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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[_] 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 0-31781
AMERICAN PHARMACEUTICAL PARTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0389419
(State of Incorporation) (I.R.S. Employer Identification No.)
11777 SAN VICENTE BOULEVARD, SUITE 550
LOS ANGELES, CA 90049 (310) 826-8505
(Address of principal executive offices, (Registrant's telephone number,
including zip code) 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 $0.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the 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. [_]
As of March 25, 2002, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $298,228,000 based upon the
average of the high and low prices of the Common Stock as reported on The Nasdaq
National Market on such date.
As of March 25, 2002, the Registrant had 49,735,063 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Proxy Statement for its 2002 Annual Meeting of
Stockholders are incorporated by reference into Items 11, 12 and 13 of this
report on form 10-K.
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AMERICAN PHARMACEUTICAL PARTNERS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 3
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity and Related 22
Stockholder Matters
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements With Accountants on Accounting 52
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners and Management 53
Item 13. Certain Relationships and Related Transactions 53
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 54
Signatures 56
2
PART I
ITEM 1. BUSINESS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K, which are not
historical facts, are forward-looking statements, as the term is defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, whether expressed or implied, are subject to risks and uncertainties
which can cause actual results to differ materially from those currently
anticipated, due to a number of factors, which include, but are not limited to:
o the impact of competitive products and pricing;
o the availability and pricing of raw materials and components used in
the manufacture of our pharmaceutical products;
o the ability to successfully manufacture products in an efficient,
time-sensitive and cost effective manner;
o the acceptance of and demand for our existing and new pharmaceutical
products;
o the impact of laws and regulations, and their interpretations, which
govern or affect the pharmaceutical industry;
o the impact of patents and other proprietary rights licensed or owned
by us, our competitors and other third parties;
o the difficulty in predicting the timing or outcome of product
development efforts and regulatory approvals;
o the actual results achieved in the Phase III clinical trials for
ABI-007;
o the timing of the completion of Phase III trials for ABI-007;
o licenses or acquisitions; and
o relationships and agreements with other parties.
Forward-looking statements also include the assumptions underlying or relating
to any of the foregoing or other such statements. When used in this report, the
words "may," "will," "should," "could," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "continue", and similar expressions are
generally intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. We
undertake no obligation to revise or publicly release the results of any
revision to these forward-looking statements. Readers should carefully review
the factors described in BUSINESS: FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS and other documents we file from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by
us in fiscal year 2002.
OVERVIEW
We are a specialty pharmaceutical company that develops, manufactures and
markets injectable pharmaceutical products. We currently produce over 100
generic injectable pharmaceutical products in more than 300 dosages and
formulations. Our primary focus is in the oncology, anti-infective and critical
care markets, and we believe that we offer one of the most comprehensive generic
injectable product portfolios in the pharmaceutical industry across these
therapeutic categories. We manufacture products in all three of the three basic
forms in which injectable products are sold: liquid, powder and lyophilized, or
freeze-dried. In November 2001, we obtained the exclusive North American rights
to manufacture and sell ABI-007, a proprietary injectable oncology product
candidate that is a patented formulation of paclitaxel. Paclitaxel is the active
ingredient in Taxol, the world's top selling cancer drug. A multi-center Phase
III clinical trial has commenced for ABI-007 for the treatment of metastatic
breast cancer, or breast cancer that has spread to other parts of the body.
Our products are generally used in hospitals, long-term care facilities,
alternate care sites, and clinics. Unlike the retail pharmacy market for oral
products, the injectable pharmaceuticals marketplace is largely made up of end
users who have relationships with
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group purchasing organizations, or GPOs. GPOs enter into collective purchasing
agreements with pharmaceutical suppliers for products in an effort to secure
favorable drug pricing on behalf of their members.
We were incorporated in Delaware in 2001, as successor to a California
corporation formed in 1996.
OUR STRATEGY
Our goal is to become an industry leader in the development, manufacture, sale
and distribution of injectable pharmaceutical products. The key elements of our
strategy include:
o CONTINUE TO FOCUS ON HIGHER-MARGIN OPPORTUNITIES. We believe there
continue to be significant opportunities for growth driven by an
increasing number of patent expirations for proprietary injectable
pharmaceutical products. We will continue to target products where
additional generic competition is likely to be limited because of
complexities in product development, the need for specialized
manufacturing capabilities and the need for raw materials that are
difficult to obtain. In particular, we will continue to focus on
product opportunities in the oncology, anti-infectives and critical
care markets, where we can utilize the manufacturing facilities that
we already have in place.
o CONTINUE TO FOCUS ON GPO RELATIONSHIPS. We will continue to focus on
maintaining strong relationships with the leading GPOs in the United
States. Much of our growth to date has resulted from increased
penetration of our existing products into hospitals that are members
of the largest GPOs. These relationships are key to ensuring a market
for the products we develop and thus enable us to invest aggressively
in new product development.
o PURSUE PROPRIETARY PHARMACEUTICAL PRODUCT OPPORTUNITIES IN OUR FOCUS
THERAPEUTIC AREAS. We intend to acquire or license rights to
proprietary injectable pharmaceutical products in our focus
therapeutic areas, allowing us to enhance our market presence and
visibility, as well as our revenue growth and profitability. We intend
to take advantage of our manufacturing and marketing resources in
oncology, anti-infectives and critical care by entering into
development and marketing collaborations with companies that are
developing proprietary products.
o COMPLEMENT INTERNAL GROWTH WITH STRATEGIC ACQUISITIONS. We believe
opportunities exist for us to enhance our competitive position by
acquiring companies with complementary products and technologies. We
also intend to invest in or acquire additional manufacturing capacity
to meet projected increased demand for our current and future
products.
OUR PRODUCTS
INJECTABLE ONCOLOGY PRODUCTS
We presently market eleven injectable oncology products. According to IMS
Health, Inc., a market research firm, we were the market leader for four of
these products in terms of units sold for 2001, selling more units than the
innovator and all generic competitors. Our injectable oncology products
generated net sales of approximately $31.2 million in 2001, which represented
approximately 16% of our total net sales for that year.
Our oncology products include:
CISPLATIN. Cisplatin is a chemotherapy agent used alone or in combination with
other agents to treat metastatic testicular or ovarian cancer, Hodgkin's
disease, non-Hodgkin's lymphoma, brain tumors, cancer of the nervous system and
head, neck, bone, cervical, lung and bladder cancer. Bristol-Myers Squibb
originally marketed cisplatin under the brand name Platinol. Together with
several other companies, we prevailed in a lawsuit invalidating Bristol-Myers'
patent covering this product in October 1999 and the FDA granted us 180 days of
market exclusivity when we launched cisplatin in November 1999. We are currently
one of five producers of cisplatin competing for market share. According to IMS,
we were the market leader for cisplatin in terms of units sold in 2001.
DACARBAZINE. Dacarbazine is a chemotherapy agent used alone or in combination
with other agents to treat Hodgkin's disease, cancer of the nervous system,
soft-tissue sarcoma and malignant skin, islet cell and thyroid cancer. Bayer AG
originally marketed dacarbazine under the brand name DTIC-Dome. According to
IMS, we sold the largest number of units of dacarbazine in 2001 of any
manufacturer.
MESNA. Mesna is used to treat the side effects associated, and is currently sold
together with the chemotherapy drug ifosfamide. Bristol-Myers originally
marketed mesna under the brand name Mesnex. We currently are one of only two
generic companies who have received approval from the FDA to sell mesna. We
launched this product in May 2001.
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INJECTABLE ANTI-INFECTIVE PRODUCTS
We market 15 injectable anti-infective products. According to IMS, we were the
market leader for five of our injectable anti-infective products in terms of
units sold during 2001. Our injectable anti-infective products generated net
sales of approximately $54.7 million in 2001, which represented approximately
28% of our total net sales for that year.
We believe we offer one of the most comprehensive portfolios of injectable
anti-infective products, including six different classes of antibiotics. We own
and operate one of only two dedicated manufacturing facilities in the United
States for generic cephalosporins. We currently are the only generic competitor
offering first-generation, second-generation and third generation
cephalosporins. Dedicated facilities are required by the FDA for the manufacture
of cephalosporins. According to IMS, the markets for second and third generation
cephalosporins were approximately $100 million and $800 million, respectively,
in 2001.
Our anti-infective products include:
VANCOMYCIN. Vancomycin is an antibiotic used to treat some types of Staph or
Strep infections, particularly in-patients who are allergic to penicillins or
cephalosporins, and other infections. Eli Lilly originally marketed vancomycin
under the brand name Vancocin HCL. We currently are one of five competitors for
injectable vancomycin. We are the only generic competitor to offer a 10-gram
formulation of this antibiotic. According to IMS, we sold the second largest
number of units of vancomycin in 2001.
DOXYCYCLINE. Doxycycline is an antibiotic used to treat anthrax, Rocky Mountain
Spotted Fever, typhus and mycoplasma pneumonia. Pfizer, Inc. originally marketed
doxycycline under the brand name Vibramycin. We currently manufacture and
distribute nearly all of the injectable doxycycline sold in North America.
CEFOTAXIME. Cefotaxime is a broad spectrum antibiotic in the third-generation
cephalosporin class of antibiotics. It is used to treat intra-abdominal
infections such as peritonitis, central nervous system infections including
meningitis, lower respiratory tract, genitourinary, and gynecological
infections, bacteremia and septicemia, and infections of the skin, bone and
joints. Abbott Laboratories originally marketed this drug under the brand name
Claforan. We initially introduced cefotaxime on a limited basis in September
2001, and conducted a full launch of the product in February 2002.
GENTAMICIN. Gentamicin is an antibiotic used to treat endocarditis, septicemia
and bacterial, bone, respiratory tract, soft tissue, urinary tract and other
infections. Schering-Plough originally marketed gentamicin under the brand name
Garamycin. We currently are one of six competitors for gentamicin. According to
IMS, we sold the second largest number of units of injectable gentamicin during
2001.
INJECTABLE CRITICAL CARE PRODUCTS
We market 62 injectable critical care products. According to IMS, we were the
market leader for seven of our injectable critical care products in terms of
units sold in 2001. Our injectable critical care products generated net sales of
approximately $100.4 million in 2001, which represented approximately 52% of our
total net sales for that year.
Our critical care products include:
HEPARIN. Injectable heparin is a blood thinner used to prevent and treat blood
clotting, especially in patients during and after surgery. We manufacture one of
the most comprehensive lines of injectable heparin. We currently are one of
seven competitors for injectable heparin and are one of only two companies
currently selling beef lung heparin. According to IMS, we sold the third largest
number of units of injectable heparin during 2001.
OXYTOCIN. Oxytocin is used to induce labor at term and control postpartum
bleeding. Wyeth-Ayerst originally marketed oxytocin under the brand name
Pitocin. We are currently the only manufacturer of generic oxytocin. According
to IMS, we were the market leader for oxytocin in terms of units sold in 2001.
HALOPERIDOL DECANOATE. Haloperidol is an antipsychotic agent used to treat
psychoses, Tourette's Syndrome and severe behavioral problems in children.
Ortho-McNeil Pharmaceuticals originally marketed haloperidol decanoate under the
brand name Haldol Decanoate.
GENERIC INJECTABLE PHARMACEUTICALS UNDER DEVELOPMENT
Since our acquisition of the Fujisawa generic business in 1998, which included
seven abbreviated new drug applications, or ANDAs, that were pending with the
FDA, we have filed a total of 26 ANDAs for injectable product candidates with
the FDA and received a total of 26 new generic product approvals. In the year
ended December 31, 2001, we received 13 ANDA approvals and
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had an additional 14 ANDAs pending with the FDA. We have over 50 product
candidates under development, including 17 oncology, 18 anti-infective and 17
critical care products.
PROPRIETARY INJECTABLE PRODUCT
ABI-007, A PROPRIETARY INJECTABLE ONCOLOGY PRODUCT CANDIDATE
We have licensed ABI-007, a patented formulation of paclitaxel, from American
BioScience, Inc. (ABI). Paclitaxel is the active ingredient in Taxol, the
world's largest selling cancer drug marketed by Bristol-Myers. A multi-center
Phase III clinical trial has commenced for ABI-007 for the treatment of
metastatic breast cancer.
Many oncology drugs, including paclitaxel, are water insoluble and thus often
require toxic solvents to formulate the drugs for injection. Taxol and its
generic equivalents contain the toxic solvent Cremaphor. The toxicity of
Cremaphor limits the dose of Taxol that can be administered, potentially
limiting the efficacy of the drug. Furthermore, patients receiving Taxol require
pre-medication with steroids to prevent the toxic side effects associated with
Cremaphor and, in some cases, require a growth factor such as G-CSF to overcome
low white blood cell levels resulting from chemotherapy. The FDA-approved dose
of Taxol is 135-175 mg/m/2/, administered over three to 24 hours using
specialized intravenous tubing. Despite the difficulties associated with
administration and serious dose-limiting toxicities, it is estimated that
approximately $1.5 billion of Taxol and its generic equivalents were sold in
2001.
ABI-007 utilizes a proprietary nanoparticle drug delivery technology to
encapsulate paclitaxel in albumin, a human protein found in blood. Because
ABI-007 is not formulated with Cremaphor, we believe ABI-007 provides several
advantages over Taxol and its generic equivalents, including:
o avoiding the need for steroid pre-medication
o reducing or eliminating the need for G-CSF support
o allowing for more rapid infusion, using standard intravenous tubing
Three Phase I studies to determine the maximum tolerated dose of ABI-007 have
been completed and have found that ABI-007 can be tolerated at much higher doses
than Taxol without the need for steroid pre-medication.
Enrollment has been completed for two multi-center Phase II trials, in which
ABI-007 was administered at the current maximum FDA-approved dose of Taxol (175
mg/m/2) and at a much higher dose of 300 mg/m/2 over 30 minutes as
mono-therapy, without steroid pre-medication, in patients with metastatic breast
cancer. Data from these Phase II trials will be presented at the American
Society of Clinical Oncology (ASCO) annual meeting in May 2002.
A randomized Phase III trial in breast cancer patients to directly compare
ABI-007 with Taxol has been initiated and a number of treatment centers have
begun patient enrollment. The actual results achieved in the Phase III clinical
trials may not be reflective of the Phase I or Phase II clinical trial data, or
may fail to demonstrate sufficient safety and efficacy required to obtain the
necessary regulatory approvals or to warrant further product development.
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In November 2001, we signed a license agreement with American BioScience under
which we acquired the exclusive rights to market and sell ABI-007 in North
America, and have paid the up-front licensing fees under that agreement. This
license is perpetual. American BioScience is responsible for substantially all
costs associated with the development of ABI-007, except that we have agreed to
provide up to $2 million of ABI-007 for use in clinical trials. The cost of the
clinical product was charged to research and development expense in the year
ended December 31, 2001. We are required to make milestone payments of up to (a)
$60 million for indications relating to breast, ovarian and lung cancers and (b)
$32.5 million for indications relating to prostate cancer and other indications
agreed upon between American BioScience and us. We also may be required to make
additional milestone payments, of up to an aggregate of $110 million, based upon
the achievement of particular annual sales levels. Profits from any sales of
ABI-007 shall be shared equally after deducting costs of goods sold, selling
expenses and other appropriate deductions. All costs and expenses related to
product recalls and product liability claims generally will be split equally
between American BioScience and us.
In November 2001, we also entered into a manufacturing agreement with American
BioScience under which we agreed to manufacture ABI-007 for American BioScience
and its licensees for sales outside North America during the term of the
agreement. Under this agreement, we were granted the exclusive right to
manufacture ABI-007 for sales in North America for a period of three years and
the non-exclusive right to manufacture ABI-007 for sales (a) outside North
America and (b) in North America after expiration of the three year exclusivity
period. We will charge American BioScience and its licensees a customary margin
on our manufacturing costs based on whether the product will be used for
clinical trials or commercial sale. The initial term of this agreement is ten
years and may be extended for successive two-year terms by American BioScience.
RESEARCH AND DEVELOPMENT
We have approximately 57 employees dedicated to product development, including
more than 20 employees with Ph.D.s, who have expertise in areas such as
pharmaceutical formulation, analytical chemistry and drug delivery. We operate a
research and development facility in a building of approximately 140,000 square
feet that we own in Melrose Park, Illinois.
We have made, and will continue to make, substantial investment in research and
development. Research and development costs for the fiscal year ended December
31, 2001 were approximately $14.0 million, including stock-based compensation.
When developing new products, we consider a variety of factors, including:
o potential pricing and gross margins
o existing and potential market size
o our manufacturing capabilities and access to raw materials
o potential development and competitive challenges
o whether these products complement our existing products and the
opportunity to leverage these products with the development of
additional products
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SALES AND MARKETING
We employ a sales force comprised of 38 field sales and national accounts
professionals, supported by our customer service and sales support groups. Our
representatives have substantial injectable pharmaceutical sales experience.
We sell our products primarily to hospitals, long-term care facilities,
alternate care sites, clinics and doctors who administer injectable products in
their offices. Most purchases by these buyers are made through arrangements with
GPOs, which negotiate collective purchasing agreements on behalf of their
members, or through specialty distributors, which specialize in particular
therapeutic categories such as oncology. We have relationships with all of the
major GPOs in the United States, which we believe collectively account for over
95% of all hospital-based pharmaceutical purchases in the United States. We also
have relationships with specialty distributors. Through these agreements, we
believe we have access to nearly 100% of the buyers of injectable products in
the United States.
We currently derive, and expect to continue to derive, a large percentage of our
revenue from customers that have relationships with a small number of GPOs.
Currently, less than ten GPOs control a large majority of sales to hospital
customers. We have purchasing arrangements with the major GPOs in the United
States, including AmeriNet, Inc., Broadlane Healthcare Corporation, Consorta,
Inc., MedAssets Inc., Novation, LLC, Owen Healthcare, Inc., PACT, LLC and
Premier Purchasing Partners, LP. In order to maintain these relationships, we
believe we need to be reliable in terms of supply, offer a broad product line,
remain price competitive, comply with FDA regulations and provide high-quality
products. Most of our GPO agreements may be terminated on 60 or 90 days' notice.
Our international sales, outside U.S. and Canada, are approximately 1% of our
total net sales.
COMPETITION
We face competition from major, brand name pharmaceutical companies as well as
generic manufacturers such as Bedford Laboratories, Elkin-Sinn Laboratories,
Sicor Inc. and Teva Pharmaceutical Industries Ltd. We have experienced
additional competition from brand name competitors that have entered the generic
pharmaceutical industry by creating generic subsidiaries, purchasing generic
companies or licensing their products prior to or as their patents expire. Many
pharmaceutical companies are developing, or have developed and are marketing,
alternative formulations of paclitaxel, generic versions of Taxol and other
cancer therapies that may compete directly or indirectly with ABI-007.
Revenue and gross profit derived from sales of generic pharmaceutical products
tend to follow a pattern based on regulatory and competitive factors. As patents
for brand name products and related exclusivity periods expire, the first
generic pharmaceuticals manufacturer to receive regulatory approval for generic
versions of these products is generally able to achieve significant market
penetration and higher margins. As competing generic manufacturers receive
regulatory approvals on similar products, market share, revenue and gross profit
typically decline. The level of market share, revenue and gross profit
attributable to a particular generic pharmaceutical product is normally related
to the number of competitors in that product's market and the timing of that
product's regulatory approval and launch, in relation to competing approvals and
launches. We must continue to develop and introduce new products in a timely and
cost-effective manner and identify niche products with significant barriers to
entry in order to maintain our revenue and gross margins.
