| UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 |
| FORM 10-K |
| (Mark one) | |
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the fiscal year ended December 31, 2004 | |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the period from _____________ to _______________. | |
| Commission File No. 0-24676 | |
| CARACO PHARMACEUTICAL LABORATORIES, LTD. | |
| (Exact name of registrant as specified in its charter) | |
| Michigan | 38-2505723 |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
| 1150 Elijah McCoy Drive, Detroit, MI 48202 | |
| (Address of principal executive office) | |
| (313) 871-8400 | |
| (Registrant’s telephone number) | |
| Securities Registered Pursuant to Section 12(b) of the Exchange Act: | |
| Title of Each Class to be so Registered |
Name of Each Exchange On which Each Class is to be Registered |
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| Common Stock, No Par Value | American Stock Exchange | ||
Securities Registered Pursuant to Section 12(g) of the Exchange Act: None. 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 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 amendments to this Form 10-K. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes |
The aggregate market value of the voting common stock held by non-affiliates, based on the last sale price of the common stock on June 30, 2004, as reported on the American Stock Exchange, was $90,511,898. Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date. As of March 4, 2005, there were 26,360,294 shares of common stock outstanding Documents Incorporated By Reference: Portions of registrant’s definitive 2005 Proxy Statement in connection with the Annual Meeting of Stockholders to be held in June 2005 (“2005 Proxy Statement”) to be filed on or before April 30, 2005 are incorporated by reference into Part III. |
CARACO PHARMACEUTICAL LABORATORIES, LTD. PART I Item 1. Business Introduction Caraco Pharmaceutical Laboratories, Ltd. (“Caraco” which is also referred to as the “Company,” the “Corporation,” “we,” “us” or “our”) is a corporation organized under Michigan law in 1984, to engage in the business of developing, manufacturing and marketing generic drugs for the ethical or prescription and over-the-counter or non-prescription or “OTC” markets. A generic drug is a pharmaceutical product, which is the chemical and therapeutic equivalent of a brand-name drug as to which the patent and/or market exclusivity has expired. Generics are well accepted for substitution of brand products as they sell at lower prices than the prices of the branded products and at their equivalence in quality and bioavailability. The Company’s principal executive offices are located at 1150 Elijah McCoy Drive, Detroit, Michigan 48202, and its telephone number is (313) 871-8400. The Company files annual reports, quarterly reports, current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any of the Company’s SEC filings at the SEC’s Public Reference Room at 450 5th Street, N.W., Washington, D.C., 20549. You may call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. Our SEC filings are also available to the public on the SEC’s website at http://www.sec.gov and our principal Internet address at www.caraco.com. We believe that these reports are made available as soon as reasonably practicable after we electronically file with or furnish them to the SEC. Overview Our manufacturing facility and executive offices were constructed in 1991, pursuant to a $9.1 million loan from the Economic Development Corporation of the City of Detroit (the “EDC”). Since August 1997, capital infusions and loans have primarily come from Sun Pharmaceutical Industries Limited, a specialty pharmaceutical corporation organized under the laws of India (“Sun Pharma”). Among other things, Sun Pharma has acted as a guarantor on loans to Caraco, has supplied us with raw materials for certain of our products, helped us obtain machinery and equipment to enhance our production capacities at competitive prices and transferred certain generic products to us. Sun Pharma’s investment in and support of Caraco has resulted in, since the second quarter of 2002, Caraco achieving the sales necessary to support its operations. As of March 4, 2005, Sun Pharma beneficially owns approximately 64% (69% including its convertible Series B Preferred Stock) of the outstanding common shares of Caraco. See “Current Status” and “Sun Pharmaceutical Industries Limited.” Current Status We posted record net sales during 2004. Net sales for 2004 were $60.3 million as compared to $45.5 million for 2003. We earned operating income of $0.2 million for 2004 as compared to $12.4 million for 2003. After interest costs, we incurred a net loss of $0.2 million for 2004 as compared to net income of $11.2 million for 2003. We incurred non-cash R&D expenses of $24.4 million during 2004 compared to $3.1 million during 2003. Net cash generated from operating activities was $22.0 million for 2004 as compared to of $15.5 million for 2003. At December 31, 2004, we had a stockholders’ equity of $25.8 million as compared to a stockholders’ deficit of $5.0 million at December 31, 2003. In |
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addition, for the first time since inception, in 2004 we have assets in excess of liabilities. See “Part II – Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We received two Abbreviated New Drug Application (“ANDA”) approvals in 2004. Additionally, during the first quarter of 2004, we received approval for an additional strength for one product in our portfolio. See “Caraco’s Products and Product Strategy” below. Pursuant to our products agreement with Sun Pharma Global, Inc. (“Sun Global”), a wholly-owned subsidiary of Sun Pharma, we have selected, through December 31, 2004, 18 products out of the 25 products to be transferred to us by Sun Global. Of these, eight products passed their bio-equivalency studies as of December 31, 2004, and two products passed since then. Sun Global has thereby earned 544,000 shares of Series B Preferred Stock for each product. Under the products