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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 000-31475
ANDRX CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 65-1013859
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(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
4955 ORANGE DRIVE
DAVIE, FLORIDA 33314
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(Address of Principal Executive Offices) (Zip Code)
(954) 584-0300
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
ANDRX CORPORATION - ANDRX GROUP COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
(Title of Class)
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [X] No [ ]
As of June 30, 2003, the aggregate market value of Andrx common stock held by
non-affiliates (based on the closing price on June 30, 2003 as reported on the
Nasdaq National Market) was approximately $1.4 billion.
There were 72,587,700 shares of Andrx common stock outstanding as of March 1,
2004.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part III of this report is incorporated herein
by reference to the proxy statement for the 2004 annual meeting of stockholders.
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As used in this Form 10-K, "Andrx Corporation," "Andrx," "we," "us,"
"our" or the "Company" refer to Andrx Corporation and all of its subsidiaries
taken as a whole. "Management" and "board of directors" refers to our management
and board of directors.
This Form 10-K contains trademarks held by third parties and us. Our
trademarks, including licensed trademarks, contained within this report include:
Altocor(TM), AndaConnect(R), AndaMeds(TM), AndaNet(R), Anexsia(TM), Cartia
XT(R), Diltia XT(R), Embrex(R), Entex(R), Entex(R) LA, Fortamet(TM), Metformin
XT(TM), SCOT(TM), Taztia(R) XT, VIPConnect(TM) and VIPpharm(TM). Trademarks used
in this report belonging to others include: Accupril(R), Actos(R), Advicor(R),
Cardizem(R) CD, Cardura(R) XL, Claritin-D(R) 24, Claritin-D(R) 12, Claritin
RediTabs(R), Depakote(R), Dilacor XR(R), Glucophage(R), Glucophage XL(R),
Glucotrol XL(R), K-Dur(R), Lotensin(R), Lotensin HCT(R), Mevacor(R),
Monopril(R), Naprelan(R), Ortho Cyclen(R), Ortho Novum(R) 1-35, Ortho Novum(R)
7/7/7, Ortho Tri-Cyclen(R), Oruvail(R), Paxil(R), Pepcid(R), Prozac(R),
Pravochol(R), Prilosec(R), Remeron(R), Tiazac(R), Trental(R), Toprol-XL(R),
Tylenol(R), Ventolin(R), Vicodin(R) HP, Wellbutrin SR(R), Zocor(R) and Zyban(R).
Our Internet website address is www.andrx.com. Our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
amendments to those reports are available free of charge on our website, as soon
as reasonably practicable after such material is electronically filed with the
U.S. Securities and Exchange Commission. Our Internet website and the
information contained therein or connected thereto are not intended to be
incorporated into this Annual Report on Form 10-K or any other SEC filings.
FORWARD-LOOKING STATEMENTS
Forward-looking statements (statements which are not historical facts)
in this report 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 Andrx 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, which may cause actual results to differ materially from
those projected in a forward-looking statement, including but not limited to,
Andrx's dependence on a relatively small number of products; licensing revenues;
the timing and outcome of patent, antitrust and other litigation and future
product launches; whether we will be awarded any marketing exclusivity period
and, if so, the precise dates thereof; government regulation generally;
competition; manufacturing capacities, output and quality processes; our 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; our 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 our brand
products from formularies; the consolidation or loss of customers; our
relationship with our suppliers; the success of our joint ventures; difficulties
in integrating, and potentially significant charges associated with,
acquisitions of technologies, products and businesses; our 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. Further, certain forward-looking statements are based upon
assumptions of future events, which may not prove to be accurate. We are also
subject to other risks detailed herein, including those under the heading Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," or detailed from time to time in this Annual Report or in our other
SEC filings. Subsequent written and oral forward-looking statements attributable
to us or to persons
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acting on our behalf are expressly qualified in their entirety by the cautionary
statements set forth in this Annual Report and in our other SEC filings.
Readers are cautioned not to place reliance on these forward-looking
statements, which are valid only as of the date they were made. We undertake no
obligation to update or revise any forward-looking statements to reflect new
information or the occurrence of unanticipated events or otherwise.
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PART I
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ITEM 1. BUSINESS
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OVERVIEW
We are a pharmaceutical company that:
o develops and commercializes generic versions of controlled-release
brand name pharmaceuticals, using our proprietary controlled-release
drug delivery technologies, and generic versions of niche and
immediate-release pharmaceutical products, including oral
contraceptives;
o distributes pharmaceuticals, primarily generics, manufactured by others
as well as manufactured by us, primarily to independent pharmacies,
pharmacy chains, pharmacy buying groups and physicians' offices; and
o commercializes brand name pharmaceuticals, in some instances using our
proprietary controlled-release drug delivery technologies.
Controlled-release pharmaceuticals generally provide more consistent
drug levels in the bloodstream than immediate-release dosage forms and may
improve drug efficacy and reduce side effects, by releasing drug dosages at
specific times and in specific locations in the body. Controlled-release
pharmaceuticals allow for "patient friendly" dosage forms, which reduce the
number of times a drug must be taken, thus improving patient compliance.
BUSINESS STRATEGY
We currently plan to continue our business approach of developing and
commercializing generic products, enhancing our distribution operations and
commercializing brand products. We intend to grow these businesses through
internal efforts, strategic alliances and collaborative agreements, as well as
acquisitions, as appropriate.
RESEARCH AND DEVELOPMENT
Our research and development efforts are currently focused
predominantly on developing generic products using our proprietary
controlled-release drug delivery technologies, as well as niche and
immediate-release products, including oral contraceptives. Total research and
development expenses were approximately $52.2 million, $51.5 million and $52.8
million, in 2003, 2002 and 2001, respectively. We anticipate that research and
development expenses will increase to approximately $55 million during 2004.
From 2001 through 2003, research and development expenses also included the
development of brand products. Research and development expenses for generic
development activities include, among other things, costs relating to personnel,
overhead, laboratories for conducting bioequivalence studies and raw materials
used in developing our products. Historically, research and development expenses
for brand product activities included, among other things, costs related to
personnel, overhead, professional services, filing fees and raw materials, but
primarily included the cost of laboratory services, clinical investigators and
clinical research organizations that were responsible for conducting the
clinical trials required to support a product application with the Food and Drug
Administration (FDA) and preparing New Drug Applications (NDAs). Planned
research and development expenses will be periodically evaluated during 2004 to
take into consideration, among other things, our level of profitability and cash
flows.
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STRATEGIC ALLIANCES, COLLABORATION AGREEMENTS AND DISPOSITIONS
We intend to consider and, as appropriate, enter into strategic
alliances and collaborative agreements with other companies to, among other
things, license or acquire rights to generic or brand products or product
candidates, and possibly to acquire complementary businesses. We also intend to
divest ourselves of products or businesses that are no longer a strategic fit to
our overall business. In 2003, we divested the Massachusetts aerosol
manufacturing operation, the Physicians' Online (POL) web portal and certain
marketing rights for butalbital with acetaminophen and caffeine, as these
operations and products were no longer strategic fits to our overall business.
GENERIC PHARMACEUTICALS
Our future results of operations will depend in large part upon our
ability to successfully develop, manufacture and market generic pharmaceutical
products in a timely manner, and such products must meet regulatory standards
and receive regulatory approvals (See "REGULATION - PHARMACEUTICALS").
Historically, we focused our efforts on developing generic versions of
controlled-release patent protected brand pharmaceuticals, using
controlled-release technologies and formulation techniques to develop products
that will mimic the brand product's physiological characteristics, but not
infringe the patents protecting the brand product. Over the past several years,
we have broadened our generic research and development efforts to include
immediate-release and niche pharmaceuticals.
In connection with our generic products, we generally conduct studies
to establish that our product is bioequivalent to the brand product, and obtain
legal advice that our product does not infringe the NDA owner's or the
innovator's patents or that such patents are invalid or unenforceable and/or
have expired. FDA approval is required before a generic version of a previously
approved drug or certain new dosage forms of an existing drug can be marketed.
Approval for such products generally is sought using an Abbreviated New Drug
Application (ANDA). In most cases, bioavailability and bioequivalence studies,
and not clinical studies, are required in support of an ANDA. Bioavailability
indicates the rate of absorption and levels of concentration of a drug in the
blood stream. Bioequivalence compares the bioavailability of one drug product
with another and, when established, indicates that the rate of absorption and
levels of concentration in the body are substantially equivalent to the
previously approved reference listed drug. An ANDA may be submitted for a drug
product on the basis that it is the equivalent of a previously approved drug
product or, in the case of a new dosage form, that it is suitable for use for
the indications specified without the need to conduct additional safety or
efficacy testing.
As further detailed below, the law provides a complex, time-consuming
and litigious process for bringing generic versions of brand products to market,
which are covered by existing patents (See "REGULATION - PHARMACEUTICALS-ANDA
PROCESS - GENERIC PHARMACEUTICALS" for a description of this regulatory process
and "PATENT INFRINGEMENT LITIGATION" for a discussion of the litigation
involving our ANDA products).
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If the ANDA applicant is the first to successfully file an application
for a patent-protected product and provides the appropriate patent certification
notice to the FDA, the NDA holder and the patent holder, the applicant may be
awarded a 180-day period of marketing exclusivity against other companies that
subsequently file ANDAs for that same product. Even if a company is granted
marketing exclusivity, the brand product can also be marketed as an authorized
generic during such period. In the event no exclusivity is awarded, or once the
180-day period expires, other companies can immediately begin marketing their
own approved generic version of a product. We believe this period of marketing
exclusivity can provide an opportunity for the successful patent challenger to
build market share, to recoup the expense of patent litigation, to realize
greater gross profit, and in some cases, to gain value by relinquishing or
transferring this marketing exclusivity right to others. In addition, once that
exclusivity period has lapsed, we believe that the marketer of the first
commercialized product may more effectively defend its market share position
against future competition. The ability to secure the benefit of this
exclusivity period, and the extent of the benefit it confers, is dependent upon
a variety of factors, some beyond the ANDA applicant's control, including
whether the brand product will also be marketed as an authorized generic, either
before or during such exclusivity period; the date in which its ANDA was filed,
and consequently, the law pertaining to its ANDA and its exclusivity period; and
the speed and results of litigation involving other ANDA filers (See "REGULATION
- - PHARMACEUTICALS-ANDA PROCESS - GENERIC PHARMACEUTICALS") .