REGULATORY CONSIDERATIONS
Proprietary and generic prescription pharmaceutical products are subject to
extensive pre- and post-market regulation by the FDA, including regulations that
govern the testing, manufacturing, safety, efficacy, labeling, storage, record
keeping, advertising, and promotion of the products under the Federal Food Drug
and Cosmetic Act and the Public Health Services Act, and by comparable agencies
in foreign countries. 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 in the United States. All applications for FDA approval must
contain information relating to pharmaceutical formulation, stability,
manufacturing, processing, packaging, labeling and quality control.
GENERIC DRUG APPROVAL
The Drug Price Competition and Patent Term Restoration Act of 1984, or the
Hatch-Waxman Act, established abbreviated FDA approval procedures for those
proprietary drugs that are no longer protected by patents and which are shown to
be equivalent to previously approved proprietary drugs. Approval to manufacture
these drugs is obtained by filing an abbreviated new drug
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application, or an ANDA. An ANDA is a comprehensive submission that must contain
data and information pertaining to the active pharmaceutical ingredient, drug
product formulation, specifications and stability of the generic drug, as well
as analytical methods, manufacturing process validation data and quality control
procedures. As a substitute for clinical studies, the FDA may require data
indicating that the ANDA drug formulation is equivalent to a previously approved
proprietary drug. In order to obtain an ANDA approval of strength or dosage form
that differs from the referenced brand name drug, an applicant must file and
have granted an ANDA Suitability Petition. A product is not eligible for ANDA
approval if it is not determined by the FDA to be equivalent to the referenced
brand name drug or if it is intended for a different use. However, such a
product might be approved under a New Drug Application, or an NDA, with
supportive data from clinical trials.
One advantage of the ANDA approval process is that an ANDA applicant generally
can rely upon equivalence data in lieu of conducting pre-clinical testing and
clinical trials to demonstrate that a product is safe and effective for its
intended use. We generally file ANDAs to obtain approval to manufacture and
market our generic products. No assurance can be given that ANDAs submitted for
our products will receive FDA approval on a timely basis, if at all.
NEW DRUG APPROVAL
The process required by the FDA before a new drug may be marketed in the United
States generally involves:
o completion of pre-clinical laboratory and animal testing
o submission of an investigational new drug application, or IND, which
must become effective before clinical trials may begin
o performance of adequate and well-controlled human trials to establish
the safety and efficacy of the proposed drug product's intended use
o submission to and approval by the FDA of an NDA
Clinical trials are typically conducted in three sequential phases that
may overlap. These phases generally include:
o Phase I during which the drug is introduced into healthy human
subjects or, on occasion, patients, and generally is tested for
safety, stability, dose tolerance and metabolism
o Phase II during which the drug is introduced into a limited patient
population to determine the efficacy of the product in specific
targeted diseases, to determine dosage tolerance and optimal dosage
and to identify possible adverse effects and safety risks
o Phase III during which the clinical trial is expanded to a more
diverse patient group in geographically dispersed trial sites to
further evaluate clinical efficacy, optimal dosage and safety
The drug sponsor, the FDA or the Institutional Review Board at each institution
at which a clinical trial is being performed may suspend a clinical trial at any
time for various reasons, including a belief that the subjects are being exposed
to an unacceptable health risk.
The results of product development, preclinical animal studies and human studies
are submitted to the FDA as part of the NDA. The NDA also must contain extensive
manufacturing information. The FDA may approve or disapprove the NDA if
applicable FDA regulatory criteria are not satisfied or it may require
additional clinical data. Once approved, the FDA may withdraw the product
approval if compliance with pre- and post-market regulatory standards are not
maintained or if problems occur after the product reaches the marketplace. In
addition, the FDA may require post-marketing studies to monitor the effect of
approved products and may limit further marketing of the product based on the
results of these post-marketing studies. The FDA has broad post-market
regulatory and enforcement powers, including the ability to levy fines and civil
penalties, suspend or delay issuance of approvals, seize or recall products, and
withdraw approvals.
Satisfaction of FDA pre-market approval requirements typically takes several
years and the actual time required may vary substantially based upon the type,
complexity and novelty of the product or disease. Government regulation may
delay or prevent marketing of potential products for a considerable period of
time and impose costly procedures upon a manufacturer's activities. Success in
early stage clinical trials does not assure success in later stage clinical
trials. Data obtained from clinical activities is not always conclusive and may
be susceptible to varying interpretations that could delay, limit or prevent
regulatory approval. Even if a product receives regulatory approval, later
discovery of previously unknown problems with a product may result in
restrictions on the product or even complete withdrawal of the product from the
market.
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MANUFACTURING
Our manufacturing facilities are located in Melrose Park, Illinois and Grand
Island, New York. These facilities, which include dedicated cephalosporin powder
filling and oncolytic manufacturing suites, have in the aggregate approximately
277,000 square feet of manufacturing, packaging, laboratory, office and
warehouse space.
We can produce a broad range of dosage formulations, including lyophilized
products, liquids, both aseptically filled and terminally sterilized, and
powders. We currently produce approximately 200 million vials per year.
In addition to manufacturing, we have fully integrated manufacturing support
systems, including quality assurance, quality control, regulatory affairs and
inventory control. These support systems enable us to maintain high standards of
quality for our products and simultaneously deliver reliable services and goods
to our customers on a timely basis.
We are required to comply with the applicable FDA manufacturing requirements
contained in the FDA's current Good Manufacturing Practice, or GMP, regulations.
GMP regulations require quality control and quality assurance as well as the
corresponding maintenance of records and documentation. Our manufacturing
facilities must meet GMP requirements in order that we can manufacture our
products. We are subject to the periodic inspection of our facilities,
procedures and operations and/or the testing of our products by the FDA, the
Drug Enforcement Administration and other authorities to assess our compliance
with applicable regulations.
Failure to comply with the statutory and regulatory requirements subjects the
manufacturer to possible legal or regulatory action, including the seizure or
recall of products, injunctions, consent decrees placing significant
restrictions on or suspending manufacturing operations, and civil and criminal
penalties. Adverse experiences with the product must be reported to the FDA and
could result in the imposition of market restriction through labeling changes or
in product removal. Product approvals may be withdrawn if compliance with
regulatory requirements is not maintained or if problems concerning safety or
efficacy of the product occur following approval.
RAW MATERIALS
The manufacture of our products requires raw materials and other components that
must meet stringent FDA requirements. Some of these raw materials and other
components are currently available only from a limited number of sources.
Additionally, our regulatory approvals for each particular product denote the
raw materials and components, and the suppliers for such materials, we may use
for that product. Even when more than one supplier exists, we may elect to list,
and in some cases have only listed, one supplier in our applications with the
FDA. Any change in a supplier not previously approved must then be submitted
through a formal approval process with the FDA. From time to time, it is
necessary to maintain increased levels of certain raw materials due to the
anticipation of raw material shortages and decreases in competition.
INTELLECTUAL PROPERTY
Our success depends on our ability to operate without infringing the patents and
proprietary rights of third parties. We cannot determine with certainty whether
patents or patent applications of other parties will materially affect our
ability to make, use or sell any products. A number of pharmaceutical companies,
biotechnology companies, universities and research institutions may have filed
patent applications or may have been granted patents that cover aspects of our
or our licensors' products, product candidates or other technologies.
We rely on trade secrets, unpatented proprietary know-how, continuing
technological innovation and, in some cases, patent protection to preserve our
competitive position. As of December 31, 2001, we owned three patents issued by
the U.S. Patent and Trademark Office covering some processes used in the
manufacture of our products. In addition, ABI-007 is covered by at least six
issued patents owned by American BioScience relating to composition of matter,
method of use and method of preparation.
Intellectual property protection is highly uncertain and involves complex legal
and factual questions. Our patents and those for which we have or will license
rights may be challenged, invalidated, infringed or circumvented, and the rights
granted in those patents may not provide proprietary protection or competitive
advantages to us. We and our licensors may not be able to develop patentable
products. Even if patent claims are allowed, the claims may not issue, or in the
event of issuance, may not be sufficient to protect the technology owned by or
licensed to us.
Third-party patent applications and patents could reduce the coverage of the
patents licensed, or that may be licensed to or owned by us. If patents
containing competitive or conflicting claims are issued to third parties, we may
be enjoined from commercialization of products or be required to obtain licenses
to these patents or to develop or obtain alternative technology. In
10
addition, other parties may duplicate, design around or independently develop
similar or alternative technologies to ours or our licensors.
Litigation may be necessary to enforce patents issued or licensed to us or to
determine the scope or validity of another party's proprietary rights. U.S.
Patent Office interference proceedings may be necessary if we and another party
both claim to have invented the same subject matter. We could incur substantial
costs and our management's attention would be diverted if:
o patent litigation is brought by third parties
o we participate in patent suits brought against or initiated by our
licensors
o we initiate similar suits
o we participate in an interference proceeding
In addition, we may not prevail in any of these actions or proceedings.
EMPLOYEES
As of December 31, 2001, we had a total of 940 full-time employees, of which 57
were engaged in research and development, 690 were in manufacturing, 53 were in
sales and marketing and 140 were in administration and finance. None of our
employees are represented by a labor union or subject to a collective bargaining
agreement. We have not experienced any work stoppage and consider our relations
with our employees to be good.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the executive
officers ("Executive Officers") and certain key employees of the Company as of
March 29, 2002:
NAME AGE POSITION
---- --- --------
Patrick Soon-Shiong, M.D. 49 President, Chief Executive Officer
and Chairman
Derek J. Brown 52 Co-Chief Operating Officer, Chief
Financial Officer, Secretary and
Director
Jeffrey M. Yordon 53 Co-Chief Operating Officer and
Director
Jack C. Silhavy 45 Vice President and General Counsel
Mitchall Clark 41 Vice President of Regulatory Affairs
Mia Igyarto 48 Vice President of Human Resources
Rajesh Kapoor, Ph.D. 49 Vice President of Quality Assurance/
Quality Control
Thomas Shea 63 Vice President of Corporate Marketing
Dennis Szymanski, Ph.D. 51 Vice President of Product Development
Sam Trippie 61 Vice President of Manufacturing
The following is a brief description of the capacities in which each of the
Executive Officers and key employees has served during the past five years.
PATRICK SOON-SHIONG, M.D. has served as President of the Company since July
2001 and Chief Executive Officer and Chairman of the Board of Directors of the
Company since its inception in March 1996. From the Company's inception to
August 1997, Dr. Soon-Shiong served as its Chief Financial Officer. Since June
1994, Dr. Soon-Shiong has also served as president, chief financial officer and
a director of ABI. From June 1994 to June 1998, he served as chief executive
officer and chairman of the Board of Directors of VivoRx, Inc., a biotechnology
company. Dr. Soon-Shiong is named as a co-inventor on over 30 issued U.S.
patents. Dr. Soon-Shiong is a fellow of the American College of Surgeons and the
Royal College of Physicians and Surgeons of Canada. Dr. Soon-Shiong holds a
degree in Medicine from the University of the Witwatersrand and a M.S. in
Science from the University of British Columbia.
11
DEREK J. BROWN has served as Co-Chief Operating Officer since June 2000 and
Chief Financial Officer, Secretary and a director of the Company since August
1997. From November 1995 to June 1998, he served as vice president of finance
and administration and as chief financial officer of VivoRx, Inc. Mr. Brown
serves as a director of ABI. Mr. Brown also has over eight years of public
accounting experience, having served as a manager at Price Waterhouse. Mr. Brown
is a Chartered Accountant and holds a Bachelor of Commerce in Economics and an
M.B.A. from the University of the Witwatersrand.
JEFFREY M. YORDON has served as Co-Chief Operating Officer since June 2000
and a director of the Company since August 1997. From August 1997 to July 2001,
Mr. Yordon served as President of the Company. From January 1994 to June 1996,
Mr. Yordon served as president of Faulding Pharmaceuticals, Inc. Mr. Yordon has
also held various senior management positions at several pharmaceutical
companies, including Gensia, Inc. and LyphoMed, Inc. Mr. Yordon holds a B.S. in
Political Science and Business from Northern Illinois University.
JACK C. SILHAVY has served as Vice President and General Counsel of the
Company since September 1999. From October 1986 to August 1999, Mr. Silhavy
worked as an attorney for Monsanto Company, a diversified company with food
ingredient, pharmaceutical, agricultural and other businesses. He served as
assistant general counsel for Monsanto from May 1992 to August 1999. Mr. Silhavy
holds a B.A. in American Studies from the University of Notre Dame and a J.D.
from Loyola University of Chicago.
MITCHALL CLARK has served as the Company's Vice President of Regulatory
Affairs since September 1998. From May 1997 to September 1998, Mr. Clark served
as senior director of regulatory affairs at VivoRx, Inc. Prior to that, he
served as senior director of regulatory affairs from April 1996 to May 1997 at
Faulding, Inc. Mr. Clark holds a B.Pharm. from the University of Nottingham,
United Kingdom.
MIA IGYARTO has served as the Company's Vice President of Human Resources
since July 2001. From March 1995 to July 2001, she served as vice president of
human resources for McWhorter Technologies, Inc., a specialty chemicals company
that was acquired by Eastman Chemical Company in July 2000. She holds a B.S. in
biology from Northern Illinois University and an M.B.A. from Northwestern
University, Kellogg School of Management.
RAJESH KAPOOR, PH.D. has served as the Company's Vice President of Quality
Assurance/Quality Control since February 2000. From March 1997 to February 2000,
Dr. Kapoor was a director of quality assurance/quality control at American Home
Products Corporation, a pharmaceutical company. From November 1995 to March
1997, he served as director of quality assurance/quality control at Regeneron
Pharmaceuticals, Inc., a biotechnology company. From September 1993 to November
1995, Dr. Kapoor served as a manager of quality assurance development at Bayer
Corporation, a pharmaceutical company. Dr. Kapoor holds a B.S. in Biochemistry
from the University of Essex in England, an M.B.A. from Suffolk University and a
Ph.D. in Biochemistry from the University of Lancaster, England.
THOMAS SHEA has served as the Company's Vice President of Corporate
Marketing since April 2000. From June 1998 to April 2000, he served as the
Company's Senior Director of Corporate Marketing. From October 1989 to June
1998, Mr. Shea served as senior director of corporate marketing at Fujisawa
Healthcare, Inc., a pharmaceutical company. Prior to that, he held various
positions at LyphoMed, Inc., a pharmaceutical company, including director of
national accounts and marketing and senior director of corporate marketing. Mr.
Shea holds an M.A. from Catholic University.
DENNIS SZYMANSKI, PH.D. has served as the Company's Vice President of
Product Development since February 1999. From December 1997 to January 1999, Dr.
Szymanski served as vice president of U.S. research and development at
Pharmascience Laboratories Inc., a pharmaceutical company. From April 1988 to
December 1997, Dr. Szymanski served as vice president of research and
development at Lemmon Company, a pharmaceutical company that was acquired by
Teva Pharmaceuticals USA in 1990. Prior to that, Dr. Szymanski held various
positions at Baxter International, a pharmaceutical company, and G.D. Searle
Pharmaceuticals. Dr. Szymanski holds a B.S. in Pharmacy and a Ph.D. in
Pharmaceutics from Wayne State University.
SAM TRIPPIE has served as the Company's Vice President of Manufacturing
since June 1998. From September 1992 to June 1998, Mr. Trippie served as vice
president of manufacturing at Fujisawa USA, Inc., a pharmaceutical company.
Prior to that, Mr. Trippie was vice president of manufacturing at Sanofi Animal
Health Ltd. and held various positions in quality assurance and manufacturing at
Baxter International. Mr. Trippie holds a B.S. in Microbiology from the
University of Southwest Louisiana.
12
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
OUR MARKETS ARE HIGHLY COMPETITIVE AND, IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY, OUR REVENUE WILL DECLINE AND OUR BUSINESS WILL BE HARMED.
The markets for injectable pharmaceutical products are highly competitive,
rapidly changing and undergoing consolidation. Most of our products are generic
injectable versions of brand name products that are still being marketed by
proprietary pharmaceutical companies. The first company to market a generic
product is often initially able to achieve high sales, profitability and market
share with respect to that product. Prices, revenue and market size for a
product typically decline, however, as additional generic manufacturers enter
the market.
We face competition from major, brand name pharmaceutical companies as well as
generic manufacturers such as Bedford Laboratories, Elkin-Sinn Laboratories,
Sicor Inc. and Teva Pharmaceutical Industries Ltd. Smaller companies may also
prove to be significant competitors, particularly through collaboration
arrangements with large and established companies. Many of these entities have
significantly greater research and development, financial, sales and marketing,
manufacturing, regulatory and other resources than us. As a result, they may be
able to devote greater resources to the development, manufacture, marketing or
sale of their products, receive greater resources and support for their
products, initiate or withstand substantial price competition, more readily take
advantage of acquisition or other opportunities, or otherwise more successfully
market their products.
Any reduction in demand for our products could lead to a decrease in prices,
fewer customer orders, reduced revenues, reduced margins, reduced levels of
profitability, or loss of market share. These competitive pressures could
adversely affect our business and operating results.
IF WE ARE UNABLE TO DEVELOP AND COMMERCIALIZE NEW PRODUCTS, OUR FINANCIAL
CONDITION WILL DETERIORATE.
Revenue and profit margins for a pharmaceutical product generally decline as new
competitors enter the market. As a result, our future success will depend on our
ability to commercialize the product candidates we are currently developing, as
well as develop new products in a timely and cost-effective manner. We have over
50 new product candidates under development. Successful development and
commercialization of our product candidates will require significant investment
in many areas, including research and development and sales and marketing, and
we may not realize a return on those investments. In addition, development and
commercialization of new products are subject to inherent risks, including:
o failure to receive necessary regulatory approvals
o difficulty or impossibility of manufacture on a large scale
o prohibitive or uneconomical costs of marketing products
o failure to be developed or commercialized prior to the successful
marketing of similar or superior products by third parties
o acceptance by customers
o infringement on the proprietary rights of third parties
o new patents for existing products may be granted, which could prevent
the introduction of newly-developed products for additional periods of
time
o the FDA may grant another manufacturer a 180-day period of marketing
exclusivity under the Drug Price Competition and Patent Term
Restoration Act of 1984, or the Hatch-Waxman Act, as patents or other
exclusivity periods for brand name products expire
The timely and continuous introduction of new products is critical to our
business. Our financial condition will deteriorate if we are unable to
successfully develop and commercialize new products.
13
IF SALES OF OUR KEY PRODUCTS DECLINE, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
Our top product for 2001, heparin, accounted for approximately 13.6% of our net
sales. Our top ten products accounted for approximately 58% of our net sales in
2001. Our key products could lose market share or revenue by numerous factors,
many of which are beyond our control, including:
o lower prices offered on similar products by other manufacturers
o substitute or alternative products or therapies
o development by others of new pharmaceutical products or treatments
that are more effective than our products
o entrance of new products to our markets
o interruptions in manufacturing or supply
o changes in the prescribing practices of physicians
o changes in third-party reimbursement practices
o migration of key customers to other manufacturers or sellers
Any factor adversely affecting the sale of our key products may cause our
revenues to decline.
IF WE OR OUR SUPPLIERS ARE UNABLE TO COMPLY WITH ONGOING AND CHANGING REGULATORY
STANDARDS, SALES OF OUR PRODUCTS COULD BE DELAYED OR PREVENTED.
