UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2002.
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-18549
SICOR Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 33-0176647 |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
19 Hughes
Irvine, California 92618
(Address of principal executive offices and zip code)
(949) 455-4700
(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:
Common Stock, Par Value $.01
(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 ý No o
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. ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ý No o
The aggregate market value of the shares of common stock held by non-affiliates of the Company, based upon the closing price of the common stock on June 30, 2002 as reported on the Nasdaq National Market, was approximately $1.7 billion. Shares of common stock held by each executive officer and director and by each person who owned 10% or more of the outstanding shares of common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
At February 28, 2003, there were 117,674,769 shares of common stock, $.01 par value, of the registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(To the extent indicated herein)
The registrant's definitive proxy statement filed in connection with solicitation of proxies for its Annual Meeting of Stockholders to be held on May 20, 2003 is incorporated by reference into Part III of this Form 10-K.
Forward-Looking Statements
Some of the information in this Form 10-K contains forward-looking statements that involve risks and uncertainties within the meaning of Section 27A of the Securities Act of 1933. These statements are only predictions and you should not unduly rely on them. Our actual results could differ materially from those anticipated in the forward-looking statements made or incorporated by reference in this Form 10-K as a result of a number of factors, including, but not limited to, the risks faced by us described below and elsewhere in this Form 10-K, including risks and uncertainties in:
We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors listed above, as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this Form 10-K could have a material adverse effect on our business, operating results and financial condition.
You should read and interpret any forward-looking statements together with our other filings with the SEC.
Any forward-looking statement speaks only as of the date on which that statement is made. Unless required by U.S. federal securities laws, we will not update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made.
Overview
We are a vertically integrated, multinational specialty pharmaceutical company that focuses on generic finished dosage injectable pharmaceuticals, active pharmaceutical ingredients, or APIs, and generic biopharmaceuticals. Using our internal research and development capabilities, together with our operational flexibility and our manufacturing and regulatory expertise, we are able to take a wide variety of products from the laboratory to the worldwide market. Leveraging these capabilities, we concentrate on products and technologies that present significant barriers to entry or offer first-to-market opportunities. Our goal is to become a leading multinational developer, manufacturer and marketer of injectable pharmaceutical and biopharmaceutical products.
We operate our business through several subsidiaries (see Note 15 to the 2002 audited consolidated financial statements filed as part of this Form 10-K). The Company evaluates performance resource allocation based on the geographic location of its business units, which are the United States, Italy, Mexico, Lithuania, and Switzerland.
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Our Finished Dosage Injectable Pharmaceuticals Business
We have broad capabilities in the development, manufacture and marketing of generic finished dosage injectable pharmaceutical products. Our finished dosage injectable pharmaceutical products are primarily used in hospitals and clinics for critical care/anesthesiology and oncology. Through our own sales force and our marketing partners, including Baxter Healthcare Corporation ("Baxter") and Faulding Pharmaceutical Co. ("Faulding"), we currently market products in the United States, Europe, Latin America and various developing nations. We conduct our finished dosage injectable pharmaceutical business from our facilities in California and Mexico.
We have sales and distribution agreement with both Baxter and Faulding and maintain our own sales force that covers the major hospital and alternate site markets in the United States. As collective purchasing agreements have become increasingly important to healthcare providers as a means to control costs, our sales and marketing team has established relationships with hospital group purchasing organizations, managed care groups and other large healthcare purchasing organizations.
In the United States, our product development focuses on generic finished dosage injectable pharmaceuticals primarily in the areas of critical care/anesthesiology and oncology.
Our Active Pharmaceutical Ingredients Business
We manufacture APIs for our own finished dosage manufacturing facilities located in the United States and Mexico, and for sale to other pharmaceutical companies located primarily in North America, the European Union and Asia for use in finished dosage pharmaceutical products, including anti-inflammatories, oncolytics, immunosuppressants and muscle relaxants. We produce APIs in our facilities in Italy and Mexico for oral, pulmonary, intravenous and topical administration, using both chemical synthesis and fermentation in compliance with the current Good Manufacturing Practices ("cGMP") regulations of the United States Food and Drug Administration ("FDA").
In addition to our production of APIs for generic products, we also provide custom manufactured APIs for a variety of proprietary drug manufacturers. We believe our development and regulatory expertise and our proven manufacturing capabilities make us a preferred API partner for many multinational pharmaceutical companies. Our API capabilities have also led to partnership opportunities where we manufacture and market finished dosage pharmaceuticals for our customers in addition to producing the API.
Our Biopharmaceuticals Business
Our biopharmaceutical operations provide us with an established platform for manufacturing and marketing biopharmaceutical products for developing nations initially, followed by Western Europe and, eventually, the United States.
In July 2001, we acquired Sicor Biotech U.A.B. ("Sicor Biotech", formally Biotechna U.A.B.), a company in Lithuania with state-of-the-art facilities, which develops and manufactures generic recombinant protein products that are sold through agents and distributors. We acquired Sicor Biotech from Bio-Rakepoll N.V., a wholly-owned subsidiary of Rakepoll Finance. Carlo Salvi, Vice Chairman of our board of directors, is indirectly the majority owner of Rakepoll Finance. A committee composed of two of our disinterested directors approved the Sicor Biotech acquisition.
Sicor Biotech's predecessor was established in February 1989 by a team of scientists previously associated with a Lithuanian state research institute of applied enzymology. With protein development expertise dating back to at least 1989, Sicor Biotech provides us with the opportunity to enter the field of biotechnology, as it combines scientific proficiency in genetics and molecular biology with practical experience in producing therapeutic proteins on a commercial scale. Our Sicor Biotech manufacturing facility offers bacterial fermentation and cell culture capabilities, as well as state-of-the-art research and
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development laboratories. This facility has been constructed in accordance with both European Medicines Evaluation Agency ("EMEA") and FDA standards.
Through Sicor Biotech, we currently sell recombinant human interferon [alpha]-2b, ("IFN [alpha]-2b"), and a human growth hormone ("hGH"). We currently sell IFN [alpha]-2b in Lithuania, Latvia, Belarus, Korea, Pakistan, Bulgaria, Russia, Kazakhstan, Ukraine and Moldova, and hGH in Lithuania. We intend to market IFN [alpha]-2b in Algeria, Mexico and Southeast Asia in the future and have pending agreements or agreements in place to begin sales of IFN [alpha]-2b in Armenia, Azerbaijan, Georgia, and Turkey.
Our near-term goal is to submit an application for European marketing approval for IFN [alpha]-2b to the EMEA, while maximizing our sales of IFN [alpha]-2b in our current markets. Production of IFN [alpha]-2b is currently underway for clinical trials scheduled to begin in the second quarter of 2003, and we plan to submit an application for IFN [alpha]-2b with the EMEA in 2004. We are currently developing several generic equivalents to existing biopharmaceutical products, including granulocyte colony stimulating factor, or G-CSF, erythropoietin, ("EPO"), interferon [alpha]-2a ("IFN") [alpha]-2a, and interferon [beta], ("IFN [beta]").
Research and Development
Substantially all of our sales are derived from products which are the result of our own research and development efforts. We believe that our research and development activities have been a principal contributor to our achievements to date and that our future performance will depend, to a significant extent, upon the results of these activities. Accordingly, we are committed to the development of new products.
As of December 31, 2002, we had a total of 98 employees dedicated to research and development activities across our worldwide operations. We expect to increase our expenditures for research and development over the next five years.
Manufacturing
Our manufacturing operations are conducted in eight facilities in California, Italy, Mexico and Lithuania, with the capability to produce either APIs or finished dosage pharmaceuticals. We have a dedicated and experienced workforce as well as facilities that are specifically dedicated to the production of biopharmaceuticals, oncolytics and corticosteroids.
Our Irvine, California facility, which is our largest and most diverse finished dosage facility, provides us with the capability to formulate, fill, label and package finished dosage forms of injectable pharmaceutical products. The facility has a broad filling capability, including the ability to terminally sterilize or aseptically fill syringes and single and multiple dose vials in both glass and plastic. The facility also has the capability to lyophilize, or freeze dry, products. Products from this facility are sold principally in the United States.
