Research and Development
We
are working on developing additional generic products in the form of tablets, capsules,
and suppositories. The research, development, clinical testing and the FDA review process,
leading to approvals, takes approximately two years for each product. As discussed in the
section titled “Government Regulation,” some products require no review or
limited laboratory testing, in which case the time required to complete the process can be
less than two years. Typically, our research and development activities consist of:
- identifying brand-name drugs for which patent protection has expired or will expire in the near future;
- conducting research (including patent and market research) and developing new product formulations based upon such drugs;
- developing and testing our formulation in laboratory and human clinical studies as necessary;
- compiling and submitting all the information to the FDA; and
- obtaining approval from the FDA for our new product formulations.
As
part of the approval process, we contract with outside laboratories to conduct biostudies
that are required for FDA approval. We use biostudies to demonstrate that the rate and
extent of absorption of a generic drug are not significantly different from that achieved
by the corresponding brand-name drug. These biostudies are subject to rigorous standards
set by the FDA. They may cost up to $500,000 each and are a significant part of the overall cost
of our drug development work.
As
of March 13, 2003, we have fifteen (15) Abbreviated New Drug Applications
(“ANDAs”) pending approval at the FDA. Prior to FDA approval of an ANDA, we
generally undergo an on-site inspection, known as a pre-approval inspection or PAI, by the
district office of the FDA. Between January 2001 and March 13, 2003, we have had six
pre-approval inspections, covering several products. Our product development program
includes several active projects in various stages of completion. We intend to develop and
file ANDA applications covering additional products this year. We can, however, give no
assurance that we will receive approval from the FDA to
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market the products covered by
these pending and planned applications and, if we do, there is no assurance that we will
be able to penetrate the market and achieve reasonable levels of sales or profits from the
products.
For
the fiscal year ended December 31, 2002, we spent $6,944,952 on research and development
activities, compared with $2,352,666 for the fiscal year ended December 31, 2001 and
$2,392,166 for the fiscal year ended December 31, 2000.
Sales and Marketing
Our
products are sold primarily through direct sales efforts to drug wholesalers, distributors
and retail drug chains and other pharmaceutical companies. We market our generic drug
products under our “Able Laboratories” label as well as under private label
arrangements. The majority of our sales are to customers who purchase under firm purchase
order commitments. Excluding seasonal trade show purchases, these purchase orders range
from $1,000 to $1,700,000 and are typically filled within three months from the time we
receive them. Sales to Cardinal Health, a wholesaler, were approximately 37% of our sales
in 2002. The dollar amount of backlog orders, as of March 10, 2003, was approximately
$4,577,000. Because the level of our customers’ purchases can fluctuate over the
course of an operating period, backlog historically has not been a meaningful indicator of
revenues for a particular period or for future periods.
We
have four senior and experienced executives in our sales department, supported by three
associates. In January 2001 we appointed Bi-Coastal Pharmaceutical Corporation (“Bi-Coastal”) as our
representative. Bi-Coastal, located in New Jersey, has over 20 sales and support
professionals representing several pharmaceutical companies. Under our agreement,
Bi-Coastal is limited to selling our products only to generic drug distributors. We
believe, at this time, that this Bi-Coastal arrangement allows us to optimize our sales costs and achieve national
exposure for our product line.
Suppliers
We
manufacture our generic products at our facilities in South Plainfield, New Jersey. The
principal components used in the manufacture of generic products are active and inactive
pharmaceutical ingredients and certain packaging materials. The FDA must approve our
sources for almost all of the materials. In many instances, only one source may have been
approved. We purchase active raw material ingredients primarily from United States
distributors of bulk pharmaceutical materials manufactured by the U.S. or foreign
companies. If raw materials from an approved supplier were to become unavailable, we would
have to file a supplement to the applicable regulatory approval and revalidate the
manufacturing process using any new supplier’s materials. Delays in revalidating the
manufacturing process or in obtaining new materials could result in the loss of revenues
and could have a material adverse effect on our business, financial condition and results
of operations.
Manufacturing Facilities
Our
facilities consist primarily of approximately 110,000 square feet of manufacturing, warehousing,
laboratory and office space contained in four buildings. Over the past two years, we have
invested approximately $8,000,000 to upgrade our facilities, including installing new
flooring, building additional tablet compression and packaging rooms, separating
manufacturing areas for phenazopyridine production, adding new air handling units and
installing new manufacturing and laboratory equipment. We also built a self-contained
research and development facility with its own separate support laboratory. In our
production areas, we built storage vaults required for handling controlled substances. We
intend to increase our manufacturing and laboratory capacity to handle our anticipated
production needs for approximately the next 12 months. See “Certain Factors That May Affect
Future Results — We may have difficulty managing our growth.”