As of March 1, 2004, our marketed generic products include generic
versions of Cardizem CD, Tiazac, Glucophage and Claritin-D 24, all of which we
manufacture, as well as Glucotrol XL, which we presently purchase from Pfizer
and sell as an authorized generic. Our generic version of Cardizem CD and, to a
lesser extent, Tiazac, Claritin-D 24, Glucophage and Glucotrol XL account for a
substantial portion of the revenues and profits we derive from our generic
product portfolio. (See "RISK FACTORS"). Our other generic marketed products
include versions of Claritin RediTabs, Dilacor XR, Entex LA, K-Dur, Lotensin,
Lotensin HCT, Naprelan, Remeron, Tylenol and Codeine Tablets and Vicodin HP. Our
generic Claritin line of products is sold through Perrigo Company as over-the
counter or OTC products. We also manufacture and sell a generic version of
Oruvail, which is part of our ANCIRC joint venture with Watson Pharmaceuticals,
Inc. Additionally, we sell generic versions of Pepcid, Prozac and Mevacor, which
were developed and are manufactured by Carlsbad Technologies, Inc., in
connection with our CARAN joint venture with Carlsbad. We maintain the ability
to sell generic Ventolin (Albuterol Metered Dose Inhalers) manufactured by our
former Massachusetts aerosol manufacturing operation through October 2004.
We continue to work to expand our generic product line. In 2003, we
launched six generic products, received 13 final product approvals, four
tentative approvals and submitted 12 ANDAs to the FDA, some of which we believe
will be awarded first-to-file exclusivity, and therefore may be entitled to a
180-day period of marketing exclusivity. The FDA issues a "tentative approval"
when it has determined the ANDA to be approvable, but there is a patent or
exclusivity period prohibiting it from granting final approval. We currently
have approximately 30 ANDAs at FDA. Though we generally do not comment on our
pending ANDAs for strategic reasons, information concerning certain of our ANDA
filings becomes publicly known for various reasons, but generally as a result of
the patent infringement litigation that is commenced against us. Those disclosed
ANDAs include our generic versions of Wellbutrin SR/Zyban, for which we believe
we are entitled to a 180-day period of marketing exclusivity on the 150mg
strength, the 50mg strength of Toprol-XL, for which we believe we are entitled
to a 180-day period of marketing exclusivity, Accupril, Paxil, and certain oral
contraceptive products, including Ortho Novum 1-35 and Ortho Novum 7/7/7.
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We generally sell our generic products under the Andrx Pharmaceuticals,
Inc. label through our internal sales team, mainly to warehousing pharmacy
chains, wholesalers, large managed care customers and selected government
agencies. This sales effort is complemented by the efforts of our distribution
operations, which distribute our products, but primarily other manufacturers'
generic products, principally to independent pharmacies, pharmacy chains, buying
groups and physicians' offices.
Securing and maintaining these customers for generic products is highly
competitive and requires high service levels. When our competitors attempt to
gain market share, significant price erosion often results. Moreover, since a
few warehousing pharmacy chains, wholesalers and managed care customers control
a large share of this market, our business may be adversely affected by the loss
of, or the consolidation of, any of our customers.
COLLABORATIVE AGREEMENTS AND STRATEGIC ALLIANCES - GENERIC PRODUCTS
We intend to consider and, as appropriate, enter into collaborative
agreements and strategic alliances with other companies to, among other things,
license or acquire rights to generic products or product candidates, to acquire
complementary businesses and to achieve other business objectives. We have
entered into various collaborative agreements for generic products, including
our:
o January 2003 agreement with Perrigo, whereby we agreed to
manufacture and supply Perrigo our generic versions of
Claritin-D 24, Claritin RediTabs and Claritin-D 12, and
Perrigo agreed to market such products as store brand OTC
products. This agreement followed the FDA's determination that
the Claritin line of products should be sold as OTC products,
and not as prescription pharmaceuticals. The FDA approved our
generic version of Claritin-D 24 in February 2003, with a
180-day period of marketing exclusivity, and Perrigo began
marketing it in June 2003. The FDA approved our generic
version of Claritin RediTabs in November 2003, and Perrigo
began marketing it in January 2004. The FDA approved our
generic version of Claritin-D 12 in January 2004, and we hope
to place Perrigo in a position to launch this product in 2004;
o July 2003 Exclusivity Transfer Agreement with Impax and a
subsidiary of Teva, through which we are trying to
commercialize the value of our ANDAs for generic versions of
Wellbutrin SR/Zyban, whether through the sale of our own
products or through the sale of Impax's product, which will be
sold by Teva. Under this agreement, Impax and Teva will share
certain profits with us from the sale of certain of Impax's
products for a 180-day period, and we agreed to share certain
profits for a 180-day period with them if our products were
marketed. Though the agreement originally extended to both the
100mg and 150mg strengths of Wellbutrin SR/Zyban, we have
since learned that we did not enjoy a marketing exclusivity
period for the 100mg strength, as we were not the first to
file an ANDA for that strength. Consequently, we will not
share in any of the profits from the sale of Impax's 100mg
strength of this product, which was approved for sale in
January 2004;
o September 2003 agreement with Pfizer and Alza Corporation that
resolved patent infringement litigation involving our ANDAs
for the 2.5mg, 5mg and 10mg strengths of Glucotrol XL
(extended-release glipizide). Pursuant to this settlement,
Pfizer and Alza dismissed their lawsuits against us, all of
the parties exchanged mutual releases, and we received the
right to either market the Glucotrol XL product (or any
strength thereof) supplied by Pfizer as an authorized generic
and/or to manufacture and market our ANDA product(s) in
exchange for a royalty, pursuant to a sublicense for relevant
Alza patents. In December 2003, we launched all
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three strengths of Glucotrol XL, supplied by Pfizer. As we
will pay less of a royalty to Pfizer and Alza from the sale of
our own ANDA product than the product we acquire from Pfizer,
we are working toward FDA approval to give us the ability to
launch our own versions of this product in the future;
o December 2003 agreement with Teva, whereby we agreed that we
would be responsible for the formulation, FDA submissions and
manufacture of the oral contraceptive products we presently
have pending at the FDA, as well as certain others, and Teva
would market such products as part of its larger product line
in both the United States and Canada. In January 2004, the FDA
issued final approval for our generic version of Ortho
Cyclen-28 and tentative approval of our generic version of
Ortho Tri-Cyclen. We anticipate launching these products
through Teva in 2004. Our currently filed or approved ANDAs
are for products that currently generate approximately 50% of
total oral contraceptive prescriptions; and
o Our October 2002 agreement with Genpharm and KUDCo, pursuant
to which we and Genpharm relinquished our shared marketing
exclusivity rights to the generic versions of the 10mg and
20mg strengths of omeprazole (Prilosec), and accelerated the
ability of KUDCo to receive FDA approval of the sale of its
product. Under that agreement, we earn a portion of KUDCo's
net profits, as defined, from sales of KUDCo's product. That
share decreased from 15% to 9% on June 9, 2003, and was
further reduced to 6.25% in February 2004, as a result of the
December 2003 appellate court decision affirming the lower
court decision that our version of generic Prilosec infringed
valid patents of AstraZeneca plc. We continue to try to
commercialize the value of our ANDA for the 40mg strength of
generic Prilosec, which is not covered by our agreement with
Genpharm and KUDCo, and for which we believe we continue to
have marketing exclusivity rights.
GENERIC PRODUCT PIPELINE
We are continually evaluating potential generic product candidates by,
among other things, actively reviewing pharmaceutical patents and looking for
opportunities to challenge those patents where we believe such patents are
invalid, or will not be infringed by the application of our drug delivery
technologies or are expiring. Though the majority of such products have
historically been controlled-release products, we are also seeking to develop
niche and immediate-release pharmaceutical products, including oral
contraceptives, to broaden our product line.
CUSTOMER ARRANGEMENTS
Consistent with generic industry practice, we have a return policy that
allows customers to return our products for a variety of reasons at various
times. We may also provide credits, known as shelf stock adjustments, to our
customers for decreases that we make to the selling price of our product, in an
amount approximating the decrease in the value of the inventory owned by our
customers as of the date of that price reduction. We also have indirect customer
arrangements, whereby those customers purchase our products at prices negotiated
with us, but obtain those products through wholesalers they independently
select. In these transactions, we provide a chargeback or credit to the
wholesaler in an amount equal to the difference between our invoice price to the
wholesaler and the contract price for the indirect customer (See "CRITICAL
ACCOUNTING POLICIES AND ESTIMATES - REVENUE RECOGNITION"). We have from time to
time entered into long-term supply agreements with certain customers related to
our generic products.
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JOINT VENTURES
We have established two unconsolidated joint ventures for the
commercialization of generic products, including:
o CARAN, which is a 50/50 joint venture with Carlsbad
Technologies, Inc. Through this joint venture, Carlsbad
developed and manufactures generic versions of Pepcid, Prozac
and Mevacor, which we are currently selling under the Andrx
Pharmaceuticals, Inc. label; and
o ANCIRC, which is a joint venture with Watson Pharmaceuticals,
Inc. for the development, manufacture and sale of certain
generic products. We are currently selling one ANCIRC product,
a generic version of Oruvail, for which we share profits 50/50
with Watson. In November 2000, we became solely responsible
for all of the additional costs to develop, manufacture and
sell the six remaining ANCIRC products, and Watson became
entitled, under certain conditions, to a royalty on the net
sales we derive from the commercialization of those products,
including our generic versions of Glucotrol XL and Procardia
XL. We have the right to elect to discontinue our efforts to
develop or market those remaining ANCIRC products at any time.
PHARMACEUTICAL DISTRIBUTION OPERATIONS
Through our Anda, Anda Pharmaceuticals and Valmed (also known as VIP)
subsidiaries, we distribute predominantly generic pharmaceuticals manufactured
largely by others, as well as our own products. We purchase these
pharmaceuticals and market them primarily through our internal sales
representatives mainly to independent pharmacies, pharmacy chains, pharmacy
buying groups and physicians' offices. We offer next day delivery, competitive
pricing, quality products and responsive customer service for our more than
5,700 shelf-keeping units (SKUs), which we believe are the critical elements to
competing effectively in this market. Our telemarketing staff currently consists
of approximately 220 persons who primarily initiate approximately 80,000 phone
calls per week to approximately 18,000 active accounts, supplemented by sales
executives responsible for national accounts. Our customers can also place
orders through AndaNet, AndaMeds and VIPpharm, our internally developed,
proprietary Internet ordering systems and through AndaConnect and VIPConnect,
which are hand-held Palm-ordering devices. During 2003, approximately 12.5% of
our orders were generated through our order entry Internet sites, and
approximately 5.2% of our orders were generated through AndaConnect and
VIPConnect. These order entry systems complement our internal sales
representatives, who are located in Weston, Florida, Grand Island, New York and
Boca Raton, Florida.
We presently distribute products out of our facilities in Weston,
Florida and Columbus, Ohio. Our Columbus, Ohio distribution center opened in
2002 and is intended to provide us with additional distribution opportunities
nationally. For the year-ended December 31, 2003, approximately 55% of the
distribution sales were shipped out of our Florida facility, while the balance
of the distribution sales were shipped out of Ohio.
Our distribution operations are utilized for the sale and marketing of
our own generic products, our collaborative partners' products and products we
purchase from third parties.
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BRAND PHARMACEUTICALS
Our brand products are currently sold under the Andrx Laboratories,
Inc. label primarily to wholesalers, warehousing pharmacy chains and pharmacy
benefit managers (PBMs). Unlike generic products, which are generally
substituted at the pharmacy, brand products need to generate demand through a
sales force dedicated to explaining to physicians the pharmaceutical
characteristics of the product, as well as marketing materials. The cost of
maintaining a sales force and promoting a brand pharmaceutical product is
substantial. We expect that, for the near term, our brand products' selling,
general and administrative expenses will continue to exceed the gross profit
generated by our brand operations.