Virtually all aspects of our business, including the development, testing,
manufacturing, processing, quality, safety, efficacy, packaging, labeling,
record-keeping, distribution, storage and advertising of our products and
disposal of waste products arising from these activities, are subject to
extensive regulation by federal, state and local governmental authorities in the
United States, including the U.S. Food and Drug Administration, or the FDA. Our
business is also subject to regulation in foreign countries. Compliance with
these regulations is costly and time-consuming.
Our manufacturing facilities and procedures and those of our suppliers are
subject to ongoing regulation, including periodic inspection by the FDA and
foreign regulatory agencies. For example, manufacturers of pharmaceutical
products must comply with detailed regulations governing current good
manufacturing practices, including requirements relating to quality control and
quality assurance. We must spend funds, time and effort in the areas of
production, safety, quality control and quality assurance to ensure compliance
with these regulations. In the recent past, we have received warning letters
from the FDA regarding our Melrose Park, Illinois manufacturing facility. We
cannot assure you that our manufacturing facilities or those of our suppliers
will not be subject to regulatory action in the future.
Our products generally must receive appropriate regulatory clearance before they
can be sold in a particular country, including the United States. We may
encounter delays in the introduction of a product as a result of, among other
things, insufficient or incomplete submissions to the FDA for approval of a
product, objections by another company with respect to our submissions for
approval, new patents by other companies, patent challenges by other companies,
and changes in regulatory policy during the period of product development or
during the regulatory approval process. The FDA has the authority to revoke drug
approvals previously granted and remove from the market previously approved
products for various reasons, including issues related to current good
manufacturing practices for that particular product or in general. We may be
subject from time to time to product recalls initiated by us or by the FDA and,
in the recent past, we have initiated several product recalls. Delays in
obtaining regulatory approvals, the revocation of a prior approval, or product
recalls could impose significant costs on us and adversely affect our ability to
generate revenue.
Our inability or the inability of our suppliers to comply with applicable FDA
and other regulatory requirements can result in, among other things, warning
letters, fines, consent decrees restricting or suspending our manufacturing
operations, delay of approvals for new products, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of sales and criminal
prosecution. Any of these or other regulatory actions could materially adversely
affect our business and financial condition.
THE MANUFACTURE OF OUR PRODUCTS IS HIGHLY EXACTING AND COMPLEX, AND IF WE OR OUR
SUPPLIERS ENCOUNTER PRODUCTION PROBLEMS, OUR BUSINESS MAY SUFFER.
All of the products we make are sterile, injectable drugs. We also purchase such
products from other companies. The manufacture of these products is highly
exacting and complex, due in part to strict regulatory requirements and
standards which govern both the
14
manufacture of a particular product and the manufacture of these types of
products in general. Problems may arise during their manufacture due to a
variety of reasons including equipment malfunction, failure to follow specific
protocols and procedures, and environmental factors. If problems arise during
the production of a batch of product, that batch of product may have to be
discarded. This could, among other things, lead to loss of the cost of raw
materials and components used, lost revenue, time and expense spent in
investigating the cause, and, depending on the cause, similar losses with
respect to other batches or products. If such problems are not discovered before
the product is released to the market, recall costs may also be incurred. To the
extent we experience problems in the production of our pharmaceutical products,
this may be detrimental to our business, operating results and reputation.
IF WE ARE UNABLE TO MAINTAIN OUR GPO OR KEY CUSTOMER ARRANGEMENTS, SALES OF OUR
PRODUCTS AND REVENUE WOULD DECLINE.
Almost all injectable pharmaceutical products are sold to customers through
arrangements with group purchasing organizations, or GPOs, and distributors. The
majority of hospitals contract with the GPO of their choice for their purchasing
needs. We currently derive, and expect to continue to derive, a large percentage
of our revenue from customers that have relationships with a small number of
GPOs. Currently, less than ten GPOs control a large majority of sales to
hospital customers. We have purchasing arrangements with the major GPOs in the
United States, including AmeriNet, Inc., Broadlane Healthcare Corporation,
Consorta, Inc., MedAssets Inc., Novation, LLC, Owen Healthcare, Inc., PACT, LLC
and Premier Purchasing Partners, LP. In order to maintain these relationships,
we believe we need to be reliable in terms of supply, offer a broad product
line, remain price competitive, comply with FDA regulations and provide
high-quality products. The GPOs with whom we have relationships also have
relationships with other manufacturers that sell competing products and may
decide to contract for or otherwise prefer products other than ours for one or
more of these or other reasons. Most of our GPO agreements may be terminated on
60 or 90 days notice. If we are unable to maintain our arrangements with GPOs
and key customers, sales of our products and revenue would decline.
IF ABI-007 IS NOT DEVELOPED INTO A SUCCESSFUL COMMERCIAL PRODUCT, OUR FUTURE
PROFITABILITY COULD BE ADVERSELY AFFECTED AND WE WOULD BE UNABLE TO RECOUP THE
INVESTMENTS MADE TO LICENSE THIS PRODUCT CANDIDATE.
In connection with our agreement to license ABI-007 from ABI, we have paid a
substantial upfront licensing fee, and committed to make milestone and royalty
payments. The inability to successfully develop and commercialize ABI-007 could
cause us to lose some or all of the investment we made to license this product
candidate.
A multi-center Phase III clinical trial has commenced for ABI-007 for the
treatment of metastatic breast cancer, or breast cancer that has spread to other
parts of the body. American BioScience is responsible for conducting clinical
trials and obtaining necessary regulatory approvals prior to commercialization
of ABI-007. The amount and timing of resources American BioScience devotes to
develop ABI-007 is not within our control. Additionally, any breach or
termination of the ABI-007 license agreement could delay or stop the
commercialization of ABI-007.
The results from pre-clinical studies and early clinical trials conducted to
date may not be predictive of results to be obtained in later clinical trials.
Clinical trials conducted for ABI-007 may not demonstrate sufficient safety and
efficacy to obtain the necessary regulatory approvals or a commercially viable
product may not result. If the results of Phase III clinical trials are not
satisfactory, American BioScience will need to conduct additional clinical
trials or cease developing ABI-007. The commencement and completion of clinical
trials may be delayed by many factors that are beyond our control, including:
o scheduling or other conflicts with participating clinicians and
clinical institutions
o slower than anticipated patient enrollment
o difficulty in finding and retaining patients fitting the trial profile
o adverse events occurring during the clinical trials
Even if regulatory approvals are obtained for, and we commercialize, ABI-007, we
may not generate sales sufficient to recoup the investments made to license
ABI-007. In addition, we would need to significantly expand our sales force to
market ABI-007 to oncologists. Further, a number of pharmaceutical companies are
working to develop alternative formulations of paclitaxel, generic versions of
Taxol and other cancer drugs and therapies, any of which may compete directly or
indirectly with ABI-007 and which might adversely affect the commercial success
of ABI-007.
15
OUR STRATEGY TO LICENSE RIGHTS TO OR ACQUIRE AND COMMERCIALIZE PROPRIETARY
PRODUCTS MAY NOT BE SUCCESSFUL, AND WE MAY NEVER RECEIVE ANY RETURN ON OUR
INVESTMENT IN THESE PRODUCT CANDIDATES.
Because our research and development activities are not focused on the
development of proprietary products, we intend to license rights to or acquire
proprietary products from third parties. Other companies, including those with
substantially greater financial and sales and marketing resources, will compete
with us to license rights to or acquire these products. We may not be able to
license rights to or acquire these proprietary products on acceptable terms, if
at all. Even if we obtain rights to a pharmaceutical product and commit to
payment terms, including, in some cases, significant up-front license payments,
we may not be able to generate product sales sufficient to create a profit or
otherwise avoid a loss. ABI-007 is the only proprietary product that we have
licensed to date.
A product candidate may fail to result in a commercially successful drug for
other reasons, including the possibility that the product candidate may:
o fail to receive necessary regulatory approvals
o be difficult or uneconomical to produce in commercial quantities
o be precluded from commercialization by proprietary rights of third
parties
o fail to achieve market acceptance
Our marketing strategy, distribution channels and levels of competition with
respect to any licensed or acquired proprietary product may be different than
those of our current products, and we may not be able to compete favorably in
any new proprietary product category.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR GROWTH, WHICH COULD HARM OUR
FINANCIAL CONDITION.
Our financial success is dependent in part on our ability to successfully manage
our growth. We have had a history of rapid growth, and our operating results
will depend on our ability to accurately forecast revenues and control expenses,
as well as on a number of external factors. A decline in the growth rate of our
revenues without a corresponding and timely slowdown in expense growth could
have an adverse impact on our business, results of operations, financial
condition or cash flows.
WE AND SOME OF OUR OFFICERS AND DIRECTORS, INCLUDING OUR PRESIDENT AND CEO, HAVE
POTENTIAL CONFLICTS OF INTEREST WITH RESPECT TO OUR PAST AND ONGOING
RELATIONSHIPS WITH AMERICAN BIOSCIENCE THAT WE MAY NOT BE ABLE TO RESOLVE ON
TERMS FAVORABLE TO US.
Conflicts of interest may arise between American BioScience and us in a number
of areas relating to our past and ongoing relationships, including:
o intellectual property matters, as well as licensing arrangements we
have entered, or may enter, into with American BioScience
o employee retention and recruiting
o loans
o payment of dividends
o issuances of capital stock
o election of directors
o business opportunities that may be attractive to both American
BioScience and us
16
Some of our officers and directors may experience conflicts of interest with
respect to decisions involving business opportunities and similar matters that
may arise in the ordinary course of our business or the business of American
BioScience. Our President, Chief Executive Officer and Chairman of our Board of
Directors, Patrick Soon-Shiong, M.D., is also the president, chief financial
officer and a director of American BioScience. Dr. Soon-Shiong also beneficially
owns over 80% of the outstanding capital stock of American BioScience. Derek J.
Brown, our Co-Chief Operating Officer, Chief Financial Officer and a member of
our Board of Directors, is also a director of American BioScience.
We expect to resolve potential conflicts of interest on a case-by-case basis, in
the manner required by applicable law and customary business practices. We
entered into an agreement with American BioScience in July 2001 under which we
acknowledged and agreed that Dr. Soon-Shiong and Mr. Brown may devote time to
the business of, receive remuneration from and present business opportunities to
American BioScience and that American BioScience's business and operations may
compete with us. This agreement does not ensure the continued services of either
Dr. Soon-Shiong or Mr. Brown. Resolutions of some potential conflicts of
interest are subject to review and approval by our Board of Directors,
including, in some instances, the independent and disinterested non-executive
directors and by our governance committee. We still may be unable, however, to
resolve some potential conflicts of interest with American BioScience and Dr.
Soon-Shiong and, even if we do, the resolution may be less favorable than if we
were dealing with an unaffiliated party because of their controlling interest in
our company. Nothing restricts American BioScience from competing with us, and
American BioScience is not obligated to engage in any future business
transactions with us or license any products it may develop in the future to us.
WE DEPEND HEAVILY ON THE PRINCIPAL MEMBERS OF OUR MANAGEMENT AND RESEARCH AND
DEVELOPMENT TEAMS, THE LOSS OF WHOM COULD HARM OUR BUSINESS.
We depend heavily on the principal members of our management and research and
development teams, including Dr. Patrick Soon-Shiong, our President and Chief
Executive Officer, Derek Brown, our Co-Chief Operating Officer and Chief
Financial Officer, and Jeffrey Yordon, our Co-Chief Operating Officer. We do not
have employment agreements with any of these individuals, and the loss of the
services of any one of them may significantly delay or prevent the achievement
of our product development or business objectives. Competition among
pharmaceutical and biotechnology companies for qualified employees is intense,
and the ability to attract and retain qualified individuals is critical to our
success. We may not be able to attract and retain these individuals on
acceptable terms or at all, and our inability to do so would significantly harm
our business and reputation.
WE DEPEND ON THIRD PARTIES TO SUPPLY RAW MATERIALS AND OTHER COMPONENTS AND MAY
NOT BE ABLE TO OBTAIN SUFFICIENT QUANTITIES OF THESE MATERIALS, WHICH WILL LIMIT
OUR ABILITY TO MANUFACTURE OUR PRODUCTS ON A TIMELY BASIS AND HARM OUR OPERATING
RESULTS.
The manufacture of our products requires raw materials and other components that
must meet stringent FDA requirements. Some of these raw materials and other
components are currently available only from a limited number of sources.
Additionally, our regulatory approvals for each particular product denote the
raw materials and components, and the suppliers for such materials, we may use
for that product. Obtaining approval to change, substitute or add a raw material
or component, or the supplier of a raw material or component, can be time
consuming and expensive, as testing and regulatory approval is necessary. In the
past, we have experienced shortages in some of the raw materials and components
we purchase. If our suppliers are unable to deliver sufficient quantities of
these materials on a timely basis or we encounter difficulties in our
relationships with these suppliers, the manufacture and sale of our products may
be disrupted, and our business, operating results and reputation could be
adversely affected.
OTHER COMPANIES MAY CLAIM THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY OR
PROPRIETARY RIGHTS, WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR
PREVENT US FROM SELLING OUR PRODUCTS.
Our success depends in part on our ability to operate without infringing the
patents and proprietary rights of third parties. The manufacture, use and sale
of new products with conflicting patent rights have been subject to substantial
litigation in the pharmaceutical industry. These lawsuits relate to the validity
and infringement of patents or proprietary rights of third parties. This is
especially true for the sale of generic versions of products for which the
patent covering the brand name product is expiring, an area where infringement
litigation is prevalent. A number of pharmaceutical companies, biotechnology
companies, universities and research institutions may have filed patent
applications or may have been granted patents that cover aspects of our products
or our licensor's products, product candidates or other technologies.
Future patents issued to third parties may contain claims that conflict with our
products. We are subject to infringement claims from time to time in the
ordinary course of our business, and third parties could assert infringement
claims against us in the future
17
with respect to our current products, products we may develop or products we may
license. Litigation or interference proceedings could force us to:
o stop or delay selling, manufacturing or using products that
incorporate or are made using the challenged intellectual property
o pay damages
o enter into licensing or royalty agreements that may not be available
on acceptable terms, if at all
Any litigation or interference proceedings, regardless of their outcome, would
likely delay the regulatory approval process, be costly and require significant
time and attention of our key management and technical personnel.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS IN THE UNITED STATES
AND FOREIGN COUNTRIES COULD LIMIT OUR ABILITY TO MANUFACTURE OR SELL OUR
PRODUCTS.
We rely on trade secrets, unpatented proprietary know-how, continuing
technological innovation and, in some cases, patent protection to preserve our
competitive position. Our patents and those for which we have or will license
rights, including for ABI-007, may be challenged, invalidated, infringed or
circumvented, and the rights granted in those patents may not provide
proprietary protection or competitive advantages to us. We and our licensors may
not be able to develop patentable products. Even if patent claims are allowed,
the claims may not issue, or in the event of issuance, may not be sufficient to
protect the technology owned by or licensed to us. Third party patents could
reduce the coverage of the patents license, or that may be license to or owned
by us. If patents containing competitive or conflicting claims are issued to
third parties, we may be prevented from commercializing the products covered by
such patents, or may be required to obtain or develop alternate technology. In
addition, other parties may duplicate, design around or independently develop
similar or alternative technologies.
We may not be able to prevent third parties from using our intellectual
property. We generally control and limit access to, and the distribution of, our
product documentation and other proprietary information. Despite our efforts to
protect this proprietary information, however, unauthorized parties may obtain
and use information that we regard as proprietary. Other parties may
independently develop know-how or obtain access to our technologies.
The laws of some foreign countries do not protect proprietary information to the
same extent as the laws of the United States, and many companies have
encountered significant problems and costs in protecting their proprietary
information in these foreign countries.
The U.S. Patent and Trademark Office and the courts have not established a
consistent policy regarding the breadth of claims allowed in pharmaceutical
patents. The allowance of broader claims may increase the incidence and cost of
patent interference proceedings and the risk of infringement litigation. On the
other hand, the allowance of narrower claims may limit the value of our
proprietary rights.
IF WE ARE UNABLE TO INTEGRATE POTENTIAL FUTURE ACQUISITIONS SUCCESSFULLY, OUR
BUSINESS MAY BE HARMED.
As part of our business strategy and growth plan, we plan to acquire businesses,
technologies or products that we believe complement our business. The process of
integrating an acquired business, technology or product may result in unforeseen
operating difficulties and expenditures and may require significant management
attention that would otherwise be available for ongoing development of our
existing business. In addition, we may not be able to maintain the levels of
operating efficiency that any acquired company achieved or might have achieved
separately. Successful integration of the companies we acquire will depend upon
our ability to, among other things, eliminate redundancies and excess costs. As
a result of difficulties associated with combining operations, we may not be
able to achieve cost savings and other benefits that we might hope to achieve
with acquisitions. Future acquisitions could result in potentially dilutive
issuances of our equity securities, the incurrence of debt and contingent
liabilities or have an undesirable impact on our consolidated financial
statements.
18
WE ARE SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL SALES AND PURCHASES, WHICH
COULD HARM BOTH OUR DOMESTIC AND INTERNATIONAL OPERATIONS.
As part of our business strategy and growth plan, we plan to expand our
international sales as we obtain regulatory approvals to market our products in
foreign countries, including countries in the European Union and South America,
as well as expand our purchases of raw materials and finished products overseas.
Expansion of our international operations could impose substantial burdens on
our resources, divert management's attention from domestic operations and
otherwise harm our business. In addition, international operations are subject
to risks, including:
o regulatory requirements of differing nations
o inadequate protection of intellectual property
o difficulties and costs associated with complying with a wide variety
of complex domestic and foreign laws and treaties
o legal uncertainties regarding, and timing delays associated with,
tariffs, export licenses and other trade barriers
o increased difficulty in collecting delinquent or unpaid accounts
o adverse tax consequences
o currency fluctuations
Any of these or other factors could adversely affect our ability to compete in
international markets and our operating results.
WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS THAT COULD CAUSE US TO INCUR
SIGNIFICANT COSTS OR CEASE SELLING SOME OF OUR PRODUCTS.
We may be held liable for, or incur costs related to, liability claims if any of
our products, or any products that use or incorporate any of our technologies,
cause injury or are found unsuitable during development, manufacture, sale or
use. These risks exist even with respect to products that have received, or may
in the future receive, regulatory approval for commercial use.
We currently maintain insurance coverage for product liability claims in the
aggregate amount of $100 million, including primary and excess coverages. Our
product liability insurance may not be adequate and, at any time, insurance
coverage may not be available on commercially reasonable terms or at all. A
product liability claim could result in liability to us greater than our
insurance coverage or assets. Even if we have adequate insurance coverage,
product liability claims or recalls could result in negative publicity or force
us to devote significant time and attention to those matters.
ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF, OR
CONTAMINATION FROM, HAZARDOUS MATERIALS COULD BE COSTLY TO RESOLVE.
Our research and development and manufacturing activities involve the controlled
use of hazardous materials and disposal of chemical, biological and other
hazardous waste. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of these
materials. Some of our facilities are located in industrial areas and may
experience environmental contamination due to the activities of third parties.
We cannot eliminate the risk of accidental contamination or discharge and any
resulting injury from these materials or areas. In the event of an accident or
contamination, we could be liable for costs and damages or be penalized with
fines, and this liability could exceed our resources. We may have to incur
significant costs to comply with future environmental laws and regulations. New
governmental regulations may have an adverse effect on the research,
development, manufacture and marketing of our products.
THE FTC IS STUDYING RELATIONSHIPS BETWEEN BRAND NAME AND GENERIC PHARMACEUTICAL
COMPANIES AND INVESTIGATING THE MARKET FOR PACLITAXEL.