Competition
We
compete primarily with other generic manufacturers and distributors. Many of our
competitors have substantially greater financial resources than we have, as well as other
resources such as expertise in formulations of
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technologically advanced delivery systems
and marketing that are required to commercialize a pharmaceutical product.
In
the generic drug market, we compete with:
- other off-patent drug manufacturers;
- brand-name pharmaceutical companies that also manufacture off-patent drugs;
- the original manufacturers of brand-name drugs; and
- manufacturers of new drugs that may be used for the same indications as our products.
Revenues
and gross profit derived from generic drugs tend to follow a pattern based upon regulatory
and competitive factors unique to the generic pharmaceutical industry. As patents for
brand-name products and related exclusivity periods mandated by regulatory authorities
expire, the first generic manufacturer to receive regulatory approval for generic
equivalents of such products is usually able to achieve relatively high revenues and gross
profit. As other generic manufacturers receive regulatory approvals on competing products,
prices and revenues typically decline. Accordingly, the level of revenues and gross profit
we can achieve from developing and manufacturing generic products depends, in part, on our
ability to develop and introduce new generic products, the timing of regulatory approvals
of our products, and the number and timing of regulatory approvals of competing products.
Competition
in the United States generic pharmaceutical market continues to intensify as the
pharmaceutical industry adjusts to increased pressures to contain health care costs.
Brand-name drug manufacturers are increasingly selling their products into the generic
market directly by acquiring or forming strategic alliances with generic pharmaceutical
companies. No regulatory approvals are required for a brand-name manufacturer to sell
directly or through a third party to the generic market, nor do such manufacturers face
any other significant barriers to entry into such market. These competitive factors may
have a material adverse effect upon our ability to sell our generic pharmaceutical products.
There
can be no assurance that we will be able to successfully compete in the generic drug
business. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Certain Factors That May Affect Future Results.”
Government Regulation
Our
products and business activities are highly regulated, principally by the FDA, the U.S.
Drug Enforcement Agency, state governments and governmental agencies of other countries.
Federal and state regulations and statutes impose certain requirements on the testing,
manufacture, labeling, storage, recordkeeping, approval, advertising and promotion of our
products. Noncompliance with applicable requirements can result in judicially and
administratively imposed sanctions, including seizures of adulterated or misbranded
products, injunction actions, fines and criminal prosecutions. Administrative enforcement
measures can also involve product recalls and the refusal, by the government, to approve
new drug applications known as NDAs, or ANDAs. In order to conduct clinical tests and
produce and market products for human diagnostic and therapeutic use, we must comply with
mandatory procedures and safety standards established by the FDA and comparable state and
foreign regulatory agencies. Typically, standards require that products be approved by the
FDA as safe and effective for their intended use prior to being marketed for human
applications.
To
obtain an NDA, or FDA, approval for a new drug or generic equivalent, a prospective
manufacturer must, among other things, comply with the FDA’s current Good
Manufacturing Practices, or cGMP, regulations. The FDA may inspect the manufacturer’s
facilities to assure such compliance prior to approval or at any other reasonable time. We
must follow cGMP regulations at all times during the manufacture and other processing of
drugs. To comply with the requirements set forth in these regulations, we must continue to
expend significant time and resources in the areas of development, production, quality
control and quality assurance.
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We
must obtain FDA approval, in the form of an ANDA, before we can market a generic equivalent
of a previously approved drug. The process for obtaining an ANDA approval is set by the
provisions of the Waxman-Hatch Act of 1984, which established a statutory procedure for
the submission and FDA review and approval of ANDAs for generic versions of drugs
previously approved by the FDA. Under the ANDA procedure, the FDA waives the requirement
of conducting complete clinical studies of safety and efficacy and, instead, typically
requires the applicant to submit data illustrating that the generic drug formulation is
“bioequivalent” to a previously approved drug. “Bioequivalence” means
that the rate of absorption and the levels of concentration of a generic drug in the body,
needed to produce a therapeutic effect, are substantially equivalent to those of the
previously approved drug. For some drugs, the FDA may require other means of demonstrating
that the generic drug is bioequivalent to the original drug. The NDA and ANDA approval
processes both generally take a number of years and involve the expenditure of substantial
resources.
