UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
COMMISSION FILE NUMBER 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 425-7100
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 twelve 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 ___
32,492,490
Number of shares of Common Stock outstanding as of August 9, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
JUNE 30, DECEMBER 31,
Assets 2002 2001
------ (UNAUDITED) (AUDITED)
----------- ---------
Current assets:
Cash and cash equivalents $ 24,447 $ 67,742
Accounts receivable, net of allowances of
$29,787 and $47,168 56,980 38,009
Inventories 46,017 31,458
Prepaid expenses and other current assets 4,886 4,156
Deferred income tax assets 43,222 34,485
-------- --------
Total current assets 175,552 175,850
Property, plant and equipment, at cost less
accumulated depreciation and amortization 27,608 24,345
Deferred charges and other assets 12,971 8,426
Intangible assets 25,554 8,305
Goodwill 24,626 --
-------- --------
Total assets $266,311 $216,926
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 212 $ 239
Accounts payable 24,211 18,007
Payables due to distribution agreement partners 15,644 32,295
Accrued salaries and employee benefits 3,996 2,859
Accrued expenses and other current liabilities 4,853 4,817
Income taxes payable 34,094 14,766
-------- --------
Total current liabilities 83,010 72,983
Long-term debt, less current portion 964 1,060
Accrued pension liability 331 331
Deferred income tax liabilities, net 3,999 4,129
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01 per share; authorized
90,000,000 shares; issued and outstanding
32,161,303 and 32,035,189 shares 322 320
Additional paid-in capital 114,052 115,610
Retained earnings 63,633 22,493
-------- --------
Total shareholders' equity 178,007 138,423
-------- --------
Total liabilities and shareholders' equity $266,311 $216,926
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
--2--
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (ACCUMULATED DEFICIT)
(In Thousands, Except Per Share Amounts)
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ---------------------
(*RESTATED) (*RESTATED)
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---- ---- ---- ---------
Net sales $ 182,263 $ 55,001 $ 101,755 $ 29,297
Cost of goods sold 96,573 35,452 55,340 18,176
--------- -------- --------- --------
Gross margin 85,690 19,549 46,415 11,121
Operating expenses:
Research and development 6,937 3,657 4,063 2,119
Selling, general and administrative 16,363 8,954 8,847 4,759
--------- -------- --------- --------
Total operating expenses 23,300 12,611 12,910 6,878
--------- -------- --------- --------
Operating income 62,390 6,938 33,505 4,243
Settlements 9,051 -- -- --
Other (expense) income (4,380) 364 (223) 45
Interest income (expense) 381 (442) 127 (222)
--------- -------- --------- --------
Income before provision for income taxes 67,442 6,860 33,409 4,066
Provision for income taxes 26,302 3,160 13,029 1,862
--------- -------- --------- --------
NET INCOME 41,140 3,700 20,380 2,204
Retained earnings (accumulated deficit):
Beginning of period 22,493 (31,429) 43,253 (29,933)
--------- -------- --------- --------
End of period $ 63,633 $(27,729) $ 63,633 $(27,729)
========= ======== ========= ========
NET INCOME PER SHARE OF COMMON STOCK:
BASIC $ 1.28 $ .12 $ .64 $ .07
========= ======== ========= ========
DILUTED $ 1.25 $ .12 $ .62 $ .07
========= ======== ========= ========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC 32,069 29,725 32,089 29,790
========= ======== ========= ========
DILUTED 32,869 31,442 32,898 31,637
========= ======== ========= ========
* Restated as described in Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
--3--
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
SIX MONTHS ENDED
(*RESTATED)
JUNE 30, JUNE 30,
2002 2001
---- ------
Cash flows from operating activities:
Net income $ 41,140 $ 3,700
Adjustments to reconcile net income to net cash
used in operating activities:
Deferred income taxes (8,867) 1,444
Depreciation and amortization 2,358 1,625
Write-off of inventories 2,742 466
Allowances against accounts receivable (17,381) 1,819
Settlements (9,651) --
Tax effect from exercise of stock options (2,254) 1,716
Other (23) 149
Changes in assets and liabilities:
Increase in accounts receivable (1,331) (9,166)
Increase in inventories (17,233) (3,101)
Increase in prepaid expenses and other assets (7,298) (1,439)
Increase (decrease) in accounts payable 6,105 (2,027)
Decrease in payables due to distribution agreement
partners (16,651) (78)
Increase (decrease) in accrued expenses and other
liabilities 1,250 (151)
Increase in income taxes payable 19,328 101
-------- -------
Net cash used in operating activities (7,766) (4,942)
Cash flows from investing activities:
Capital expenditures (3,551) (1,569)
Acquisition of FineTech (32,581) --
Proceeds from sale of fixed assets 28 17
-------- -------
Net cash used in investing activities (36,104) (1,552)
Cash flows from financing activities:
Proceeds from issuances of Common Stock 698 929
Net proceeds from revolving credit line -- 5,712
Principal payments under long-term debt and other
borrowings (123) (134)
-------- -------
Net cash provided by financing activities 575 6,507
Net (decrease) increase in cash and cash equivalents (43,295) 13
Cash and cash equivalents at beginning of period 67,742 222
-------- -------
Cash and cash equivalents at end of period $ 24,447 $ 235
======== =======
Supplemental disclosure of cash flow information
Cash paid during the year for:
Taxes $ 18,095 $ 182
======== =======
Interest $ 76 $ 447
======== =======
* Restated as described in Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
--4--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
Pharmaceutical Resources, Inc. (the "Company" or "PRX") operates,
primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. ("Par"),
in one business segment, the manufacture and distribution of generic
pharmaceuticals in the United States. Marketed products are principally in solid
oral dosage form (tablet, caplet and two-piece hard-shell capsule). The Company
also distributes one product in the semi-solid form of a cream and one oral
suspension.