The U.S. Federal Trade Commission, or the FTC, has instituted an industry-wide
study into whether brand name and generic pharmaceutical companies have entered
into agreements or have used other strategies to delay introduction of generic
versions of proprietary drugs. In early 2001, we were required to produce
documents and other information in connection with the FTC's study. The FTC has
stated that it plans to produce a factual description of how the 180-day
marketing exclusivity and 30-month stay provisions of the Hatch-Waxman Act have
influenced the development of generic drug competition. The FTC study could
affect the manner in which generic drug manufacturers resolve intellectual
property litigation with proprietary pharmaceutical companies and could increase
litigation against pharmaceutical companies.
19
In September 2000, American BioScience received a subpoena from the FTC in
connection with its investigation into whether Bristol-Myers Squibb Company and
American BioScience engaged in anti-competitive practices with respect to the
market for paclitaxel. We, as one of ABI's affiliates, were required to respond
to the subpoena. The FTC may bring enforcement actions as to specific agreements
it concludes are anti-competitive.
WE FACE UNCERTAINTY RELATED TO PRICING AND REIMBURSEMENT AND HEALTH CARE REFORM.
In both domestic and foreign markets, sales of our products will depend in part
on the availability of reimbursement from third-party payers such as government
health administration authorities, private health insurers, health maintenance
organizations and other health care-related organizations.
Medicare, Medicaid and other reimbursement legislation or programs govern drug
coverage and reimbursement levels in the United States. Federal law requires all
pharmaceutical manufacturers to rebate a percentage of their revenue arising
from Medicaid-reimbursed drug sales to individual states. Generic drug
manufacturers' agreements with federal and state governments provide that the
manufacturer will remit to each state Medicaid agency, on a quarterly basis, 11%
of the average manufacturer price for generic products marketed under
abbreviated new drug applications covered by the state's Medicaid program. For
proprietary products, which are marketed under new drug applications,
manufacturers are required to rebate the greater of (a) 15.1% of the average
manufacturer price or (b) the difference between the average manufacturer price
and the lowest manufacturer price during a specified period.
Both the federal and state governments in the United States and foreign
governments continue to propose and pass new legislation, rules and regulations
designed to contain or reduce the cost of health care. Existing regulations that
affect the price of pharmaceutical and other medical products may also change
before any of our products are approved for marketing. Cost control initiatives
could decrease the price that we receive for any product we develop in the
future. In addition, third-party payers are increasingly challenging the price
and cost-effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved pharmaceutical products,
including injectable products. Our products may not be considered cost effective
or adequate third-party reimbursement may not be available to enable us to
maintain price levels sufficient to realize an adequate return on our
investments.
WE MAY NEED TO CHANGE OUR BUSINESS PRACTICES TO COMPLY WITH CHANGES TO, OR MAY
BE SUBJECT TO CHARGES UNDER, THE FRAUD AND ABUSE LAWS.
We are subject to various federal and state laws pertaining to health care fraud
and abuse, including anti-kickback, marketing and pricing laws. Violations of
these laws are punishable by criminal and/or civil sanctions, including, in some
instances, imprisonment and exclusion from participation in federal and state
health care programs such as Medicare and Medicaid. If there is a change in
laws, regulations or administrative or judicial interpretations, we may have to
change our business practices, or our existing business practices could be
challenged as unlawful, which could materially adversely affect our business.
WE MAY BECOME SUBJECT TO FEDERAL FALSE CLAIMS OR OTHER SIMILAR LITIGATION
BROUGHT BY PRIVATE INDIVIDUALS AND THE GOVERNMENT.
The Federal False Claims Act allows persons meeting specified requirements to
bring suit alleging false or fraudulent Medicare or Medicaid claims and to share
in any amounts paid to the government in fines or settlement. These suits, known
as qui tam actions, have increased significantly in recent years and have
increased the risk that a health care company will have to defend a false claim
action, pay fines and/or be excluded from Medicare and Medicaid programs.
Federal false claims litigation can lead to civil monetary penalties, criminal
fines and imprisonment and/or exclusion from participation in Medicare, Medicaid
and other federally funded health programs. Other alternate theories of
liability may also be available to private parties seeking redress for such
claims. A number of parties have brought claims against numerous pharmaceutical
manufacturers, and we cannot be certain that such claims will not be brought
against us, or if they are brought, that such claims might not be successful.
20
ITEM 2. PROPERTIES
We operate various facilities in the United States, which have an aggregate size
of approximately 551,000 square feet.
Our principal executive offices are located in Los Angeles, California. The
facility occupies 5,300 square feet under a lease that expires in December 2006.
Our business office is located in Schaumburg, Illinois, and encompasses a total
of 20,700 square feet of space under a lease that expires in June 2005. Our
Raleigh, North Carolina, facility has 1,800 square feet of office space under a
lease that expires in October 2006. Our business office in Ontario, Canada
consists of 6,500 square feet of office space under a lease that expires in June
2004 and a sublease that expires in May 2004. In Bensenville, Illinois, we
operate a distribution facility of approximately 100,000 square feet under a
lease that expires in September 2004.
We own two manufacturing facilities, which are located in Melrose Park, Illinois
and Grand Island, New York. We occupy approximately 122,000 square feet and
155,000 feet of manufacturing, packaging, laboratory, office and warehouse space
at our Illinois and New York facilities respectively. We operate a research and
development facility in a building of approximately 140,000 square feet that we
own in Melrose Park, Illinois.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in claims and legal proceedings that arise
in the ordinary course of our business. We are currently party to several such
claims and legal proceedings. We do not believe that the resolution of these
legal proceedings will have a material adverse effect on our business, our
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 10, 2001, the majority of our stockholders representing 31,989,440
shares of our capital stock approved by written consent the adoption of our 2001
Stock Incentive Plan, our 2001 Employee Stock Purchase Plan, and our current
Amended and Restated Certificate of Incorporation.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
Our common stock is listed and traded on the NASDAQ National Market under the
symbol "APPX". The following table sets forth the high and low prices for our
common stock as reported by NASDAQ for fiscal year 2001 commencing with our
initial trading date on December 14, 2001:
PRICE PER SHARE
---------------
HIGH LOW
------ ------
Period from December 14, 2001 through December 31, 2001 $22.00 $17.69
On March 25, 2002, the closing price for our common stock, as reported on
NASDAQ, was $17.39 per share. At such date, we had approximately 750 holders of
record of our common stock.
DIVIDEND POLICY
No cash dividends were declared or paid in fiscal 2001 or fiscal 2000. Our
credit facility currently restricts us from paying dividends.
USE OF INITIAL PUBLIC OFFERING PROCEEDS
On December 14, 2001, we completed our initial public offering of 9,000,000
shares of common stock at a public offering price of $16.00 per share and
realized an aggregate offering price of $144.0 million. We received net proceeds
of $133.9 million. These proceeds are net of $10.1 million in underwriting
discounts and commissions. Of the net proceeds, we used $37.7 million of the net
proceeds to repay in full and terminate our term loan and to repay amounts
outstanding under the revolving credit facility with CIBC. In addition, expenses
of $2.9 million relating to the issuance and distribution of the securities sold
were incurred.
On January 10, 2002, the underwriters for our initial public offering exercised
in full their option to purchase an additional 1,350,000 shares of our common
stock at the initial public offering price of $16.00 per share in order to cover
over-allotments. As a result of this exercise, we received proceeds of
$20,088,000. This is net of underwriting discounts and commissions of
$1,512,000.
Also in January 2002, we made an initial license payment of $60,000,000 to
American BioScience. Under this agreement, we acquired the exclusive rights to
market and sell ABI-007 in North America.
We intend to use the remaining net proceeds for general corporate purposes,
including working capital, capital expenditures, and potential acquisitions and
licensing opportunities. At this time, we do not have any commitments or
agreements with respect to any material acquisition.
22
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999 1998 (1) 1997
--------- --------- --------- -------- --------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales $ 192,029 $ 165,495 $ 136,523 $ 65,915 $ 7,574
Cost of sales 121,619 105,587 91,062 48,764 5,245
--------- --------- --------- -------- --------
Gross margin 70,410 59,908 45,461 17,151 2,329
Operating expenses:
Research and development costs
(exclusive of stock-based compensation) 13,790 13,016 9,865 3,646 217
Selling, general and administrative
expenses (exclusive of stock-based
compensation) 30,911 30,048 23,450 13,267 1,373
Stock-based compensation (2) 2,491 615 88 127 -
(Gain) loss on litigation settlements, net (750) 28,353 - - -
Equity in net (income) loss of Drug Source
Co., LLC (1,414) 122 - - -
--------- --------- --------- -------- --------
Total operating expenses 45,028 72,154 33,403 17,040 1,590
--------- --------- --------- -------- --------
Operating income (loss) 25,382 (12,246) 12,058 111 739
Interest income 1,204 200 275 344 13
Interest expense (4,419) (1,751) (2,104) (1,256) -
--------- --------- --------- -------- --------
Income (loss) before income taxes 22,167 (13,797) 10,229 (801) 752
Provision (benefit) for income taxes 9,539 (5,038) 4,147 (289) 293
--------- --------- --------- -------- --------
Net income (loss) 12,628 (8,759) 6,082 (512) 459
Less imputed preferred stock dividends (951) (1,000) (1,000) (583) -
--------- --------- --------- -------- --------
Income (loss) applicable to common stock $ 11,677 $ (9,759) $ 5,082 $ (1,095) $ 459
========= ========= ========= ======== ========
Income (loss) per common share (3):
Basic $ 0.47 $ (0.43) $ 0.23 $ (0.05) $ 0.02
Diluted $ 0.30 $ (0.43) $ 0.14 $ (0.05) $ 0.02
Weighted-average common shares outstanding:
Basic 24,718 22,528 21,977 21,542 21,236
Diluted 38,948 22,528 35,057 21,542 21,236
OTHER DATA:
EBITDA (4) $ 34,734 $ (4,485) $ 18,962 $ 4,494 $ 739
Adjusted EBITDA (4) 38,229 29,265 21,132 5,207 739
Cash flow provided by operating activities 11,605 18,580 8,186 6,602 683
Cash flow used in investing activities (9,146) (11,851) (6,762) (56,503) -
Cash flow provided by (used in) financing
activities 93,722 (11,661) (2,489) 55,621 27
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 76,421 $ 25,249 $ 31,130 $ 26,844 $ 377
Total assets 239,787 122,823 103,015 92,629 2,362
Long-term debt, including current portion - 18,939 23,501 25,000 -
Series A redeemable convertible preferred
stock - 12,583 11,583 10,583 -
Total stockholders' equity 130,070 38,699 50,175 42,272 754
- ----------------
(1) We acquired the Fujisawa generic business on June 1, 1998. This business is
included in our operations since that date.
23
(2) We recorded stock-based compensation related to certain stock option
grants. Stock-based compensation relates to the following (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999 1998 1997
------ ---- ---- ---- ----
Research and development costs $ 182 $ 73 $ - $ - $ -
Selling, general and
administrative expenses 2,309 542 88 127 -
------ ---- ---- ---- ----
$2,491 $615 $88 $127 $ -
====== ==== ==== ==== ====
(3) See Note 2 to our consolidated financial statements for an explanation of
the number of shares used to compute basic and diluted net income (loss)
per common share.
(4) EBITDA consists of net income (loss) before interest, income taxes,
depreciation and amortization. Adjusted EBITDA is defined as EBITDA
adjusted to exclude shares issued to Premier Purchasing Partners, L.P.,
stock-based compensation and litigation settlements, net. Items excluded
from EBITDA and adjusted EBITDA are significant components in understanding
and assessing our financial performance, and EBITDA and adjusted EBITDA
should not be considered as measures of financial performance under
generally accepted accounting principles, or GAAP. We present adjusted
EBITDA to enhance the understanding of our operating results. EBITDA and
adjusted EBITDA should not be considered in isolation or as alternatives to
net income, cash flows generated by (used in) our operations, investing or
financing activities or other financial information presented in the
consolidated financial statements as indicators of our financial
performance or liquidity. Because EBITDA and adjusted EBITDA are not
measurements determined in accordance with GAAP and are therefore
susceptible to varying calculations, EBITDA and adjusted EBITDA as
presented may not be comparable to other similarly tested measures of other
companies.
The following table reconciles net income (loss) to EBITDA and EBITDA to
adjusted EBITDA:
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999 1998
------- ------- ------- -------
(in thousands)
Net income (loss) $12,628 $(8,759) $ 6,082 $ (512)
Depreciation and amortization 9,352 7,761 6,904 4,383
Provision (benefit) for income 9,539 (5,038) 4,147 (289)
taxes
Interest expense, net 3,215 1,551 1,829 912
------- ------- ------- -------
EBITDA 34,734 (4,485) 18,962 4,494
Common shares issued to Premier 1,754 4,782 2,082 586
Stock-based compensation 2,491 615 88 127
Litigation settlements, net (750) 28,353 - -
------- ------- ------- -------
Adjusted EBITDA $38,229 $29,265 $21,132 $ 5,207
======= ======= ======= =======
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YOU SHOULD READ THIS DISCUSSION TOGETHER WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K.
Statements contained in this Annual Report on Form 10-K, which are not
historical facts, are forward-looking statements, as the term is defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, whether expressed or implied, are subject to risks and uncertainties
which can cause actual results to differ materially from those currently
anticipated, due to a number of factors, which include, but are not limited to:
o the impact of competitive products and pricing;
o the availability and pricing of raw materials and components used in
the manufacture of our pharmaceutical products;
o the ability to successfully manufacture products in an efficient,
time-sensitive and cost effective manner;
o the acceptance of and demand for our existing and new pharmaceutical
products;
o the impact of laws and regulations, and their interpretations, which
govern or affect the pharmaceutical industry;
o the impact of patents and other proprietary rights licensed or owned
by us, our competitors and other third parties;
o the difficulty in predicting the timing or outcome of product
development efforts and regulatory approvals;
o the actual results achieved in the Phase III clinical trials for
ABI-007;
o the timing of the completion of Phase III trials for ABI-007;
o licenses or acquisitions; and
o relationships and agreements with other parties.
Forward-looking statements also include the assumptions underlying or relating
to any of the foregoing or other such statements. When used in this report, the
words "may," "will," "should," "could," "expect," "plan," "anticipate,"
"believe," "estimate" "predict," "continue", and similar expressions are
generally intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. We
undertake no obligation to revise or publicly release the results of any
revision to these forward-looking statements. Readers should carefully review
the factors described in Business: Factors that May Affect Our Result of
Operations and other documents the company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q
to be filed by the Company in fiscal year 2002.
OVERVIEW
We are a specialty pharmaceutical company that develops, manufactures and
markets injectable pharmaceutical products. Although we plan in the future to
pursue opportunities to manufacture and market proprietary injectable
pharmaceutical products, substantially all of our net sales are derived from the
sale of generic injectable pharmaceutical products.
We began in 1996 with an initial focus on marketing and distributing in the
United States generic pharmaceutical products manufactured by others. In 1997,
we commenced sales of our first generic injectable product, acyclovir, through
an agreement with Glaxo Wellcome, Inc. We derived revenue during our first two
fiscal years exclusively from sales of products manufactured by others. Although
we continue to sell products manufactured by others, sales from those products
constitute a small percentage of our current revenue.
In June 1998, we acquired Fujisawa USA, Inc.'s generic injectable pharmaceutical
business (Fujisawa generic business) for approximately $75.0 million, of which
American BioScience, Inc. (ABI) funded $42.5 million in cash and its stock in
exchange
25
for shares of our preferred stock. We acquired substantially all of our current
facilities in this transaction, including our manufacturing facilities in
Melrose Park, Illinois and Grand Island, New York and our research and
development facility in Melrose Park, Illinois. We also acquired additional
assets in this transaction, including inventories, plant and equipment and
abbreviated new drug applications that were pending with or approved by the FDA.
We derived substantially all of our revenue since this acquisition from the sale
of products manufactured in the facilities we acquired from Fujisawa.
Pursuant to an agreement we entered into with ABI in November 2001 to acquire
the exclusive rights to market and sell ABI-007, a proprietary injectable
oncology product candidate that is a patented formulation of paclitaxel, in
North America, we paid $60 million to ABI in January 2002, as the initial
license payment.
On December 14, 2001, we completed our initial public offering of 9,000,000
shares of common stock at a public offering price and realized an aggregate
offering price of $144,000,000. After underwriting discounts and commission and
expenses of the offering of $13.0 million, we netted $131.0 million from the
offering. Concurrent with offering, all of our outstanding preferred stock was
converted into 14,810,475 shares of our common stock. On January 10, 2002, the
underwriters from our initial public offering exercised in full their option to
purchase an additional 1,350,000 shares of our common stock at the initial
public offering price of $16.00 per share providing additional proceeds of $20.1
million, net of underwriting discounts and commissions of $1.5 million.
As of December 31, 2001, ABI owned 66.3% of our outstanding common stock. After
the exercise of the underwriters' overallotment option on January 10, 2002, ABI
owns 64.5% of our outstanding common stock.
RESULTS OF OPERATIONS
The following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
Year ended December 31,
---------------------------
2001 2000 1999
----- ----- -----
Statement of Operations Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.3% 63.8% 66.7%
----- ----- -----
Gross margin 36.7% 36.2% 33.3%
Operating expenses:
Research and development costs 7.2% 7.9% 7.2%
Selling, general, and administrative expenses 16.1% 18.1% 17.2%
Stock-based compensation 1.3% 0.4% 0.1%
(Gain) loss on litigation settlements, net (0.4)% 17.1% -
Equity in net (income) loss of Drug Source Co., LLC (0.7)% 0.1% -
----- ----- -----
Total operating expenses 23.5% 43.6% 24.5%
Income (loss) from operations 13.2% (7.4)% 8.8%
Interest expense, net (1.7)% (0.9)% (1.3)%
----- ----- -----
Income (loss) before income taxes 11.5% (8.3)% 7.5%
Provision (benefit) for income taxes 4.9% (3.0)% 3.0%
----- ----- -----
Net income (loss) 6.6% (5.3)% 4.5%
===== ===== =====
YEARS ENDED DECEMBER 31, 2001 AND 2000
NET SALES. Net sales were $192.0 million and $165.5 million for 2001 and 2000,
respectively, representing an increase of $26.5 million, or 16.0%. This increase
was due primarily to the launch in 2001 of ten new products. Two of these
products, mesna and haloperidol lactate, which were launched in May 2001 and
March 2001, respectively, collectively contributed approximately $15.9 million
to net sales for 2001. In addition, sales increased substantially in 2001 for
heparin and protamine (the result of our competitor's inability to supply) and
doxycycline and vancomycin (as consequence of demand created by September 11).
These increases were offset by the anticipated decrease in cisplatin sales,
which resulted from the price erosion normally associated with a new generic
product.
26
In 2002, we expect unit sales of haloperidol lactate and mesna to increase and
prices to erode as additional competitors enter the market, which is the typical
generic product cycle. Unit sales in 2002 of heparin and doxycycline are
expected to remain strong as we expect to continue to hold a major share of the
market.
COST OF SALES. Cost of sales was $121.6 million and $105.6 million in 2001 and
2000, respectively, representing an increase of $16.0 million. This increase was
primarily due to the increase in net sales in 2001. Cost of sales as a
percentage of net sales decreased to 63.3% in 2001 from 63.8% in 2000.