In our Irvine, California facility, we also operate a contract manufacturing business focused on manufacturing finished dosage injectable products for biotechnology and pharmaceutical companies. This business offers a range of manufacturing services, including formulation development and optimization, analytical methods development and validation, regulatory support and finished dosage manufacturing on both pilot and commercial scales. Revenues from our contract manufacturing business accounted for approximately 7%, 8% and 4% of our consolidated revenues in 2002, 2001 and 2000, respectively.
Our Mexican finished dosage pharmaceutical operation is located in Mexico City. Our wholly-owned subsidiary, Lemery, S.A. de C.V. ("Lemery"), produces drugs in finished dosage form, including injectable oncolytic agents and critical care products. These products are sold in Mexico and exported to countries in Central and South America, the Middle East and Eastern Europe.
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The majority of our API production is carried out at two manufacturing sites in Italy. The manufacturing facilities are located near Milan and are regularly inspected by the FDA. Our wholly-owned subsidiary, SICOR-Società Italiana Corticosteroidi S.p.A.("Sicor S.p.A."), is a major producer of oncolytic agents, steroids and certain other products in bulk drug form, which are manufactured through fermentation or chemical synthesis processes. These facilities also supply specialty bulk drug substances to our finished dosage pharmaceutical facilities in Irvine, California and Mexico City, Mexico as well as other drug manufacturers around the world.
Our Mexican API operation is located in Toluca, near Mexico City, and produces principally steroid products for export to various countries. We recently expanded this cGMP compliant facility to produce oncolytic agents.
Our biopharmaceutical operations are conducted in Vilnius, Lithuania and Toluca, Mexico. We have constructed a research and development center and state-of-the-art protein manufacturing facility in Vilnius that has the capability to produce IFN [alpha]-2b and hGH, as well as other biotherapeutics. This new facility can produce proteins by biosynthesis in bacteria, yeast and mammalian cells and was designed and built according to the cGMP. Our second manufacturing facility in Vilnius, which is compliant with the requirements of the World Health Organization, is used for the manufacturing of IFN [alpha]-2b and hGH, process development and scale-up work. Our finished dosage biopharmaceutical manufacturing facility in Toluca, Mexico became operational in the first quarter of 2002, and was designed to meet the regulatory requirements of the United States and the European Union. Additionally, we have invested approximately $4.3 million in Tianjin Hualida Biotechnology Co. Ltd. ("Hualida"), a biopharmaceutical research and development and manufacturing facility located in China. We hold a 45% equity interest in Hualida.
Each of our manufacturing facilities is maintained in accordance with applicable regulatory agency standards. We consider our manufacturing facilities to be key strategic assets to us. We believe that we have adequate manufacturing capacity to meet the current and planned future sales demand for our products. See Item 2—Properties.
Patents, Trademarks and Trade Secrets
Our policy is to protect our technology by, among other things, filing patent applications for technology that we consider important to the development of our business. We intend to file additional patent applications, when appropriate, relating to improvements in our technology and other specific products that we develop. We also rely on trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position.
In January 1999, we received an Abbreviated New Drug Application ("ANDA"), approval from the FDA for the first generic version of propofol and in November 2000, we received the first of two U.S. patents from the U.S. Patent and Trademark Office for our propofol formulation.
Competitors may have filed patent applications for, or may obtain patents and proprietary rights relating to, products or processes competitive with our products or processes. Accordingly, there can be no assurance that our patent applications will result in patents being issued or that, if issued, the patents will afford protection against competitors with similar technology; nor can there be any assurance that any patents issued to us will not be infringed or circumvented by others, or that others will not obtain patents that we would need to license or circumvent. There can be no assurance that licenses that might be required for our processes or products would be available on reasonable terms. If we do not obtain these licenses, product introductions could be delayed or foreclosed. In addition, there can be no assurance that our patents, if issued, would be held valid by a court. Litigation to defend against or assert claims of infringement or otherwise related to proprietary rights could result in substantial costs to us.
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We also rely upon unpatented trade secrets, and no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets or disclose our technology. There can be no assurance that we can meaningfully protect our rights to our unpatented trade secrets.
Competition
Significant competition exists in our industry niche. Our competitors include Abbott Laboratories, Faulding, a subsidiary of Mayne Group Limited, American Regent, a subsidiary of Luitpold Inc., Bedford Laboratories, a division of Boehringer Ingelheim Corp., Elkins-Sinn, Inc., a subsidiary of Baxter, American Pharmaceutical Partners, Pharmacia, Inc., Bristol-Myers Squibb Co., AstraZeneca PLC, Novartis Pharmaceuticals Corporation, Schering-Plough Corporation, GlaxoSmithKline, and Teva Pharmaceuticals U.S.A. Many of these companies have been in business for a longer period of time, have a greater number of products on the market and have substantially greater resources than we do.
Manufacturers of off-patent brand name products may reduce prices in order to keep their brand name products competitive with equivalent products. Additionally, several manufacturers of off-patent brand name products create generic subsidiaries, purchase generic companies or license their products prior to or as relevant patents expire. No further regulatory approvals are required for a brand manufacturer to sell its pharmaceutical products directly or through a third party to the generic market, nor do these manufacturers face any other significant barriers to entry into that particular market.
We began to market our propofol product in the United States in 1999. While no other company has introduced its own generic equivalent since then, additional competitors can be expected to enter the market at any time. In 2002, Elkins-Sinn, then a subsidiary of Wyeth, filed an ANDA for propofol with an unidentified preservative. As a result of the acquisition of Elkins-Sinn by Baxter, rights to this propofol product were required to be divested, and were transferred to Faulding. The ANDA contained a Paragraph IV certification pursuant to the Hatch-Waxman Act, and AstraZeneca instituted a patent infringement suit against Wyeth. Under the Hatch-Waxman Act, approval of an ANDA is automatically stayed for a period of 30 months. Accordingly, we do not believe that the Faulding propofol product is likely to be marketed in the United States until at least 2005. We believe that the difficulty presented by formulating propofol with an appropriate microbial retardant may delay the entry of competition and that, once their formulations have been introduced, they may be less desirable than ours. In addition to competitors working on formulations of propofol, non-propofol injectable general anesthetics could compete with our propofol product in the future.
Government Regulation
In the United States, we are subject to extensive, detailed and evolving regulation by the federal government, principally the FDA, and to a lesser extent, by state government agencies. The Federal Food, Drug and Cosmetic Act, and other federal government statutes and regulations govern or influence the testing, manufacturing, packaging, labeling, storing, record keeping, safety, approval, advertising, promotion, sale and distribution of our products. We are also subject to extensive industry regulation in other jurisdictions, including the European Union, and may be subject to future legislative and other regulatory developments concerning our products and the healthcare field generally.
In the United States, the FDA requires comprehensive testing of new pharmaceutical products to indicate that these products are both safe and effective in treating the indications for which approval is sought. Testing in humans cannot be initiated until an Investigational New Drug ("IND"), exemption has been granted by the FDA. Generally, New Drug Applications ("NDAs"), are filed for newly developed branded products or for a new dosage form of previously approved drugs.
FDA approval is also required before a generic equivalent or a new dosage form of an existing drug can be marketed. If a drug has been previously approved by the FDA, an ANDA is available for
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the generic equivalent. When processing an ANDA, the FDA waives the requirement of conducting complete clinical studies, although it normally requires bioavailability or bioequivalence studies. "Bioavailability" indicates the rate and extent of absorption and levels of concentration of a drug product in the blood stream needed to produce a therapeutic effect. "Bioequivalence" compares the bioavailability of one drug product with another, and when established, indicates that the rate of absorption and levels of concentration of a generic drug in the body are the same as the previously approved drug. As compared to an NDA, an ANDA typically involves reduced research and development costs. However, there can be no assurance that any of these applications will be approved. Furthermore, the suppliers of raw materials also must be approved by the FDA. The NDA and ANDA approval process generally takes a number of years and involves the expenditure of substantial resources. Delays in the review process or failure to obtain approval of certain ANDAs or suppliers could have a material adverse effect on us.