BASIS OF PREPARATION:
The accompanying consolidated financial statements at June 30, 2002 and
for the six-month and three-month periods ended June 30, 2002 and 2001 are
unaudited; however, in the opinion of the Company's management, such statements
include all adjustments (consisting of normal recurring accruals) necessary to
present a fair statement of the information presented therein. The consolidated
balance sheet at December 31, 2001 was derived from the Company's audited
consolidated financial statements at such date.
On April 17, 2002, the Company purchased a portion of International
Specialty Products' ("ISP's") fine chemical business, FineTech Ltd. ("FineTech")
based in Haifa, Israel. The acquisition was accounted for as a purchase under
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and the consolidated financial statements include the operating
results from the date of acquisition.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
consolidated financial statements and these notes do not include all disclosures
required by accounting principles generally accepted in the United States for
audited financial statements. Accordingly, these statements should be read in
conjunction with the Company's most recent annual financial statements.
Results of operations for interim periods are not necessarily indicative
of those to be achieved for a full fiscal year.
RESTATEMENT OF PRIOR YEAR RESULTS
Certain items in the consolidated financial statements for the six and
three-month periods ended June 30, 2001 have been restated to change the manner
in which the Company accounted for its transactions with Merck KGaA in fiscal
year 1998. In June 1998, the Company sold to Merck KGaA 10,400,000 shares of its
Common Stock, and entered into a distribution agreement (the "Genpharm
Distribution Agreement"), dated March 1998, with Genpharm, Inc. ("Genpharm"), a
Canadian subsidiary of Merck KGaA. Previously, the Company accounted for the
sale of the Common Stock and the distribution agreement as separate
transactions. In restating its consolidated financial statements, the Company
has accounted for the two agreements as a single transaction under Emerging
Issues Task Force ("EITF") Issue No. 96-18 "Accounting for Equity Instruments
that are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling Goods or Services". Under EITF Issue 96-18, the fair value of the Common
Stock sold, to the extent it exceeded the cash consideration received for such
Common Stock, must be attributed to the distribution agreement. The Company
determined the fair value of the Common Stock sold to Merck KGaA to be
$27,300,000, which exceeded the cash consideration of $20,800,000 by $6,500,000.
That $6,500,000 has therefore been assigned to the Genpharm Distribution
Agreement, with a corresponding increase in shareholders' equity. Additionally,
the Company recorded a deferred tax liability, and a corresponding increase in
the financial reporting basis of the distribution agreement, of $4,333,000 to
account for the difference between the basis in the distribution agreement for
financial reporting and income tax purposes as required by SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). The aggregate of $10,833,000
assigned to the Genpharm Distribution Agreement is included in intangible assets
net of amortization that began in the third calendar quarter of 1998. The total
value is being amortized on a straight-line basis over fifteen years and
included as a non-cash charge in selling, general and administrative expenses.