agreement, Sun Global earns 544,000 preferred shares for each product. See “Sun Pharmaceutical Industries Limited” and “Part II – Item 6. – Future Outlook.” We filed six ANDAs with the FDA during 2004, and one since then. This brings our total number of ANDAs pending approval by the FDA to seven. One of the filed ANDAs is for a generic version of Ortho-McNeil Pharmaceutical Inc.’s Ultracet®, challenging its patent under a procedure commonly known as a “Paragraph IV Certification”. We believe that we were the third company to file a Paragraph IV Certification for the drug product and we do not expect to get 180 days exclusivity. Ortho-McNeil Pharmaceutical Inc. has instituted patent litigation against Caraco. (See “Item 3. Legal Proceedings” below.) During the first quarter of 2004, we appointed three independent directors, William C. Brooks, Timothy Manney and Georges Ugeux, to comply with the requirements of the Sarbanes-Oxley Act of 2002 and the regulations of the American Stock Exchange. The independent directors replace the three former independent directors who resigned in late 2003. During 2004, we repaid the entire balance of $4.4 million due to ICICI Bank Limited and the $6.4 million mortgage loan due to the Economic Development Corporation of the City of Detroit (the “EDC”), and repaid $12.5 million due to the Bank of Nova Scotia. We have also repaid the entire borrowing of $10.0 million from Citibank during 2004. These repayments leave us debt-free (other than normal accounts payables and accruals) at December 31, 2004, and our entire property, plant, equipment and intellectual property free of any mortgages, liens or similar restrictions. During the first quarter of 2004, Sun Pharma acquired 3,452,291 additional shares of common stock and 1,679,066 stock options from two former directors and a significant shareholder. Sun Pharma exercised these stock options during the fourth quarter of 2004, thereby increasing its beneficial ownership to 64% (69% including its convertible Series B Preferred Stock). On January 27, 2005, the Board of Directors of the Company resolved to change the Company’s fiscal year from December 31 to March 31 commencing in 2005. This change is being effectuated in order to make the Company’s fiscal year conform to the March 31 fiscal year of its parent company, Sun Pharma. The Company intends to file a transition report for the period January 1, 2005 through March 31, 2005 on Form 10-K no later than June 14, 2005. Subsequent to this, the Company’s Form 10-Ks will cover the fiscal year April 1 to March 31, the same as Sun Pharma’s fiscal year. Overview of the Generic Drug Industry We believe that sales of generic drugs have increased in recent years because of a number of factors including (i) modification of state and federal laws to permit or require substitution of generic drugs by pharmacists; (ii) enactment of ANDA procedures for obtaining FDA approval to manufacture generic prescription drugs; (iii) changes in governmental and third-party payor health care reimbursement policies to encourage cost containment; (iv) increased |
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acceptance of generic drugs by physicians, pharmacists and consumers; and (v) increased number of formerly patented drugs which have become available to generic competition. Although generic pharmaceuticals must meet the same quality standards as branded pharmaceuticals, they are sold at prices that are typically up to 90% (in some cases even more) below those of their branded counterparts. This discount tends to increase, and margins consequently decrease, as the number of generic competitors rises for a given branded product. Companies aspiring to earn higher margins for generic drugs have a strategy of patent challenge and first to file and obtain 180 days exclusivity. The developer of a generic product that is the first to have its ANDA accepted for filing by the FDA and whose filing includes a Paragraph IV Certification that the patent on the brand-name drug is invalid, unenforceable and/or not infringed may be eligible to receive a 180-day period of generic market exclusivity. During that 180-day period, the exclusive generic product would tend to earn higher margins on a higher volume of sales than in a situation in which other generic competition was also present. Products that are difficult to develop requiring difficult-to-source raw materials or representing smaller therapeutic niche markets, are generally marketed by fewer companies and may also offer margins that are higher than those where barriers to entry do not exist. Caraco’s Products and Product Strategy Our present product portfolio includes 19 prescription products in 34 strengths in 82 package sizes. The products and their use for the indications are set forth in the table below: |
| Generic Name | Purpose | |||
| Metroprolol Tartrate | Hyper-Tension | |||
| Miraphen PSE | Decongestant | |||
| Paromomycin Sulfate | Antibacterial | |||
| Salsalate | Decongestant | |||
| CMT | Arthritis/NSAID | |||
| Guaifenesin/DM | Decongestant | |||
| Clonazepam | Seizure, Panic Disorders | |||
| Flurbiprofen | Arthritis/NSAID | |||
| Carbamazepine | Epilepsy | |||
| Oxaprozin | Rheumatoid Disease | |||
| Metformin Hydrochloride | Diabetes | |||
| Tramadol Hydrochloride | Analgesic | |||
| Miraphen PE | Decongestant | |||
| Meperidine Hydrochloride* | Analgesic | |||
| Ticlopidine | Reduction of incidence of Strokes | |||
| Tizanidine | Management of Muscle Tone associated with spasticity | |||
| Digoxin | Heart Failure | |||
| Mirtazapine | Anti-depressant | |||
| Citalopram Hbr | Anti-depressant | |||
* Expected to be marketed sometime in 2005. |
