelf life and current and expected market conditions, including
levels of competition and for its inventories held for distribution, the
Company's right to return or exchange such products with the products'
manufacturer. As appropriate, provisions through cost of goods sold are made to
reduce inventories to their net realizable value. If conditions change in future
periods, additional provisions may be required. Such additional provisions could
be significant.
Andrx has made, is in the process of making and/or will scale-up and
make commercial quantities of certain of its product candidates prior to the
date Andrx anticipates that such products will receive FDA final marketing
approval and/or satisfactory resolution of the patent infringement litigation
involving them (i.e., pre-launch inventory). The scale-up and commercial
production of pre-launch inventories involves the risk that such products may
not be approved for marketing by the FDA on a timely basis, or ever, and/or that
the outcome of related litigation may not be satisfactory. This risk
notwithstanding, Andrx plans to continue to scale-up and build pre-launch
inventories of certain products that have not yet received final FDA approval
and/or satisfactory resolution of patent infringement litigation when it
believes that such action is appropriate in relation to the commercial value of
its product launch opportunity. When an exclusivity period is involved, this is
a particularly difficult determination. As of June 30, 2003, the Company had
approximately $9.5 million of inventories, primarily raw materials, pending
final approval and/or satisfactory resolution of litigation.
24
For the three months ended June 30, 2003 the Company recorded charges
of $8.2 million related to the writedown of certain assets of the Company's
Massachusetts aerosol facility, which the Company is seeking to possibly divest.
The writedown, which is included in cost of goods sold, consisted of $3.0
million for inventories and $5.2 million for property, plant and equipment. For
the three and six months ended June 30, 2003 cost of goods sold included $1.3
million and $2.7 million, respectively, relating primarily to under utilization
and inefficiencies at Andrx's Massachusetts aerosol manufacturing facilities.
During the three and six months ended June 30, 2003, Andrx also recorded charges
directly to cost of goods sold of $1.1 million and $2.7 million, respectively,
associated with its manufacturing facilities in Weston, Florida (which is in the
start-up phase), Morrisville, North Carolina (which the Company plans to
renovate) and Davie, Florida (related to under utilization and inefficiencies).
For the six months ended June 30, 2003, cost of goods sold also includes charges
totaling $10.3 million for the production of the Company's products and product
commercialization activities which include a provision of $5.7 million related
to pre-launch production of Andrx's bioequivalent versions of Wellbutrin
SR/Zyban placed into production after December 31, 2002. The Company is
continuing to work on resolving the FDA and USP issues that affect its
Abbreviated New Drug Application ("ANDA") for bioequivalent versions of
Wellbutrin SR/Zyban.
In July 2003, the Company entered into an Exclusivity Transfer
Agreement ("Exclusivity Agreement") with Impax Corporation ("Impax") and a
subsidiary of Teva Pharmaceutical Industries Ltd ("Teva") pertaining to pending
ANDAs for bioequivalent versions of Wellbutrin SR and Zyban 100mg and 150mg
extended-release tablets filed by Andrx and by Impax. The Exclusivity Agreement
provides, among other things, that while Andrx will continue to seek to launch
its own versions of these ANDA products, if it is unable to do so within a
defined period of time, and Impax is able to market these ANDA products, Andrx
will enable Impax to launch the Impax products through Teva. Impax and Teva will
then share certain payments with Andrx relating to the sale of the Impax
products for a 180-day period. Should Andrx launch its own products prior to the
launch of the Impax products, Andrx will share with Impax and Teva certain
payments relating to the sale of the Andrx products for a 180-day period. To
date, neither the Andrx nor the Impax ANDAs for these products have been
approved by the FDA, and the appellate court has not ruled on GlaxoSmithKline's
("Glaxo") appeal of the favorable lower court decisions received by both Andrx
and Impax in their respective patent infringement litigations. The Exclusivity
Agreement may be subject to the approval of certain various governmental
agencies.
Sales Returns and Allowances
Allowances against net sales for estimated returns, chargebacks, and
other sales allowances are established by the Company concurrently with the
recognition of revenue. The allowances are included in the Company's Condensed
Consolidated Balance Sheets as either accounts receivable, net or in accrued
expenses and other liabilities, as appropriate, and are based upon consideration
of a variety of factors, including but not limited to, actual return experience
by product type, the number and timing of competitive products approved for sale
both historically and as projected, the market for the product, estimated
customer inventory levels by product and current and projected economic
conditions, levels of competition and price declines. Actual product returns,
chargebacks and other sales allowances incurred are dependent upon future
events. The Company periodically monitors the factors that influence sales
allowances and makes adjustments to these provisions when management believes
that actual product returns, chargebacks and other sales returns and allowances
may differ from established allowances. If conditions in future periods change,
additional allowances may be required. Such additional allowances could be
significant. Net sales of the Company's bioequivalent and brand products may be
affected by the Company's estimated sales returns and allowances.