The impact of the restatement for the six and three-month periods ended June 30,
2001 is as follows:
--5--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
Six Months Ended Three Months Ended
CONSOLIDATED STATEMENTS OF June 30, 2001 June 30, 2001
---------------------------------- ----------------------------------
OPERATIONS AND ACCUMULATED DEFICIT As Reported Restated As Reported Restated
---------------- ---------------- ---------------- ---------------
(In Thousands)
Selling, general and administrative $8,592 $8,954 $4,578 $4,759
Net income $4,062 $3,700 $2,385 $2,204
Accumulated deficit ($25,561) ($27,729) ($25,561) ($27,729)
Net income per share of common stock:
Basic $0.14 $0.12 $0.08 $0.07
Diluted $0.13 $0.12 $0.08 $0.07
ACCOUNTS RECEIVABLE:
JUNE 30, DECEMBER 31,
2002 2001
---- ----
(IN THOUSANDS)
Accounts receivable $86,767 $85,177
------ ------
Allowances:
Doubtful accounts 856 998
Returns and allowances 11,726 4,847
Price adjustments 17,205 41,323
------ ------
29,787 47,168
------ ------
Accounts receivable,
net of allowances $56,980 $38,009
====== ======
The accounts receivable amounts at June 30, 2002 and December 31, 2001
are net of provisions for customer rebates of $13,259,000 and $14,081,000, and
chargebacks of $104,218,000 and $41,830,000, respectively. Customer rebates are
price reductions generally given to customers as an incentive to increase sales
volume. This incentive is based on a customer's volume of purchases during an
applicable monthly, quarterly or annual period. Chargebacks are price
adjustments given to the wholesale customer for product it resells to specific
healthcare providers on the basis of prices negotiated between the Company and
the provider. The increase in chargebacks is due to lower contract pricing on
fluoxetine and a larger volume of sales through the Company's wholesale
customers, primarily due to new product awards and trade show promotions.
The accounts receivable allowances include price adjustments that consist
of cash discounts, sales promotions and price protection or shelf-stock
adjustments. The Company may offer price protection, or shelf-stock adjustments,
with respect to sales of new generic drugs for which it has a market exclusivity
period. To account for the fact that the price of such drugs typically will
decline when additional generic manufacturers introduce and market a comparable
generic product at the end of the exclusivity period, such plans, which are
common in the industry, generally provide that the Company credit its customers
with respect to the customer's inventory at the end of the exclusivity period
for the difference between the Company's new price at the end of the exclusivity
period and the price at which the Company sold the customers the product.
The Company's exclusivity period for fluoxetine, the generic version of
Eli Lilly and Company's Prozac(R), ended in late-January 2002. With respect to
fluoxetine, the Company established a price protection reserve during the
exclusivity period of approximately $34,400,000, based on an estimate that
between eight and ten additional generic manufacturers would introduce and
market comparable products for the 10 mg and 20 mg tablets and between one and
three additional manufacturers would introduce and market a comparable product
for the 40 mg capsules. As a result of the introduction of these competing
generic products during the first quarter of 2002, the sales price for
fluoxetine has substantially declined from the sales price the Company charged
--6--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
during the exclusivity period. Through June 30, 2002, the Company issued price
protection credits of approximately $26,200,000 and adjusted the reserve by
approximately $5,800,000, which due to a profit split with a strategic partner
had a favorable affect of approximately $1,160,000 on the Company's gross
margins in the quarter, for price protection on the 40 mg it believes is no
longer necessary. The Company expects that the remaining price protection
reserve at June 30, 2002 of approximately $2,400,000 will be sufficient and
fully utilized. Accordingly, sales and gross margin generated by fluoxetine in
fiscal year 2002 have been and will continue to be adversely affected in future
periods. The affect of gross margin declines from lower pricing on the 40 mg
capsule have been offset, however, by an increase in the Company's profit
sharing percentage. Although there can be no assurance, the Company expects to
continue to introduce new products throughout fiscal year 2002 and to increase
sales of certain existing products to offset any loss of sales and gross margin
on its fluoxetine products.
The Company's exclusivity period for megestrol acetate oral suspension,
the generic version of Bristol Myers Squibb's ("BMS") Megace(R) Oral Suspension,
ended in mid-January 2002. One generic competitor was granted U.S. Food and Drug
Administration ("FDA") approval to market another generic version of megestrol
acetate oral suspension and began shipping the product to a limited number of
customers in the second quarter of 2002. In addition, a second potential generic
competitor entered into a settlement agreement with BMS pursuant to which the
public record states that the present formulation of the generic company's
product infringes a BMS patent related to megestrol acetate. However, at this
time the Company has no information as to whether the settlement agreement
provides for the generic competitor to enter the market at some point in the
future. The Company has patents that cover its unique formulation for megestrol
acetate oral suspension and will avail itself of all legal remedies and will
take all of the necessary steps to protect its intellectual property rights.
Although competitors may be taking the necessary steps to enter the market, the
Company believes they are less likely to successfully enter this market because
of patents owned by BMS or the Company. Megestrol acetate oral suspension is
still anticipated to be a significant profit contributor for the remainder of
fiscal year 2002, despite potential competition. Based on these factors and the
Company not experiencing any significant price competition to date on megestrol
acetate oral suspension, the Company did not record a price protection reserve
for such product as of June 30, 2002, but will continue to evaluate the effect
of potential competition and will record a price protection reserve when it
deems necessary.