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We have submitted 22 ANDAs to the FDA for approval since August 1997, including six filed during 2004 and one filed subsequent to year-end. Of these 22 ANDAs, the FDA has approved 15 through December 31, 2004. Accordingly, we have seven pending ANDAs. Our strategy has been to analyze the marketplace and try to determine opportunities for products having good market potential, that are difficult to develop, that require difficult-to-source raw materials and/or products representing smaller therapeutic niche markets. Recently, we have started looking at products which have potential patent litigation, and/or first to file opportunities. Sun Pharmaceutical Industries Limited Pursuant to a stock purchase agreement, Sun Pharma made an initial investment of $7.5 million for the purchase of 5.3 million common shares of Caraco in 1997. Sun Pharma and its affiliates had loaned us approximately $10 million since August 1997. As of December 31, 2003, we have repaid all of such loans. Sun Pharma has also assisted us, by acting as guarantor, in obtaining line of credit loans from ICICI Bank Limited, The Bank of Nova Scotia and Citibank FSB in the amounts of $5.0 million, $12.5 million and $10.0 million, respectively. In August 1997, we entered into an agreement, whereby Sun Pharma was required to transfer to us the technology formula for 25 generic pharmaceutical products over a period of five years through August 2003. We exchanged 544,000 shares of our common stock for each technology transfer of an ANDA product (when bio-equivalency studies were successfully completed) and 181,333 shares for each technology transfer of a DESI product. The products provided to us from Sun Pharma were selected by mutual agreement. Under such agreement, we conducted, at our expense, all tests including bio-equivalency studies. Pursuant to such agreement, Sun Pharma delivered to us the technology for 13 products. This agreement has expired and as noted below, we have entered into a new agreement, with Sun Global, an affiliate of Sun Pharma. On November 21, 2002, we entered into a products agreement with Sun Global. Under the agreement, which was approved by our independent directors, Sun Global has agreed to provide us with 25 new generic drugs over a five-year period. Our rights to the products are limited to the United States and its territories or possessions, including Puerto Rico. Sun Global retains rights to the products in all other territories. The products are selected by mutual agreement. Under such agreement, we conduct, at our expense, all tests including bio-equivalency studies. We are also obligated to market the products consistent with our customary practices and to provide marketing personnel. In return for the technology transfer, Sun Global will receive 544,000 shares of a newly created Series B Preferred Stock for each generic drug transferred when such drug has passed its bio-equivalency studies. The preferred shares are non-voting, do not receive dividends and are convertible into common shares after three years (or immediately upon a change in control) on a one-to-one basis. The preferred shares have a liquidation preference equal to the value attributed to them on the dates on which they were earned. While such preferred shares are outstanding, we cannot, without the consent of the holders of a majority of the outstanding shares of the preferred stock, amend or repeal our articles of incorporation or bylaws if such action would adversely affect the rights of the preferred stock. In addition, without such consent, we cannot authorize the issuance of any capital stock having any preference or priority superior to the preferred stock. The products agreement was amended by the Independent Committee, comprised of the three independent directors, in the first quarter of 2004 to eliminate the provision requiring that the Independent Committee concur in the selection of each product, and provides instead, that each product satisfy certain objective criteria developed by management and approved by the Independent Committee. Pursuant to such objective criteria, we have selected 18 products, eight of which passed bio-equivalency studies as of December 2004 and two products since then. Sun Global has thereby earned 544,00 shares of Series B Preferred Stock for each product. See Part II – Item 6. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Future Outlook.” |
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Sun Pharma has established Research and Development Centers in Mumbai and Vadodara in India, where the development work for products is performed. Sun Pharma and its subsidiaries supply us with certain raw materials and formulations. In addition, Sun Pharma assists us in acquiring machinery and equipment to enhance our production capacities. During 2004, we purchased approximately $16,710,000 in raw materials and formulations from Sun Pharma, as compared to $10,270,000 during 2003. We acquired $611,000 worth of machinery and equipment from Sun Pharma during 2004 as compared to $510,000 during 2003. Such machinery and equipment are sold to us at their cost. Sun Pharma also assists us by sending qualified technical professionals who work as Caraco employees. Sun Pharma and its affiliates may use Caraco as a contract manufacturer and/or distributor of their products. In December 2004, Caraco entered into such agreements for one product. During the first quarter of 2004, Sun Pharma acquired 3,452,291 additional shares of common stock and 1,679,066 stock options from two former directors and a significant shareholder. Sun Pharma exercised these stock options during the fourth quarter of 2004, thereby increasing its beneficial ownership to 64% (69% including its convertible Series B Preferred Stock). Prior Products Agreement With Non-Affiliate In 1993, we entered into a products agreement with an unaffiliated large generic drug company (the “Non-Affiliate”). Under the agreement, two products were to be delivered to us in exchange for royalties and options exercisable at $3.50 per share which could only be paid for out of royalties. Pursuant to the agreement, we received a formulation for one product, Metoprolol Tartrate (“the Product”), from the Non-Affiliate in March 1995. However, we have determined that the formula provided to us by the Non-Affiliate with respect to the Product is different than the formula submitted in an ANDA to the FDA in 1995, approved by the FDA in 1996 and manufactured and introduced by us