As of March 1, 2004, we had approximately 250 primary care sales
representatives covering approximately 325 primary care territories, focusing
primarily on primary care physicians. Though we had as many as approximately 430
sales representatives in 2003, we reduced the amount of representatives and
changed the territories they cover in December 2003. We will review and adjust
the number of sales representatives we maintain based on the needs of our
business and products, which is expected to include Pfizer's Cardura XL product,
which we anticipate will be marketed to urologists as well as primary care
physicians.
In December 2003, we determined that we would focus our brand research
and development efforts on selected opportunities with other pharmaceutical
companies that will leverage our formulation technologies, as we believe our
proprietary controlled-release drug delivery technologies can improve the
characteristics of products; for example, by decreasing undesired side effects,
improving performance, patient compliance or reducing the frequency of
administration. As a result, we reduced the size of our New Jersey brand
clinical research operations.
Before that change occurred, we developed our own brand product
formulations and used contract research organizations to conduct and manage
clinical studies and to assist us in the preparation of the NDA for those
products. We generally filed an Investigational New Drug Application (IND) with
FDA before we commenced clinical trials. Because our development efforts
typically involved chemical entities that have been previously approved by FDA,
as opposed to new chemical entities, we utilized the Section 505(b)(2) NDA
approval process, which we believe is less expensive and less risky than the
approval process associated with most NDAs. A Section 505(b)(2) NDA must contain
safety and effectiveness studies, but may rely on published reports or prior FDA
determinations that related products are safe and effective (e.g., approval of a
controlled-release version of a previously approved immediate-release drug
product) for those studies. In most cases, our product may receive marketing
exclusivity rights. Conversely, marketing exclusivity rights awarded to another
product may delay approval of our NDA.
In June 2002, the FDA approved our first NDA, Altocor, an
extended-release lovastatin for lowering cholesterol. Our NDA for Fortamet, an
extended-release metformin tablet for the control of blood sugar in patients
with Type 2 diabetes, and our NDA for a valproate product for the treatment of
manic episodes associated with bipolar disorder, various seizure disorders and
prophylaxis of migraine headaches have both received approvable letters from the
FDA. Fortamet is intended to compete in the oral glucose-lowering market, which
had 2003 U.S. sales of $5.7 billion and our valproate product is intended to
compete with the Depakote family of brand products, which had 2003 U.S. sales of
$800 million. In the case of our valproate product, we are presently involved in
patent infringement litigation, which will also delay the approval and
commercial sale of our product. Though the Fortamet NDA used immediate-release
Glucophage as its reference listed drug, FDA recently advised us that we must
make a patent certification with respect to the Orange Book patents listed for
Glucophage XR. Accordingly, the timing of the FDA's approval of Fortamet depends
upon whether the NDA holder initiates patent infringement litigation within the
45-day period following its receipt of our patent notice,
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among other things. We believe that our product does not infringe such patents
and note that the NDA holder did not initiate patent infringement litigation
against the many ANDAs, including our own, that were filed for Glucophage XR. We
are required to pay Sandoz Inc., formerly known as Geneva Pharmaceuticals, Inc.,
a subsidiary of Novartis, additional milestones of $2.0 million upon FDA
approval and $3.0 million upon the launch of Fortamet, as well as royalties on
net revenues from this product (See "RISK FACTORS" and "REGULATION -
PHARMACEUTICALS-NDA PROCESS - BRAND PHARMACEUTICALS" for a description of this
regulatory process and "RISK FACTORS" and "PATENT INFRINGEMENT LITIGATION" for a
discussion of the litigation involving our NDA products).
Additionally, we presently sell several brand products we acquired or
obtained the rights to market from third parties, including: i) the Entex line
of cough and cold products we acquired in June 2001 from an affiliate of Elan
Corporation, which are prescription-only products that did not require the
submission and approval of an NDA in order to be marketed; ii) the Anexsia pain
products in-licensed from Mallinkrodt, a Tyco Healthcare company, in September
2001 through an eight-year marketing and supply agreement; and iii) the Embrex
pre-natal vitamin, which we acquired through our acquisition of CTEX
Pharmaceuticals, Inc. The Anexsia and Embrex products and some of the Entex
products have generic versions available in the marketplace. On October 17,
2003, FDA issued a draft compliance policy guide with respect to pharmaceutical
products that are presently permitted to be on the market and sold by
prescription without an approved ANDA or NDA, such as the Entex line of
products. This draft guidance is intended to provide notice that once FDA
approves a version of such product, unapproved drug products, such as our Entex
product line, may be subject to FDA enforcement action at any time, and that FDA
will evaluate each product on a case-by-case basis. In determining whether to
permit a grace period, and how long such grace period will be, FDA indicates
that it will consider factors such as: the effects on the public health of
immediate removal; the difficulty of conducting any required studies, and
preparing and obtaining approval of an application; the burden on affected
parties; FDA's available enforcement resources; and any special circumstances.
Though this guidance is only a draft, we are continuing to assess this matter,
including whether to seek FDA approval to market some or all of the Entex line
of products as prescription products or OTC products, as well as the FDA's
requirements for such submissions.
COLLABORATIVE AGREEMENTS AND STRATEGIC ALLIANCES - BRAND PRODUCTS
We believe that our proprietary drug delivery technologies provide the
opportunity to enhance the commercial value of existing drug products and new
drug candidates. We also believe that our sales force can be utilized to promote
or co-promote products developed by others, whether by ourselves or in
conjunction with the marketing or co-marketing of such other company's products.
Moreover, since the development and marketing processes for brand
pharmaceuticals are costlier than those for generic products, and could involve
synergies with products currently being marketed or developed by other
pharmaceutical companies, we will, from time to time, evaluate or seek to enter
into collaborative arrangements with other pharmaceutical companies to increase
revenues, to reduce costs or otherwise gain mutual benefits. We also are
considering acquiring or licensing additional brand products for our sales force
to promote and/or entering into co-promotion or contract sales arrangements with
respect to our products or other companies' products. Examples of our
collaborative agreements include our:
o November 2003 supply and distribution agreement with Pfizer to
further expand our brand product portfolio. Under the
agreement, we acquired the right to market Cardura XL, a
sustained-release formulation of doxazosin mesylate, which is
the subject of an NDA filed by Pfizer for the treatment of
benign prostatic hyperplasia (BPH). In exchange for the right
to market the product for five years, we agreed to pay Pfizer
$35 million, of which $10 million has been paid (and is
refundable under certain circumstances), and $25 million is
payable if the FDA approves the product in 2004 with the
certain agreed upon minimum labeling claims. We also agreed to
(i) purchase certain annual minimum quantities of Cardura XL
at an established price
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for the first three years following the NDA approval totaling
approximately $150 million, and (ii) provide a minimum number
of annual physician details during the term of the agreement;
o December 2003 agreement with Takeda whereby we agreed to
co-develop and later manufacture a combination product
consisting of Takeda's Actos (pioglitazone) and our
extended-release metformin, each of which is administered
once-a-day for the treatment of Type 2 diabetes. Takeda will
have exclusive worldwide marketing rights for this combination
product and will be responsible for regulatory approvals. Upon
execution of the agreement, we were entitled to receive $10
million as an initial milestone payment. Upon approval of the
NDA and the manufacture and marketing of the combination
product, we will receive a transfer price for the supply of
the combination product and a royalty as well as certain
additional performance payments related to Takeda's sale of
the combination product; and
o 1999 agreement granting Sandoz the U.S. and selected
international marketing rights for Fortamet and selected
international marketing rights for Altocor. In 2001, we
reacquired those rights from Sandoz, and in exchange agreed to
make certain milestone payments and royalty payments on net
sales in the U.S. for Fortamet for the first five years after
Fortamet's commercialization. We recorded our first milestone
payment of $2.0 million in December 2001, and recorded our
second milestone of $3.0 million in the 2002 fourth quarter.
Additional milestones of $2.0 million and $3.0 million will be
due to Sandoz upon FDA approval and our launch of Fortamet,
respectively.
MANAGED CARE
In addition to the efforts of our brand sales representatives, the
marketing of our brand products requires us to gain access to health
authorities, pharmacy benefit managers (PBMs) and managed care organizations'
(MCO) formularies (lists of recommended or approved medicines and other
products) and reimbursement lists. It is estimated that over half the U.S.
population now participates in some version of managed care. The purchasing
power of MCOs has been increasing, both due to their growing numbers of enrolled
patients and the consolidation of those organizations into fewer, larger
entities. Because of the size of the patient population covered by MCOs, the
marketing of prescription drugs to them and to the PBMs that serve many of those
organizations is important to our brand business.
MCOs and PBMs typically develop formularies to reduce their cost for
medications. Inclusion on formularies can be based on the prices and therapeutic
benefits of the available products, but can also be influenced by a variety of
other factors, including rebates offered by pharmaceutical companies and
limitations on the amount of products included within a particular therapeutic
class. Exclusion of a product from a formulary can lead to sharply reduced usage
in the MCO patient population.
OUR PROPRIETARY DRUG DELIVERY TECHNOLOGIES
Certain of our pharmaceutical products (both generic and brand) utilize
our proprietary controlled-release drug delivery technologies to control the
release characteristics of a variety of orally administered drugs.
Controlled-release products are formulations that release active drug compounds
in the body gradually and predictably over a 12 to 24-hour period and therefore
need be taken only once or twice daily, as opposed to immediate-release products
that have to be taken 3-4 times per day. Controlled-release products typically
provide benefits over immediate-release drugs.
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We have 10 proprietary drug delivery technologies that have been
patented for certain applications or for which we have filed for patent
protection for certain applications. These include:
o Pelletized Pulsatile Delivery System
o Single Composition Osmotic Tablet System
o Solubility Modulating Hydrogel System
o Delayed Pulsatile Hydrogel System
o Stabilized Pellet Delivery System
o Stabilized Tablet Delivery System
o Granulated Modulating Hydrogel System
o Pelletized Tablet System
o Porous Tablet System
o Modified Antihistamine/Decongestant Combination System
PATENTS, TRADEMARKS AND LICENSES
The pharmaceutical industry has traditionally placed considerable
importance on obtaining patent and trade secret protection for significant new
technologies, products and processes, and we believe that patents and other
proprietary rights are important to our business. Our policy is to file patent
applications to protect our products, technologies, inventions and improvements
we consider important to the development of our business. We also rely upon
trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
We hold numerous U.S. and foreign patents and expect to continue to
file U.S. and foreign patent applications to protect our intellectual property.
As of December 31, 2003, we had 96 patents issued, allowed or applied for in the
U.S. and 127 internationally, and had exclusively licensed additional U.S. and
foreign patents and patent applications from others. Our success depends, in
part, on our ability to obtain U.S. and foreign patent protection for our
products, to preserve our trade secrets and proprietary rights and to operate
without infringing on the proprietary rights of third parties or having third
parties circumvent our rights.