The first generic manufacturer to file an ANDA with a Paragraph IV certification for a generic equivalent to a brand name product may be entitled to a 180-day period of marketing exclusivity under the Hatch/Waxman Act. A Paragraph IV certification asserts that the patent for the brand name product is invalid, unenforceable or not infringed. During this 180-day exclusivity period, the FDA cannot give final approval to any other generic equivalent. If we are unable to file the first ANDA with a Paragraph IV certification for a generic equivalent, our generic product may be kept off the market for 180 days after the first commercial launch of a competitor's generic product. This is important because the first generic equivalent on the market is generally able to capture a significant market share.
Prior to receiving FDA approval, we may face lawsuits relating to intellectual property rights. While these suits, instituted by brand name pharmaceutical companies, rarely result in findings of infringement or monetary settlements, they significantly delay the FDA approval process. We expect the brand name pharmaceutical companies to continue these tactics since it is a very cost effective way to delay generic competition and the subsequent cost savings for the consumer. As a result, generic drug manufacturers, including us, are often involved in lengthy, expensive patent litigation against brand name drug companies that have considerably greater resources and that are typically inclined to actively pursue patent litigation in an effort to protect their franchises.
On an ongoing basis, the FDA reviews the safety and efficacy of marketed pharmaceutical products and monitors labeling, advertising and other matters related to the promotion of these products. Our facilities, procedures and operations and testing of our products are subject to periodic inspection by the FDA, the Drug Enforcement Administration and other authorities. Additionally, the FDA conducts pre-approval and post-approval reviews and plant inspections to determine whether our systems and processes are in compliance with cGMP and other FDA regulations. The FDA may withhold approval of NDAs, ANDAs or other product applications of a facility if the facility is found to be deficient. Some of our vendors are also subject to comparable regulations and inspections.
If we fail to comply with FDA and other governmental regulations it could result in fines, compliance expenditures, total or partial suspension of production and distribution, recall or seizure of products, suspension of the FDA's review of NDAs, ANDAs or other product applications, enforcement actions, injunctions and criminal prosecution. The FDA has the authority, under certain circumstances, to rescind previously issued drug approvals.
In connection with our activities outside of the United States, we are also subject to regulatory requirements governing the testing, approval, manufacturing, labeling, marketing and sale of our products, which requirements vary from country to country. Whether or not FDA approval has been obtained for a product, approval of the product by comparable regulatory authorities of foreign countries must be obtained prior to marketing the product in those countries. The approval process may be more or less rigorous from country to country, and the time required for approval may be
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longer or shorter than that required in the United States. No assurance can be given that clinical studies conducted outside of any country will be accepted by that country, and the approval of any pharmaceutical or diagnostic product in one country does not assure that that product will be approved in another country.
Employees
As of December 31, 2002, we employed 1,905 individuals worldwide, of which 677, 234, 835, 142, and 17 individuals were employed in the United States, Italy, Mexico, Lithuania, and Switzerland, respectively. As is customary in Italy and Mexico, unions represent most of the employees in those locations. We have not experienced any significant labor disputes in recent years. We consider our employee relations to be good.
Management
Directors and Executive Officers
Our directors and executive officers as of December 31, 2002 are as follows:
| Name |
Age |
Position |
||
|---|---|---|---|---|
| Marvin Samson | 61 | President and Chief Executive Officer and Director | ||
| Jack E. Stover | 49 | Executive Vice President, Finance and Chief Financial Officer and Treasurer | ||
| Michael D. Cannon | 57 | Executive Vice President and Chief Scientific Officer and Director | ||
| Gianpaolo Colla | 64 | Executive Vice President, Italian Operations | ||
| Armand J. LeBlanc | 60 | Senior Vice President, Corporate Scientific Affairs and President, Gensia Sicor Pharmaceuticals, Inc. | ||
| Wesley N. Fach | 51 | Senior Vice President, General Counsel and Secretary | ||
| David C. Dreyer | 46 | Vice President, Chief Accounting Officer and Corporate Controller | ||
| Donald E. Panoz | 67 | Chairman of the Board | ||
| Carlo Salvi | 65 | Vice Chairman of the Board | ||
| Lee Burg | 62 | Director | ||
| Michael D. Casey | 57 | Director | ||
| Herbert J. Conrad | 70 | Director | ||
| J. Sanford Miller | 53 | Director | ||
| John J. Roberts | 58 | Director | ||
| Carlo Ruggeri | 53 | Director |
Marvin Samson. Mr. Samson was elected President and Chief Executive Officer in September 2001, and has been one of our directors since September 2000. He is the founder and Chief Executive Officer of Samson Medical Technologies, L.L.C., a privately held company providing hospital and alternative site pharmacists with injectable drug delivery systems and programs. He was a founder, President and Chief Executive Officer of Elkins-Sinn, Inc., now a division of Baxter Healthcare Corporation, and Marsam Pharmaceuticals, Inc. Mr. Samson served as the Chairman of the Generic Pharmaceutical Industry Association from March 1997 to June 2000. In addition, Mr. Samson is the holder of five U.S. patents pertaining to pharmaceutical manufacturing and has served on the boards of several pharmaceutical companies.
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Jack E. Stover. Mr. Stover joined SICOR Inc. as Executive Vice President, Chief Financial Officer and Treasurer in April 2002. Prior to joining the Company, Mr. Stover was a partner in The Technology Compass Group, a network of senior executives providing various services to technology based companies. From 2001 to 2002 Mr. Stover was a venture partner for Sarnoff Corporation. From 1998 to 2000 Mr. Stover was the Chief Operating and Financial Officer and Director at Gynetics, Inc. an early stage pharmaceutical company. From 1993 to 1998 Mr. Stover initiated the company's first private placement and other various merger and acquisition activities as Senior Vice President, Chief Financial Officer and Director at B. Braun Medical, Inc. a major international medical device and pharmaceutical company. From 1975 to 1993 Mr. Stover was employed by PricewaterhouseCoopers LLP (formerly Coopers & Lybrand), where since 1985 he was a partner delivering advisory services to medical and biotechnology clients. Mr. Stover earned a Bachelor's degree in Accounting from Lehigh University and is a licensed Certified Public Accountant. Mr. Stover has also served as a Director for several health care companies.
Michael D. Cannon. Mr. Cannon has been one of our directors and our Executive Vice President and Chief Scientific Officer since February 1997. Mr. Cannon was named President of our Biotechnology Division in April 2000. Mr. Cannon is a member of the board of directors of Sicor S.p.A., where he worked since the company's founding in 1983, and Director of Business Development of Alco Chemicals Ltd. in Lugano, Switzerland since 1986. From 1970 to 1982, Mr. Cannon worked at SIRS S.p.A., a manufacturer of bulk corticosteroids in Milan, Italy in a variety of technical positions.
Gianpaolo Colla. Dr. Colla has been our Executive Vice President, Italian Operations since March 1999, and was one of our directors from 1999 until 2002. In June 1999, Dr. Colla was named Chairman of the Board of Sicor S.p.A. He has served as Managing Director of Sicor S.p.A. and as a member of its board of directors since 1996, as well as in various management capacities with Sicor S.p.A. since its founding in 1983. From 1983 to 1994, Dr. Colla also collaborated with the Elemond Group, a publishing company, as Strategic Operating Planning Coordinator, and prior to this period he was Director of Mergers and Acquisitions with Fides (now KPMG LLP) from 1982 through 1983. Dr. Colla continues to serve as member of the Statutory Audit Board for several significant Italian companies. He is a Registered Statutory Auditor in Italy and graduated from Milan's Catholic University with a degree in economics and business sciences.
Armand J. LeBlanc. Mr. LeBlanc joined us as Vice President, Scientific Affairs, Gensia Sicor Pharmaceuticals in January 1996. He was appointed Senior Vice President, Corporate Scientific Affairs in June 1999 and President, Gensia Sicor Pharmaceuticals, Inc. in November 2001. Prior to joining us, Mr. LeBlanc was Vice President, Quality Assurance/Quality Control at Fujisawa USA, Inc. from 1993 to 1996. From 1976 to 1993, he was employed in various management capacities in Quality Assurance/Quality Control for Lorex Pharmaceuticals, G.D. Searle & Co., Millipore Corporation and Mallinckrodt, Inc. Prior to being employed in the pharmaceutical industry, Mr. LeBlanc was employed as a microbiologist with the FDA from 1966 to 1976. He received his master of science degree from Georgia Institute of Technology and his bachelor of science degree from Louisiana State University.