The
Waxman-Hatch Act establishes other statutory protections, for certain FDA-approved drugs,
which could preclude submission or delay the approval of a competing ANDA. One such
provision allows a five-year market exclusivity period for NDAs involving new chemical
compounds and a three-year market exclusivity period for NDAs (including different dosage
forms) containing data from new clinical investigations essential to the approval of the
application. Both patented and non-patented drug products are subject to these market
exclusivity provisions. Another provision of the Act extends patents for up to five years
as compensation for reducing the effective market life of the patent resulting from
the time involved in the federal regulatory review process.
The
Prescription Drug User Fee Act of 1992, enacted to expedite drug approval by providing the
FDA with resources to hire additional medical reviewers, imposes three types of user fees
on manufacturers of NDA-approved prescription drugs. Applicants submitting only ANDAs and
most other off-patent drug manufacturers, including Able, are not currently subject to any
of the three user fees. If we submit NDAs for non-ANDA products, we may be subject to user
fees.
Penalties
for wrongdoing in connection with the development or submission of an ANDA were
established by the Generic Drug Enforcement Act of 1992, authorizing the FDA to
permanently or temporarily bar companies or individuals from submitting or assisting in
the submission of an ANDA. The FDA may also temporarily deny approval and suspend
applications to market generic drugs. The FDA may also suspend the distribution of all
drugs approved or developed in connection with certain wrongful conduct and, under certain
circumstances, also has the authority to withdraw approval of an ANDA and to seek civil
penalties. We do not expect the law to have a material impact on the review or approval of
our ANDAs.
Reimbursement
legislation, such as Medicaid, Medicare, Veterans Administration and other programs,
governs reimbursement levels. All pharmaceutical manufacturers rebate to individual states
a percentage of their revenues arising from Medicaid-reimbursed drug sales. Generic drug
manufacturers currently rebate 11% of average net sales price for products marketed under
ANDAs. Makers of NDA-approved products are required to rebate the greater of 15.2% of
average net sales price or the difference between average net sales price and the lowest
net sales price during a specified period. We believe that the federal and state
governments may continue to enact measures in the future aimed at reducing the cost of
drugs and devices to the public. We cannot predict the nature of such measures or their
impact on our profitability.
We
currently manufacture several products that are regulated as “old drugs” and
subject to the requirements of the Over-the-Counter Drug Review regulations promulgated by
the FDA. This class of drugs requires no prior approval from the FDA before marketing, but
such products must comply with applicable FDA monographs which specify, among other
things, required ingredients, dosage levels, label contents and permitted uses. These
monographs may be changed from time to time, in which case we might be required to change
the formulation, packaging or labeling of any affected product. Changes to monographs
normally have a delayed effective date, so while we may have to incur costs to comply with
any such changes, disruption of distribution is not likely.
The
FDA can also significantly delay the approval of a pending NDA or ANDA under its
“Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities
Policy.” Manufacturers of drugs and devices must also comply with the FDA’s
current Good Manufacturing Practices, or cGMP standards, or risk sanctions such as the
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suspension of manufacturing approval, the seizure of drug products or the FDA’s
refusal to approve additional applications.
We
can give no assurance that we will obtain the requisite approvals from the FDA for any of
our proposed products or processes, that the process to obtain such approvals will not be
excessively expensive or lengthy, or that we will have sufficient funds to pursue such
approvals. Our failure to receive the requisite approvals for our products or processes,
when and if developed, or significant delays in obtaining such approvals, would prevent us
from commercializing our products as anticipated and would have a materially adverse
effect on our business, financial condition and results of operations. See “Certain
Factors That May Affect Future Results — Intense regulation by government agencies
may delay our efforts to commercialize our proposed drug products.”
Product Liability
Insurance Coverage
We presently
maintain product liability insurance in the amount of $10,000,000 for the products we
market. The product liability insurance has a $100,000 deductible. We also maintain
product liability insurance for products in clinical investigations. Although we intend to
obtain product liability insurance prior to the commercialization of certain products that
are not presently covered, we can give no assurance that we will obtain such insurance at
favorable rates, or that any such insurance, even if obtained, will be adequate to cover
potential liabilities.
In
the event of a successful suit against us, insufficient insurance coverage could have a
materially adverse impact on our operations and financial condition. Furthermore, the
costs of defending or settling a product liability claim and any attendant negative
publicity may have a materially adverse affect upon us, even if we ultimately prevailed.