In addition, companies having competing brand pharmaceutical products
may bring litigation against ANDA or some NDA applicants seeking approval to
manufacture and market generic forms of their brand products. These companies
allege patent infringement or other violations of intellectual property rights
as the basis for filing suit against the applicant, thereby delaying or
preventing the introduction of the ANDA or NDA applicant's product (See "RISK
FACTORS" AND "REGULATION - PHARMACEUTICALS").
RAW MATERIALS
The active chemical raw materials, essential to our business, are
generally readily available from multiple sources. Certain raw materials used in
the manufacture of our products are, however, available from limited sources,
and in some cases, a single source. We have at times experienced problems as a
result of a lack of raw material availability. Such problems result from the
supplier's delay in providing such materials, delays in getting such materials
through customs, the closure of a particular materials source and the
unavailability of a comparable replacement, and latent defects in the materials
we utilize in certain of our products and product candidates. The impact of such
delays and problems are heightened by the need for FDA to approve changes in raw
materials and raw material suppliers prior to the use of such new material.
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MANUFACTURING
We presently operate manufacturing facilities in Florida. In December
2002, we acquired a 500,000 square foot manufacturing facility in Morrisville,
North Carolina, which we anticipate using in certain of our operations
commencing mid-2005. We are currently expanding our manufacturing capacity, both
by converting portions of our existing Florida facilities into additional
manufacturing space, and by renovating and equipping our North Carolina
facility. The timely completion of these efforts is necessary for us to have
sufficient manufacturing capacity for the anticipated quantities of our existing
products and the products we expect to launch in the coming years.
Our manufacturing and other processes utilize sophisticated equipment,
which sometimes requires a significant amount of time to obtain and install.
Although we endeavor to properly maintain our equipment and our inventory of
spare parts, our business could suffer if certain manufacturing or other
equipment, or a portion or all of our facilities were to become inoperable for a
period of time. This could occur for various reasons, including catastrophic
events such as hurricane or explosion, but also equipment failures and/or delays
in obtaining components or replacements thereof, delays in receiving FDA
approval of our North Carolina facility, as well as equipment issues,
construction delays or defects and other events, both within and outside of our
control.
We sometimes file our ANDA or NDA based on study results utilizing
product batches that are smaller than what we anticipate may be required for the
commercial launch of that product. Thus, in order to manufacture these products
for commercial launch, we are required to "scale-up" our manufacturing process
for use on larger equipment, in accordance with FDA regulations. Our business
could suffer if we are unable to successfully scale-up any of our significant
products or if successful scale-up of any such product is delayed or cannot be
achieved.
We continue to make improvements in the efficiency of our manufacturing
operations in order to meet the market demand for our current products and
position ourselves to plan appropriately for the manufacturing of our future
products. Operating on this basis and meeting the anticipated market demand
requires minimal equipment failures and product rejections. Moreover, because we
manufacture products that employ a variety of technology platforms, certain of
our manufacturing capabilities may at times be over-utilized, while others may
be under-utilized.
To address these problems, we have, and continue to focus our efforts
on: (i) optimizing our processes and reducing equipment failures and thereby
reducing product rejections; (ii) hiring additional experienced manufacturing
operations personnel, and reducing the turnover of manufacturing operations
personnel; (iii) assuring compliance with FDA's current Good Manufacturing
Practices (cGMP) regulations; (iv) increasing personnel training,
accountability, development and expertise; (v) implementing a more fully
integrated use of our operating systems, in anticipation of our migration to a
JD Edwards Enterprise Resource Planning (ERP) system; (vi) evaluating the
commercial viability of producing certain products that we anticipate will
generate a relatively small amount of profit as compared to the utilization of
resources in order to allow us to optimize our output and maximize our
profitability; (vii) transferring production (or portions thereof) for certain
products to third parties; and (viii) renovating and acquiring additional
facilities to increase or optimize production.
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Our pharmaceutical manufacturing operations are required to comply with
cGMP. cGMP encompasses all aspects of the production process, including
validation and record keeping, in addition to standards for facilities,
equipment and personnel, and involves changing and evolving standards.
Consequently, continuing compliance with cGMP can be a particularly difficult,
extensive and expensive part of our manufacturing operations. Similar cGMP
regulations, and other requirements, apply to products that we manufacture for
sale in certain other countries. On March 3, 2004, following an inspection of
our Davie, Florida manufacturing facility, the FDA issued a Form 483 notice to
us providing observations by the inspector concerning our compliance with cGMP,
including certain observations that were also reflected in the August 2000
Warning Letter. We are currently reviewing each of those observations and, as is
customary, will prepare a written response with an explanation of proposed
corrective action for each of the FDA's observations. (See "RISK FACTORS").
As a result of all of the foregoing factors, we may at times have
difficulty fulfilling all of the market demand for our products and having
pre-launch quantities of our product candidates available when we obtain FDA
approval to market our products (See "RISK FACTORS").
INFORMATION SYSTEMS
We have experienced significant expansion of all of our operations,
which has required the expansion, upgrading and improvement of our
administrative, operational and management systems, controls and resources. To
achieve this objective, we began the implementation of a JD Edwards ERP software
package and related hardware in 2002. JD Edwards is a fully integrated software
system that is intended to allow information to be shared and utilized
throughout Andrx. We anticipate that the majority of the JD Edwards software
package will be implemented throughout 2004. Total capital expenditures and
related costs for this project are estimated to be $25 million.
In 2002, Andrx also began the implementation of the PeopleSoft human
resources and payroll system. PeopleSoft is an enterprise-wide software package
that is intended to enable us to better manage, optimize, and leverage our
employees and thereby achieve a higher level of business performance. The
payroll software modules were successfully implemented among our divisions in
the 2003 first quarter. We estimate the total cost of this project to be $4
million. Implementation of human resources software modules began in 2003 and we
anticipate completion of the modules in 2004.
Following the completed implementation of these programs, we will
continue to incur costs to support and modify these systems for our expanding or
changing operations. We also intend to enhance the information systems
capabilities of our distribution operations and to invest further in new
technology and systems to enhance customer and supplier relationships and
internal efficiencies.
REGULATION - PHARMACEUTICALS
ANDA PROCESS - GENERIC PHARMACEUTICALS
In our generic operations, we apply our proprietary technology
processes and formulations to develop a product that will reproduce the brand
product's physiological characteristics (i.e., the rate and extent of absorption
into the bloodstream), but not infringe upon the patents of the brand owner or
other innovator of the NDA. In connection with this process, we conduct studies
to establish that our product is bioequivalent to the brand product, and obtain
legal advice that our product does not infringe the NDA owner's or the
innovator's patents or that such patents are invalid or unenforceable. FDA
approval is required before a generic version of a
15
previously approved drug or certain new dosage forms of an existing drug can be
marketed. Approval for such products generally is sought using an ANDA. In most
cases bioavailability and bioequivalence studies must be conducted in support of
the ANDA and clinical studies are not required. Bioavailability indicates the
rate of absorption and levels of concentration of a drug in the blood stream.
Bioequivalence compares the bioavailability of one drug product with another
and, when established, indicates that the rate of absorption and levels of
concentration in the body are substantially equivalent to the previously
approved reference listed drug. An ANDA may be submitted for a drug product on
the basis that it is bioequivalent to a previously approved drug product or, in
the case of a new dosage form, that it is suitable for use for the indications
specified without the need to conduct additional safety or efficacy testing.
The Drug Price Competition and Patent Restoration Act of 1984, known as
the Waxman-Hatch Amendments, require that we submit an ANDA to the FDA for each
generic product we seek to market. The ANDA contains a substantial amount of
information about the proposed product's formulation, ingredients, chemistry and
manufacturing controls, stability and the bioavailability and bioequivalence
studies conducted on such product, all of which is reviewed by the FDA's Office
of Generic Drugs (OGD). In addition, the ANDA is required to contain the ANDA
applicant's certification concerning each patent that has been listed for the
reference brand product in the Orange Book. If there is no patent listed in the
Orange Book, the ANDA applicant so states by submitting what is referred to as a
Paragraph I certification. If the patent listed in the Orange Book has expired,
the ANDA applicant so states by submitting what is referred to as a Paragraph II
certification. If the ANDA applicant intends to wait until the expiration of the
patent listed in the Orange Book before it intends to market its product, the
ANDA applicant so states by submitting what is referred to as a Paragraph III
certification. And, if the ANDA applicant believes that the listed patent is
invalid or unenforceable, or that its product does not infringe such patent(s),
the ANDA applicant so states by submitting what is referred to as a Paragraph IV
certification in its ANDA.
If a Paragraph IV certification is made, the ANDA applicant must also
send a notice containing its factual basis for its Paragraph IV certification to
the NDA owner and any patent holder. The NDA owner or patent holder may then
initiate a legal challenge against the ANDA applicant for patent infringement.
Before the December 2003 Amendments to Waxman-Hatch were enacted, if the NDA
owner or patent holder asserted a patent challenge within 45 days of their
receipt of notice of the ANDA applicant's Paragraph IV certification, FDA was
prevented from approving that ANDA until the earlier of 30 months, the
expiration of the patent, or when the infringement case concerning each such
patent was favorably decided in an ANDA applicant's favor or such shorter or
longer period as may be ordered by a court. This prohibition is generally
referred to as the 30-month stay. In some cases, NDA owners and patent holders
obtained additional patents for their products after an ANDA had been filed, but
before that ANDA received final marketing approval, and then initiated a new
patent challenge, which resulted in more than one 30-month stay.
The December 2003 Amendments to Waxman-Hatch were intended to eliminate
certain unfair advantages of patent holders in the implementation of
Waxman-Hatch. As a result of those amendments, the NDA owner remains entitled to
an automatic 30-month stay if they initiate a patent infringement lawsuit within
45 days of their receipt of notice of our Paragraph IV certification, but only
if their patent infringement lawsuit is directed to patents that were listed in
the Orange Book before the ANDA was filed. An ANDA applicant is now permitted to
take legal action to enjoin or prohibit the listing of certain of these patents
as a counterclaim in response to a claim by the NDA owner that its patent covers
its approved drug product. By granting 30-month stays only with respect to
patent infringement claims for patents that were listed in the Orange Book
before an ANDA was filed, the December 2003 amendments are intended to reduce
the potential for multiple 30-month stays. Some believe, however, that without
the incentive of a 30 month stay to encourage an early resolution of patent
infringement claims, ANDA applicants will be at a greater risk that the NDA
holder will initiate patent litigation shortly before or soon after the generic
version of its product is marketed.
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In addition, an FDA regulation that became effective in August 2003
further defines the types of patents that may be listed in the Orange Book and
requires increased disclosure requirements for listed patents in an effort to
decrease the number of improperly listed patents. While most of these changes
should help prevent improperly listed patents, the effectiveness of this
regulation and the December 2003 amendments is unclear, and is likely to result
in additional litigation.