Wesley N. Fach. Mr. Fach joined us as Assistant General Counsel in January 1992 and was named Secretary in January 1993. He was appointed Vice President and Senior Legal Counsel in July 1997, and Senior Vice President and General Counsel in May 2002. Prior to joining us, Mr. Fach was legal counsel to Marrow-Tech Incorporated (now named Advanced Tissue Sciences, Inc.) from 1990 to 1992. From 1984 to 1990 he was General Counsel of IMED Corporation and from 1986 to 1990 he was Assistant General Counsel of its parent company, Fisher Scientific Group Inc. Mr. Fach received his juris doctor degree from Columbia University.
David C. Dreyer. Mr. Dreyer joined us as Vice President, Corporate Controller in August 1997 and was appointed Chief Accounting Officer in April 2000. Prior to joining us, Mr. Dreyer was Finance Director for Athena Neurosciences from 1995 to 1997, which was acquired by Élan Pharmaceuticals in
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1996. From 1986 to 1995, he was employed at Syntex Corporation as Controller of the Diagnostics Division, as well as in various other management positions in Syntex's U.S. and international pharmaceutical divisions. From 1983 to 1986, Mr. Dreyer was a practicing CPA with Arthur Andersen and Company in San Francisco. Mr. Dreyer received his bachelor of science degree in accounting from Golden Gate University in San Francisco, and is a CPA in the state of California.
Donald E. Panoz. Mr. Panoz has been Chairman of our board of directors since February 1997 and served as our Chief Executive Officer from November 1997 to August 1998. Mr. Panoz was a founder and principal shareholder of Élan Corporation, plc and was Élan's Chairman of the Board from 1970 to December 1996. Until January 1995, he held the position of Chief Executive Officer of Élan. Mr. Panoz was a founder of Mylan Laboratories and served as its President from 1960 to 1969. Mr. Panoz is executive Chairman of Fountainhead Holdings Ltd., an investment holding company, and of Fountainhead Development Corp., Inc., its principal U.S. operating subsidiary.
Carlo Salvi. Mr. Salvi has been one of our directors since February 1997 and was named Vice Chairman of our board of directors in September 2001. He has served as our President and Chief Executive Officer from August 1998 to September 2001 and as our Executive Vice President from November 1997 to August 1998. Additionally, from February 1997 to June 1999, Mr. Salvi served as a Chairman of the board of directors of Sicor S.p.A. In June 1999, Mr. Salvi was named Vice President of Sicor S.p.A. From September 1995 to February 1997, Mr. Salvi was a consultant to Alco Chemicals Ltd., Swiss Branch ("Alco") in Lugano, Switzerland, which acts as an agent and distributor of some of our API products. From 1986 to September 1995, he was General Manager of Alco.
Lee Burg. Mr. Burg has been one of our directors since May 2001. He served as General Manager of Apothecon, a wholly-owned subsidiary of Bristol-Myers Squibb, from June 1990 to March 1997. Prior to joining Apothecon, Mr. Burg was responsible for the Managed Care Division at E.R. Squibb & Sons. Mr. Burg has spent over 25 years in various senior level positions in sales and marketing in a number of pharmaceutical companies. Mr. Burg has a bachelor of science degree in chemistry and biology from Tarkio College.
Michael D. Casey. Mr. Casey has been one of our directors since April 2002. From 1997 to 2002, Mr. Casey served as the President, Chief Executive Officer and a Director of Matrix Pharmaceutical, Inc. and from 1999 to 2002 Mr. Casey served as its Chairman. Mr. Casey joined Matrix in October 1997 from Schein Pharmaceutical, Inc., a generic and ethical pharmaceutical company, where he was Executive Vice President from November 1995 to December 1996. In December 1996 he was appointed President of the retail and specialty products division of Schein. From June 1993 to November 1995, he served as President and Chief Operating Officer of Genetic Therapy, Inc., a biopharmaceutical company. Mr. Casey was President of McNeil Pharmaceutical (a unit of Johnson & Johnson) from 1989 to June 1993 and Vice President, Sales and Marketing for the Ortho Pharmaceutical Corp. (a subsidiary of Johnson & Johnson) from 1985 to 1989. Mr. Casey is a Director of Cholestech Corporation, Bone Care International Inc., Celgene Corporation, and Allos Therapeutics, Inc.
Herbert J. Conrad. Mr. Conrad has been one of our directors since September 1993. From April 1988 to August 1993, Mr. Conrad was President of the Pharmaceuticals Division and Senior Vice President of Hoffmann-La Roche Inc. Mr. Conrad was a member of the board of directors of Hoffmann-La Roche and a member of its Executive Committee from December 1981 through August 1993. Mr. Conrad joined Hoffmann-La Roche in 1960 and held various positions over the years including Senior Vice President of the Pharmaceuticals Division, Chairman of the Board of Medi-Physics, Inc. and Vice President, Public Affairs and Planning Division. Mr. Conrad is a director of Biotechnology General Corp., Reliant Pharmaceuticals LLC, and Chairman of GenVec, Inc.
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J. Sanford Miller. Mr. Miller has been one of our directors since April 2002. Mr. Miller has been a Managing Director at 3i, an international venture capital company, since 2001. Prior to joining 3i, Mr. Miller co-founded Thomas Weisel Partners ("TWP") where he was a member of the Executive Committee, Chief Administrative and Strategic Officer and Co-Director of Investment Banking. Prior to co-founding TWP, Mr. Miller was a senior Partner at Montgomery Securities, where he led the Technology and Healthcare Groups. Previously, he was a Managing Director and directed technology/healthcare investment banking in San Francisco for Merrill Lynch & Co. and Donaldson, Lufkin & Jenrette. Mr. Miller holds a BA from the University of Virginia and an MBA and JD from Stanford University. He currently serves on the Board of Directors of several private companies.
John J. Roberts. Mr. Roberts has been one of our directors since October 2002. Mr. Roberts served as Global Managing Partner at PricewaterhouseCoopers LLP from 1998 until his retirement in June 2002. Mr. Roberts began his career in 1967 in the Philadelphia office of Coopers & Lybrand LLP, serving in positions such as Chief Operating Officer from 1994 to 1998 and Vice Chairman from 1991 to 1994. Mr. Roberts is currently a director of Safeguard Scientifics, Inc., a Trustee of Drexel University and a member of the American Institute of CPAs. Mr. Roberts holds a BS from Drexel University.
Carlo Ruggeri. Mr. Ruggeri has been one of our directors since March 1999. He served as President of Élan Pharma Inc., a subsidiary of Élan, from January 1992 to June 1997. Between 1988 and 1991, he was Chairman and Chief Executive Officer of Vega Biomedical Corp., a medical diagnostics company, and was Vice President of Sclavo, a medical diagnostics company, from January 1986 to December 1987. Prior thereto, from 1979, Mr. Ruggeri held various senior positions in sales and marketing in the U.S. diagnostics industry.
Legal Proceedings
On March 7, 2002, Terry Klein, who alleges that she is acting to recover money on behalf of our company, filed an action in the U.S. District Court for the Southern District of New York, against Carlo Salvi, Rakepoll Finance N.V., Karbona Industries Ltd., Bio-Rakepoll N.V. and us. On January 16, 2003, Klein amended the complaint to add Michael Cannon as a defendant. Plaintiff alleges that all of the defendants other than our company constitute a group for purposes of section 16(b) of the Securities Exchange Act of 1934, and engaged in the purchase and sale of securities of the Company within six months and realized a profit which should be paid over to us. Bio-Rakepoll N.V. did acquire 1.5 million shares of our common stock (150,000 of which were held in escrow) in July 2001 as a result of our acquisition of Gatio Investments B.V. and Biotechna U.A.B. (since renamed Sicor Biotech U.A.B.), and Rakepoll Finance N.V. sold more than that number of shares of our common stock as part of a public offering in October 2001, but the defendants deny that any profit was made on such purchase and sale, and filed an answer denying liability. Accordingly, we do not seek to realize any recovery from the other defendants in this action, and expect to bear certain of the costs of the defense directly. We also expect to bear certain of Mr. Salvi's and Mr. Cannon's costs of defense under directors and officers' indemnity obligations to Mr. Salvi, a director of our company, and Mr. Cannon, a director and officer of our company, subject to reimbursement of our company by Mr. Salvi and Mr. Cannon if a court determines there was a violation of section 16(b), and further subject to our potential reimbursement rights under certain insurance held by us. The matter has not yet been set for trial.