RESEARCH AND DEVELOPMENT. Research and development costs were $13.8 million and
$13.0 million in 2001 and 2000, respectively, representing an increase of $.8
million. This increase was primarily the result of research and development
expenses (product supplied to ABI for clinical trials) for our proprietary
injectable oncology product candidate, ABI-007.
We anticipate research and development expenses to increase in 2002 as a result
of increasing costs of raw materials used in research and development
activities.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $30.9 million and $30.0 million in 2001 and 2000, respectively,
representing an increase of $.9 million. This increase was primarily due to an
increase of salary and related expenses that resulted from headcount increases,
and the extinguishment of the unamortized deferred loan fees pertaining to our
retired debt. These unfavorable variances were offset by a decrease in bad debt
expense in 2001 and lower commission expense.
STOCK-BASED COMPENSATION. Stock-based compensation was $2.5 million and $.6
million in 2001 and 2000, respectively, representing an increase of $1.9
million. This increase was the result of an increase in stock options granted
during 2001 for which the exercise price was less than the estimated fair value
of our common stock on the grant date.
LITIGATION SETTLEMENTS. The (gain) loss on litigation settlements, net amounted
to $(.7) million in 2001 compared to $28.4 million in 2000. We settled two
lawsuits in 2000 resulting in net expense of $28.4 million. Under the terms of
one of these settlement agreements, we were entitled to receive a payment of
$1.25 million in March 2000 and six quarterly payments of $250,000 beginning in
June 2000, based upon meeting certain conditions of the settlement. We received
all payments due to us under this settlement agreement during 2001 and 2000.
EQUITY IN DRUG SOURCE CO., LLC. In June 2000, a limited liability company, Drug
Source Co., LLC, was formed to engage in the business of selling raw materials
to the pharmaceutical industry. We own 50% of Drug Source Co., LLC, and account
for this interest on the equity method from which income of $1.4 million in 2001
was recognized compared to a $122,000 loss in 2000.
INTEREST INCOME. Interest income was $1.2 million and $.2 million in 2001 and
2000, respectively, representing an increase of $1.0 million. This increase was
primarily the result of interest charges on amounts due from ABI beginning in
February 2001.
INTEREST EXPENSE. Interest expense was $4.4 million and $1.8 million in 2001 and
2000, respectively, representing an increase of $2.6 million. This increase was
the result of increased borrowings on our revolving line of credit during 2001
and imputed interest expense related to the amounts due to VivoRx, Inc. related
to the settlement of litigation, offset in part by lower interest rates. Our
revolving line of credit was paid off with proceeds from our initial public
offering in December 2001.
PROVISION FOR INCOME TAXES. Provision (benefit) for income taxes was $9.5
million and $(5.0) million in 2001 and 2000, respectively, representing an
increase of $14.5 million. Our effective tax rates were 43.0% and 36.5% for 2001
and 2000, respectively. The increase in our effective tax rate in 2001 was
primarily due to an increase in non-deductible, stock-based compensation charges
in 2001.
YEARS ENDED DECEMBER 31, 2000 AND 1999
NET SALES. Net sales were $165.5 million and $136.5 million in 2000 and 1999,
respectively, representing an increase of $29.0 million, or 21.2%. This increase
was primarily a result of $18.7 million in increased sales of cisplatin in 2000,
which we launched in November 1999, and $5.5 million in sales associated with
the introduction of other new products.
COST OF SALES. Cost of sales was $105.6 million and $91.1 million in 2000 and
1999, respectively, representing an increase of $14.5 million. This increase was
primarily a result of an increase in our net sales in 2000. Cost of sales as a
percentage of net sales decreased to 63.8% in 2000 from 66.7% in 1999. This
decrease was primarily a result of increased sales from higher gross margin
products such as cisplatin in 2000.
27
RESEARCH AND DEVELOPMENT. Research and development costs were $13.0 million and
$9.9 million in 2000 and 1999, respectively, representing an increase of $3.1
million. This increase was primarily a result of an increase in the number of
products under development and an increase in raw material spending for these
products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $30.0 million and $23.5 million in 2000 and 1999, respectively,
representing an increase of $6.5 million. This increase was primarily a result
of higher commissions for increased sales of our products and additional
headcount and related expenses, including payroll and related costs, relocation
and recruitment, as we expanded our management team and overall headcount to
support our growth.
STOCK-BASED COMPENSATION. Stock-based compensation was $0.6 million in 2000 and
$0.1 million in 1999, representing an increase of $0.5 million. This increase
was the result of stock options granted during 2000 for which the exercise price
was less than the estimated fair value of our common stock on the grant date.
LITIGATION SETTLEMENT. We settled two lawsuits in 2000 that resulted in a net
expense of $28.4 million. There were no gains or losses resulting from
litigation in 1999.
INTEREST INCOME. Interest income was $0.2 million and $0.3 million in 2000 and
1999, respectively, representing a decrease of $0.1 million. This decrease was a
result of a lower average balance of funds invested during 2000.
INTEREST EXPENSE. Interest expense was $1.8 million and $2.1 million in 2000 and
1999, respectively, representing a decrease of $0.3 million. This decrease was
primarily a result of lower average balances on our term loan.
PROVISION FOR INCOME TAXES. Provision (benefit) for income taxes was $(5.0)
million and $4.1 million in 2000 and 1999, respectively, representing a decrease
of $9.1 million. This decrease was related to the settlement of two lawsuits in
2000 for $28.4 million. Our effective tax rates were (36.5)% and 40.5% in 2000
and 1999, respectively. The decrease in our effective tax rate in 2000 was due
to the settlement of the two lawsuits offset partially by an increase in
non-deductible, stock-based compensation charges in 2000.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
most significant estimates in the Company's consolidated financial statements
are discussed below. Actual results could vary from those estimates.
REVENUE RECOGNITION
We recognize revenue from the sale of a product when that product is shipped to
a customer, acceptance terms are fulfilled and no significant contractual
obligations remain. We sell a majority of our products to wholesalers, who
generally sell our products to hospitals or alternative healthcare facilities at
contractual prices previously agreed upon between us and group purchasing
organizations, or GPOs, on behalf of end users such as hospitals. GPOs enter
into collective purchasing contracts with pharmaceutical suppliers for products
in an effort to secure favorable drug pricing on behalf of their members. We
invoice wholesalers at our wholesale list price. Net sales represent our
wholesale list price offset by wholesaler chargebacks, further adjusted for
estimated discounts and contractual allowances, including GPO fees. Wholesaler
chargebacks represent the difference between the wholesale list price and the
estimated contractual sales price, based upon our historical experience ratings.
The most significant estimates which affect net sales are our allowances for
doubtful accounts, cash discounts, sales credits and wholesaler chargebacks. The
allowances for doubtful accounts, cash discounts and sales credits are estimated
monthly by applying historical percentages (based on credits issued for each
category), which are reassessed periodically, to the product sales for the
month. The wholesaler chargeback calculation is computed as described in the
preceding paragraph.
28
EXPENSE RECOGNITION
Cost of sales represents the costs of the products which we have sold and
consists of labor, raw materials, components, packaging, quality assurance and
quality control, shipping and manufacturing overhead costs and the cost of
finished products purchased from third parties. Our inventories are valued at
the lower of cost or market as determined under the first-in, first-out (FIFO)
method.
Research and development costs are expensed as incurred and consist primarily of
salaries and other personnel-related expenses, as well as depreciation of
equipment, allocable facility, raw material and production expenses and contract
and consulting fees. We have made, and will continue to make, substantial
investment in research and development to expand our new product offerings and
grow our business.
Selling, general and administrative expenses consist primarily of salaries,
commissions and other personnel-related expenses, as well as costs for travel,
trade shows and conventions, promotional material and catalogs, advertising and
promotion, allocable facilities and professional fees for general, legal and
accounting services. We believe that our selling, general and administrative
expenses will continue to increase due to the growth of our business and
increased expenses associated with being a public company.
STOCK-BASED COMPENSATION
Stock-based compensation related to research and development cost and selling,
general and administrative expenses are presented separately in our consolidated
statement of operations. Stock-based compensation represents the difference
between the exercise price of options granted and the deemed fair value of our
common stock on the grant date in accordance with Accounting Principles Board
Opinion No. 25 and its related interpretations. We recognize stock-based
compensation over the option vesting period, typically four years, on an
accelerated basis using the graded vesting method in accordance with Financial
Accounting Standards Board Interpretation No. 28.
We have recorded deferred stock-based compensation related to unvested options
granted to employees and outside directors. Based upon the number of unvested
options outstanding as of December 31, 2001, we expect to amortize approximately
$4.7 million of deferred stock-based compensation in future periods as follows:
$2.6 million in 2002; $1.4 million in 2003; $0.6 million in 2004; and $0.1
million in 2005. We anticipate that the exercise price of stock options granted
after our December 14, 2001 offering will be at the reported market price of our
common stock and, therefore, no additional deferred stock-based compensation
will result from these option grants.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $11.6 million in 2001, $18.6
million in 2000 and $8.2 million in 1999. Operating cash flows have been
impacted primarily by fluctuations in net income and changes in working capital,
primarily in accounts receivable, inventory, accounts payable and accrued
expenses.
Net cash used in investing activities was $9.1 million in 2001, $11.9 million in
2000 and $6.8 million in 1999. Our investing activities have primarily consisted
of capital expenditures for new manufacturing equipment.
Net cash provided by (used in) financing activities was $93.7 million in 2001,
$(11.7) million in 2000 and $(2.5) million in 1999. Our financing activities in
2001 included net proceeds received from the sale of common stock in our initial
public offering of $131.0 million, offset by payments on long-term debt of $18.9
million and loans to ABI of $13.9 million. Our financing activities in 2000 and
1999 included payments on long-term debt of $4.6 million and $1.5 million,
respectively. Additional financing activities in 2000 and 1999 included loans to
ABI of $7.1 million and $1.0 million, respectively.
During 1998, we entered into a credit agreement with IBJ Whitehall Business
Credit (IBJ) providing for two term loans totaling $25 million and an additional
$25 million revolving line of credit. We used the term loans primarily to
finance a portion of our acquisition of the Fujisawa generic business. The loans
were secured by substantially all of our assets. The revolving line of credit
was used for working capital and general corporate purposes. In December, 2001,
the IBJ credit facility balance of $34 million was paid off and replaced by a
new credit agreement with a syndicate of banks headed by the Canadian Imperial
Bank of Commerce (CIBC). The CIBC agreement includes a $50 million revolving
line of credit and a $25 million term loan. The credit facility is secured by
substantially all of our assets, is guaranteed by each of our subsidiaries and
our majority stockholder, and contains various operating and financial
covenants. The revolving credit facility has a term of five years and can be
increased to $75 million at our request. The initial CIBC term loan balance of
$25 million, the proceeds of which were used to repay our indebtedness to IBJ,
was repaid and permanently reduced with proceeds from our initial public
offering. The initial CIBC revolving credit facility balance of $12.7
29
million was also paid in full with proceeds from our initial public offering.
The $12.7 million balance included bank fees and financing expenses of $3.7
million incurred in connection with the new credit agreement. The CIBC credit
facility expires in 2006. There were no outstanding balances due under the CIBC
credit facility at December 31, 2001.
As of December 31, 2001, we were jointly and severally liable with ABI for
payments due to VivoRx, Inc. pursuant to a litigation settlement as follows:
$12.0 million to be paid on or prior to February 26, 2002 and $12.0 million to
be paid prior to February 26, 2003. Under the terms of an agreement between ABI
and us, ABI has agreed to pay this obligation in full. On February 26, 2002, ABI
made the $12.0 million payment due on that date. If ABI fails or is unable to
pay the remaining obligation of $12.0 million due on February 26, 2003, we will
be liable for any amounts that remain unpaid, which could adversely affect our
financial condition.
See Note 8 to our consolidated financial statements for details of our lease
commitments, which aggregated $6.0 million as of December 31, 2001.
In November 2001, we entered into a license agreement with ABI for the exclusive
North American manufacturing and sales rights to ABI-007 under which we made
initial license payments totaling $60 million in January 2002. ABI is
responsible for substantially all costs associated with the development of
ABI-007, except that we have agreed to manufacture up to $2 million of product
for use in clinical trials. We are also required to make milestone payments of
up to (a) $60 million for indications relating to breast, ovarian and lung
cancers and (b) $32.5 million for indications relating to prostate cancer and
other indications agreed upon between ABI and us. We also may be required to
make additional milestone payments, up to an aggregate of $110 million, based
upon the achievement of particular annual sales levels. Profits from any sales
of ABI-007 will be shared equally after deducting costs of goods sold, selling
expenses and other appropriate deductions. All costs and expenses related to
product recalls and product liability claims generally will be split equally
between ABI and us.
Our capital requirements depend on numerous factors, including the requirements
of our product development and commercialization efforts, need for capacity
expansion and improvement, need for information technology requirements, and the
amount of cash generated by our operations. We believe that the net proceeds
from our December 14, 2001 initial public offering, cash generated from
operations and funds available from our revolving line of credit will be
sufficient to finance our operations and capital expenditures for at least the
next 12 months. We may, however, need to raise additional capital that may not
be available on terms favorable or acceptable to us, if at all. In the event we
engage in future acquisitions, we may have to raise additional capital through
additional borrowings or the issuance of debt or equity securities. Adequate
funds for these purposes may not be available when needed or on terms acceptable
to us. Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants. If we cannot raise
more money when needed, we may have to reduce our capital expenditures, scale
back our development of new products or reduce our workforce.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 141 and SFAS No. 142). Under the
new rules, effective January 1, 2002, goodwill and intangible assets deemed to
have indefinite lives, related to acquisitions prior to June 30, 2001, will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives. The effect of adopting SFAS No. 141 and SFAS No. 142 is not
expected to have any impact on the Company's statement of operations or
financial position.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our activities
without increasing risk. Some of the securities that we invest in may have
market risk. This means that a change in prevailing interest rates may cause the
fair value of the principal amount of the investment to fluctuate. For example,
if we hold a security that was issued with a fixed interest rate at the
prevailing rate and the prevailing rate later rises, the fair value of the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
government and non-government debt securities and money market funds. The
average duration of all our investments has been less than one year. Due to the
short-term nature of these investments, we believe we have no material exposure
to interest rate risk arising from our investments. Therefore, no quantitative
tabular disclosure is presented.
We have operated primarily in the United States and the majority of our
activities with our collaborators outside the United States to date have been
conducted in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency exchange rate fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Financial Statement Schedule are
included in Part IV, Item 14 (a) (1) and (2) of this Annual Report on Form 10-K.
31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
American Pharmaceutical Partners, Inc.
We have audited the accompanying consolidated balance sheets of American
Pharmaceutical Partners, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Pharmaceutical Partners, Inc. at December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Woodland Hills, California
February 20, 2002
32
AMERICAN PHARMACEUTICAL PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 96,688,000 $ 501,000
Accounts receivable, less allowances for doubtful accounts of $400,000 in
2001 and $436,000 in 2000 and net chargebacks of $19,271,000 in 2001
and $20,269,000 in 2000 15,649,000 15,569,000
Inventories 51,253,000 35,640,000
Prepaid expenses and other current assets 2,469,000 851,000
Deferred income taxes 9,222,000 8,214,000
------------- ------------
Total current assets 175,281,000 60,775,000
Deferred income taxes 4,758,000 7,982,000
Property, plant and equipment, net 53,821,000 53,611,000
Investment in Drug Source Co., LLC 1,512,000 98,000
Product license rights, net of accumulated amortization of $30,000 in 2001 270,000 -
Deferred financing costs, net of accumulated amortization of $- in 2001
and $287,000 in 2000 4,145,000 357,000
------------- ------------
Total assets $ 239,787,000 $122,823,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,593,000 $ 9,136,000
Accrued expenses 16,438,000 12,719,000
Distribution payable to American BioScience, Inc. 60,000,000 -
Current portion of liability to VivoRx, Inc. 11,829,000 9,670,000
Current maturities of long-term debt - 4,001,000
------------- ------------
Total current liabilities 98,860,000 35,526,000
Liability to VivoRx, Inc., less current portion 10,857,000 20,684,000
Long-term debt, less current maturities - 14,938,000
Other - 393,000
Commitments and contingencies
Series A redeemable convertible preferred stock - no par value; none
authorized, issued and outstanding in 2001; 2,821,035 shares authorized,
issued and outstanding in 2000 - 12,583,000
Stockholders' equity:
Common stock - $.001 par value; 100,000,000 shares authorized, 48,272,628
shares issued and outstanding in 2001; none authorized,
issued and outstanding in 2000 48,000 -
Common stock - no par value; none authorized, issued and outstanding
in 2001; 100,000,000 shares authorized; 22,836,548 shares issued and
outstanding in 2000 - 9,268,000
Preferred stock - no par value; 6,000,000 shares authorized, none issued
and outstanding in 2001; none authorized, issued and outstanding in 2000 - -
Series B convertible preferred stock - no par value; none authorized, issued
and outstanding in 2001; 4,231,585 shares authorized, issued and
outstanding in 2000 - 15,000,000
Series C convertible preferred stock - no par value; none authorized, issued
and outstanding in 2001; 1,410,530 shares authorized, issued and
outstanding in 2000 - 5,000,000
Series D convertible preferred stock - no par value; none authorized, issued
and outstanding in 2001; 6,347,325 shares authorized, issued and
outstanding in 2000 - 22,500,000
Amounts due from American BioScience, Inc. (20,957,000) (7,105,000)
Deferred stock-based compensation (4,713,000) (944,000)
Additional paid-in capital 149,041,000 -
Retained earnings (deficit) 6,658,000 (5,019,000)
Other comprehensive loss (7,000) (1,000)
------------- ------------
Total stockholders' equity 130,070,000 38,699,000
------------- ------------
Total liabilities and stockholders' equity $ 239,787,000 $122,823,000
============= ============
See accompanying notes.
33
AMERICAN PHARMACEUTICAL PARTNERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2001 2000 1999
------------- ------------- -------------
Net sales $ 192,029,000 $ 165,495,000 $ 136,523,000
Cost of sales 121,619,000 105,587,000 91,062,000
------------- ------------- -------------
Gross margin 70,410,000 59,908,000 45,461,000
Operating expenses:
Research and development costs 13,790,000 13,016,000 9,865,000
Selling, general, and administrative expenses 30,911,000 30,048,000 23,450,000
Stock-based compensation 2,491,000 615,000 88,000
(Gain) loss on litigation settlements, net (750,000) 28,353,000 -
Equity in net (income) loss of Drug Source Co., LLC (1,414,000) 122,000 -
------------- ------------- -------------
Total operating expenses 45,028,000 72,154,000 33,403,000
------------- ------------- -------------
Income (loss) from operations 25,382,000 (12,246,000) 12,058,000
Interest Income (includes $1,104,000 from American
BioScience,Inc. in 2001, none in 2000 and 1999) 1,204,000 200,000 275,000
Interest expense (4,419,000) (1,751,000) (2,104,000)
------------- ------------- -------------
Income (loss) before income taxes 22,167,000 (13,797,000) 10,229,000
Provision (benefit) for income taxes 9,539,000 (5,038,000) 4,147,000
------------- ------------- -------------
Net income (loss) 12,628,000 (8,759,000) 6,082,000
Imputed preferred stock dividends (951,000) (1,000,000) (1,000,000)
------------- ------------- -------------
Income (loss) applicable to common stock $ 11,677,000 $ (9,759,000) $ 5,082,000
============= ============= =============
Income (loss) per common share:
Basic $ 0.47 $ (0.43) $ 0.23
============= ============= =============
Diluted $ 0.30 $ (0.43) $ 0.14
============= ============= =============
The fair value of common shares earned by Premier
has been deducted from net sales as follows: $ 1,754,000 $ 4,782,000 $ 2,082,000
============= ============= =============
Research and development costs include purchases
from Drug Source Co., LLC as follows: $ 1,066,000 $ - $ -
============= ============= =============
The composition of stock-based compensation is as follows:
Research and development costs $ 182,000 $ 73,000 $ -
Selling, general and administrative expenses 2,309,000 542,000 88,000
------------- ------------- -------------
$ 2,491,000 $ 615,000 $ 88,000
============= ============= =============
See accompanying notes.