If an ANDA applicant is the first to file an ANDA with a Paragraph IV
certification, and provide appropriate notice to the FDA, the NDA holder and all
patentees for a particular generic product, the applicant may be awarded a
180-day period of marketing exclusivity against other companies that
subsequently file ANDAs for that same product. We believe this period of
marketing exclusivity can provide an opportunity for the successful patent
challenger to build its market share, to recoup the expense of patent litigation
and to realize greater profit margins, and in some cases, to gain value by
relinquishing or transferring this marketing exclusivity right to others. In
addition, once that exclusivity period has lapsed, we believe that the marketer
of the first commercialized product may more effectively defend its market share
position against future competition. However, our ability to secure the benefit
of this exclusivity period, and the actual benefit we might experience from the
exclusivity period, depends on a variety of factors, some beyond our control,
such as: the timing of FDA approval; whether other ANDA applicants share that
exclusivity; patent litigation related to our product and competitors' products;
and whether the brand product will also be marketed as a generic (sometimes
referred to as an authorized generic). New court decisions, FDA interpretations,
legislative changes and when an ANDA was filed all affect, among other things,
how this exclusivity period is to be awarded, how it is affected by other ANDA
applicants, and the benefit, if any, which may be obtained from the 180-day
marketing exclusivity period.
As an example, FDA had previously taken the position that it could
award "shared" 180-day marketing exclusivity if different ANDA applicants were
first-to-file Paragraph IV certifications to different patents listed in the
Orange Book for the same product. This interpretation was recently rejected by a
United States District Court, which determined that exclusivity is to be awarded
on a per product basis rather than on a per patent basis. FDA has announced that
it will challenge that court's ruling, and will continue to rely on its earlier
interpretation for ANDAs filed before December 8, 2003, when the December 2003
Waxman-Hatch amendments prospectively eliminated shared exclusivity. Until this
issue is resolved, it is unclear how the 180-day marketing exclusivity period
will apply to certain of our pending ANDAs. For ANDAs that are filed on or after
December 8, 2003, the 180-day marketing exclusivity period will only be awarded
to the first ANDA applicant(s) to assert a Paragraph IV certification as to any
patent listed in the Orange Book for that product (including multiple ANDA
applicants who file the first Paragraph IV certification on the same day).
However, FDA will award shared 180-day marketing exclusivity to multiple ANDA
applicants who all file the first Paragraph IV certification on the same day.
The new legislation also modifies the rules governing when generic
products are eligible for 180-day exclusivity periods and when the 180-day
exclusivity period is triggered or forfeited. Prior to the legislation, the
180-day marketing exclusivity period was triggered upon the first commercial
marketing of the ANDA or a court decision holding the patent invalid,
unenforceable or not infringed. For ANDAs accepted for filing before March 2000,
that court decision had to be final and non-appealable, for ANDAs accepted for
filing after March 2000, any court decision, including a district court
decision, could trigger exclusivity, and in all cases, the court decision
trigger did not have to involve the first ANDA applicant, but could be a court
decision by a subsequent ANDA applicant. The new legislation retroactively
applies a final and non-appealable court decision trigger for all ANDAs filed
before December 8, 2003. As for ANDAs filed after December 8, 2003, exclusivity
is only triggered upon the first commercial marketing of the ANDA product, but
that exclusivity may be forfeited under certain circumstances, including, if the
ANDA is not marketed within a certain timeframe after a final and non-
17
appealable court decision by the first-filer or another ANDA applicant, or if
the FDA does not tentatively approve the first-filer's ANDA within 30 months.
Regulatory approval of an ANDA may also be affected by the grant of a
period of "pediatric exclusivity." Pediatric exclusivity rewards brand
pharmaceutical companies for conducting research in a pediatric population,
through the grant of an additional six months of exclusivity, which is attached
to any patent or market exclusivity period protecting its product. Thus, where
pediatric exclusivity is requested by a brand company and granted by FDA, final
marketing approval could be delayed by six months.
Certain ANDA procedures for generic controlled-release drugs and other
products are presently the subject of petitions filed by brand name drug
manufacturers, which seek changes from FDA in the approval process for generic
drugs. We cannot predict at this time whether FDA will make any changes to the
ANDA procedures as a result of such petitions, ongoing rulemakings, or
litigation or the effect that such changes may have on us. Any changes in FDA
regulations, policies or procedures may make ANDA approvals more difficult or
otherwise have a significant adverse effect on our business.
NDA PROCESS - BRAND PHARMACEUTICALS
Approval of a new drug occurs in the context of FDA review of an NDA.
The NDA must contain complete pre-clinical, clinical safety and efficacy data,
as well as reference to such data or literature. Before clinical testing can
begin, stringent governmental requirements for pre-clinical evaluation must be
satisfied. Pre-clinical data are typically obtained from studies in animal
species, as well as laboratory studies, and are submitted to FDA in an IND. The
pre-clinical data must provide an adequate basis for evaluating both the safety
and the scientific rationale for the initiation of clinical trials (i.e., trials
in humans) and demonstrate that such studies would not expose subjects to an
unreasonable or significant risk of illness or injury.
Clinical trials are typically conducted in three sequential phases,
Phase I, Phase II, and Phase III, although the phases may overlap. The process
of completing clinical trials for a new drug typically takes several years and
requires the expenditure of substantial resources. Preparing an NDA involves
considerable data collection, verification, analysis and expense. The approval
process is affected by a number of factors, including the risks and benefits of
a drug product as demonstrated in clinical trials, the severity of the target
disease or health condition and the availability of alternative treatments. FDA
or other health authorities may deny approval of an NDA if the regulatory
criteria are not satisfied, or may require additional testing or information
before an NDA will be approved. The safety and effectiveness testing necessary
to obtain approval of an NDA is time-consuming and expensive.
We have submitted our internally developed brand name
controlled-release pharmaceutical products using a NDA procedure that is
permitted by Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act. A
Section 505(b)(2) NDA must contain safety and effectiveness studies, but may
rely on published reports or prior FDA determinations that related products are
safe and effective (e.g., approval of a controlled-release version of a
previously approved immediate-release drug product) for those studies. Thus, by
eliminating the need for certain duplicative testing, the Section 505(b)(2) NDA
process may significantly reduce the time and expense of new drug development.
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There are limitations on the use of Section 505(b)(2) NDAs, however.
First, patent listing/certification requirements and marketing exclusivity
awarded to reference or competitor products may result in the lengthy and
uncertain delay of approvals similar to those described above for ANDAs. Second,
there currently is uncertainty concerning the extent to which Section 505(b)(2)
NDAs may rely upon prior FDA findings that reference listed drugs are safe and
effective for approved uses. There may therefore be limitations on a Section
505(b)(2) NDA applicant's ability to innovate without conducting substantial
clinical testing.
NDA products, including Section 505(b)(2) NDAs, may qualify for
specific patent and marketing exclusivity protections against competitive
products submitted for approval via the Section 505(b)(2) NDA or ANDA processes.
PATENT INFRINGEMENT LITIGATION
Patent litigation can be a part of the business of bringing some
generic, or even brand, pharmaceuticals to market, and if such action is filed
within the 45-day period prescribed by law, such litigation can result in a
delay in FDA's ability to approve the marketing of a pharmaceutical product.
Numerous patent infringement actions have been filed against us, and we have
been successful in resolving most of such litigation matters, either through a
court decision or through settlement, in a manner that permits our product to be
marketed. Examples include our generic versions of: Dilacor XR, Cardizem CD,
Glucotrol XL, Tiazac, Remeron, Claritin-D 24, Claritin-D 12 and Claritin
RediTabs. We did not successfully resolve our patent infringement litigation
involving our generic version of Prilosec and are currently unable to market
such product. We are continuing to litigate patent issues pertaining to our
generic versions of Wellbutrin SR/Zyban (we obtained a favorable summary
judgment at the trial court, but the Court of Appeals vacated and remanded that
judgment), Naprelan (we prevailed at the trial court, and an appeal is pending),
Paxil, Monopril, Monopril HCT and Toprol XL (no court decision as of March
2004), as well as our brand valproate product (no court decision as of March
2004).
Patent litigation was also filed against Andrx, and Carlsbad, one of
our joint venture partners, with respect to the generic version of Pepcid that
Carlsbad developed, and we sell. That litigation was resolved through a
settlement.
We anticipate that additional actions may be filed as we or companies
we collaborate with file additional ANDAs containing Paragraph IV
certifications. Patent litigation may also affect NDAs that we file in the
future.
The outcome of patent litigation or any litigation is difficult to
predict because of the uncertainties inherent to litigation. Our business could
be harmed by the delay in obtaining FDA approval to market our products as a
result of patent litigation (both with respect to patents listed with FDA when
the ANDA was filed and thereafter), the delay in obtaining judicial decisions in
such litigation, the expense of litigation whether or not we are successful, or
an adverse outcome of such litigation. Moreover, this litigation or other events
may precipitate additional litigation affecting the marketing of our products.
We often encounter substantial delay in obtaining judicial decisions in
ANDA Paragraph IV litigation. Such delay could cause us to decide in the future
to launch a product prior to final resolution of the pending litigation. The
risk involved in doing so can be substantial because the remedies available to
the owner of a patent for infringement include, among other things, damages
measured by the profits lost by the patent owner and not by the profits earned
by the infringer. Because of the discount pricing typically involved with
generic products, patented brand products generally realize a higher profit
margin than generic products. In the case of a willful infringer, the definition
of which is unclear, such damages may be trebled. We believe that this profit
differential can act as a deterrent to the settlement of patent litigation on
terms that will allow our products to be marketed upon the settlement of patent
litigation. Thus, we have faced, and will continue to be faced with, the
decision of whether, and in what manner, time-frame or other circumstances, we
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should launch our product prior to the conclusion of patent litigation, or to
discontinue selling our product in the face of new patent litigation. In making
these determinations, we intend to consider and balance what we then believe are
the relevant considerations and factors, including: (i) the risk that our
product will be found to infringe the brand product, the size of the market, and
the claim for damages that could result from the sale of an infringing product,
and other costs, including inventory; (ii) the potential claim for damages that
could result from the sale of an infringing product against our current capital
resources, and our future capital needs; (iii) the risk of being enjoined from
making such sales and thereby losing our exclusivity rights for such product;
(iv) the possibility that launching the product may increase the incentive for
the owner of the patented brand product to settle the pending litigation on a
basis that would allow us to continue to market our product without further
legal risk; and (v) the lost opportunity cost if we do not have available launch
quantities of our product when the patent litigation is ultimately resolved,
particularly in instances where that court decision starts the 180-day period of
marketing exclusivity for us, and additional competition awaits the expiration
of that period of marketing exclusivity.