Certain federal and state governmental agencies, including the U.S. Department of Justice and the U.S. Department of Health and Human Services, have been investigating issues surrounding pricing information reported by drug manufacturers, including us, and used in the calculation of reimbursements under the Medicaid program administered jointly by the federal government and the states and under the Medicare program. We have supplied documents in connection with these investigations and have had discussions with representatives of the federal and state governments. In addition, we are a defendant in seven purported class action or representative lawsuits brought by
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private plaintiffs who allege claims arising from the reporting of pricing information by drug manufacturers for the calculation of patient co-payments under the Medicare program or other insurance plans and programs. These actions are among a number of similar actions which have been filed against many pharmaceutical companies raising similar allegations, and five of the actions in which we are a defendant have been consolidated in the U.S. District Court for the District of Massachusetts. We have established a total reserve of $4.0 million, which represents management's estimate of costs that will be incurred in connection with the defense of these matters. Actual costs to be incurred may vary from the amount estimated. There can be no assurance that these investigations and lawsuits will not result in changes to our pricing policies or other actions that might have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Where You Can Find More Information
The Company's internet address is www.sicorinc.com. The Company makes available free of charge on www.sicor.com its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practical after the Company electronically files such material with, or furnishes it to, the SEC. The information found on the Company's website shall not be deemed incorporated by reference by any general statement incorporating by reference this report into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates the information found on the Company's website by reference, and shall not otherwise be deemed filed under such Acts.
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You should carefully consider the following risks, together with all of the other information included or incorporated by reference in this Form 10-K. If any of the following risks occurs, our business, financial condition, operating results and prospects could be materially adversely affected. In such case, the trading price of our common stock could decline.
We currently derive a large percentage of our revenue from one product, propofol. If sales of propofol decrease, our results of operations may be adversely affected.
In 1999, we began to market the first generic formulation of propofol in the United States, which formulation remains the only generic propofol on the U.S. market. We market propofol under our exclusive marketing alliance with Baxter. Revenues attributable to the Baxter alliance accounted for 37%, 34%, and 33% of our consolidated revenues during the years ended 2002, 2001, and 2000, respectively, of which a substantial majority was derived from the sale of propofol. We believe that sales of this product will continue to constitute a significant portion of our total revenues for the foreseeable future. Accordingly, any factor adversely affecting sales of propofol, such as the introduction by other companies of additional generic equivalents of propofol or alternative non-propofol injectable general anesthetics, may have a material adverse effect on revenues. In addition, the total market for propofol in the United States has fluctuated in recent years, and there can be no assurance that this market will not decline in the future.
If our relationship with Baxter fails to continue to benefit us, our business will be harmed.
In March 1999, we amended our sales and distribution agreement with Baxter to grant Baxter the exclusive right to market propofol in the United States. We are responsible for supplying Baxter with substantially all of its requirements for the products it markets under our agreement, including propofol, in the United States, including the Commonwealth of Puerto Rico. Under our agreement with Baxter, we share with Baxter the gross profit from its sale of our products. We are significantly dependent on Baxter to achieve market penetration for propofol and certain other products covered by the Baxter agreement, and entered into our agreement with Baxter based on expectations of product sales, including sales of propofol, that Baxter will achieve. However, Baxter is not required to achieve any specified level of sales. In addition, pursuant to a November 2002 amendment, the agreement with Baxter terminates on January 1, 2009. If we fail to maintain our relationship with Baxter, or if our relationship with Baxter fails to generate the level of sales we expect, our revenues will not meet our expectations and our business will be negatively impacted.
In order to remain profitable and continue to grow and develop our business, we are dependent on successful development and commercialization of newly developed products. If we are unable to successfully develop or commercialize new products, our operating results will suffer.
Our future results of operations depend, to a significant extent, on our ability to successfully develop and commercialize new generic versions of branded and off-patent pharmaceutical products in a timely manner. These new products must be continually developed, tested and manufactured and must meet regulatory standards and receive requisite regulatory approvals. Products currently in development by us may or may not receive the regulatory approvals necessary for marketing. Our future growth in the biopharmaceuticals sector is dependent on, among other things, accessible and cost effective pathways to regulatory approval of generic biologics, which, currently do not exist in the United States and the majority of the European countries. If any of our products, if and when acquired or developed and approved, cannot be successfully commercialized in a timely manner, our operating results could be adversely affected. Delays or unanticipated costs in any part of the process or our
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failure to obtain regulatory approval for our products, including failure to maintain our manufacturing facilities in compliance with all applicable regulatory requirements, could adversely affect us.
Our overall profitability also depends on our ability to introduce, on a timely basis, new generic products for which we are either the first to market, or among the first to market, or can otherwise gain significant market share. The first generic equivalent on the market is generally able to capture a significant share of the market for that product. Our ability to achieve substantial market share is dependent upon, among other things, the timing of regulatory approval of these products and the number and timing of regulatory approvals of competing products. In as much as this timing is not within our control, we may not be able to introduce new generics on a timely basis, if at all, and we may not be able to achieve substantial market share from the sale of new products.
Future inability to obtain raw materials from suppliers could seriously affect our operations.
While we attempt to use our own APIs when possible, we depend on third party manufacturers for bulk raw materials for many of our products. These raw materials are generally available from a limited number of sources, and many of our raw materials are available only from foreign sources. In addition, our operations use sole sources of supply for a number of raw materials used in manufacturing of our products and packaging components. Any curtailment in the availability of these raw materials could result in production or other delays, and, in the case of products for which only one raw material supplier exists, could result in a material loss of sales, with consequent adverse effects on us. In addition, because regulatory authorities must generally approve raw material sources for pharmaceutical products, changes in raw material suppliers may result in production delays, higher raw material costs and loss of sales and customers. Furthermore, our arrangements with foreign raw materials suppliers are subject to, among other things, customs and other government clearances, duties and regulation by the countries of origin, in addition to the regulatory approval of the agencies responsible for certifying the API manufacturing facilities and regulating the sale of finished dosage pharmaceutical products, such as the FDA, the EMEA, and the United Kingdom Medicines Control Agency ("MCA"). Any significant interruption of our supply could have a material adverse effect on us.
Third parties may claim that we infringe their proprietary rights and may prevent us from manufacturing and selling our products.
There has been substantial litigation in the pharmaceutical industry with respect to the manufacture, use and sale of new generic products. These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. We have been required in the past, and expect to be required in the future, to defend against charges relating to the alleged infringement of patent or other proprietary rights of third parties. Litigation may:
Although patent and intellectual property disputes within the pharmaceutical industry have often been settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include the long-term payment of royalties. These arrangements may be investigated by U.S. regulatory agencies and, if improper, may be invalidated. Furthermore, we cannot be certain that the required licenses would be made available to us on acceptable terms. Accordingly, an adverse finding in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent us from manufacturing and selling some of our products or increase our marketing costs.
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In addition, when seeking regulatory approval for our products, we may be required to certify to the FDA that these products do not infringe upon third party patent rights, or that such patent rights are invalid. Filing such a certification against a patent, commonly known as a paragraph IV certification, gives the patent holder the right to bring a patent infringement lawsuit against us. Brand name pharmaceutical companies regularly institute these suits, and we expect them to continue these tactics since it is a cost-effective way to delay generic competition. A lawsuit may delay regulatory approval by the FDA until the earlier of the resolution of the claim or 30 months from the patent holder's receipt of notice of certification. A claim of infringement and the resulting delay could result in additional expenses and even prevent us from manufacturing and selling some of our products.
We depend on our ability to protect our intellectual property and proprietary rights, and we cannot be certain of their confidentiality and protection.