25
The pharmaceutical industry practice is generally to grant customers
the right to return or exchange purchased goods. In the generic pharmaceutical
industry, this practice has resulted in generic manufacturers issuing inventory
credits (also known as shelf-stock adjustments) to customers based on the
customers' existing inventory, following decreases in the market price of the
related generic pharmaceutical product. Shelf-stock adjustments occur
frequently, potentially in significant amounts. The determination to grant an
inventory credit to a customer following a price decrease is generally at the
discretion of the Company, and not pursuant to contractual arrangements with
customers. Accordingly, the Company makes significant accounting estimates,
including quantities shipped and still on customers' shelves, and price declines
before the products pull through the distribution channel. The Company accrues
an estimate for the sales allowances in the same period the sale is recognized
and periodically reviews such estimates. If conditions in future periods change,
additional allowances or reversals may be required. Such additional allowances
could be significant.
The Company's significant accounting estimates for sales returns and
allowances for brand products are dependent on the Company's ability to promote
to physicians, create demand for products, pull products through the
distribution channel and estimate returns, future levels of prescriptions for
its products and the inventory levels in the distribution channel. It is a
common pharmaceutical industry practice for brand manufacturers to offer
customers, among other things, buy-in allowances on initial purchases prior to
promotion activities by the manufacturer. As there are a limited number of large
customers, customer purchases are generally subject to the right of return or
exchange. Accordingly, the Company makes significant accounting estimates
related to sales allowances in connection with the recognition of revenues, and
periodically reviews such estimates. The Company's policy is to recognize net
sales to the extent it can reasonably estimate returns and the product being
pulled through the distribution channel. If conditions change in future periods,
additional allowances or reversals may be required. Such additional allowances
could be significant.
Useful Life or Impairment of Goodwill and Other Intangible Assets
Under the purchase method of accounting for acquisitions, goodwill
represents the excess of purchase price over the fair value of the net assets
acquired. As of June 30, 2003, the Company had approximately $34.0 million of
goodwill in the Condensed Consolidated Balance Sheet consisting of $26.3 million
from the acquisition of CTEX Pharmaceuticals, Inc ("CTEX") in January 2001 and
$7.7 million from the acquisition of Valmed Pharmaceuticals, Inc. ("Valmed") in
March 2000. With the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142 in 2002, goodwill is no longer amortized and is subject to a
periodic assessment, based on fair value, of whether there is any impairment in
the value of the acquired goodwill. This assessment is to be performed at least
annually, and the applicable impairment loss is the amount, if any, by which the
implied fair value of goodwill is less than the carrying value. If conditions in
future periods change, impairment charges may be required. Such additional
charges could be significant.
26
As of June 30, 2003, the Company had $18.4 million of other intangible
assets, net in the Condensed Consolidated Balance Sheet, which consisted
primarily of $3.7 million related to POL and related trademarks, $1.3 million
related to patents for Andrx's electronic prescription process, and $11.8
million, $1.6 million and $9,000 for product rights related to the Entex,
Anexsia and Embrex product lines, respectively. Andrx's Physicians' Online
("POL") web portal and related trademarks, and patents relating to Andrx's
electronic prescription process are being amortized over periods ranging from
four to fourteen years. Brand product rights purchased from other pharmaceutical
companies or acquired through the allocation of purchase price upon the
acquisition of another entity are being amortized over periods ranging from
three to ten years. Management established the amortization period based on an
estimate of the period that the assets would generate positive cash flow. If
conditions in future periods change, the Company may be required to decrease the
estimated amortization period. Amortization is provided using the straight-line
method over the estimated useful life. Intangible assets are reviewed for change
in useful life or impairment whenever events or changes in circumstances have
occurred that may warrant revision of the estimated useful life or indicate that
the carrying amount of an asset may not be recoverable. If conditions in future
periods change, impairment charges may be required, which could be significant.
On February 25, 2003, the FDA announced that it intends to publish a
Federal Register notice to describe its enforcement policy with respect to
products such as the Entex line of products that are presently on the market and
sold by prescription without an approved ANDA or New Drug Application ("NDA").
As a result of the Federal Register notice, Andrx may be required to seek FDA
approval for marketing the Entex line of products and may be required to market
some or all of these products as over-the-counter ("OTC") products. Upon
issuance of definitive guidance on this matter, Andrx will assess the
unamortized portion of the Entex product rights ($11.8 million as of June 30,
2003) and Entex inventories ($259,000 as of June 30, 2003) for any resulting
impairment.