Furthermore, certain food and drug retailers require minimum product liability insurance
coverage as a precondition to purchasing or accepting products for commercial
distribution. Failure to satisfy these insurance requirements could impede our ability to
achieve broad commercial distribution of our proposed products, which could have a
materially adverse effect upon our business and financial condition.
Proprietary Technology
Our
generic business relies upon unpatented trade secrets and proprietary technologies and
processes. There is no assurance that others will not independently develop substantially
equivalent proprietary information and techniques, or gain access to our trade secrets or
proprietary technology, or that we can meaningfully protect unpatented trade secrets. We
require employees, consultants and other advisors to execute confidentiality agreements.
However, these agreements may not provide meaningful protection for our trade secrets, or
adequate remedies in the event of unauthorized use or disclosure of such information. The
manufacture and sale of certain products will involve the use of processes, products or
information, including some owned by others.
Employees
As
of March 5, 2003, we had 288 full-time employees, of whom 35 were employed in selling,
general and administrative activities, 100 were employed in quality and regulatory roles,
20 were employed in research and development and 133 were employed in manufacturing. None
of our employees is represented by a union. We believe our relationship with our employees
is good.
Item 2. Properties
We
have moved our principal executive offices to 6 Hollywood Court, South Plainfield, New
Jersey, the location of our 50,000 square foot manufacturing and administrative facility.
We
have a 50,000 square foot manufacturing and administrative facility, a 22,000 square foot
office and warehouse facility, a 12,700 square foot research and development laboratory
and a 21,500 square foot warehouse, office and shipping facility in four buildings, all of
which are located in South Plainfield, New Jersey. The premises are leased from
unaffiliated parties for terms expiring on March 31, 2015, September 30, 2004, June 14,
2005 and July 31, 2005, respectively. We also lease a 731 square foot facility in
Cincinnati, Ohio to house part of our sales
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force. We also maintain an administrative
office in Needham, Massachusetts which consists of approximately 2,580 square feet of
office space.
We
believe that our present facilities are adequate to meet our current needs. If new or
additional space is required, we believe that adequate facilities are available at
competitive prices in the respective areas.
Item 3. Legal Proceedings
On
August 27, 2001, Novopharm USA, Inc. filed a complaint against Able Laboratories, Inc. in
the Superior Court of New Jersey (Middlesex County), alleging that we had breached a joint
commercialization agreement for the development, production, marketing, and sale of
generic clorazepate dipotassium tablets. In its complaint, Novopharm sought approximately
$2,000,000 claimed to be due for payments made by Novopharm to improve our facilities and
in respect of Novopharm’s raw material purchase costs, and also made claims for
compensation for assistance rendered by Novopharm to us and for our sales of clorazepate
dipotassium tablets. We answered the claim, denying liability and also made counterclaims
against Novopharm asserting that it had failed to pay us $900,000 for clorazepate sales
and failed to undertake promised sales efforts. Further, we asserted that Novopharm’s
only recovery for advances and raw material costs was through sales under the joint
commercialization agreement and that Novopharm had breached a separate product agreement
by failing to pay us $269,000.
In
February 2003, we settled this matter and executed mutual releases with Novopharm. The
claims and counterclaims were dismissed with prejudice. The settlement had no material
effect on our consolidated financial position or results of operation.
We
are also involved in certain other legal proceedings from time to time incidental to our
normal business activities. While the outcome of any such proceedings cannot be accurately
predicted, we do not believe the ultimate resolution of any existing matters should have a
material adverse effect on our financial position or results of operations.
Item 4. Submission of
Matters to a Vote of Security Holders
No
matters were submitted to a vote of our security holders during the last fiscal quarter of
the year ended December 31, 2002.
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PART II
Item 5. Market for
Common Equity and Related Stockholder Matters
(a) Market Price of
Common Stock
Our
common stock is traded on the Nasdaq National Market and the Boston Stock Exchange under
the symbol “ABRX.” On March 17, 2003, based upon information from American Stock
Transfer & Trust Company, our transfer agent, there were approximately 2,543 holders
of record of common stock. We believe that there are a substantial number of additional
beneficial owners that hold common stock in “street name” through brokerage
firms. The following table sets forth, for the periods indicated, the range of quarterly
high and low sale prices as reported on the OTC Bulletin Board from January 1, 2001 to
November 18, 2002 and on the Nasdaq SmallCap Market from November 19, 2002 to December 31,
2002 for the Common Stock.
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