Our ability to successfully market certain proprietary formulations of generic products, such as propofol, may depend, in part, on our ability to protect and defend our intellectual property rights. If we fail to protect our intellectual property adequately, competitors may manufacture and market products similar to ours. A patent covering our formulation of propofol has been issued to us, and we have filed, or expect to file, patent applications seeking to protect newly developed technologies and products in various countries, including the United States. Some patent applications in the United States are maintained in secrecy until the patent is issued. Since the publication of discoveries tends to follow their actual discovery by several months, we cannot be certain that we were the first to invent or file patent applications on any of our discoveries. We cannot be certain that patents will be issued to us with respect to any of our patent applications or that any existing or future patents that will be issued or licensed by us will provide competitive advantages for our products or will not be challenged, invalidated or circumvented by our competitors. Furthermore, our patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products.
We also rely on trade secrets, unpatented know-how and continuing technological innovation that we seek to protect, in part, by entering into confidentiality agreements with our corporate collaborators, employees, consultants and certain contractors. We cannot assure you that these agreements will not be breached. We also cannot be certain that there will be adequate remedies available to us in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. We cannot be assured that our trade secrets and proprietary technology will not otherwise become known or be independently discovered by our competitors or, if patents are not issued with respect to products arising from research, that we will be able to maintain the confidentiality of information relating to these products.
Failure to comply with governmental regulation could harm our business.
We are subject to extensive, complex, costly and evolving regulation by the governments of the countries in which we operate. In the United States, that regulation is carried out by the federal government, principally the FDA, and to a lesser extent by state governmental agencies. The Federal Food, Drug and Cosmetic Act and other federal statutes and regulations govern or influence the testing, manufacturing, packing, labeling, storing, record keeping, safety, approval, advertising, promotion, sale and distribution of our products in the United States, and comparable regulations govern our operations in other countries in which we do business.
Our facilities, manufacturing procedures and operations and the procedures we use in testing our products are also subject to regulation by the FDA and other authorities, who conduct periodic inspections to confirm that we are in compliance with all applicable regulations. In addition, the FDA conducts pre-approval and post-approval reviews and plant inspections to determine whether our systems and processes are in compliance with current Good Manufacturing Processes ("cGMP") and
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other FDA regulations. Following these inspections, the FDA may issue notices on Form 483, listing conditions that the FDA inspectors believe may violate cGMP or other FDA regulations, and warning letters that could cause us to modify certain activities identified during the inspection.
Failure to comply with FDA or other U.S. governmental regulations can result in fines, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production or distribution, suspension of the FDA's review of our Abbreviated New Drug Applications ("ANDAs"), or other product applications, enforcement actions, injunctions and criminal prosecution. Under certain circumstances, the FDA also has the authority to revoke previously granted drug approvals. Although we have instituted internal compliance programs, if these programs do not meet regulatory agency standards or if compliance is deemed deficient in any significant way, it could have a material adverse effect on us. Some of our vendors are subject to similar regulations and periodic inspections.
In connection with our activities outside the United States, we are also subject to regulatory requirements governing the testing, approval, manufacturing, labeling, marketing and sale of pharmaceutical products, which requirements vary from country to country. Whether or not FDA approval has been obtained for a product, approval by comparable regulatory authorities of foreign countries must be obtained prior to marketing the product in those countries. For example, some of our foreign operations are subject to regulation by the EMEA and MCA. The approval process may be more or less rigorous from country to country, and the time required for approval may be longer or shorter than that required in the United States. No assurance can be given that clinical studies conducted outside of any country will be accepted by that particular country, and the approval of a pharmaceutical product in one country does not assure that the product will be approved in another country. In addition, regulatory agency approval of pricing is required in many countries and may be required in order to market any drug we develop in those countries.
Under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch/Waxman Act, we are required to file ANDAs for our generic products with the FDA. An ANDA does not require the extensive animal and human studies of safety and effectiveness before we can manufacture and market such products that are normally required to be included in a new drug application, or an NDA. However, there can be no assurance that any of our ANDAs will be approved, and delays in the review process or failure to obtain approval of our ANDAs could have a material adverse effect on us.
The process for obtaining governmental approval to manufacture and market pharmaceutical products is rigorous, time-consuming and costly, and we cannot predict the extent to which we may be affected by legislative and regulatory developments. Moreover, if we obtain regulatory agency approval for a drug, it may be limited regarding the indicated uses for which the drug may be marketed which could limit our potential market for the drug. The discovery of previously unknown problems with any of our drugs could result in restrictions on the use of a drug including possible withdrawal of the drug from the market.
It is impossible for us to predict the extent to which our operations will be affected under the regulations discussed above or any new regulations which may be adopted by regulatory agencies.
We are increasing our efforts to develop new proprietary pharmaceutical products, but we can give no assurance that any of these efforts will be commercially successful.
Our principal business has traditionally focused on developing, manufacturing and marketing of generic equivalents of injectable pharmaceutical products first introduced by third parties. However, we have recently commenced efforts to develop new proprietary products. Expanding our focus beyond generic products and broadening our portfolio of product offerings to include proprietary product candidates may require additional internal expertise or external collaboration in areas in which we
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currently do not have substantial expertise, resources and personnel. We may have to enter into collaborative arrangements with other parties that may require us to relinquish rights to some of our technologies or product candidates that we would otherwise pursue independently. We cannot assure you that we will be able to acquire the necessary expertise or enter into collaborative arrangements on acceptable terms, if at all, to develop and market proprietary product candidates.
In addition, only a small minority of all new proprietary research and development programs ultimately results in commercially successful products. It is not possible to predict whether any of our programs will succeed until it actually produces a drug that is commercially marketed for a significant period of time. As a result, we could spend a significant amount of funds and effort without material benefits.
In order to obtain regulatory approvals for the commercial sale of proprietary product candidates, we may be required to complete extensive clinical trials in humans to demonstrate the safety and efficacy of our products. We have limited experience in conducting clinical trials in new product areas. In addition, a clinical trial may fail for a number of reasons, including:
The current investigation by U.S. authorities into the pricing practices of companies in the pharmaceutical industry may have an adverse impact on us.
Certain federal and state governmental agencies, including the U.S. Department of Justice and the U.S. Department of Health and Human Services, have been investigating issues surrounding pricing information reported by drug manufacturers, including us, and used in the calculation of reimbursements under the Medicaid program administered jointly by the federal government and the states and under the Medicare program. We have supplied documents in connection with these investigations and have had discussions with representatives of the federal and state governments. In addition, we are a defendant in seven purported class action or representative lawsuits brought by private plaintiffs who allege claims arising from the reporting of pricing information by drug manufacturers for the calculation of patient co-payments under the Medicare program or other insurance plans and programs. These actions are among a number of similar actions which have been filed against many pharmaceutical companies raising similar allegations, and five of the actions in which we are a defendant have been consolidated to the U.S. District Court for the District of Massachusetts. We have established a total reserve of $4.0 million, which represents our estimate of costs that will be incurred in connection with the defense of these matters. Actual costs to be incurred may vary from the amount estimated. There can be no assurance that these investigations and lawsuits will not result in changes to our pricing policies or fines, penalties or other actions that might have a material adverse effect on us.
Political and economic instability may adversely affect the revenue our foreign operations generate.
In 2002, 31% of our total revenues were derived from our operations outside the United States, and 26% of our total assets were located outside of the United States. Our international operations are subject in varying degrees to greater business risks such as war, civil disturbances, adverse governmental actions, which may disrupt or impede operations and markets, restrict the movement of funds, impose limitations on foreign exchange transactions or result in the expropriation of assets, and economic and
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governmental instability. We may experience material adverse financial results within these markets if any of these events were to occur.
In 2002, 15% of our total revenues were derived from our Mexican operations, and 10% of our total assets were located in Mexico. The Mexican government has exercised and continues to exercise significant influence over many aspects of the Mexican economy. Accordingly, Mexican government actions could have a significant effect on our operations in Mexico. A significant portion of our sales in Mexico are to the Mexican government, which may not continue in the future. There can be no assurance that changes in the bidding, pricing or payment practices of the government will not change and affect the ability of our Mexican operations to win government contracts, maintain operating margins or collect on past sales to the government. In addition, our Mexican operations are subject to changes in the Mexican economy. For example, Mexico last experienced high double-digit inflation in 1995, and it may experience similar high inflation in the future. Future actions by the Mexican government, or developments in the Mexican economy and changes in Mexico's political, social or economic situation may adversely affect our operations in Mexico.