since 1997. Accordingly, since April 2003, we have discontinued to accrue royalties. The Product has been one of our top selling products. There is no assurance that the Non-Affiliate will not challenge our determination and make a claim that royalties and/or options are owed. Marketing We believe the primary factors driving competition in the generic pharmaceutical industry are price, product development, timely FDA approval, manufacturing capabilities, product quality, customer service and reputation. Caraco competes effectively with respect to each of these factors; however, price is a key competitive factor in the generic pharmaceutical business. To compete effectively on the basis of price and remain profitable, a generic drug manufacturer must manufacture its products in a cost-effective manner. In addition, we maintain an adequate level of inventories to meet customer demands in a timely manner. Our products are effectively marketed among all classes of customers, including wholesalers, buying groups, retail pharmacies, hospitals, etc. Recently, the emergence of large buying groups representing independent retail pharmacies, managed care organizations and consolidation among major wholesalers, has resulted in higher discounts on pharmaceutical products. As the influence of these entities continues to grow, the Company continues to face pricing pressure on our products. Our marketing objective is to compete effectively, encourage long-term relationships and supply contracts and also expand our customer base. |
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Sales and Customers Our sales team effectively addressed the challenges in 2004 and is geared up to meet the objectives set up for 2005. The sales team is being strengthened to meet the growth needs. Shipments to three large wholesale customers, namely McKesson Corporation (44% and 10%), Amerisource-Bergen Corporation (24% and 61%) and Cardinal Health (11% and 9%), accounted for approximately 79% and 80% of gross sales in 2004 and 2003, respectively. Balances due from these customers represented approximately 82% and 84% of gross accounts receivable at December 31, 2004 and 2003, respectively. No other single customer represented more than 10% of our gross sales during the past two years. Certain of our customers purchase our products through designated wholesalers, such as Amerisource Bergen Corporation and/or McKesson Corporation, who act as intermediary distribution channels for our products. For example, the Veterans Administration, which has entered into the sales contract discussed below, has selected Mckesson as its designated wholesaler. We have entered into a sales contract with the Veterans Administration, an agency of the U.S. government. Our agreement with this customer is for the period of June 21, 2002 through June 20, 2003, with four 1-year option periods and is for the purchase of one product, Metformin Hydrochloride. The first two option periods were exercised. The agreement may be terminated by the purchaser without cause and in such case, we would only be entitled to a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges that have resulted from the termination. The agreement provides that certain penalties would be incurred if we are unable to meet our sales commitment. Seasonality The Company’s business, taken as a whole, is not materially affected by seasonal factors. Research and Development The development of new prescription ANDA products, including formulation, stability testing and the FDA approval process, averages from two to five years. A drug is “bioequivalent” to a brand-name drug if the rate and extent of absorption of the drug are not significantly different from those of the brand-name drug. Although we perform our own stability testing, bioequivalence is done through independent testing laboratories. An outline of research and development expenses incurred directly by Caraco for 2004, 2003 and 2002 are as follows ($000’s): |
| 2004 | 2003 | 2002 | ||||||||||
| Salaries | $ | 917 | $ | 719 | $ | 678 | ||||||
| Raw Materials/Supplies | 677 | 439 | 165 | |||||||||
| Bio-equivalency Studies | 2,068 | 179 | 594 | |||||||||
| Laboratory | 826 | 559 | 505 | |||||||||
| Technology Transfer, non-cash | 24,397 | 3,103 | 3,887 | |||||||||
| Other | 1,565 | 1,217 | 1,407 | |||||||||
| TOTAL | $ | 30,450 | $ | 6,216 | $ | 7,236 | ||||||
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Regulation The research and development, manufacture and marketing of our products are subject to extensive regulation by the FDA and by other federal, state and local entities, which regulate, among other things, research and development activities and the testing, manufacture, labeling, storage, record keeping, advertising and promotion of pharmaceutical products. The Federal Food, Drug and Cosmetic Act, the Public Health Services Act, the Controlled Substances Act and other federal statutes and regulations govern or influence our business. Noncompliance with applicable requirements can result in fines and other judicially imposed sanctions, including product seizures, injunction actions and criminal prosecutions. In addition, administrative remedies can involve voluntary recall of products, and the total or partial suspension of products as well as the refusal of the government to approve pending applications or supplements to approved applications. The FDA also has the authority to withdraw approval of drugs in accordance with statutory due process procedures. FDA approval is required before any dosage form of any new unapproved drug, including a generic equivalent of a previously approved drug, can be marketed. All applications for FDA approval must contain information relating to product formulation, stability, manufacturing processes, packaging, labeling and quality control. To obtain FDA approval for an unapproved new drug, a prospective manufacturer must also demonstrate compliance with the FDA’s current good manufacturing practices (“cGMP”) regulations as well as provide substantial evidence of safety and efficacy of the drug product. Compliance with