34
AMERICAN PHARMACEUTICAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
COMMON STOCK COMMON STOCK SERIES B CONVERTIBLE SERIES C CONVERTIBLE
$0.001 PAR VALUE NO PAR VALUE PREFERRED STOCK PREFERRED STOCK
------------------ ----------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- --------- --------- ----------- --------- -----------
Balance at December 31, 1998 - $ - 21,090,140 $ 255,000 4,231,585 $15,000,000 1,410,530 $ 5,000,000
Issuance of common stock
earned by Premier - - 1,129,647 2,714,000 - - - -
Exercise of stock options - - 18,750 1,000 - - - -
Grants of stock options - - - 29,000 - - - -
Amortization of deferred stock-based
compensation - - - - - - - -
Comprehensive income:
Net income - - - - - - - -
Foreign currency translation gain - - - - - - - -
Comprehensive income - - - - - - - -
Imputed preferred stock dividends - - - - - - - -
---------- ------- ---------- --------- --------- ----------- --------- -----------
Balance at December 31, 1999 - - 22,238,537 2,999,000 4,231,585 15,000,000 1,410,530 5,000,000
Issuance of common stock
earned by Premier - - 570,351 4,750,000 - - - -
Exercise of stock options - - 27,660 28,000 - - - -
Grants of stock options, net of
forfeitures - - - 1,491,000 - - - -
Amortization of deferred stock-based
compensation - - - - - - - -
Net advances to American
BioScience, Inc. - - - - - - - -
Comprehensive income (loss):
Net loss - - - - - - - -
Foreign currency translation loss - - - - - - - -
Comprehensive income (loss) - - - - - - - -
Imputed preferred stock dividends - - - - - - - -
---------- ------- ---------- --------- --------- ----------- --------- -----------
Balance at December 31, 2000 - - 22,836,548 9,268,000 4,231,585 15,000,000 1,410,530 5,000,000
Issuance of common stock
earned by Premier - - 161,955 1,906,000 - - - -
Exercise of stock options 7,300 - 1,274,025 139,000 - - - -
Grants of stock options, net of
forfeitures - - - 6,260,000 - - - -
Amortization of deferred stock-based
compensation - - - - - - - -
Net advances to American
BioScience, Inc. - - - - - - - -
Payment by American BioScience, Inc.
of share of liability to VivoRx,Inc.,
net of related deferred income taxes - - - 4,026,000 - - - -
Issuance of warrants - - - 393,000 - - - -
Exercise of warrants 182,325 - - - - - - -
Recapitalization of company in
Delaware 24,272,528 24,000 (24,272,528) (21,992,000) - - - -
Conversion of preferred stock into
common stock 14,810,475 15,000 - - (4,231,585)(15,000,000) (1,410,530) (5,000,000)
Net proceeds from sale of common stock
in initial public offering 9,000,000 9,000 - - - - - -
Accrual of distribution to American
BioScience, Inc. for product
license rights - - - - - - - -
Comprehensive income:
Net income - - - - - - - -
Foreign currency translation loss - - - - - - - -
Comprehensive income - - - - - - - -
Imputed preferred stock dividends - - - - - - - -
---------- ------- ---------- --------- --------- ----------- --------- -----------
Balance at December 31, 2001 48,272,628 $48,000 - $ - - $ - - $ -
========== ======= ========== ========= ========= =========== ========= ===========
See accompanying notes.
SERIES D CONVERTIBLE AMOUNTS DUE
PREFERRED STOCK ADDITIONAL FROM AMERICAN DEFERRED RETAINED
---------------------- PAID-IN BIOSCIENCE, STOCK-BASED EARNINGS
SHARES AMOUNT CAPITAL INC. COMPENSATION (DEFICIT)
---------------------- ---------- ----------- ------------ ---------
Balance at December 31, 1998 6,347,325 $ 22,500,000 $ - $ - $ (127,000) $ (342,000)
Issuance of common stock
earned by Premier - - - - - -
Exercise of stock options - - - - - -
Grants of stock options - - - - (29,000) -
Amortization of deferred stock-based
compensation - - - - 88,000 -
Comprehensive income:
Net income - - - - - 6,082,000
Foreign currency translation gain - - - - - -
Comprehensive income - - - - - -
Imputed preferred stock dividends - - - - - (1,000,000)
--------- ----------- ----------- ----------- ----------- ----------
Balance at December 31, 1999 6,347,325 22,500,000 - - (68,000) 4,740,000
Issuance of common stock
earned by Premier - - - - - -
Exercise of stock options - - - - - -
Grants of stock options, net of
forfeitures - - - - (1,491,000) -
Amortization of deferred stock-based
compensation - - - - 615,000 -
Net advances to American
BioScience, Inc. - - - (7,105,000) - -
Comprehensive income (loss):
Net loss - - - - - (8,759,000)
Foreign currency translation loss - - - - - -
Comprehensive income (loss) - - - - - -
Imputed preferred stock dividends - - - - - (1,000,000)
--------- ----------- ----------- ----------- ----------- ----------
Balance at December 31, 2000 6,347,325 22,500,000 - (7,105,000) (944,000) (5,019,000)
Issuance of common stock
earned by Premier - - - - - -
Exercise of stock options - - 23,000 - - -
Grants of stock options, net of
forfeitures - - - - (6,260,000) -
Amortization of deferred stock-based
compensation - - - - 2,491,000 -
Net advances to American
BioScience, Inc. - - - (13,852,000) - -
Payment by American BioScience, Inc.
of share of liability to VivoRx,Inc
net of related deferred income taxes - - - - - -
Issuance of warrants - - - - - -
Exercise of warrants - - - - - -
Recapitalization of company in
Delaware - - 21,968,000 - - -
Conversion of preferred stock into
common stock (6,347,325) (22,500,000) 56,019,000 - - -
Net proceeds from sale of common stock
in initial public offering - - 131,031,000 - - -
Accrual of distribution to American
BioScience, Inc. for product
license rights - - (60,000,000) - - -
Comprehensive income:
Net income - - - - - 12,628,000
Foreign currency translation loss - - - - - -
Comprehensive income - - - - - -
Imputed preferred stock dividends - - - - - (951,000)
--------- ----------- ------------ ------------ ----------- ----------
Balance at December 31, 2001 - $ - $149,041,000 $(20,957,000) $(4,713,000) $6,658,000
========= =========== ============ ============ =========== ==========
See accompanying notes.
OTHER
COMPREHENSIVE
INCOME(LOSS) TOTAL
---------- ------------
Balance at December 31, 1998 $ (14,000) $ 42,272,000
Issuance of common stock
earned by Premier - 2,714,000
Exercise of stock options - 1,000
Grants of stock options - -
Amortization of deferred stock-based
compensation - 88,000
Comprehensive income:
Net income - 6,082,000
Foreign currency translation gain 18,000 18,000
------------
Comprehensive income - 6,100,000
Imputed preferred stock dividends - (1,000,000)
---------- ------------
Balance at December 31, 1999 4,000 50,175,000
Issuance of common stock
earned by Premier - 4,750,000
Exercise of stock options - 28,000
Grants of stock options, net of
forfeitures - -
Amortization of deferred stock-based
compensation - 615,000
Net advances to American
BioScience, Inc. - (7,105,000)
Comprehensive income (loss):
Net loss - (8,759,000)
Foreign currency translation loss (5,000) (5,000)
------------
Comprehensive income (loss) - (8,764,000)
Imputed preferred stock dividends - (1,000,000)
---------- ------------
Balance at December 31, 2000 (1,000) 38,699,000
Issuance of common stock
earned by Premier - 1,906,000
Exercise of stock options - 162,000
Grants of stock options, net of
forfeitures - -
Amortization of deferred stock-based
compensation - 2,491,000
Net advances to American
BioScience, Inc. - (13,852,000)
Payment by American BioScience, Inc.
of share of liability to VivoRx,Inc.,
net of related deferred income taxes - 4,026,000
Issuance of warrants - 393,000
Exercise of warrants - -
Recapitalization of company in
Delaware - -
Conversion of preferred stock into
common stock - 13,534,000
Net proceeds from sale of common stock
in initial public offering - 131,040,000
Accrual of distribution to American
BioScience, Inc. for product
license rights - (60,000,000)
Comprehensive income:
Net income - 12,628,000
Foreign currency translation loss (6,000) (6,000)
------------
Comprehensive income - 12,622,000
Imputed preferred stock dividends - (951,000)
------------ ------------
Balance at December 31, 2001 $ (7,000) $130,070,000
============ ============
See accompanying notes.
35
AMERICAN PHARMACEUTICAL PARTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
------------ ------------ -----------
Cash flows from operating activities:
Net income (loss) $ 12,628,000 $ (8,759,000) $ 6,082,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 8,422,000 7,632,000 6,776,000
Amortization 930,000 129,000 128,000
Imputed interest on liability to VivoRx, Inc. 2,332,000 - -
Stock-based compensation 2,491,000 615,000 88,000
Loss on disposal of property, plant and equipment 214,000 291,000 -
Deferred income taxes (358,000) (12,437,000) (1,512,000)
Equity in net (income) loss of Drug Source Co., LLC (1,414,000) 122,000 -
Common stock earned by Premier 1,754,000 4,782,000 2,082,000
Changes in operating assets and liabilities:
Accounts receivable, net of chargebacks (80,000) (2,051,000) (9,351,000)
Inventories (15,613,000) (6,815,000) (829,000)
Prepaid expenses and other current assets (1,618,000) (185,000) (116,000)
Accounts payable and accrued expenses 5,317,000 4,902,000 4,838,000
Liability to VivoRx, Inc. (3,400,000) 30,354,000 -
------------ ------------ -----------
Net cash provided by operating activities 11,605,000 18,580,000 8,186,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Drug Source Co., Inc. - (220,000) -
Purchases of property, plant and equipment (8,846,000) (11,631,000) (6,762,000)
Purchase of product license rights (300,000) - -
------------ ------------ -----------
Net cash used in investing activities (9,146,000) (11,851,000) (6,762,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (18,939,000) (4,562,000) (1,499,000)
Proceeds from the exercise of stock options 162,000 28,000 1,000
Increase in amounts due from American BioScience, Inc. (13,852,000) (7,127,000) (991,000)
Payment of deferred financing costs (4,689,000) - -
Proceeds from the sale of common stock, net 131,040,000 - -
------------ ------------ -----------
Net cash provided by (used in) financing activities 93,722,000 (11,661,000) (2,489,000)
------------ ------------ -----------
Increase (decrease) in cash and cash equivalents 96,181,000 (4,932,000) (1,065,000)
Foreign currency translation (gain) loss 6,000 5,000 (18,000)
Cash and cash equivalents at beginning of period 501,000 5,428,000 6,511,000
------------ ------------ -----------
Cash and cash equivalents at end of period $ 96,688,000 $ 501,000 $ 5,428,000
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 2,423,000 $ 2,007,000 $ 2,081,000
Income taxes (including in lieu of payments to
American BioScience, Inc.) 7,764,000 7,003,000 5,244,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Accrual of distribution payable to American BioScience $ 60,000,000 $ - $ -
Inc. for product license rights
Payment by American BioScience, Inc. of share of
liability to VivoRx, Inc., net of related deferred tax 4,026,000 - -
asset of $2,574,000
Imputed preferred stock dividends 951,000 1,000,000 1,000,000
Conversion of series A,B,C and D preferred stock
into common stock 56,034,000 - -
See accompanying notes.
36
AMERICAN PHARMACEUTICAL PARTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. DESCRIPTION OF BUSINESS
American Pharmaceutical Partners, Inc. (Company) is a majority owned subsidiary
of American BioScience, Inc. (ABI), a California corporation. The Company was
incorporated in the state of California on March 26, 1996. On December 10, 2001,
the Company reincorporated in the state of Delaware. At December 31, 2001, ABI
owned 31,989,440 shares (66.3%) of the Company's common stock.
The Company is a specialty pharmaceutical company that develops, manufactures,
and markets injectable pharmaceutical products, with a primary focus in the
areas of oncology, infectious disease, and critical care. The majority of the
Company's products are used in hospital or urgent care clinical settings and are
primarily contracted and distributed through group purchasing organizations and
drug wholesalers.
On June 1, 1998, we acquired Fujisawa USA, Inc.'s generic injectable
pharmaceutical business (Fujisawa Acquisition), of which ABI funded $42,500,000
in cash and its stock in exchange for shares of the Company's Series B, C and D
preferred stock. The Company has derived substantially all of its revenue since
this acquisition from the sale of products manufactured in facilities acquired
from Fujisawa.
A subsidiary of the Company owns a 50% share of Drug Source Co., LLC. Drug
Source Co., LLC is a joint venture with three other partners established in June
2000 to purchase raw materials for resale to pharmaceutical companies, including
the Company. The Company's equity in the net income (loss) of Drug Source Co.,
LLC is classified in operating expenses in the accompanying consolidated
statements of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the assets, liabilities, and
results of operations of the Company and its subsidiaries. The investment in
Drug Source Co. LLC is accounted for using the equity method. All material
intercompany balances and transactions have been eliminated.
FISCAL YEAR
The Company uses a 52-week, 53-week fiscal year that ends on the Saturday
nearest to December 31. For clarity of presentation, all periods are presented
as if the year ended on December 31. Each of the years ended December 31, 2001,
2000, and 1999 contained 52 weeks.
CASH AND CASH EQUIVALENTS
It is the Company's policy to reflect as cash equivalents all highly liquid
investments that have a maturity of three months or less at the time of
acquisition.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
The Company has executed contracts, varying between one and six years, with
group purchasing organizations and individual hospital groups to supply the
Company's products to hospitals and alternate site customers. As is traditional
in the pharmaceutical industry, the Company sells a significant portion of its
products to wholesalers who, in turn, fulfill the Company's contracts. Four
wholesalers each individually comprise from 15% to 27% of the Company's sales
annually and, collectively, comprised 83%, 86%, and 72% of the Company's sales
for the years ended December 31, 2001, 2000, and 1999, respectively.
Accounts receivable primarily represent receivables from wholesalers and other
direct customers. These four wholesalers described above represent approximately
84% and 78% of accounts receivable at December 31, 2001 and 2000, respectively.
The
37
remaining receivables are from other wholesalers, hospitals and other end users.
Receivables from export accounts represent approximately 8% and 7% of net
accounts receivable at December 31, 2001 and 2000, respectively.
The Company performs ongoing credit evaluations of its customers' financial
condition, and generally does not require collateral. Allowances are maintained
for potential credit losses and such losses have been within management's
expectations.
INVENTORIES
Inventories are valued at the lower of cost or market as determined under the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated on the basis of cost or allocated
acquisition value. Provisions for depreciation are computed for financial
reporting purposes using the straight-line method over the estimated useful life
of the related asset as follows:
Buildings and improvements ..................... 10-30 years
Machinery and equipment ........................ 3-10 years
Furniture and fixtures ......................... 5-7 years
DEFERRED FINANCING COSTS
Expenses incurred in connection with obtaining the Company's credit facility
were deferred and are being amortized over the life of the facility using the
straight-line method. Deferred financing costs are stated net of accumulated
amortization in the consolidated balance sheets.
PRODUCT LICENSE RIGHTS
In June 2001, the Company purchased license rights to acyclovir and etoposide
for $300,000. These license rights are being amortized over five years using the
straight-line method. Product license rights are stated net of accumulated
amortization in the consolidated balance sheets.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of products to customers, upon
fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain. Adjustments to net sales are made for estimated wholesaler
chargebacks (as more fully described below), contractual allowances and early
payment discounts.
The fair value of common stock earned by Premier Purchasing Partners, L.P.
(Premier) (see Note 11) and administrative fees payable to Premier are deducted
from net sales. The Company provides for returns at the time of sale based on
estimated product returns. The Company's revenue recognition policies are in
compliance with Securities and Exchange Commission Staff Accounting Bulletin No.
101.
Shipping and handling fees billed to customers are recognized in net sales.
Shipping and handling costs are included in cost of sales.
CHARGEBACK LIABILITIES, NET OF ADVANCES
The majority of the Company's products are distributed through independent
wholesalers. Sales to wholesalers are transacted at the Company's wholesale list
price. The wholesalers generally sell to a hospital, alternative healthcare
facility, or an independent pharmacy at a contractual price previously
established between the end users and the Company.
At the time the wholesaler sells the product to the end user at the contract
price, the wholesaler charges the Company back for the difference between the
list price and the contract price. When the Company records the sale, a
receivable from the wholesaler is established at the Company's list price.
However, it is known from experience that most of these sales prices will
eventually be
38
reduced (through the chargebacks) to the contract price. Therefore, at the time
of the sale, a liability is recorded for the difference between the list price
and the average contract price. This liability is estimated by calculating, by
product code, the average number of units that will be sold on contract and
multiplying that number by the weighted average contract price. Thus, a contra
asset is established, reducing the amount of the receivable from the wholesaler
by the difference between the list price and the ultimate selling price, the
average contract price. In addition, cash advance credits are also periodically
issued to wholesalers as a standard trade practice.
INCOME TAXES
Through December 14, 2001, for federal and, where applicable, state income tax
purposes, taxable income of the Company has been included in the consolidated
income tax returns of ABI. However, since ABI's ownership interest in the
Company has dropped below 80%, due to the Company's initial public offering on
December 14, 2001, the Company no longer qualifies to be included in the
consolidated tax return of ABI in accordance with Internal Revenue Service
regulations. The Company's provision for income taxes is computed on a separate
return basis in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (SFAS No. 109). All allocated income taxes of
the Company have been accounted for through the intercompany account with ABI.
RESEARCH AND DEVELOPMENT COSTS
Costs relating to the research and development of new products are charged to
expense as incurred.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123), the Company accounts for stock
options granted to its employees and outside directors using the intrinsic value
method. Certain of the Company's stock options have been granted with exercise
prices below the fair value of the Company's common stock as estimated by the
Company's management for financial reporting purposes. For these stock options,
the Company has recorded deferred stock-based compensation for the difference
between their exercise prices and such estimated fair values which is being
amortized to expense on an accelerated basis using the graded vesting method
over the stock options' vesting period in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 28.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting period. The Company routinely estimates chargeback
liabilities and other sales allowances. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and its credit
facility. Cash equivalents include short-term investments with maturities of
three months or less. The fair value of substantially all financial instruments
of the Company approximates their carrying value due to the short-term nature of
these financial instruments. The interest rates on borrowings under the
Company's bank credit facility are adjusted periodically to market rates.
The Company has not used any derivatives or other foreign currency hedging
instruments and, accordingly, Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," has had no
effect on the Company's consolidated financial statements.
39
PER SHARE INFORMATION
Basic income (loss) per common share is computed by dividing net income (loss)
applicable to common stock by the weighted-average number of common shares
outstanding plus the number of common shares earned by, but not yet issued to
Premier (see Note 11). Dilutive income per common share is computed by dividing
net income applicable to common stock by the weighted-average number of common
shares used for the basic calculations plus potentially dilutive shares for the
portion of the year that the shares were outstanding. Potentially dilutive
common shares result from outstanding stock options and warrant, and Series B,
Series C and Series D convertible preferred stock. The assumed conversion of
Series A convertible preferred stock is anti-dilutive.