In 2002, sales to the government of Mexico accounted for 7% of our total revenue. Any substantial decline in our sales to the government of Mexico, for any reason, would have an adverse effect on us.
In 2002, sales to the government of Mexico accounted for 7% of our total revenues, as compared to 9% and 11% for the years ended 2001 and 2000, respectively. We have no long-term agreement with the government of Mexico and have no assurance that it will continue to purchase from us at any time in the future. As part of the government bidding process during April 2002, for purchases effective in the second half of the year, the Mexican government significantly reduced its hospital budget and opened product bidding to more suppliers in order to reduce prices. As a result, we won fewer contracts and at lower prices than in prior years.
We may pursue transactions that may cause us to experience significant charges to earnings that may adversely affect our stock price and financial condition.
We regularly review potential transactions related to technologies, products or product rights and businesses complementary to our business. These transactions could include mergers, acquisitions, strategic alliances, licensing agreements or co-promotion agreements. In the future, we may choose to enter into these transactions at any time. As a result of acquiring businesses or entering into other significant transactions, we have previously experienced, and will likely continue to experience, significant charges to earnings for merger and related expenses that may include transaction costs, closure costs or costs related to the write-off of acquired in-process research and development. These costs may also include substantial fees for investment bankers, attorneys, accountants and financial printing costs and severance and other closure costs associated with the elimination of duplicate or discontinued products, employees, operations and facilities. Although we do not expect these charges to have a material adverse effect upon our overall financial condition, these charges could have a material adverse effect on our results of operations for particular quarterly or annual periods and could possibly have an adverse impact upon the market price of our common stock.
We may make acquisitions of businesses. Inherent in this practice is a risk that we may experience difficulty integrating the businesses or companies that we have acquired into our operations, which would be disruptive to our management and operations.
The merger of two companies involves the integration of two businesses that have previously operated independently. Difficulties encountered in integrating two businesses could have a material adverse effect on the operating results or financial condition of the combined company's business. As a result of uncertainty following a merger and during the integration process, we could experience disruption in our business or employee base. There is also a risk that key employees of a merged
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company may seek employment elsewhere, including with competitors, or that valued employees may be lost upon the elimination of duplicate functions. If we and our merger partner are not able to successfully blend our products and technologies to create the advantages the merger is intended to create, it may affect our results of operations, our ability to develop and introduce new products and the market price of our common stock. Furthermore, there may be overlap between our products or customers, and a merged company may create conflicts in relationships or other commitments detrimental to the integrated businesses.
We face risks related to foreign currency exchange rates, which could adversely affect our operations and reported results.
We have significant operations in several countries, including the United States, Italy, Mexico and Lithuania. In addition, we make purchases and sales in a large number of other countries. As a result, our business is subject to the risks and uncertainties of foreign currency fluctuations. To the extent that we incur expenses in one currency but earn revenue in another, any change in the values of those foreign currencies relative to the U.S. dollar could cause our profits to decrease or our products to be less competitive against those of our competitors. To the extent that cash and receivables denominated in foreign currency are greater or less than our liquid liabilities denominated in foreign currency, we have foreign exchange exposure. In response to this exposure, we have entered into hedging transactions designed to reduce our exposure to the risks associated with Euro (previously Italian Lira) rate fluctuations, but those transactions cannot eliminate the risks entirely, and there can be no assurance that we will be able to enter into those transactions on economical terms, or at all, in the future.
We depend on key officers and qualified scientific and technical employees. The loss of key personnel could have a material adverse effect on us.
We are highly dependent on the principal members of our management staff, the loss of whose services might impede the achievement of our development objectives. Although we believe that we are adequately staffed in key positions and that we will be successful in retaining skilled and experienced management, we cannot assure you that we will be able to attract and retain key personnel on acceptable terms. We do not have any employment agreements with any of our key executive officers, other than Marvin Samson, our President and Chief Executive Officer, and Jack E. Stover, our Executive Vice President, Finance, Chief Financial Officer, and Treasurer, and we do not maintain key person life insurance on the lives of any of our executives. If we lose the services of any of these executive officers, it could have a material adverse effect on us. Due to the specialized scientific nature of our business, we are also highly dependent upon our ability to continue to attract and retain qualified scientific and technical personnel. Loss of the services of, or failure to recruit, key scientific and technical personnel would be significantly detrimental to our product development programs. We face competition for personnel from other companies, academic institutions, government entities and other organizations.
In some circumstances, we may retroactively reduce the price of products which we have already sold. These price reductions may result in reduced revenues.
In some circumstances including, for example, if we reduce our prices as a result of competition, we may issue to our customers credits and rebates for products that we have previously sold to them. These credits and rebates effectively constitute a retroactive reduction of the price of products already sold. Although we establish a reserve with respect to these potential credits and rebates at the time of sale, we cannot assure you that our reserves will be adequate.
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In some circumstances, inventory levels maintained by our wholesalers may be in excess of underlying demand. These surpluses may result in increased product returns from our wholesalers or reduced product orders in the future, which may result in reduced revenues.
A significant portion of our domestic pharmaceutical sales is made to wholesalers. As a result, our financial results are affected by fluctuations in the buying patterns of these major wholesalers and the corresponding changes in inventory levels maintained by these wholesalers. These changes may not reflect underlying demand.
Our industry is intensely competitive. The competition we encounter may have a negative impact on the prices we charge for our products, the market share of our products and our revenues and profitability.
Significant competition exists in the generic drug business. We compete with:
Many of our competitors have substantially greater financial, research and development and other resources than we do. Consequently, many of our competitors may be able to develop products and processes competitive with, or superior to, our own. Furthermore, we may be unable to develop products that are differentiated from those of our competitors or successfully develop or introduce new products that are less costly or offer better performance than those of our competitors. If we are unable to compete successfully, our revenues and profitability will be adversely affected.
Brand name companies frequently take actions to prevent or discourage the use of generic drug products such as ours.
Brand name companies frequently take actions to prevent or discourage the use of generic equivalents to their products including generic products, which we manufacture or market. These actions may include:
Generally, no additional regulatory approvals are required for brand name manufacturers to sell directly, or through a third party, to the generic market. This facilitates the sale by brand name manufacturers of generic equivalents of their brand name products. If brand name manufacturers are successful in capturing a significant share of the generic market for our products, our revenues will be adversely affected.
Our revenues and profits from individual generic pharmaceutical products are likely to decline as our competitors introduce their own generic equivalents.
Revenues and gross profits derived from generic pharmaceutical products tend to follow a pattern based on regulatory and competitive factors unique to the generic pharmaceutical industry. As the
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patents for a brand name product and the related exclusivity periods expire, the first generic manufacturer to receive regulatory approval for a generic equivalent of the product is often able to capture a substantial share of the market. However, as other generic manufacturers receive regulatory approvals for competing products, the market share and the price of that product will typically decline. In 1999, we began to market the first generic formulation of propofol to be sold in the United States. The introduction of additional generic equivalents may have an adverse effect on revenues from our products.
New developments by others could make our products or technologies obsolete or noncompetitive.
Brand name manufacturers are constantly developing and marketing new pharmaceutical products which may be superior to our generic products for the therapeutic indications for which our products are marketed. These new products may render our products non-competitive or obsolete.
Legislative proposals, reimbursement policies of third parties, cost containment measures and health care reform could affect the marketing, pricing and demand for our products.
Our ability to market our products depends, in part, on reimbursement levels for those products and for related treatment established by healthcare providers, including government authorities, private health insurers and other organizations, including health maintenance organizations and managed care organizations. Reimbursement may not be available for some of our products and, even if granted, may not be maintained. Limits placed on reimbursement could make it more difficult for people to buy our products, and reduce, or possibly eliminate, the demand for our products. We are unable to predict whether governmental authorities will enact additional legislation or regulations which will affect third party coverage and reimbursement, and ultimately reduce the demand for our products. In addition, the purchase of our products could be significantly influenced by the following factors:
These factors could result in lower prices and a reduced demand for our products, which would have a material adverse effect on us.
Federal regulation of arrangements between manufacturers of brand name and generic drugs could materially affect our business.