cGMPs is required at all times during the manufacture and processing of drugs. Such compliance requires considerable Corporation time and resources in the areas of production and quality control. Following such inspections, the FDA may issue notices on Form 483 and Warning Letters that could cause a company to modify certain activities identified during the inspection. A Form 483 notice may be issued at the conclusion of an FDA inspection and lists conditions the FDA inspectors believe may violate cGMP or other FDA regulations. FDA guidelines specify that a Warning Letter is issued only for violations of “regulatory significance” for which the failure to adequately and promptly achieve correction may be expected to result in an enforcement action. We underwent FDA inspections during March and April 2001 and November 2002 and on each occasion we were found to be in substantial compliance with cGMPs. We did receive FDA 483s but we do not believe the observations are material and we have taken appropriate remedial actions. There are generally two types of applications that would be used to obtain FDA approval for pharmaceutical products: |
New Drug Application (“NDA”). Generally, the NDA procedure is required for drugs with active
ingredients and/or with a dosage form, dosage strength or delivery system of an active ingredient
not previously approved by the FDA. We do not expect to submit an NDA in the foreseeable future. | |
Abbreviated New Drug Application (“ANDA”). The Hatch-Waxman Act established a statutory procedure
for submission of ANDAs to the FDA covering generic equivalents of previously approved brand-name
drugs. Under the ANDA procedure, an applicant is not required to submit complete reports of preclinical
and clinical studies of safety and efficacy, but instead is required to provide |
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bioavailability data illustrating that the generic drug formulation is bioequivalent to a previously
approved drug. Bioavailability measures the rate and extent of absorption of a drug’s active
ingredient and its availability at the site of drug action, typically measured through blood levels.
A generic drug is bioequivalent to the previously approved drug if the rate and extent of absorption
of the generic drug are not significantly different from that of the previously approved brand-name
drug. |
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The FDA may deny an ANDA if applicable regulatory criteria are not satisfied. The FDA may withdraw product approvals if compliance with regulatory standards is not maintained or if new evidence demonstrating that the drug is unsafe or lacks efficacy for its intended uses becomes known after the product reaches the market. As previously disclosed, we currently manufacture several products that are regulated as Drug Efficacy Studies Implementation, or DESI, products. These products do not require the submission of an ANDA or an NDA to the FDA. These products are, however, subject to cGMP compliance. Also, while products within this DESI classification require no prior approval from the FDA before marketing, they 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. FDA policy and its stringent requirements have increased the time and expense involved in obtaining ANDA approvals and in complying with FDA’s cGMP standards. The ANDA filing and approval process takes approximately 12 to 18 months. The timing of final FDA approval of ANDA applications depends on a variety of factors, including whether or not the maker of the applicable branded drug is entitled to the protection of one or more statutory exclusivity periods, during which the FDA is prohibited from approving generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date. For example, the FDA may now extend the exclusivity of a product by six months past the date of a patent expiration if the manufacturer undertakes studies on the effect of their product in children (a so-called “pediatric extension”). FDA approval is required before each dosage form of any new drug can be marketed. Applications for FDA approval must contain information relating to bio-equivalency, product formulation, raw material suppliers, stability, manufacturing processes, packaging, labeling and quality control. FDA procedures require full-scale manufacturing equipment to be used to produce test batches for FDA approval. Validation of manufacturing processes by the FDA also is required before a company can market new products. The FDA conducts pre-approval and post-approval reviews and plant inspections to enforce these rules. Supplemental filings are required for approval to transfer products from one manufacturing site to another and may be under review for a year or more. In addition, certain products may only be approved for transfer once new bio-equivalency studies are conducted. The Hatch-Waxman Act provides incentives for generic pharmaceutical manufacturers to challenge patents on branded pharmaceutical products and/or their methods of use, as well as to develop non-infringing forms of the patented subject matter. The Hatch-Waxman legislation places significant burdens on the challenger to ensure that such suits are not frivolous, but also offers the opportunity for significant financial reward if the challenge is successful. If there is a patent listed in the FDA’s Orange Book at the time of filing an ANDA with the FDA and the generic drug company intends to market the generic equivalent prior to the expiration of that patent, the generic company files with its ANDA a certification asserting that the patent is invalid, unenforceable and/or not infringed (a so-called “Paragraph IV Certification”). After receiving notice from the FDA that its application is acceptable for filing, the generic company sends the patent holder and the holder of the New Drug Application (“NDA”) for the brand-name drug a notice explaining why it believes that the patents in question are invalid, unenforceable or not infringed. Upon receipt of the notice from the generic company, the patent holder has 45 days during which to bring a patent infringement suit in federal district court against the generic company. The discovery, trial and appeals process in such suits can take several years. |