Calculations of basic and diluted income per common share information are based
on the following:
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
----------- ------------ -----------
Basic and dilutive numerator:
Net income (loss) $12,628,000 $ (8,759,000) $ 6,082,000
Less dividends on series A convertible preferred stock (951,000) (1,000,000) (1,000,000)
----------- ------------ -----------
Net income (loss) applicable to common stock $11,677,000 $ (9,759,000) $ 5,082,000
=========== ============ ===========
Denominator:
Weighted-average common shares outstanding 24,656,000 22,248,000 21,092,000
Weighted-average common shares earned by,
but not issued to, Premier 62,000 280,000 885,000
----------- ------------ -----------
Weighted common shares - Basic 24,718,000 22,528,000 21,977,000
Net effect of dilutive securities:
Stock options 2,665,000 - 1,086,000
Warrant 167,000 - 5,000
Weighted-average conversion of convertible preferred stock:
Series B 4,023,000 - 4,232,000
Series C 1,341,000 - 1,410,000
Series D 6,034,000 - 6,347,000
----------- ------------ -----------
Weighted common shares - Diluted 38,948,000 22,528,000 35,057,000
=========== ============ ===========
Income (loss) per common share - Basic $ 0.47 $ (0.43) $ 0.23
=========== ============ ===========
Income (loss) per common share - Diluted $ 0.30 $ (0.43) $ 0.14
=========== ============ ===========
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 141 and SFAS No. 142). Under the
new rules, effective January 1, 2002, goodwill and intangible assets deemed to
have indefinite lives, related to acquisitions prior to June 30, 2001, will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives. The effect of adopting SFAS No. 141 and SFAS No. 142 is not
expected to have any impact on the Company's statement of operations or
financial position.
40
3. TRANSACTIONS WITH AMERICAN BIOSCIENCE, INC.
LOANS TO AMERICAN BIOSCIENCE, INC.
A summary of activity in the loans to American BioScience Inc. account, which is
classified as a deduction from stockholders equity in the accompanying
consolidated balance sheet, is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
Balance at beginning of year $ 7,105,000 $ (22,000) $(1,013,000)
Payments on behalf of American BioScience, Inc.:
New product development (principally related to ABI-007) 4,865,000 3,197,000 3,834,000
Income taxes 5,735,000 10,560,000 1,655,000
Liability to VivoRx, Inc. 4,600,000 - -
Interest charged to American BioScience, Inc. 1,104,000 - -
Other 5,865,000 4,373,000 746,000
In lieu of income tax liability (7,764,000) (7,003,000) (5,244,000)
Repayments by American BioScience, Inc. (553,000) (4,000,000) -
----------- ----------- -----------
$20,957,000 $ 7,105,000 $ (22,000)
=========== =========== ===========
Payments on behalf of ABI's new product development activities include the
Company's manufacturing costs related to ABI's products in development, payments
made to third parties for ABI's clinical studies and outside testing, and
charges for Company services of employees related to ABI's products in
development.
On July 24, 2001, the Company received a $22,000,000 demand promissory note from
ABI (Demand Note). This note was amended in October, 2001 to $23,000,000. The
Demand Note bears interest at a rate equal to the Company's rate of interest on
its term loans (7.25% at December 31, 2001). For the period from February 1,
2001 through July 23, 2001, the amounts due from ABI bore interest at a rate
equal to the Company's rate of interest on its revolving line of credit.
Previously, the amounts due from ABI did not bear interest.
In connection with the execution of the Demand Note, as security for payment of
the obligations under the Demand Note, the Company entered into a pledge
agreement with ABI under which ABI pledged and granted to the Company a security
interest in shares of the Company's common stock held by it having a fair market
value equal to 120% of the balance of the Demand Note.
VIVORX, INC. SETTLEMENT
As of December 31, 2001, the Company is jointly and severally liable for the
remaining outstanding portion of ABI's share of the VivoRx, Inc. settlement,
$24,000,000, as more fully described in Note 15. The allocation of the
settlement obligation was primarily based on ABI obtaining clear title and
ownership to its intellectual property, including the intellectual property
underlying ABI's ABI-007 product candidate currently in Phase III clinical
trials. Notwithstanding the agreed upon allocation of the settlement obligation
between ABI and the Company (limiting the Company's share to $3,400,000), the
Company recorded the present value of the entire settlement of $30,354,000 in
the year ended December 31, 2000, which is included in (gain) loss on litigation
settlements, net, in the accompanying consolidated statement of operations. As
ABI makes the payments to VivoRx, the liability to VivoRx in the Company's
consolidated balance sheet will be reduced and a corresponding capital
contribution will be recorded net of related deferred income taxes.
The Company expects that ABI will have sufficient liquid assets to fulfill its
portion of the liability to VivoRx. The amount due from ABI is classified as a
deduction from stockholders' equity in the accompanying consolidated balance
sheet. In July, 2001, ABI agreed that if, after the effective date of the
Company's initial public offering of its common stock, it fails to timely make
any of the settlement payments due to VivoRx, ABI will surrender to the Company
shares of the Company's common stock having a fair market value of 120% of the
unpaid amount.
41
GUARANTEE OF BORROWINGS
In December 2001, ABI guaranteed all borrowings outstanding under the Company's
credit facility that is described in Note 7.
PRODUCT LICENSE AGREEMENT
In November 2001, the Company entered into a license agreement with ABI under
which the Company acquired the exclusive rights to manufacture, market and sell
ABI-007 in North America, and which provides for initial license payments of
$60,000,000. This license is perpetual. American BioScience is responsible for
substantially all costs associated with the development of ABI-007, except that
the Company has agreed to provide up to $2,000,000 of ABI-007 for use in
clinical trials. The cost of the clinical product was charged to research and
development expense in the year ended December 31, 2001. The Company also is
required to make milestone payments of up to (a) $60,000,000 for indications
related to breast, ovarian and lung cancers and (b) $32,500,000 for indications
relating to prostate cancer and other indications agreed upon between ABI and
the Company. The Company also may be required to make additional milestone
payments of up to an aggregate of $110,000,000 based upon the achievement of
particular annual sales levels. Profits from any sales of ABI-007 will be shared
equally with ABI after deducting costs of goods sold, selling expenses and other
appropriate deductions. All costs and expenses related to product recalls and
product liability claims generally will be split equally between ABI and the
Company.
The initial license payment has been accounted for as a distribution of
Company's stockholders' equity to ABI. As of December 31, 2001, the entire
$60,000,000 had been accrued as a distribution payable to ABI. The $60,000,000
was paid to ABI in January 2002.
4. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
------------------------------------
2001 2000
----------------- -----------------
Finished goods $15,792,000 $11,988,000
Work in process 7,958,000 8,021,000
Raw materials 27,503,000 15,631,000
----------------- -----------------
$51,253,000 $35,640,000
================= =================
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
DECEMBER 31,
------------------------------------
2001 2000
----------------- -----------------
Land $ 2,384,000 $ 2,384,000
Building and improvements 33,344,000 32,282,000
Machinery and equipment 32,465,000 27,611,000
Furniture and fixtures 4,363,000 3,594,000
Construction in progress 7,446,000 5,567,000
----------------- -----------------
80,002,000 71,438,000
Less allowance for depreciation (26,181,000) (17,827,000)
----------------- -----------------
$ 53,821,000 $ 53,611,000
================= =================
42
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31,
------------------------------------
2001 2000
----------------- -----------------
Payroll and employee benefits $ 6,207,000 $ 4,481,000
Legal 1,015,000 254,000
Insurance 1,183,000 1,084,000
Sales and marketing 4,812,000 4,412,000
Accrued state income taxes 2,211,000 288,000
Other 1,010,000 2,200,000
----------------- -----------------
$16,438,000 $12,719,000
================= =================
7. CREDIT FACILITY
Long-term debt consists of the following:
DECEMBER 31,
------------------------------------
2001 2000
----------------- -----------------
Tranche A term loan $ - $16,200,000
Tranche B term loan - 2,738,000
Other - 1,000
----------------- -----------------
- 18,939,000
Less current maturities of
long-term debt - (4,001,000)
----------------- -----------------
$ - $14,938,000
================= =================
During 1998, the Company entered into a credit facility providing for two term
loans totaling $25,000,000 and a revolving line of credit agreement for an
amount not to exceed $25,000,000. In December 2001, this credit facility was
replaced by a new credit facility with another lender. The new facility consists
of a $25,000,000 term loan and a $50,000,000 revolving line of credit. Proceeds
of the Company's initial public offering were used to retire the new term loan
and pay off all outstanding amounts under the new revolving line of credit. The
revolving line of credit can be increased to $75,000,000 at the Company's
request. The new credit facility expires December 14, 2006.
Under the former credit agreement, the Company was required to make a mandatory
prepayment of the term loans within 90 days of the end of each fiscal year in an
amount equal to the lesser of $5,000,000 or 50% of excess cash flow (as
defined). For the year ended December 31, 2000, the lender agreed to waive the
mandatory prepayment in full.
Under the former credit agreement, the Company could elect the interest rates on
the term loans to be from either prime plus .75% or LIBOR plus 2.75%. The
weighted average interest rate on the outstanding term loans was 7.5%, 9.4% and
8.5% for the year ended December 31, 2001, 2000 and 1999, respectively. The
Company could elect the interest rate on borrowings under the revolving line of
credit to be either prime plus .25% or LIBOR plus 2.25% prior to Amendment Four
to the credit agreement, dated July 24, 2001. From July 24, 2001 to the
termination date, the available Revolving credit line rates were prime plus .50%
or LIBOR plus 2.5%.
The new credit facility's interest rate for the revolving line is the greater of
prime plus .50% or the Federal funds rate plus .50%. The Company also has the
option of converting revolving line loans to the Eurocurrency Rate, as defined.
There were no outstanding balances under the revolving lines of credit at
December 31, 2001 and 2000. During the years ended December 31, 2001 and 2000,
the highest outstanding revolving loan balances were $19.6 million and $4.1
million respectively.
The loans under the credit facility are collateralized by substantially all of
the Company's assets. Under the credit facility, the Company is prohibited from
paying dividends and is subject to various covenants and restrictions. At
December 31, 2001, the Company was in compliance with all covenants.
43
The credit facility limits the aggregate undrawn amount of all letters of credit
and assesses fees on the face amount of commercial and standby letters of
credit. A fee is assessed at 3.75% of the face amount of commercial and standby
letters of credit, respectively. The letters of credit are payable on demand.
There were no amounts outstanding under letters of credit at December 31, 2001.
During the year ended December 31, 2001, no interest expense was capitalized.
Interest expense of $226,000 and $27,000 was capitalized during the years ended
December 31, 2000 and 1999, respectively, as part of a major construction
project.
8. LEASES AND COMMITMENTS
The Company has entered into various operating lease agreements for warehouses,
office space, automobiles, communications, data processing equipment and
software, and office equipment. Rental expense amounted to $1,643,000,
$1,284,000 and $915,000 for the years ended December 31, 2001, 2000, and 1999,
respectively.
As of December 31, 2001, future annual minimum lease payments related to these
noncancelable operating leases are as follows:
YEAR AMOUNT
---------- -----------
2002 $ 2,108,000
2003 1,776,000
2004 1,350,000
2005 517,000
2006 237,000
Thereafter 47,000
-----------
$ 6,035,000
===========
9. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) defined-contribution plan (401(k) Plan) covering
substantially all eligible employees. Employee contributions to the 401(k) Plan
are voluntary. The Company contributes an amount equal to 50% of a covered
employee's eligible contribution not to exceed 6% of a participant's
compensation. Employer contributions vest over a period of three years.
Participants may contribute up to 15% of their salary up to the annual tax
deferred contribution limit allowed by the Internal Revenue Service. The
Company's total matching contributions to the 401(k) Plan were $962,000,
$799,000 and $732,000 for the years ended December 31, 2001, 2000, and 1999,
respectively. The Company may contribute additional amounts to the 401(k) Plan
at its discretion. These discretionary employer contributions vest over a period
of six years. No discretionary contributions have been made to the 401(k) Plan
by the Company.
10. EMPLOYEE STOCK PURCHASE PLAN
In December 2001, the Company's Board of Directors adopted the 2001 Employee
Stock Purchase Plan which is intended to qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code. An aggregate of 2,000,000
shares of the Company's common stock are reserved for issuance, and the Plan
provides for annual increases in the number of shares of the Company's common
stock, subject to the 2001 Employee Stock Purchase Plan, equal to the lesser of
1,500,000 shares, a number of shares equal to 2% of the total number of shares
outstanding or a number of shares as determined by the Company's Board of
Directors.
44
11. SERIES A REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
COMMON STOCK
In March 1996, the Company sold 20,000,000 shares of common stock to ABI for
$1,000. In October 1996, the Company sold 1,052,640 shares to Premier Purchasing
Partners, L.P. (Premier), a hospital group purchasing organization, for $100.
Pursuant to an agreement that expired March 31, 2001, Premier earned, at no
cost, additional common shares of the Company's common stock based upon the
level of sales by the Company to Premier's partners. As of December 31, 2001,
1,861,953 shares had been earned by and issued to Premier.
The Company accrued for the shares, at their estimated fair value, as Premier
earned the shares. The estimated fair value of shares earned by Premier amounted
to $1,754,000, $4,782,000, and $2,082,000 for the years ended December 31, 2001,
2000, and 1999, respectively, and have been classified as a reduction of net
sales in the accompanying statements of operations.
REINCORPORATION
On December 10, 2001, the Company reincorporated in Delaware, and filed a
certificate of incorporation authorizing the issuance of up to 100,000,000
shares of common stock and up to 6,000,000 shares of preferred stock effective
upon the closing of the Company's initial public offering. The existing
stockholders received shares of common stock and preferred stock of the Delaware
corporation in exchange for their shares of common stock and preferred stock of
the California corporation.
INITIAL PUBLIC OFFERING
On December 14, 2001, the Company completed an initial public offering of its
common stock selling 9,000,000 shares of common stock at a price of $16.00 per
share. Gross proceeds of the offering amounted to $144,000,000 of which the
Company received net proceeds of $133,920,000, after $10,080,000 in underwriting
discounts and commissions and other expenses of $2,879,000 relating to the
offering.
SHARES RESERVED FOR ISSUANCE
As of December 31, 2001, 6,297,765 common shares are reserved for the exercise
of stock options, and 2,000,000 common shares are reserved for issuance for the
employee stock purchase plan.
WARRANT
Pursuant to an obligation arising from services performed related to the
financing of the Fujisawa Acquisition, the Company issued a warrant to an
investment banking firm to purchase up to an aggregate of 234,126 shares of
common stock at an exercise price of $3.54 per share. The fair value of the
warrant, $393,000 based upon the Black-Scholes option pricing model, was
recorded as deferred financing costs as of the date of the Fujisawa Acquisition.
The warrant was exercised on December 13, 2001, and the holder of the warrant
received 182,325 shares. The remaining 51,801 warrants were tendered to the
Company as payment for the shares issued and were retired upon receipt.
PREFERRED STOCK
In June 1998, the Company sold 2,821,035 shares of Series A convertible
preferred stock for $10,000,000 to an unrelated party. Also, during 1998, the
Company entered into a Stock Purchase Agreement with ABI whereby the Company
sold 4,231,585 shares of Series B convertible preferred stock for $15,000,000,
1,410,530 shares of Series C convertible preferred stock for $5,000,000, and
6,347,325 shares of Series D convertible preferred stock for consideration of
ABI's issue of preferred stock, amounting to $22,500,000, in connection with the
Fujisawa Acquisition.
45
On December 14, 2001, in conjunction with the Company's initial public offering,
all the outstanding shares of Series A, B, C, and D preferred stock were
converted into an aggregate of 14,810,475 shares of $0.001 par value common
stock.
The Company is authorized to issue up to 6,000,000 shares of preferred stock
that is not designated as a particular class. The Company's Board of Directors
may authorize and cause the issuance of the undesignated preferred stock in one
or more series, determine the powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series of undesignated preferred stock and to fix the number of
shares constituting any series and the designation of the series, without any
further vote or action by our stockholders.
VOTING RIGHTS
The holders of our common stock are entitled to one vote for each share held of
record upon such matters and in such manner as may be provided by law.
DIVIDENDS
The Company's credit facility prohibits the payment of dividends. In the event
there is a liquidation, dissolution or wind up of the Company, the holders of
our common stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares of
preferred stock. Holders of our common stock have no preemptive rights or rights
to convert their common stock into any other securities.
The imputed dividends on the Series A redeemable convertible preferred stock
were not paid since such dividends were never declared and these shares were
automatically converted to common stock at the closing of the Company's initial
public offering.
REGISTRATION RIGHTS
Following the closing of the initial public offering on December 14, 2001, the
holders of 37,907,393 shares of our common stock, which include shares held by
ABI are entitled to registration rights with respect to their shares. Beginning
six months after the offering, the holders of these shares may require the
Company to register all or part of their shares. In addition, these holders may
require the Company to include their shares in future registration statements
that the Company files and may require the Company to register their shares on
Form S-3. Upon registration, these shares will be freely tradable in the public
market without restriction.
Generally, all expenses in effecting these registration statements, with the
exception of underwriting discounts and selling commissions, will be borne by
the Company. These registration rights are subject to some conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in a registration. The Company agreed to indemnify
the holders of these registration rights, and each selling holder has agreed to
indemnify the Company, against liabilities under the Securities Act, the
Securities Exchange Act or other applicable federal or state law.
12. STOCK OPTIONS
1997 STOCK OPTION PLAN
During 1998, the Company's Board of Directors authorized the 1997 Stock Option
Plan (1997 Plan). Under the 1997 Plan, options to purchase shares of the
Company's common stock may be granted to certain employees and directors with an
exercise price equal to the estimated fair market value of the Company's common
stock on the date of grant. The stock options have a term of 10 years, with a
vesting period of four years. In accordance with the terms of the 1997 Plan,
options granted to employees on or before December 1, 1999, vested immediately
upon the completion of the initial public offering by the Company on December
14, 2001. No further options will be granted under the 1997 Plan.
2001 STOCK INCENTIVE PLAN
In December 2001, the Company's Board of Directors authorized the 2001 Stock
Incentive Plan (2001 Plan). The 2001 Plan provides for the grant of incentive
stock options to employees, including officers and employee directors,
non-qualified stock options to employees, directors and consultants, and other
types of awards. All future option grants will be made solely under the 2001
Plan. The Company has reserved 3,000,000 shares of its common stock for issuance
under the 2001 Plan and, as of December 31, 2001, there were 2,202,826
additional options available for grant under the 2001 Plan.
46
The Company's Board of Directors or a committee designated by the Board of
Directors administers the 2001 Plan and has authority to determine the terms and
conditions of awards, including the types of awards, the number of shares
subject to each award, the vesting schedule of the awards and the selection of
grantees.
The exercise price of all options granted under the 2001 Plan will be determined
by the Company's Board of Directors or a committee designated by the Company's
Board of Directors, but in no event will this price be less than the fair market
value of the Company's common stock on the date of grant, unless otherwise
determined by the Board of Directors with respect to non-qualified stock
options.