On July 29, 2002 The Federal Trade Commission, or FTC, issued a report entitled "Generic Drug Entry Prior to Patent Expiration" which addressed, among other things, the use of agreements between brand name and generic drug manufacturers and other strategies used to delay competition from generic versions of patent-protected drugs. The report recommended legislation requiring brand name companies and first generic applicants to provide copies of certain agreements to the FTC, and also recommended the codification or clarification of certain court decisions concerning the 180-day exclusivity period applicable to first generic applicants. These recommendations, if adopted, could affect the manner in which generic drug manufacturers resolve intellectual property litigation with brand name pharmaceutical companies, and could result generally in an increase in private-party litigation against pharmaceutical companies. While we have not entered into any of these types of agreements, we cannot assure you that we will not do so in the future. The impact of the FTC's report, and the potential private-party lawsuits associated with arrangements between brand name and generic drug manufacturers is uncertain, and could have an adverse effect on our business.
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The testing, marketing and sale of our products involves the risk of product liability claims by consumers and other third parties, and insurance against potential claims is expensive.
As a manufacturer of finished dosage pharmaceutical products, we face an inherent exposure to product liability claims in the event that the use of any of our technology or products is alleged to have resulted in adverse effects. This exposure exists even with respect to those products that receive regulatory approval for commercial sale, as well as those undergoing clinical trials. While we have taken, and will continue to take, what we believe are appropriate precautions, we cannot assure you that we will avoid significant product liability exposure.
In addition, as a manufacturer of APIs, we supply other pharmaceutical companies with APIs, which are contained in finished dosage pharmaceutical products. Our ability to avoid significant product liability exposure depends in part upon our ability to negotiate appropriate commercial terms and conditions with our customers and our customers' manufacturing, quality control and quality assurance practices. We may not be able to negotiate satisfactory terms and conditions with our customers.
Although we maintain insurance for product liability claims, which we believe is in line with the insurance coverage carried by other companies in our industry, the insurance coverage may not be sufficient. In addition, adequate insurance coverage might not continue to be available at acceptable costs, if at all. Any product liability claim brought against us, whether covered by insurance or not, and the resulting adverse publicity, could have a material adverse effect on us.
Our business involves hazardous materials and may subject us to environmental liability, which would seriously harm our financial condition.
Our business involves the controlled storage, use and disposal of hazardous materials and biological hazardous materials. We are subject to numerous environmental regulations in the jurisdictions in which we operate. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation in each of our locations, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result, and the liability could exceed our resources. Current or future environmental laws or regulations may substantially and detrimentally affect our operations, business and assets. We maintain liability insurance for some environmental risks which our management believes to be appropriate and in accordance with industry practice. However, we may incur liabilities beyond the limits or outside the coverage of our insurance and may not be able to maintain insurance on acceptable terms.
Risks Related to Our Common Stock
An existing stockholder owns approximately 20% of our common stock, which may allow him to influence stockholder votes.
Carlo Salvi, Vice Chairman of our board of directors, currently beneficially owns approximately 20% of our outstanding shares of common stock. In addition, pursuant to a shareholder's agreement, Rakepoll Finance, N.V., an entity controlled by Mr. Salvi, is entitled to nominate up to three of our directors (one of whom, however, must be an independent director), who in turn are entitled to nominate, jointly with two of our management directors (one of whom must be an independent director), five additional directors. The consent of the Rakepoll Finance nominated directors is required for us to take certain actions, such as a merger or sale of all or substantially all of our business or assets and certain issuances of securities. As a result of his ownership of our common stock, Mr. Salvi may be able to control substantially all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions.
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A number of internal and external factors have caused and may continue to cause the market price of our common stock price to be volatile, which may affect your ability to sell the stock at an advantageous price.
The market price of the shares of our common stock, like that of the common stock of many other pharmaceutical companies, has been and is likely to continue to be highly volatile. For example, the market price of our common stock has fluctuated during the past twelve months between $13.04 per share and $18.55 per share and may continue to fluctuate. Therefore, especially if you have a short-term investment horizon, the volatility may affect your ability to sell your stock at an advantageous price. Market price fluctuations in our stock may be due to acquisitions or other material public announcements, along with a variety of additional factors including, without limitation:
These and similar factors have had, and could in the future have, a significant impact on the market price of our common stock. Some companies that have had volatile market prices for their securities have been subject to securities class action suits filed against them. If a suit were to be filed against us, regardless of the outcome or the merits of the action, it could result in substantial costs and a diversion of our management's attention and resources. This could have a material adverse effect on us.
The market price of our common stock may drop significantly when our existing stockholders sell their stock.
If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, the market price of our common stock may decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. As of February 28, 2003, we had 117,674,769 shares of common stock outstanding. Mr. Salvi, who beneficially owns 23,712,710 shares of our common stock, may sell his shares in the public market at any time, subject to certain exceptions, as well as applicable limitations under Rule 144. We have entered into registration rights agreements with Rakepoll Finance N.V. that entitle it to have 21,000,000 of the 23,712,710 shares of common stock registered pursuant to separate registration statements. All remaining shares held by our existing stockholders are eligible for immediate public sale if they were or are registered under the Securities Act of 1933 or are sold in accordance with Rule 144. In addition, we have entered into registration rights agreements with some
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of our existing stockholders that entitle them to have 323,052 shares of common stock registered for sale in the public market.
We have entered into an agreement with Sankyo Company, Ltd., pursuant to which Sankyo may exchange 170,388 shares of its 340,776 shares of Series A Preferred Stock issued by Metabasis Therapeutics, Inc., into shares of our common stock within 30 days after January 10 of each of the years 2004 and 2005. The number of shares of our common stock exchangeable for the Metabasis preferred stock is determined pursuant to a formula based on the number of shares of Metabasis preferred stock being exchanged multiplied by a fraction, the numerator of which is $7.09 and the denominator of which is the average closing price of our common stock for a 20 trading day period prior to the date of Sankyo's notice of exercise. It is not possible to determine the exact exchange ratio until Sankyo exercises its exchange right since the formula is partially based on the price trading levels of our common stock. We are obligated to register our shares of common stock issued on exchange of the Metabasis preferred stock as soon as practicable following the exchange.
Since we have not paid cash dividends on our common stock, investors must look to stock appreciation for a return on their investment in us.
We have never paid cash dividends on our common stock, and presently intend to retain earnings for the development of our businesses. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Thus, investors should only look to appreciation in the value of their shares for a return on their investment.
We have enacted a Stockholder Rights Plan and charter provisions that may have anti-takeover effects.
Our Restated Certificate of Incorporation and Bylaws include provisions that could discourage potential takeover attempts and make attempts by our stockholders to change management more difficult. The approval of 662/3% of our voting stock is required to approve certain transactions and to take certain stockholder actions, including the calling of a special meeting of stockholders and the amendment of any of the anti-takeover provisions contained in our Certificate of Incorporation. We also have a stockholder rights plan, the effect of which may also deter or prevent takeovers. These rights will cause a substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors and may have the effect of deterring hostile takeover attempts.
Our corporate headquarters are located in Irvine, California. We maintain manufacturing facilities, research and development facilities, offices, warehouses and distribution centers in the United States, Italy, Mexico and Lithuania. We also maintain a research and development facility and offices in Switzerland. None of the leases of these properties is financially material to us. The following table
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presents the principal facilities owned or leased by us and indicates the location and type of each of the facilities.
| Location |
Square Footage |
Status |
Description |
|||
|---|---|---|---|---|---|---|
| United States | ||||||
| California | 289,230 | Leased | Manufacturing, R&D, warehouse, office | |||
| California | 30,970 | Owned | Manufacturing, office | |||
| California | 150,000 | Leased | Sub-leased to third-party tenants | |||
| New Jersey | 5,100 | Leased | Office | |||
Italy |
||||||
| Rho | 59,790 | Owned | Manufacturing, R&D, warehouse, office | |||
| Santhià | 182,870 | Owned | Manufacturing, R&D, warehouse | |||
| Milan | 1,100 | Leased | Office | |||
Mexico |
||||||
| Mexico City | 65,003 | Owned | Manufacturing, R&D, warehouse, office |