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If a suit is commenced by the patent holder, the Hatch-Waxman Act provides for an automatic stay on the FDA’s ability to grant final approval of the ANDA for the generic product. The period during which the FDA may not approve the ANDA and the patent challenger therefore may not market the generic product is 30 months, or such shorter or longer period as may be ordered by the court. The 30-month period may or may not, and often does not, coincide with the timing of the resolution of the lawsuit or the expiration of a patent, but if the patent challenge is successful or the challenged patent expires during the 30-month period, the FDA may approve the generic drug for marketing, assuming there are no other obstacles to approval such as exclusivities given to the NDA holder. Under the Hatch-Waxman Act, the developer of a proposed generic drug which is the first to have its ANDA accepted for filing by the FDA, and whose filing includes a Paragraph IV Certification, may be eligible to receive a 180-day period of generic market exclusivity. This period of market exclusivity may provide the patent challenger with the opportunity to earn a return on the risks taken and its legal and development costs and to build its market share before competitors can enter the market. The Generic Drug Enforcement Act of 1992 establishes penalties for wrongdoing in connection with the development or submission of an ANDA by authorizing the FDA to permanently or temporarily bar companies or individuals from submitting or assisting in the submission of an ANDA, and to temporarily deny approval and suspend applications to market off-patent drugs. The FDA has authority to withdraw approval of an ANDA under certain circumstances and to seek civil penalties. The FDA can also significantly delay the approval of a pending ANDA under certain circumstances and to seek civil penalties. The FDA can also significantly delay the approval of a pending ANDA under its “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities Policy.” Manufacturers of drugs must also comply with the FDA’s cGMP standards or risk sanctions such as the suspension of manufacturing or the seizure of drug products and the FDA’s refusal to approve additional ANDAs. The Drug Enforcement Agency (“DEA”) conducts inspections bi-annually. Each domestic drug product-manufacturing establishment must be registered with the FDA. Establishments, like ours, handling controlled substances, must be licensed by the DEA. We are licensed by both the FDA and DEA. We are also subject to regulation under other federal, state and local regulations regarding work place safety, environmental protection and hazardous substance controls, among others. Specifically, we are licensed by the Michigan Board of Pharmacy as a manufacturer and wholesaler of prescription drugs and as a distributor of controlled substances. We are also licensed by the Michigan Liquor Control Commission to use alcohol in the manufacture of drugs. Reimbursement legislation, such as Medicaid, Medicare, 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 an applicable percentage of calculated average manufacturer price (AMP) marketed under ANDAs. 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. Environment The Company is subject to federal, state, and local laws and regulations relating to the protection of the environment. These evolving laws and regulations may require expenditures over a long period of time to control environmental impacts. The Company has established procedures for the ongoing evaluation of its operations to identify potential environmental exposures and assure compliance with regulatory policy and procedures. The Company believes that its operations comply in all material respects with applicable laws and regulations concerning the environment. While it is impossible to accurately predict the future costs associated with environmental compliance and potential compliance with environmental laws, any compliance is not expected to require significant |
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capital expenditures and has not had, and is not presently expected to have, a material adverse effect on the Company’s earnings or competitive position. Suppliers and Materials The principal components used in our business are active and inactive pharmaceutical ingredients and packaging materials. Some of these components are purchased from single sources, however, the majority of the components have an alternate source of supply. Development and approval of our pharmaceuticals are dependent upon our ability to procure components from FDA approved sources. Because the FDA approval process requires manufacturers to specify their proposed suppliers of components in their applications, FDA approval of a new supplier would be required if components were no longer available from the specified suppliers. We have been, and continue to be, actively identifying and validating alternate suppliers for our components. Our purchases of components are made from manufacturers in the U.S. and from abroad, including Sun Pharma. See “Sun Pharmaceutical Industries Limited.” All purchases of components are made in U.S. Dollars. Although to date no significant difficulty has been encountered in obtaining components required for products and sources of supply are considered adequate, there can be no assurance that we will continue to be able to obtain components as required. Competition The generic pharmaceutical industry is undergoing rapid and significant changes due to increasing number of generic manufacturers, introduction of authorized generics, technological advancement and consolidation among the customers. Many of our competitors have greater financial, production, and research and development resources and greater name recognition. The competition is becoming intense which is resulting in rapid erosion of prices and