Deferred Income Tax Asset Valuation Allowance
Under the provisions of SFAS No. 109, "Accounting for Income Taxes",
the Company is required to record a valuation allowance to reduce its deferred
income tax assets to the amount that is more likely than not to be realized. As
of June 30, 2003, the Company had a $50.2 million deferred income tax asset. As
of June 30, 2003, the Company determined that no valuation allowance was
necessary on its deferred income tax asset after considering its ability to
utilize net operating losses, future taxable income projections and ongoing
prudent and feasible tax planning strategies. In the event the Company were to
determine that it would not be able to realize all or part of its deferred
income tax asset in the future, an adjustment to the deferred income tax asset
would be charged to the Consolidated Statements of Income in the period such
determination was made.
27
Licensing Revenues and Royalties
In October 2002, Andrx entered into an agreement with Genpharm Inc.
("Genpharm") and Kremers Urban Development Co. ("KUDCo"), pursuant to which
Andrx and Genpharm relinquished any marketing exclusivity rights to the 10mg and
20mg strengths of omeprazole (generic Prilosec), thereby accelerating the
ability of KUDCo to receive final FDA marketing approval for its version of that
product, which KUDCo received on November 1, 2002. Pursuant to the agreement,
Andrx is entitled to receive:
o 15.0% of KUDCo's net profits, as defined in the agreement
("Net Profits"), through June 8, 2003,
o 9.0% of KUDCo's Net Profits from June 9, 2003 for
(i) approximately the next twelve months, or
(ii) until an appellate court decision, as defined in
the agreement, occurs, and
o 6.25% of KUDCo's Net Profits during approximately the next 24
months thereafter.
Such licensing fees may also cease if either Andrx or Genpharm becomes
lawfully permitted to launch their own bioequivalent version of Prilosec. Under
the agreement, KUDCo is required to provide Andrx with an estimate of Andrx's
licensing revenues for each month within 10 days subsequent to such month.
Payments to Andrx for amounts earned in December 2002 and January 2003 were due
to Andrx 90 days after month end. Amounts earned thereafter are due to Andrx 60
days after the respective month end. Based on the estimates received from KUDCo,
Andrx recorded $32.5 million in estimated licensing revenues in the second
quarter of 2003. KUDCo has advised Andrx that it estimates that licensing
revenues to be earned by Andrx for July 2003 will be approximately $6.4 million.
Future KUDCo licensing revenues will be dependent on a number of factors,
including, the applicable licensing rate (which reduced from 15% to 9% on June
9, 2003), KUDCo's profits derived from its sales of its generic Prilosec, which
are dependent on the number of units KUDCo produces and its per unit selling
price, the outcome of the various appeals involving generic Prilosec, and other
factors outside of Andrx's control. In August 2003, Mylan Laboratories, Inc.
("Mylan") launched its bioequivalent versions of the 10mg and 20mg strengths of
Omeprazole (generic Prilosec). This competition could lead to reduced sales for
KUDCo's bioequivalent version of Prilosec, which in turn would lead to reduced
licensing revenues to Andrx.
Litigation Settlements and Related Accruals
The Company accounts for the exposure of its various litigation matters
under the provisions of SFAS No. 5 "Accounting for Contingencies", which
requires, among other things, an exposure to be accrued with a charge to Andrx's
Consolidated Statement of Income when it becomes probable and estimatable. No
accrual or disclosure of legal exposures judged to be remote is required. The
exposure to legal matters is evaluated and estimated, if possible, based on,
among other things, consultation with legal counsel. Such estimates are based on
currently available information and their ultimate outcome may be significantly
different than the amounts estimated given the subjective nature and
complexities inherent in these areas. The Company's disclosures related to
possible significant exposure for legal matters are included herein in Note 9 to
the Unaudited Condensed Consolidated Financial Statements.
28
The 2003 periods include, among other things, a $7.5 million charge
relating to various previously announced legal claims, including the negotiated
settlement of an obligation to one of the Company's law firms with respect to
Andrx's bioequivalent version of Tiazac. For the three months ended June 30,
2002, in anticipation of potentially reaching a settlement on certain
litigation, Andrx recorded an estimated litigation settlement charge of $60.0
million. This contingency became probable and estimatable in June 2002 as a
result of mediation discussions between the Company, Aventis and the various
classes of plaintiffs in the Cardizem CD antitrust litigation that was pending
for multidistrict proceedings in the United States District Court for the
Eastern District of Michigan. In connection therewith, in July 2002, Andrx and
Aventis entered into a settlement, which is now binding, with the direct
purchaser class of plaintiffs. In January 2003, Andrx and Aventis entered into a
settlement agreement with the indirect purchaser class of plaintiffs, as well as
with the attorney generals for all 50 states, the District of Columbia and
Puerto Rico, which remains subject to court approval. The respective payments
made or to be made by Andrx and Aventis under these agreements has not been
disclosed. Andrx intends to vigorously litigate any outstanding related cases
that it cannot settle on a reasonable basis. The portion of the accrued
litigation settlements charge, for this and other legal matters, that was not
paid as of June 30, 2003, is included in Accrued expenses and other liabilities
in the June 30, 2003 Condensed Consolidated Balance Sheet.