OMEPRAZOLE (PRILOSEC)
In 1998, we filed an ANDA seeking approval from the FDA to market
omeprazole, our generic version of Prilosec. In May 1998, Astra Zeneca filed
suit under the provisions of the Waxman-Hatch Amendments alleging patent
infringement. The matter was tried in the U.S. District Court for the Southern
District of New York along with the consolidated claims of three other ANDA
applicants. In October 2002, the court entered an order and an opinion finding
that Astra's `505 and `230 patents are valid and that the generic versions of
Prilosec developed by Genpharm, Cheminor and us infringe those patents. The
court also determined that the generic version of Prilosec developed by KUDCo
does not infringe the two patents. The court specifically deferred ruling on the
`281 patent that was asserted solely against our product, and has not issued any
opinion on Astra's claims for willful infringement of the `505 and `230 patents
or on Astra's request for attorneys' fees. We appealed the district court's
opinion to the Federal Circuit Court of Appeals and on December 11, 2003, the
Federal Circuit affirmed the district court's opinion that Astra's patents are
valid and infringed by the products developed by Genpharm, Cheminor and us.
Following the district court decision, but well before the appellate court
decision, Astra advised the district court that it believes it may be entitled
to damages as a result of our decision to build an inventory of our product
prior to the court's determination. Since that statement was made, we are
unaware of any effort on the part of Astra to enforce such claims.
NAPROXEN SODIUM (NAPRELAN)
In 1998, we filed an ANDA seeking approval from FDA to market naproxen
sodium, our generic version of Naprelan. Elan sued us for patent infringement in
October 1998. The matter was tried in the U.S. District Court for the Southern
District of Florida and on March 14, 2002, the court issued an order of final
judgment in our favor invalidating the patent in controversy. Elan filed a
motion asking the court to reconsider and reverse its invalidity ruling and we
filed a motion asking that the court issue a ruling on our defenses of
non-infringement. On March 24, 2003, the court entered an order denying both
Elan's motion for reconsideration and our motion to amend the judgment. Elan has
appealed the district court's opinion invalidating our patent and we have
appealed the district court's order dismissing our antitrust counterclaims and
for certain other matters.
20
PAROXETINE HYDROCHLORIDE (PAXIL)
We filed an ANDA seeking FDA approval to market paroxetine
hydrochloride 40mg, our generic version of Paxil 40mg., and in June 2001,
SmithKline Beecham Corporation and Beecham Group plc sued us, and our raw
material supplier, in the U.S. District Court for the Eastern District of
Pennsylvania for patent infringement. We later amended our ANDA to add the 10mg,
20mg and 30mg strengths of paroxetine hydrochloride and in November 2003,
SmithKline filed a new infringement complaint against us in the United States
District Court for the Eastern District Pennsylvania in connection with those
lower strengths. These cases and several other cases related to other companies'
ANDAs for generic versions of Paxil have been consolidated for pre-trial
discovery purposes only.
VALPROATE (DEPAKOTE)
In December 1999, we filed an ANDA seeking FDA approval to market
valproate sodium, a generic version of Depakote. In April 2000, Abbott
Laboratories sued us for patent infringement in the U.S. District Court for the
Southern District of Florida in connection with our ANDA for our generic version
of Depakote. As a result of a dispute with the FDA as to what constituted the
active ingredient in our product, we withdrew our ANDA and filed a 505(b)(2)
application in March 2003. In May 2003, Abbott filed suit against us in
connection with our new application. Both the ANDA and NDA cases were
consolidated, but the lawsuit pertaining to our ANDA product was dismissed
without prejudice. Consequently, the trial will only pertain to our NDA product.
BUPROPION HYDROCHLORIDE (WELLBUTRIN SR/ZYBAN)
In June 1999, we filed an ANDA seeking FDA approval to market bupropion
hydrochloride, our generic versions of Wellbutrin SR/Zyban. In September 1999,
GlaxoSmithKline filed suit against us in the U.S. District Court for the
Southern District of Florida claiming patent infringement. In February 2002, the
U.S. District Court for the Southern District of Florida granted our motion for
summary judgment of non-infringement with respect to Wellbutrin SR/Zyban and
denied Glaxo's cross-motion for summary judgment. Glaxo appealed the district
court's decision and in September 2003, the U.S. Court of Appeals for the
Federal Circuit vacated the summary judgment in favor of us and remanded the
case back to the U.S. District Court for the Southern District of Florida for
further proceedings.
LORATADINE (CLARITIN-D 24/REDITABS/D 12)
We filed ANDAs with FDA seeking approval for our generic versions of
Claritin-D 24, Claritin RediTabs and Claritin-D 12 in September 1999, September
2000 and July 2001, respectively. Schering-Plough sued us in the U.S. District
Court for New Jersey claiming that our ANDA for Claritin-D 24 infringed two of
its patents, a metabolite patent and a formulation patent, and with respect to
Claritin RediTabs and D 12, claiming infringement only of the metabolite patent.
The district court entered final summary judgment in our favor with respect to
the metabolite patent, finding the patent invalid. Schering-Plough appealed that
judgment and in August 2003, the U.S. Court of Appeals for the Federal Circuit
affirmed the lower court's opinion. This decision is final. With respect to the
formulation patent at issue for the D 24 product, in October 2003, the parties
reached a settlement calling for the dismissal of the litigation, with prejudice
and the payment of a non-material amount by us.
21
GLIPIZIDE (GLUCOTROL XL)
We filed an ANDA for our generic version of Glucotrol XL in April 2001,
and in July 2001, were sued in the U.S. District Court for the Southern District
of Florida by Pfizer and Alza Corporation for alleged infringement of several
patents. In September 2003, the parties reached a settlement and entered into a
sublicense/supply agreement. As a result of this settlement, all claims by
Pfizer and Alza against us were dismissed.
FOSINOPRIL SODIUM AND FOSINOPRIL HCTZ (MONOPRIL AND MONOPRIL HCT)
In February 2003, we filed ANDAs seeking FDA approval to market
fosinopril sodium tablets that are bioequivalent to monopril and fosinopril
sodium hydrochlorathiazide tablets that are bioequivalent to Monopril HCT. On
April 10, 2003, Bristol-Myers Squibb Company and E.R. Squibb and Sons, LLC filed
identical suits against us in the U.S. District Court for the Southern District
of New York and Florida for alleged patent infringement. The New York action has
been dismissed and transferred to Florida. Trial is scheduled to commence in
April 2004.
METOPROLOL SUCCINATE (TOPROL-XL)
In 2003, we filed an ANDA seeking FDA approval to market metoprolol
succinate extended-release tablets in 50mg strength, our generic version of
Toprol-XL. In February 2004, AstraZeneca AB, Aktiebolaget Hassle and AstraZeneca
LP sued us for patent infringement in the U.S. District Court for the District
of Delaware.
SEASONALITY
There are no significant seasonal aspects to our business, except that
shipments of pharmaceutical products indicated for cold and flu symptoms are
typically higher during the fourth quarter as customers supplement inventories
in anticipation of the cold and flu season.
PERSONNEL
As of December 31, 2003, Andrx had approximately 2,100 employees. The
following chart generally reflects the areas in which such personnel are
engaged:
Corporate &
Information
Distribution Generic Brand Systems Total
-------------- --------------- ---------- ---------------- ----------
Sales & Marketing 220 10 330 - 560
Research and Development - 138 13 - 151
Manufacturing - 310 - - 310
Quality and Regulatory Affairs - 294 8 - 302
Administration 175 85 18 154 432
Warehouse/Shipping/Maintenance 190 153 2 - 345
-------------- --------------- ---------- ---------------- ----------
585 990 371 154 2,100
============== =============== ========== ================ ==========
22
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER
INFORMATION CONTAINED AND INCORPORATED BY REFERENCE IN THIS FORM 10-K. ANY OF
THESE RISKS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, FINANCIAL
CONDITION AND CASH FLOWS. ANY OF THESE EVENTS COULD ALSO CAUSE THE MARKET PRICE
OF OUR COMMON STOCK TO DECLINE.
RISKS RELATING TO ANDRX
AS WE ARE DEPENDENT ON A SMALL NUMBER OF PRODUCTS, A LOSS OF REVENUES
FROM CERTAIN PRODUCTS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS,
FINANCIAL CONDITION AND CASH FLOWS.
Currently, our overall level of profitability depends in large part on
a relatively small number of products. If the revenues and profitability we
derive from these products, and particularly our generic version of Cardizem CD,
and to a lesser extent our generic versions of Tiazac, Claritin-D 24, Glucophage
and Glucotrol XL (which we currently purchase from Pfizer), were to be reduced
as a result of pressure from competitive products, price reductions and/or
reduced market share, loss of exclusivity protection (if applicable in the
future), unexpected side effects or regulatory proceedings, it could adversely
affect our results of operations, financial condition and cash flows. For
example, as new competitors to Cardizem CD and Tiazac arise, which may occur by
mid-2004, this increased competition or other factors may significantly affect
net sales and gross profit of our generic version of Cardizem CD and/or Tiazac
and their significant contribution to our results of operations.
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE WITH RESPECT TO
MARKET SHARE, AND IS AFFECTED BY NEW TECHNOLOGIES, FINANCING AND NUMEROUS OTHER
FACTORS.
Our competitors vary depending upon our operations, and many of our
competitors have longer operating histories and greater financial, research and
development, marketing and other resources than we do. We expect to be subject
to competition from numerous other entities that currently operate or intend to
operate in the pharmaceutical industry. We also face competition for the
acquisition or licensing of new product opportunities from other companies.
Our sales efforts for generic products compete with domestic and
international companies and generic divisions of large brand pharmaceutical
companies. Some of these companies are already engaged in the development of
controlled-release and immediate-release drug delivery technologies and
products, and offer a wider variety of generic products to their customers. In
other instances, our competition may arise from manufacturers who decide to
undertake development of these products or from companies whose brand products
are losing patent and other bases for marketing exclusivity. Generally, there is
a unit price decline as the number of generic competitors increases. The timing
of these price decreases is unpredictable and can result in significantly
reduced profitability for a generic product. In addition, our generic products
may be affected by competition involving the corresponding brand product,
including the introduction and promotion of either alternative brand versions or
OTC versions of such products.
In the sales efforts for our brand products, we compete with large
domestic and international brand pharmaceutical companies with significantly
larger and more experienced sales forces and significantly greater financial
resources to support their products. As these pharmaceutical companies compete
aggressively to have their products included in formularies, our lack of a broad
range of brand products places us at a competitive disadvantage when competing
for inclusion on some MCO formularies. Our brand sales may also be affected by
the introduction of new brand products in the same therapeutic class and by the
advent of generic competition for our products.
23
In our pharmaceutical distribution business, we compete with a number
of large wholesalers and other distributors of pharmaceuticals, including
McKesson Corporation, AmerisourceBergen Corporation and Cardinal Health, Inc.,
which market both brand and generic pharmaceutical products to their customers.
We believe that increased competition, the growing role of MCOs, the formation
of buying groups and competition between manufacturers could result in increased
price erosion and competition for market share.
IF WE ARE UNABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE NEW PRODUCTS, OUR
PROFITABILITY WILL DECLINE.