profit margins. The number of generic manufacturers both domestic and from overseas is increasing resulting in increased pricing pressure. The most significant means of competition are innovation and development, timely FDA approval, manufacturing capabilities, product quality, marketing, customer service, reputation and price. The principal competitive factor in the generic pharmaceutical market is the ability to be the first company, or among the first companies, to introduce a generic product after the related patent expires. Other competitive factors include price, quality, methods of distribution, reputation, customer service, including maintenance of inventories for timely delivery, and breadth of product line. Approvals for new products may have a synergistic effect on a company’s entire product line since orders for new products are frequently accompanied by, or bring about, orders for other products available from the same source. We believe that price is a significant competitive factor, particularly as the number of generic entrants with respect to a particular product increases. As competition from other manufacturers intensifies, selling prices typically decline. We hope to compete by selecting appropriate products, based on therapeutic segments, market sizes and number of competitors manufacturing the products, and by keeping our prices competitive and by providing reliability in the timely delivery, and in the quality, of our products. Employees As of December 31, 2004 and 2003, we had a total of 191 and 200 full-time equivalent employees, respectively, engaged in research and development, quality assurance, quality control, administration, sales and marketing, materials management, facility management and manufacturing and packaging. Most of our scientific and engineering employees have had prior experience with pharmaceutical or medical products companies, including Sun Pharma. See “Sun Pharmaceutical Industries Limited.” |
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A union represents substantially all of our permanent, full-time hourly employees. In September 2004, we successfully negotiated a four-year collective bargaining agreement with the union. This agreement sets forth the wage increases which the union employees will receive in each of the next four years, and thereby giving us and the union employees, we believe, a measure of certainty and stability.] We believe that we have a cordial relationship with our employees. Product Liability and Insurance We currently maintain general and product liability insurance, with coverage limits of $10 million per incident and in the aggregate. We also maintain special product liability insurance coverage for one of our products, Citalopram Hbr, considered as a SSRI product, with coverage limits of $1 million per incident and in the aggregate. Our insurance policies provide coverage on claims made basis and are subject to annual renewal. Such insurance may not be available in the future on acceptable terms or at all. There can be no assurance that the coverage limits of such policies will be adequate to cover our liabilities, should they occur. See “Item 3. Legal Proceedings.” Item 2. Properties. EDC Financing Pursuant to Section 108 of the Housing and Community Development Act of 1974, the EDC loaned us approximately $9.1 million in 1990 in accordance with a Development and Loan Agreement dated August 10, 1990. These funds were used to pay the direct costs of acquiring land and constructing thereon our pharmaceutical manufacturing facility and executive offices. See “Part I, Item 1, Business – Current Status”, “Part II, Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 5 of Notes to Financial Statements.” During 2004, we completely repaid the loan of $6.4 million. Accordingly, as of December 31, 2004, our entire property, plant, equipment and intellectual property are free of any mortgages, liens or similar restrictions. The Facilities Our approximately 70,000 square foot facility, which was designed and constructed to our specifications and completed in 1994, contains our production, packaging, research and corporate office. It is on a four-acre site. The manufacturing facility has a special building and systems design, with each processing area equipped with independent zone and air handling units to provide temperature and humidity control to each room. These air handling units are designed to prevent product cross contamination through the use of pre-filter and final HEPA filter banks. All processing air quarters are maintained in a negative pressure mode using laminar airflow design. This system of airflow provides a measurable control of air borne particulate entrapment in each room. Environmental segregation of individual rooms within a particular zone is accomplished by the use of duct HEPA filter booster fan units that facilitate the isolation and confinement of room activities. These special dynamics provide an added dimension and flexibility in product selection and processing techniques. We also have leased an approximately 55,000 square foot facility for storage of inventory and office space. The lease expires in 2007 and includes an option to renew until 2008. We have invested approximately $4.0 million in 2004, $2.4 million in 2003 and $1.6 million in 2002 to upgrade our facilities. |