Insurance Programs
The Company maintains self-insured retentions and deductibles for some
of its insurance programs and limits its exposure to claims by maintaining
stop-loss and/or aggregate liability coverages. The estimate of the Company's
claims liability, which may be material, contains uncertainty since management
must use judgment to estimate the ultimate costs that will be incurred to settle
reported claims and unreported claims for incidents incurred but not reported as
of the balance sheet date. When estimating the Company's liability for such
claims, management considers a number of factors, including, but not limited to,
self-insured retentions, deductibles, historical claim experience, demographic
factors, severity factors and maximum claims exposure. If actual claims exceed
these estimates, additional charges may be required.
29
ANDRX CORPORATION AND SUBSIDIARIES
Results of Operations
Three Months Ended June 30, 2003 ("2003 Quarter") as Compared to the Three
Months Ended June 30, 2002 ("2002 Quarter")
For the 2003 Quarter, the Company generated net income of $14.5
million, as compared to a net loss of $31.3 million for the 2002 Quarter. For
the 2002 Quarter, of the $31.3 million of net loss, $29.8 million of net loss
was allocated to Andrx Common Stock and $1.5 million of net loss was allocated
to the former Cybear Common Stock.
Revenues and Cost of Goods Sold
Three Months Ended
June 30,
(in thousands)
------------------------------
2003 2002
--------- ---------
Distributed Products
Revenues $ 161,506 $ 121,502
Cost of goods sold 132,539 98,573
Gross profit 28,967 22,929
Gross margin 17.9% 18.9%
Andrx Products - Bioequivalent
Revenues $ 66,178 $ 48,341
Cost of goods sold 27,849 21,275
Gross profit 38,329 27,066
Gross margin 57.9% 56.0%
Andrx Products - Brand
Revenues $ 10,501 $ 7,429
Cost of goods sold 1,654 3,648
Gross profit 8,847 3,781
Gross margin 84.2% 50.9%
Andrx Products - Total
Revenues $ 76,679 $ 55,770
Cost of goods sold 29,503 24,923
Gross profit 47,176 30,847
Gross margin 61.5% 55.3%
TOTAL PRODUCTS
Revenues $ 238,185 $ 177,272
Cost of goods sold 162,042 123,496
Gross profit 76,143 53,776
Gross margin 32.0% 30.3%
LICENSING AND ROYALTIES
Revenues $ 33,054 $ 102
Gross margin 100.0% 100%
OTHER
Revenues $ 1,131 $ 3,168
Cost of goods sold 9,651 6,392
Gross profit (loss) (8,520) (3,224)
Gross margin (loss) (753.3)% (101.8)%
TOTAL REVENUES
Revenues $ 272,370 $ 180,542
Cost of goods sold 171,693 129,888
Gross profit 100,677 50,654
Gross margin 37.0% 28.1%
30
Distributed Products
Revenues from distributed products increased by 32.9% to $161.5 million
for the 2003 Quarter, from $121.5 million for the 2002 Quarter. The increase in
net sales from distributed products to an all time high level reflects the
participation in the distribution of generic products introduced by generic
manufacturers, and an increase in sales to existing and new customers, which was
partially offset by the overall price declines generally associated with generic
products. For the 2003 Quarter, net sales of distributed products generated
$29.0 million of gross profit with a gross margin of 17.9%, as compared to $22.9
million of gross profit with a gross margin of 18.9% for the 2002 Quarter. The
increase in net sales and the decrease in gross margin in the 2003 Quarter is
primarily the result of the Company's participation in the distribution of a
high sales volume, low gross margin cross-licensed version of Ciprofloxacin.
These levels of gross margins on sales of distributed products are within the
historical range of 14% to 21%.
Bioequivalent Products
Revenues from Andrx bioequivalent products increased by 36.9% to $66.2
million for the 2003 Quarter, as compared to $48.3 million in the 2002 Quarter.
Revenues from Andrx bioequivalent products for both periods include sales of the
Company's bioequivalent versions of Cardizem CD, Dilacor XR, Glucophage, K-Dur
and Ventolin metered dose inhalers. For the 2003 Quarter, such revenues also
include net sales of the Company's bioequivalent versions of Naprelan, Tiazac
and Claritin-D24 (which is sold by L. Perrigo Company ("Perrigo") as an OTC
product). The increase in revenues from Andrx bioequivalent products for the
2003 Quarter as compared to the 2002 Quarter results primarily from the launches
of its bioequivalent versions of Tiazac in April 2003, with $14.3 million in
revenues, and Claritin-D24 in June 2003, with $4.0 million in revenues. Both of
these launches included initial stocking. Andrx's bioequivalent version of
Cardizem CD continues to generate significant levels of net sa