Our future results of operations will depend to a significant extent
upon our ability to successfully develop and successfully commercialize new
generic products and brand products, in a timely manner. We can encounter
numerous difficulties in developing and commercializing new products, including:
o scaling-up production to commercial levels;
o remaining in compliance with all regulatory standards;
o securing, on commercially reasonable terms, the active
pharmaceutical ingredients and other ingredients required for
our products;
o receiving requisite regulatory approvals for these products in
a timely manner;
o avoiding the commercialization delays which result from the
listing of one or more patents in the Orange Book (resulting
in one or more 30-month stays, depending upon when the ANDA or
NDA is filed) or from the pediatric or marketing exclusivity
rights belonging to others; and
o successfully defending legal actions brought by our direct
competitors or others who seek to prevent or delay the
commercialization of our product.
These and other difficulties may delay or prevent the marketing of our
products, including products being developed in collaboration with others. We
cannot guarantee that any investment we make in developing products will be
recouped, even if we are successful in commercializing those products.
LITIGATION CLAIMING THAT WE INFRINGE THE PROPRIETARY RIGHTS OF THIRD PARTIES,
AND OUR OTHER LITIGATION MAY DELAY OR PREVENT US FROM MANUFACTURING AND SELLING
SOME OF OUR PRODUCTS OR RESULT IN SUBSTANTIAL DAMAGES CLAIMS.
The manufacture, use and sale of generic and brand products have been
the subject of substantial litigation in the pharmaceutical industry,
particularly in the context of Paragraph IV litigation involving the ANDAs and
NDAs we have filed with the FDA. These lawsuits can, and have, delayed or
prevented the marketing of our ANDA and NDA products and we anticipate that
additional actions may be commenced in the future.
The outcome of patent litigation is difficult to predict because of the
uncertainties inherent to litigation. Our results of operations, financial
condition and cash flows could be adversely affected by a delay in obtaining FDA
approval to market our products as a result of patent litigation, a delay in
obtaining judicial decisions in such litigation, the expense of litigation
whether or not we are successful, the resulting diversion of management's and
our technical personnel's attention, or an adverse outcome in such litigation,
which could prevent us from commercializing any affected products or result in
substantial damages imposed on us or a substantial financial settlement paid by
us.
24
Moreover, we often encounter substantial delays in obtaining judicial
decisions in connection with patent litigation. During this delay, additional
competition may arise, the brand product may be offered as a licensed generic or
an over-the-counter product, other brand products may be introduced and promoted
to prescribers instead of or in addition to the brand, additional exclusivities
may be awarded to the brand product, additional patents that cover the brand
product may issue or be listed in the Orange Book, the labeling of the brand
product may change or other matters occur that could delay generic competition
or lessen our economic opportunity for our product.
As we could invest a significant amount of time and expense in the
development of our generic products only to be subject to significant additional
delay and changes in the economic prospects for our product, we may be faced
with the decision whether we should commercialize our product prior to final
resolution of our pending litigation. The risk involved in marketing these
products can be substantial because the remedies available to the owner of a
patent for infringement could include, among other things, damages measured by
the profits lost by the patent owner and not by the profits earned by the
infringer. Because of the discount pricing typically involved with generic
products, patented brand products generally realize a significantly higher
profit margin than generic products. In the case of a willful infringer, the
definition of which is unclear, these damages may even be trebled. This profit
differential can act as a disincentive to the patent owner to settle patent
litigation on terms that could allow our products to be marketed upon the
settlement of such litigation. Thus, in order to reap the economic benefits of
some of our products, we may decide to risk an amount, which exceeds the profit
we anticipate making on our product, or even the selling price for such product.
In addition to the risks associated with patent litigation described
above, we are also involved in the other litigation matters more particularly
described in Item 3 "LITIGATION." An adverse judgment in any of our pending or
future litigation matters could adversely affect our results of operations,
financial condition and cash flows. Our failure to prevail in any of the
litigation matters reflected in Item 3 "LITIGATION," particularly the antitrust
matters therein described, as well as Item 1 - "PATENT INFRINGEMENT LITIGATION"
could result in material damages or adversely affect our results of operations,
financial condition and cash flows.
OUR BUSINESS COULD SUFFER AS A RESULT OF MANUFACTURING ISSUES.
The continued increase in the amount of products we market and have
pending at the FDA requires us to continue to expand our manufacturing
capabilities, including making changes to our manufacturing facilities in
Florida, and readying our North Carolina facility, which we purchased in
December 2002. The timely completion of these efforts is necessary for us to
have sufficient manufacturing capacity for the anticipated quantities of our
existing products and the products we expect to market in the future, and will
require significant levels of capital investment. Our inability to complete our
construction and conversion projects, or adequately equip the facilities in a
timely manner, could adversely affect our results of operations, financial
condition and cash flows.
Our manufacturing and other processes utilize sophisticated equipment,
which sometimes requires a significant amount of time to obtain and install.
Although we endeavor to properly maintain our equipment and spare parts on hand,
our business could suffer if certain manufacturing or other equipment, or a
portion or all of our facilities were to become inoperable for a period of time.
This could occur for various reasons, including catastrophic events such as
hurricane or explosion, but also equipment failures and/or delays in obtaining
components or replacements thereof, delays in receiving FDA approval of our
North Carolina facility, as well as equipment issues, construction delays or
defects and other events, both within and outside of our control.
25
We sometimes file an ANDA or NDA based on study results utilizing
product batches that are smaller than what we anticipate may be required for the
commercial launch of that product. Thus, in order to manufacture these products
for commercial launch, we must "scale-up" our manufacturing process for use on
larger equipment, in accordance with FDA regulations. Our results of operations,
financial condition and cash flows could be adversely affected if we are unable
to successfully scale-up any of our significant products or if successful
scale-up of any such product is delayed.
We have at times operated some of our manufacturing facilities on a
24-hour a day, 7-day a week production cycle in order to meet the market demand
for current and anticipated products. Operating on that basis and meeting the
anticipated market demand requires minimal equipment failures and product
rejections. However, because we manufacture products that employ a variety of
technology platforms, some of our manufacturing capabilities may at times be
over-utilized, while others may be under-utilized, resulting in inefficiencies,
equipment failures and rejection lots. As discussed in this report, we are
working to improve the efficiencies of our manufacturing process. Until our
manufacturing processes are optimized, and our manufacturing facilities are
expanded, we may have difficulty at times fulfilling all of the market demand
for our existing and future products, which could adversely affect our results
of operations, financial condition and cash flows (See RISK FACTORS - RISKS
RELATING TO THE PHARMACEUTICAL INDUSTRY GENERALLY AND TO ANDRX SPECIFICALLY).
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR TECHNOLOGY, OUR BUSINESS COULD
SUFFER.
Our success with the products that we develop will depend, in part, on
our ability to obtain patent protection for these products. We currently have a
number of U.S. and foreign patents issued and pending. We cannot be sure that we
will receive patents for any of our patent applications. If our current and
future patent applications are not approved or, if approved, such patents are
not upheld in a court of law or are circumvented by our competitors, it may
reduce our ability to competitively market our products.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, through confidentiality agreements with our partners,
customers, employees and consultants. It is possible that one or more of these
agreements will be breached or that they will not be fully enforceable in every
instance, and that we will not have adequate remedies for any such breach. It is
also possible that our trade secrets will become known or independently
developed by our competitors.
If we are unable to adequately protect our technology, our results of
operations, financial condition and cash flows could be adversely affected.
WE MAY NEED TO RELY ON LICENSES TO PROPRIETARY TECHNOLOGIES, WHICH MAY BE
DIFFICULT OR EXPENSIVE TO OBTAIN.
We may need to obtain licenses to patents and other proprietary rights
held by third parties to develop, manufacture and market products. If we are
unable to obtain these licenses or unable to obtain these licenses on
commercially reasonable terms in a timely manner, our ability to commercially
exploit one or more of our products may be inhibited or prevented.
26
WE MAY HAVE TO PAY ADDITIONAL TAX AS A RESULT OF AUDITS BY THE INTERNAL REVENUE
SERVICE.
Our federal income tax returns for the years 1999 to 2002 are currently
under audit by the Internal Revenue Service. Despite our belief that our tax
return positions are supportable, our policy is to establish reserves for taxes
that may become payable in future years as a result of an examination by tax
authorities. While it is difficult to predict the final outcome of any
particular tax matter, we believe that our tax reserves provide an adequate
allowance for such contingencies. The tax reserves are analyzed periodically and
adjustments are made to the tax reserves, as events occur to warrant such
adjustment. Our effective tax rate and cash flow could be materially impacted by
the ultimate resolution of our tax positions.
OUR OPERATIONS COULD BE DISRUPTED IF OUR INFORMATION SYSTEMS FAIL OR IF WE ARE
UNSUCCESSFUL IN IMPLEMENTING NECESSARY UPGRADES.
Our business depends on the efficient and uninterrupted operation of
our computer and communications software and hardware systems and our other
information technology. We are in the process of implementing significant
upgrades to our information systems, including the implementation and validation
of our JD Edwards ERP software. If our systems were to fail or we were unable to
successfully expand the capacity of these systems or to integrate new
technologies into our existing systems, our operations and financial results
could suffer.
THE LOSS OF OUR KEY PERSONNEL COULD CAUSE OUR BUSINESS TO SUFFER.
The success of our present and future operations will depend, to a
significant extent, upon the experience, abilities and continued service of key
personnel, including senior corporate and divisional executive officers. We
cannot be assured that we will be able to attract and retain key personnel, and
our failure to do so could adversely affect our results of operations, financial
condition and cash flows.
SALES OF OUR BRAND PRODUCTS FACE VARIOUS OBSTACLES.
Net sales of our brand products could be adversely affected by low
prescription levels during the early stages of a brand product's launch, generic
introductions, seasonality (for cough and cold products), the dedication of our
sales force's efforts to a particular product and the corresponding decrease in
attention then given to our other products, our ability to effectively expand
our sales force or to target all or a portion of such force to different medical
practitioners, and other factors.
Our lack of a broad range of brand products can place us at a
competitive disadvantage when competing for inclusion on certain MCO and PBM
formularies, which could adversely affect our results of operations, financial
condition and cash flows. In the event we are unable to have our brand products
included on a wide variety of formularies, our brand products may not be widely
used by the MCO patient population, which is substantial.
Another obstacle we face in our brand business involves the Altocor
name. Kos Pharmaceuticals alleges that there is a likelihood of confusion
between Kos' trademark, Advicor, and Altocor, for which we have applied for a
registered trademark. Though the U.S. District Court of New Jersey denied Kos'
motion for a preliminary injunction prohibiting our use of the Altocor name in
September 2003, Kos has appealed that ruling to the U.S. Court of Appeals for
the Third Circuit. Should we be required to change the Altocor name, our sales
and marketing efforts for this product would be impaired, and could adversely
affect our results of operations and cash flows.