2001 NON-EMPLOYEE DIRECTOR STOCK OPTION PROGRAM
The 2001 Non-Employee Director Stock Option Program (2001 Program) was adopted
as part, and is subject to the terms and conditions, of the 2001 Plan. The 2001
Program establishes an automatic option grant program for the grant of awards to
non-employee directors.
The 2001 Program will be administered by the Board of Directors or a committee
designated by the Board of Directors. Also, the Board of Directors or a
committee designated by the Board of Directors will determine the terms and
conditions of awards, and construe and interpret the terms of the program and
awards granted under the program. Non-employee directors may also be granted
additional incentive awards, subject to the discretion of the Board of Directors
or a committee designated by the Board of Directors.
STOCK OPTION GRANTS TO NON-EMPLOYEE DIRECTORS
Effective October 30, 1998, the Company approved the grant of an option to
purchase 75,000 shares of its common stock at $0.05 per share to a non-employee
director. Half of the options vested immediately and the remaining options
vested over two years. No compensation expense associated with these options was
recorded for the year ended December 31, 2001. Compensation expense of $83,000
and $86,000 associated with these options was recorded for the years ended
December 31, 2000 and 1999, respectively.
Additionally, the Company approved on November 23, 1999, the grant of options as
of December 10, 1998, to two non-employee directors to purchase 25,000 shares of
its common stock at $3.00 per share. Options for 1,000 shares were vested
immediately upon grant and the remaining options vest ratably for board meetings
attended by the option holders after December 10, 1998.
47
STOCK OPTION ACTIVITY
Stock option activity is as follows:
NUMBER OF OPTIONS
------------------------------------------------------------------------------------------------ WEIGHTED-
EXERCISE PRICE AVERAGE
---------------------------------------------------------------------------------- EXERCISE
$0.05 $3.00 $4.00 $6.00 $10.00 $15.00 $16.00 TOTAL PRICE
--------- --------- ------- ------- ------- ------- ------- --------- ---------
OPTIONS
Outstanding at
January 1, 1999 1,287,500 1,822,700 - - - - - 3,110,200 $ 1.78
Granted - 38,100 337,400 - - - - 375,500 3.90
Exercised (18,750) - - - - - - (18,750) 0.05
Forfeited - (209,800) (4,800) - - - - (214,600) 3.02
--------- --------- ------- ------- ------- ------- ------- --------- ---------
Outstanding at
December 31, 1999 1,268,750 1,651,000 332,600 - - - - 3,252,350 1.95
Granted - - 620,514 - - - - 620,514 4.00
Exercised (18,750) (8,875) (35) - - - - (27,660) 1.00
Forfeited - (109,350) (63,775) - - - - (173,125) 3.37
--------- --------- ------- ------- ------- ------- ------- --------- ---------
Outstanding at
December 31, 2000 1,250,000 1,532,775 889,304 - - - - 3,672,079 2.24
Granted - - 4,600 721,500 290,700 115,900 144,300 1,277,000 8.85
Exercised (1,250,000) (26,025) (5,300) - - - - (1,281,325) 0.13
Forfeited - (73,925) (106,290) (31,200) (800) (1,100) - (213,315) 4.11
--------- --------- ------- ------- ------- ------- ------- --------- ---------
Outstanding at
December 31, 2001 - 1,432,825 782,314 690,300 289,900 114,800 144,300 3,454,439 $ 5.29
========= ========= ======= ======= ======= ======= ======= ========= =========
The weighted average fair value of options granted was $9.70, $2.45 and $0.77
for the years ended December 31, 2001, 2000 and 1999, respectively.
The following table summarizes information about all stock options outstanding
as of December 31, 2001:
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE RANGES SHARES LIFE PRICE SHARES PRICE
- --------------------- --------- ----------- --------- --------- ---------
$ 0.00 - $ 3.50 1,432,825 6.2 $ 3.00 1,413,325 $ 3.00
$ 3.51 - $ 5.50 782,314 7.9 4.00 264,467 4.00
$ 5.51 - $ 8.50 690,300 9.1 6.00 75,000 6.00
$ 8.51 - $12.50 289,900 9.6 10.00 - -
$12.51 - $16.00 259,100 9.7 15.56 - -
--------- ----------- --------- --------- ---------
3,454,439 7.7 $ 5.36 1,752,792 $ 3.28
========= =========== ========= ========= =========
48
STOCK-BASED COMPENSATION
In connection with the granting of certain options to certain employees, the
amount of related compensation to be recognized was determined by the Company to
be the difference between the stock option exercise price and the fair value of
the Company's common stock at that date as estimated by the Company's management
for financial reporting purposes. For these stock options, the related
compensation was recorded as deferred stock-based compensation that is
classified as a reduction of stockholders' equity and is being amortized to
expense on an accelerated basis using the graded vesting method over the related
stock options' vesting periods in accordance with Financial Accounting Standards
Board (FASB) Interpretation No. 28. Such expense amounted to $2,491,000,
$532,000 and $2,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. The remaining amount of stock-based compensation during the years
ended December 31, 2000 and 1999 relates to the stock options granted to a
non-employee director.
PRO FORMA INFORMATION ABOUT STOCK OPTIONS
For the purposes of determining the pro forma effect under SFAS No. 123 of stock
options granted to employees and directors options, the fair value of each
option is estimated on the date of grant based on the Black-Scholes option
pricing model assuming, among other things, no dividend yield, a risk-free
interest rates ranging from 4.4% to 5.5%, volatility of 70%, 83% and 62% for the
years ended December 31, 2001, 2000 and 1999, respectively, and an expected life
of five years.
If the Company had accounted for its stock options in accordance with SFAS No.
123 over the stock options' normal vesting periods, the pro forma net income
(loss) and related pro forma per share information would have been as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
----------- ----------- ----------
Pro forma net income (loss) $12,453,000 $(8,800,000) $5,887,000
Pro forma net income (loss) per share:
Basic $ 0.47 $ (0.44) $ 0.22
Diluted $ 0.30 $ (0.44) $ 0.14
The pro forma disclosure is not likely to be indicative of pro forma results
that may be expected in future years because of the fact that options vest over
several years; pro forma compensation expense is recognized as the options vest
and additional awards may also be granted.
13. INCOME TAXES
Deferred tax assets and liabilities consist of the following:
DECEMBER 31,
---------------------------
2001 2000
----------- -----------
Deferred tax assets:
Inventory $ 1,113,000 $ 1,420,000
Depreciation 1,058,000 263,000
Customer discounts 368,000 383,000
Liability to VivoRx 8,961,000 10,512,000
Other accruals and reserves 3,464,000 3,969,000
----------- -----------
Total deferred tax assets 14,964,000 16,547,000
Deferred tax liabilities:
Organization costs (233,000) (349,000)
Other accruals and reserves (751,000) (2,000)
----------- -----------
Total deferred tax liabilities (984,000) (351,000)
----------- -----------
Net deferred tax asset $13,980,000 $16,196,000
=========== ===========
49
The provision for income tax consists of the following:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999
---------- ------------ -----------
Current:
Federal $7,764,000 $ 5,811,000 $ 4,422,000
State 2,123,000 1,588,000 1,183,000
Foreign 10,000 - 54,000
---------- ------------ -----------
Total current 9,897,000 7,399,000 5,659,000
Deferred:
Federal (302,000) (1,604,000) (1,200,000)
State (56,000) (321,000) (312,000)
Liability to VivoRx - (10,512,000) -
---------- ------------ -----------
Total deferred (358,000) (12,437,000) (1,512,000)
---------- ------------ -----------
Total provision (benefit) for income taxes $9,539,000 $ (5,038,000) $ 4,147,000
========== ============ ===========
The amount of allocated current liability for income taxes of the Company
accounted through the due from ABI account is $7,764,000 and $7,003,000, for the
years ended December 31, 2001 and 2000, respectively.
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
---- ------ ----
Tax provision at statutory federal rate 35.0% (34.0)% 34.0%
State income taxes, net of federal income tax benefit 6.1 (4.3) 6.2
Nondeductible expenses 1.9 1.8 0.3
----- ------- -----
Effective tax rate 43.0% (36.5)% 40.5%
===== ======= =====
The Company has been included in the consolidated federal and certain state
income tax returns of ABI. Due to the Company's initial public offering of the
Company's common stock on December 14, 2001, ABI's ownership interest in the
Company has dropped below 80%. As a result, the Company no longer qualifies to
be included in the consolidated tax return of ABI in accordance with Internal
Revenue Service regulations and will file its federal and state income tax
returns on a separate basis for periods subsequent to December 14, 2001.
14. REGULATORY MATTERS
The Company is subject to regulatory oversight by the United States Food and
Drug Administration (FDA) and other regulatory authorities with respect to the
development and manufacturing of its products. Failure to comply with regulatory
requirements can have a significant effect on the Company's business and
operations. Current management has designed a system of controls to attempt to
ensure compliance with regulatory requirements.
15. LITIGATION
VIVORX, INC. AND VIVORX DIABETES, INC.
During 1999, VivoRx brought an action against ABI, the Company and the Company's
chairman and chief executive officer relating to the development of the
businesses of ABI and the Company while the Company's chairman and chief
executive officer was also serving as the chief executive officer and chairman
of VivoRx.
This action was settled in February 2001 with ABI obtaining clear title and
ownership to its intellectual property, including the intellectual property
underlying ABI's ABI-007 product candidate. Under the settlement, the Company is
jointly and severally liable with ABI to pay VivoRx the remaining obligations
under the settlement agreement as follows: $12,000,000 in February 2002 and
$12,000,000 in February 2003. The respective boards of directors of the Company
and of ABI, in consultation with litigation counsel, passed resolutions
allocating $3,400,000 of the total settlement obligation of $34,000,000 to the
Company and
50
the remaining $30,600,000 to ABI. The allocation of the settlement was primarily
based upon ABI obtaining clear title and ownership to its intellectual property,
including the intellectual property underlying ABI's ABI-007 product candidate,
and, accordingly, being the primary beneficiary of the settlement.
Notwithstanding the agreed upon allocation of the settlement obligation between
ABI and the Company, the Company recorded the entire present value of
$30,354,000 of the litigation settlement with VivoRx as an expense of the
Company for the year ending December 31, 2000. This loss is included in
litigation settlements, net in the accompanying consolidated statements of
operations.
OTHER
A complaint was filed against the Company related to a manufacturing and
distribution agreement. In response, the Company filed a cross-complaint. The
parties reached a settlement in March 2000, resulting in a gain of $750,000 and
$2,018,000 during the years ended December 31, 2001 and 2000, respectively.
These gains are included in litigation settlements, net in the accompanying
consolidated statement of operations.
The Company is from time to time subject to claims and litigation arising in
ordinary courses of business. These claims have included assertions that the
Company's products infringe existing patents and also claims that the use of the
Company's products has caused personal injuries. The Company intends to defend
vigorously any such litigation that may arise under all defenses that would be
available to the Company. In the opinion of management, the ultimate outcome of
such proceedings will not have a material adverse effect on the consolidated
financial position or results of operation of the Company.
16. NET SALES BY PRODUCT
Net sales by product line is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Oncology $ 31,179,000 $ 36,558,000 $ 13,267,000
Anti-infective 54,721,000 46,987,000 39,216,000
Critical care 100,397,000 79,232,000 77,365,000
Contract manufacturing 6,416,000 6,525,000 7,858,000
Other 1,070,000 975,000 899,000
------------ ------------ ------------
193,783,000 170,277,000 138,605,000
Less fair value of common shares earned by Premier (1,754,000) (4,782,000) (2,082,000)
------------ ------------ ------------
$192,029,000 $165,495,000 $136,523,000
============ ============ ============
Estimated net sales to the Company's wholesalers of
products resold to Premier's members included in
above amounts $ 53,881,000 $ 51,153,000 $ 39,578,000
============ ============ ============
51
17. UNAUDITED QUARTERLY FINANCIAL DATA
Selected quarterly data for 2001 and 2000 are as follows (in thousands except
per share data):
2001
-----------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Net sales $ 39,034 $ 48,074 $ 49,290 $ 55,631
Gross margin $ 11,868 $ 18,273 $ 16,212 $ 24,057
Net income $ 797 $ 3,845 $ 2,671 $ 5,315
Net income applicable to common stock $ 547 $ 3,595 $ 2,421 $ 5,114
Income per common share:
Basic $ 0.02 $ 0.16 $ 0.10 $ 0.18
Diluted $ 0.01 $ 0.09 $ 0.06 $ 0.12
2000
-----------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Net sales $ 39,185 $ 41,971 $ 41,504 $ 42,835
Gross margin $ 16,023 $ 15,672 $ 14,646 $ 13,567
Net income (loss) $ 3,923 $ 2,227 $ 2,090 $(16,999)
Net income (loss) applicable to common stock $ 3,673 $ 1,977 $ 1,840 $(17,249)
Income (loss) per common share:
Basic $ 0.16 $ 0.09 $ 0.08 $ (0.76)
Diluted $ 0.10 $ 0.05 $ 0.05 $ (0.76)
18. EVENTS SUBSEQUENT TO DECEMBER 31, 2001
On January 10, 2002, the underwriters for the Company's initial public offering
exercised in full their option to purchase an additional 1,350,000 shares of the
Company's common stock at the initial public offering price of $16.00 per share
in order to cover over-allotments. As a result of this exercise, the Company
received net proceeds of $20,088,000, after underwriting discounts and
commissions of $1,512,000.
In January 2002, the Company made the initial license payment of $60,000,000 to
ABI, which had been accrued as of December 31, 2001 pursuant to the November
2001 license agreement under which the Company acquired the exclusive rights to
market and sell ABI-007 in North America.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding our directors is incorporated by reference from the
information contained under the caption "Election of Directors" in our 2002
Proxy Statement for the 2002 Annual Meeting of Stockholders. In addition,
information regarding our executive officers is incorporated by reference from
the information contained under the caption "Executive Officers of the
Registrant" in Part I of this report. Further, information regarding Section 16
reporting compliance is incorporated by reference from information contained
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
our 2002 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated by reference to
the information under the captions "Summary Compensation Table," "Option Grants
in Last Fiscal Year," and "Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values" in our 2002 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in our 2002 Proxy Statement,
under the caption "Security Ownership of Certain Beneficial Owners and
Management," which information is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information about certain relationships and related transactions is set
forth in our 2002 Proxy Statement, under the caption "Compensation Committee
Interlocks and Insider Participation," which information is hereby incorporated
herein by reference.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
a. (1) FINANCIAL STATEMENTS
The following consolidated financial statements of American Pharmaceutical
Partners, Inc. are included in Part II, Item 8 of this Report:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at December 31, 2001 and 2000
Consolidated Statements of Operations for the Years Ended December 31,
2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statement schedule of American
Pharmaceutical Partners, Inc. is included in Part IV, Item 14 of this Report:
Schedule II. Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because the required information is not present
or is not present in amounts sufficient to require submission of the schedule or
because the information required is given in the consolidated financial
statements or the notes thereto.
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant
3.2(1) Bylaws of the Registrant
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2(2) Specimen Stock Certificate of the Registrant
4.3(3) First Amended Registration Rights Agreement, dated as of
June 1, 1998, between the Registrant and certain holders of
the Registrant's capital stock
10.1(4) Form of Indemnification Agreement between the Registrant and
each of its executive officers and directors
10.2(3) 1997 Stock Option Plan
10.3(3) 2001 Stock Incentive Plan, including forms of agreements
thereunder
10.4(3) 2001 Employee Stock Purchase Plan, including forms of
agreements thereunder
10.6(3) Office Lease Agreement dated January 29, 1999 between the
Registrant and Woodfield Executive Center, Inc.
10.7(3) Lease Agreement dated December 4, 2000, between the Registrant
and AMB Property II, L.P.
10.8(4) Tax Sharing and Indemnification Agreement dated July 25, 2001,
between the Registrant and ABI
10.9(4) Agreement, dated as of July 25, 2001, between the Registrant
and ABI
54
10.10(4) Agreement, dated as of July 25, 2001, between the Registrant
and ABI
10.11(2) License Agreement, dated as of November 20, 2001, between the
Registrant and ABI
10.12(2) Manufacturing Agreement, dated as of November 20, 2001,
between the Registrant and ABI
10.13(4) Compensation Protection Agreement, dated as of November 20,
2001, between the Registrant and Derek J. Brown
10.14(4) Compensation Protection Agreement, dated as of November 20,
2001, between the Registrant and Jeffrey M. Yordon
10.15(4) Compensation Protection Agreement, dated as of November 20,
2001, between the Registrant and Jack C. Silhavy
10.16(1) Corporate Agreement, dated as of December 12, 1997, between
the Registrant and Premier Purchasing Partners, L.P.,
including an amendment thereunder
10.17(2) Group Purchasing Agreement, dated as of December 12, 1997,
between the Registrant and Premier Purchasing Partners, L.P.,
including an amendment thereunder
10.18(1) Pledge Agreement, dated as of November 20, 2001, between the
Registrant and ABI
10.19 Credit Agreement, dated as of December 14, 2001, between the
Registrant, Canadian Imperial Bank of Commerce, Bank of
America, N.A., UBS Warburg LLC, and the several lenders from
time to time parties thereto
21.1(1) List of Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
- -----------------------
(1) Incorporated by reference to Registrant's Registration Statement filed on
Form S-1/A, file number 333-70900, filed with the Securities and Exchange
Commission on December 11, 2001.
(2) Incorporated by reference to Registrant's Registration Statement filed on
Form S-1/A, file number 333-70900, filed with the Securities and Exchange
Commission on December 13, 2001.
(3) Incorporated by reference to Registrant's Registration Statement filed on
Form S-1, file number 333-70900, filed with the Securities and Exchange
Commission on October 3, 2001.
(4) Incorporated by reference to Registrant's Registration Statement filed on
Form S-1/A, file number 333-70900, filed with the Securities and Exchange
Commission on November 20, 2001.
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the last quarter ended December 31,
2001.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California on the 29th day of March 2002.
AMERICAN PHARMACEUTICAL PARTNERS, INC.
By: /s/ Patrick Soon-Shiong, M.D.
-----------------------------------------
Patrick Soon-Shiong, M.D.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Patrick Soon-Shiong, M.D.
- ----------------------------- Chief Executive Officer March 29, 2002
Patrick Soon-Shiong, M.D. and Chairman of the
Board of Directors
(Principal Executive Officer)
/s/ Derek J. Brown
- ----------------------------- Chief Operating Officer March 29, 2002
Derek J. Brown and Director (Principal
Financial and
Accounting Officer)
/s/ Jeffrey M. Yordon
- ----------------------------- Chief Operating Officer March 29, 2002
Jeffrey M. Yordon and Director
/s/ David S. Chen, Ph.D.
- ----------------------------- Director March 29, 2002
David S. Chen, Ph.D.
/s/ Stephen D. Nimer, M.D.
- ----------------------------- Director March 29, 2002
Stephen D. Nimer, M.D.
/s/ Ann D. Rhoads
- ----------------------------- Director March 29, 2002
Ann D. Rhoads
56
FINANCIAL SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
A B C D E
BALANCE AT BALANCE AT
YEAR ENDED BEGINNING OF (1) (2) END OF
DECEMBER 31, PERIOD ADDITIONS DEDUCTIONS PERIOD
- ------------ ------------ --------- ---------- ----------
Allowance for doubtful accounts:
2001 $ 436,000 222,000 258,000 $ 400,000
2000 $ 279,000 467,000 310,000 $ 436,000
1999 $ 254,000 26,000 1,000 $ 279,000
(1) Provision for bad debts charged to expense.
(2) Accounts receivable written-off or collections.
57