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We believe the existing facilities are suitable and adequate for our current level of operations and anticipated growth in the near future. We also believe that our facility is adequately covered by insurance. Item 3. Legal Proceedings. As previously disclosed, on February 12, 2003, C. Arnold Curry filed a complaint in the Wayne County Circuit Court alleging breach of a written employment agreement. Dr. Curry is seeking 175,000 shares of our common stock (35,000 shares for each of the first five ANDAs approved by the FDA). We and plaintiff each filed a motion for summary disposition. Both parties’ motions were denied, and the parties have agreed that the matter will be submitted to binding arbitration. We intend to vigorously defend ourselves against these claims, which we believe have no merit. On September 22, 2004, Ortho-McNeil Pharmaceutical, Inc. (“Ortho-McNeil”) filed a complaint in the United States District Court for the Eastern District of Michigan alleging that the Company’s filing of an ANDA seeking approval to market its generic version of Ortho-McNeil’s Ultracet® drug product infringed Ortho-McNeil’s patent, which expires on September 6, 2011. Ortho-McNeil seeks an order from the Court which, among other things, directs the FDA not to approve Caraco’s ANDA any earlier than the claimed expiration date. As noted above under “Part I, Item 1, Business – Current Status”, the ANDA filed by Caraco contained a Paragraph IV Certification challenging the Ortho-McNeil patent. We believe that the Ortho-McNeil patent is invalid and/or will not be infringed by Caraco’s manufacture, use or sale of the product, and we intend to vigorously defend this action. From time to time, we are also involved in other legal proceedings incidental to our normal business activities, and while the outcome of any such proceedings cannot be accurately predicted, we do not believe the ultimate resolution of any existing matters would have a material adverse effect on our financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders. We did not submit any matters to a vote of security holders in the fourth quarter of the fiscal year through the solicitation of proxies or otherwise. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer’s and Affiliates’ Purchases of Equity Securities. Since August 2003, our common stock has been listed on the American Stock Exchange, under the symbol “CPD.” Prior to August 2003, our common stock was quoted on the OTC Bulletin Board under the symbol “CARA.” The following table sets forth, in U.S. dollars and cents, for 2004, the high and low sales prices for each of the calendar quarters, and for 2003 and 2002, the high and low bid prices. The quotations for the high and low bid prices reflect inter-dealer prices, without retail mark up, mark down or commissions and may not represent actual transactions. |
| 2004 | High | Low | |||||
|---|---|---|---|---|---|---|---|
| First Quarter | $ | 13.74 | $ | 7.31 | |||
| Second Quarter | $ | 11.94 | $ | 9.40 | |||
| Third Quarter | $ | 10.24 | $ | 6.80 | |||
| Fourth Quarter | $ | 10.00 | $ | 6.82 | |||
| 2003 | High | Low | |||||
| First Quarter | $ | 3.98 | $ | 2.65 | |||
| Second Quarter | $ | 6.63 | $ | 2.40 | |||
| Third Quarter | $ | 12.20 | $ | 6.47 | |||
| Fourth Quarter | $ | 11.90 | $ | 6.77 | |||
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As of March 4, 2005 there were 105 registered holders of our Common Stock. During 2004, we issued to Sun Global 4,352,000 preferred shares in exchange for the transfer of seven products (of which 544,000 preferred shares were earned during 2003 for one product transfer) pursuant to our current products agreement. During 2002, we issued to Sun Global 1,632,000 shares of common stock in exchange for the transfer of three products under the then existing products agreement. Pursuant to various stock and option purchase agreements between Sun Pharma and three stockholders and their affiliates, Sun Pharma acquired in January and February, 2004, 3,452,291 shares of common stock and rights to acquire options for 1,679,066 shares of common stock. The shares were acquired for $9.00 per share and the rights to the options were acquired for $9.00 less the exercise price of each option. During 2004, we issued 1,679,066 shares of common stock to Sun Pharma against exercise of stock options, which, Sun Pharma had acquired from two former directors during the first quarter of 2004. During 2003 and 2002, certain of our then non-employee directors were issued 31,000 and 36,000 shares, respectively, of common stock for attending board and committee meetings. During 2003, one of our then non-employee directors was issued 224,158 shares of common stock upon exercise of stock options. During 2002, we issued 635,000 shares of common stock for cash of $1,692,000 pursuant to a private placement to accredited investors. All shares of preferred stock and common stock were issued pursuant to exemptions from registration under Section 4(2), Section 4(6) and Regulation D under the Securities Act of 1933. Dividend Policy We never have declared or paid cash dividends on our common stock. We currently intend to retain all future earnings for the operation and expansion of our business. We do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends on the common stock will be at the discretion of the Board of Directors and will depend upon our results of operations, earnings, capital requirements, and other factors deemed relevant by our Board of Directors. Item 6. Selected Financial Data The following table sets forth selected historical financial data as of and for the years ended December 31, 2004, 2003, 2002, 2001 and 2000. The data are derived from our financial statements, which have been audited by Rehmann Robson, our independent auditors. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Financial Statements and the Notes to Financial Statements included elsewhere in this report. |
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| YEARS ENDED DECEMBER 31, | ||||||||||||||||||||
| 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
| Statement of operations data | (In thousands, except per share data) | |||||||||||||||||||
| Net sales | $ | 60,340 | $ | 45,498 | $ | 22,381 | $ | 5,922 | $ | 2,378 | ||||||||||
| Cost of goods sold | 24,441 | 19,507 | 12.047 | 4,186 | 2,679 | |||||||||||||||
| Gross profit (loss) | 35,899 | 25,991 | 10,334 | 1,736 | (301 | ) | ||||||||||||||
| Selling, general and administrative expenses | 5,277 | 7,363 | 3,828 | 2,680 | 2,509 | |||||||||||||||
| Research and development costs – affiliate – non cash | 24,397 | 3,103 | 3,887 | 0 | 230 | |||||||||||||||
| Research and development costs - other | 6,053 | 3,112 | 3,348 | 3,080 | 3,065 | |||||||||||||||
| Operating income (loss) | 172 | 12,412 | (730 | ) | ||||||||||||||||