27
In addition, the continued commercial viability of our Entex product
line is uncertain. On October 17, 2003, FDA issued a draft compliance policy
guide with respect to pharmaceutical products that are presently permitted to be
on the market and sold by prescription without an approved ANDA or NDA, such as
the Entex line of products. This draft guidance is intended to provide notice
that once FDA approves a version of such product, unapproved drug products such
as our Entex product line may be subject to FDA enforcement action at any time,
and that FDA will evaluate each product on a case-by-case basis. In determining
whether to permit a grace period, and how long such grace period will be, FDA
indicates that it will consider factors such as: (1) the effects on the public
health of immediate removal, (2) the difficulty of conducting any required
studies, and preparing and obtaining approval of an application, (3) the burden
on affected parties, (4) FDA's available enforcement resources, and (5) any
special circumstances. Though this guidance is only a draft, we are continuing
to assess this matter, including whether to seek FDA approval to market some or
all of the Entex line of products as prescription products or OTC products, as
well as the FDA's requirements for such submissions. If we are required to stop
selling the Entex line of products or such products are required to be sold as
OTC products, our results of operations and cash flows would be adversely
affected.
OUR POLICIES REGARDING RETURNS, ALLOWANCES AND CHARGEBACKS MAY REDUCE OUR
REVENUES IN FUTURE FISCAL PERIODS.
Consistent with practices in the generic products industry, we have a
liberal return policy and have been willing to give customers post-sale
inventory allowances. Under these arrangements, from time to time, we provide
credits, known as shelf stock adjustments, to our customers for decreases that
we make to the selling price of our products, in an amount approximating the
decrease in the value of the inventory held by our customers as of the date of
that price reduction. Due to the competitive nature of the generic products
industry, prices to customers are subject to frequent and significant declines.
As a result, we may provide significant credits to our customers who are then
holding inventories of these products, which could reduce revenue and gross
profit for the period the credit is provided. We also have indirect customer
arrangements, whereby those customers purchase our products at prices negotiated
with us, but obtain those products through wholesalers they independently
select. In these transactions, we provide a chargeback or credit to the
wholesaler in an amount equal to the difference between our invoice price to the
wholesaler and the contract price for the indirect customer.
It is also a common practice in the pharmaceutical industry for brand
manufacturers to offer customers buy-in allowances on initial purchases prior to
promotion activities by the manufacturer. Purchases by customers are generally
subject to the right of return or exchange as a result of there being a limited
number of large customers. For example, in connection with Altocor, substantial
incentives were granted to customers in connection with the product launch,
including the right of return of initial stocking after nine months.
Although we establish reserves based on our prior experience and our
best estimates of the impact that these policies may have in subsequent periods,
we cannot ensure that our reserves are adequate or that actual product returns,
allowances and chargebacks will not exceed our estimates and adversely affect
our revenues.
28
OUR SALES OF GENERIC PRODUCTS MAY SUFFER IF THE USE OF SUCH PRODUCTS IS LIMITED
THROUGH LEGISLATIVE, REGULATORY AND OTHER EFFORTS.
Pharmaceutical companies increasingly have used state and federal
legislative, regulatory and other means to delay generic product competition.
These efforts have included:
o pursuing new patents that could extend patent protection for
their brand products and delay the launch of generic
competition;
o pursuing pediatric exclusivity for their brand products;
o using the Citizen Petition process to request amendments to
FDA standards;
o seeking changes to U.S. Pharmacopeia, an organization that
publishes industry recognized compendia of drug standards;
o attaching patent extension amendments to unrelated federal
legislation; and
o engaging in state-by-state initiatives to enact legislation
that restricts the substitution of certain generic products.
If pharmaceutical companies are successful in limiting the use of
generic products through these or other means or in securing changes in FDA
regulations, policies or procedures, the approval of our generic products may be
adversely affected, which could adversely affect our results of operations,
financial condition and cash flows.
SALES OF OUR GENERIC AND BRAND PRODUCTS MAY BE ADVERSELY AFFECTED BY THE
CONSOLIDATION OR LOSS OF OUR CUSTOMERS.
Approximately three wholesale drug distributors and 15 major retail
drug store chains comprise a significant part of the distribution network for
both brand and generic pharmaceutical products in the U.S. This distribution
network is continuing to undergo significant consolidation marked by mergers and
acquisitions among wholesalers and the growth of large retail drug store chains
that control a significant share of the market. As a result of this
concentration of our customer base, the loss of any of these customers, or
significant defaults in payment or reductions in purchases from these customers,
could adversely affect our results of operations, financial condition and cash
flows.
IF WE ARE UNABLE TO OBTAIN SUFFICIENT SUPPLIES FROM KEY SUPPLIERS THAT IN SOME
CASES MAY BE THE ONLY SOURCE OF RAW MATERIALS, OUR ABILITY TO DELIVER OUR
PRODUCTS TO THE MARKET MAY BE IMPAIRED.
Some of the raw materials used in the manufacture of our generic and
brand products are available from limited sources and, in some cases, a single
source. Any curtailment in the availability of these raw materials could be
accompanied by production or other delays and, in the case of products for which
only one raw material supplier exists or has been approved by the FDA, could
result in a material loss of sales, with consequential adverse effects on our
results of operations, financial condition and cash flows. In addition, because
raw material sources for pharmaceutical products must generally be identified
and approved by regulatory authorities, changes in raw material suppliers may
result in production delays, higher raw material costs and loss of sales and
customers. We also obtain a portion of our raw materials from foreign suppliers,
and our arrangements with these suppliers are subject to, among other risks, FDA
approval, governmental clearances, export duties, political instability,
currency fluctuations and restrictions on the transfer of funds abroad.
29
We have at times experienced problems as a result of a lack of raw
materials availability. These problems result from the supplier's delay in
providing these materials, delays in getting these materials through customs,
the closure of a particular materials source and the unavailability of a
comparable replacement, and defects in the materials received by us. While we
have improved our efforts to actively identify alternative and redundant sources
of raw materials and negotiated lower prices for current raw materials, any
inability to obtain raw materials on a timely basis, or any significant price
increases that cannot be passed on to customers, could adversely affect our
results of operations, financial condition and cash flows.
OUR DISTRIBUTION BUSINESS CONCENTRATES ON GENERIC PRODUCTS AND IS THEREFORE
SUBJECT TO THE RISKS OF THE GENERIC INDUSTRY.
Our ability to provide consistent, sequential quarterly growth is
affected, in large part, by our participation in the launch of new products by
us and other generic manufacturers and the subsequent advent and extent of
competition encountered by these products. This competition can result in
significant and rapid declines in the prices of these products and a
corresponding decrease in the net sales of our distribution operations. Our
margins can also be affected by the risks inherent to the generic industry.
WE MAY HAVE DIFFICULTY IMPLEMENTING IN A TIMELY MANNER THE INTERNAL CONTROLS
ASSESSMENT PROCEDURES NECESSARY TO ALLOW OUR MANAGEMENT TO REPORT ON THE
EFFECTIVENESS OF OUR INTERNAL CONTROLS.
Pursuant to Section 404 of Sarbanes-Oxley, we will be required to furnish an
internal controls report of management's assessment of the effectiveness of our
internal controls as part of our Annual Report on Form 10-K for the fiscal year
ending December 31, 2004. Our auditors will then be required to attest to, and
report on, our assessment. In order to issue our report, our management must
document both the design for our internal controls and the testing processes
that support management's evaluation and conclusion. Our management has begun
the necessary processes and procedures for issuing its report on our internal
controls. Moreover, in the event we make a significant acquisition, we will face
significant challenges in implementing the required processes and procedures in
our acquired operations. There can be no assurance that we will be able to
complete the work necessary for our management to issue its management report in
a timely manner, or that management will be able to report that our internal
controls over financial reporting are effective.
OUR BUSINESS COULD SUFFER IF WE EXPERIENCE DIFFICULTIES IN INTEGRATING ANY
TECHNOLOGIES, PRODUCTS AND BUSINESSES WE ACQUIRE, OR IF WE INCUR SIGNIFICANT
CHARGES TO EARNINGS WITH RESPECT TO SUCH ACQUISITIONS.
We regularly review potential acquisitions of technologies, products
and businesses. Acquisitions typically entail many risks and could result in
difficulties in integrating the operations and personnel of companies that we
acquire and the technologies and products that we acquire. If we are not able to
successfully integrate our acquisitions, we may not obtain the advantages that
the acquisitions were intended to create, which could adversely affect our
results of operations, financial condition and cash flows. In addition, in
connection with acquisitions, we could experience disruption in our business or
employee base. There is also a risk that key employees of companies that we
acquire or key employees necessary to successfully commercialize technologies
and products that we acquire may seek employment elsewhere, including with our
competitors.
As a result of acquiring businesses or products or entering into other
significant transactions, we may incur significant charges to earnings for
merger and related expenses, including transaction costs, closure costs and
acquired in-process research and development charges. These costs may include
substantial fees for investment bankers, attorneys, accountants and other
advisors and severance and other closure costs associated with the elimination
of duplicate or discontinued products, operations and facilities. Charges that
we may incur in connection with acquisitions could adversely affect our results
of operations for a particular quarter or annual period.
OUR BUSINESS COULD SUFFER FROM RISING INSURANCE COSTS, THE UNAVAILABILITY OF
INSURANCE OR OTHER EVENTS.
The cost of insurance, including directors and officers, workers'
compensation, product liability, business interruption and general liability
insurance, rose significantly in 2003 and may continue to increase in 2004. In
response, we may increase deductibles and/or decrease some coverages to mitigate
these costs. These increases, and our increased risk due to increased
deductibles and reduced coverages, could adversely affect our results of
operations, financial condition and cash flows.
30
The design, development, manufacture, sale and utilization of our
products and the products we distribute involve an inherent risk of product
liability claims and represent a continuing risk, as no reasonable amount of
insurance can fully protect against all such risks because of the potential
liability inherent in the business of producing or distributing pharmaceuticals
for human consumption or use. Although we currently maintain product liability
insurance in amounts we believe to be commercially reasonable, product liability
insurance is expensive and may not be available in the future on acceptable
terms or in sufficient amounts, if it is available at all, particularly for
certain classes of products. A claim brought against us, even if covered by our
insurance policies, could adversely affect our results of operations, financial
condition and cash flows.
Moreover, since we currently operate only one manufacturing facility,
any disruption of our ability to manufacture our pharmaceutical products could
adversely affect our results of operations, financial condition and cash flows.
Business interruption insurance is expensive and may not be available in amounts
that will fully protect us from such occurrences, whether caused by casualties,
such as hurricanes or fire, or other events, which may or may not be within our
control.
WE HAVE ENTERED INTO A CONSENT DECREE WITH THE SEC, AND FUTURE SEC
INVESTIGATIONS COULD RESULT IN THE IMPOSITION OF SEVERE PENALTIES.
On May 6, 2003, we entered into an administrative consent Order with
the SEC pursuant to which, without admitting or denying the SEC's findings, we
agreed to cease and desist from committing or causing any future violations of
certain of the reporting provisions of the Securities Exchange Act of 1934. The
order related to the SEC's finding that Cybear had improperly recognized
approximately $1.3 million in revenue (representing approximately $27,000 in
gross profit) pursuant to a joint venture between Andrx and Cybear. In a
separa