INVENTORIES:
JUNE 30, DECEMBER 31,
2002 2002
---- ----
(IN THOUSANDS)
Raw materials and supplies $17,256 $11,574
Work in process and finished goods 28,761 19,884
------ ------
$46,017 $31,458
====== ======
DEFERRED CHARGES AND OTHER ASSETS:
In November 2001, the Company entered into a joint development and
marketing agreement with Breath Ltd. of the Arrow Group to pursue the worldwide
distribution of latanoprost ophthalmic solution 0.005%, the generic equivalent
of Pharmacia Corporation's ("Pharmacia") Xalatan(R), a glaucoma medication. As a
result of this agreement, Par filed an Abbreviated New Drug Application ("ANDA")
for latanoprost, including a Paragraph IV certification that the existing
patents for the product will not be infringed by Par's generic product. Par has
reason to believe that its ANDA is the first to be filed for this drug with a
Paragraph IV certification. In December 2001, Pharmacia, among others, initiated
a patent infringement action against Par and Par intends to vigorously defend
its position in its pending litigation with Pharmacia. Pursuant to this
agreement Par made payments to Breath Ltd. of $2,500,000 in fiscal year 2001 and
$2,500,000 in the first quarter of fiscal year 2002, which are included in
deferred charges and other assets on the consolidated balance sheets (see
"-Legal Proceedings").
In April 2002, the Company entered into an agreement (the "Genpharm 11
Product Agreement") to expand its strategic product partnership with Merck KGaA.
Under the terms of the Genpharm 11 Product Agreement, Par has licensed the
exclusive rights to 11 generic pharmaceutical products currently under
development and not included in any other distribution agreements between the
--7--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
Company and Genpharm (see "-Distribution Agreements-Genpharm, Inc."). Pursuant
to the Genpharm 11 Product Agreement, Genpharm has agreed to develop the
products, submit all corresponding ANDAs to the FDA and subsequently manufacture
the products. Par has agreed to serve as exclusive U.S. marketer and distributor
of the products, pay a share of the costs, including development and legal
expenses incurred to obtain final regulatory approval, and pay Genpharm a
percentage of the gross profits on all sales of products covered under this
agreement. Pursuant to the Genpharm 11 Product Agreement, the Company paid
Genpharm a non-refundable fee of $2,000,000 in the second quarter of 2002, which
is included in deferred charges and other assets on the consolidated balance
sheets, for two of the products, loratadine 10 mg tablets and mirtazapine
tablets, which are tentatively approved and expected to be marketed in fiscal
years 2003 to 2004. In addition, the Company will be required to pay an
additional non-refundable fee of up to $414,000 based upon FDA acceptance of
filings for six of the nine remaining products.
INTANGIBLE ASSETS:
On March 5, 2002 the Company acquired the United States rights to five
products from BMS. Based on the Company's market research, these products, which
include the antihypertensives Capoten(R) and Capozide(R), the
cholesterol-lowering medications Questran(R) and Questran Light(R), and
Sumycin(R), an antibiotic, are expected to generate annual net sales of
approximately $10,000,000. To obtain the rights to the five products, the
Company paid approximately $1,024,000 in March 2002 and agreed to make an
additional payment of approximately $1,025,000 in the first quarter of 2003. The
Company also agreed to terminate its outstanding litigation against BMS
involving megestrol acetate oral suspension and buspirone. The Company
determined, through a third party appraisal, the fair value of the agreement to
be $11,700,000, which exceeded the cash consideration of $2,049,000 and
associated costs of $600,000 by $9,051,000. The $9,051,000 value was assigned to
the litigation settlements and included in settlement income in the first
quarter of 2002. The value assigned to the agreement is included in intangible
assets and is being amortized on a straight-line basis over seven years as a
non-cash charge included in cost of goods sold.
ACQUISITION OF FINETECH:
On March 15, 2002, the Company announced the termination of negotiations
with ISP related to its purchase of the entire ISP FineTech fine chemical
business, based in Haifa, Israel and Columbus, Ohio. At that time, the Company
discontinued negotiations with ISP as a result of various events and
circumstances that occurred after the announcement of the proposed transaction.
Pursuant to the termination of the purchase, the Company paid ISP a $3,000,000
break-up fee in March 2002, which was subject to certain credits and offsets,
and incurred approximately $1,278,000 in related acquisition costs, both of
which were included in other expense in the first quarter of 2002.
The Company subsequently purchased a portion of ISP's fine chemical
business, FineTech, based in Haifa, Israel, from ISP in April 2002 for
approximately $32,000,000 and $1,200,000 in related acquisition costs financed
by its cash-on-hand. The Company has acquired the physical facilities, the
intellectual property and patents of FineTech and has retained all FineTech
employees. FineTech specializes in the design and manufacture of proprietary
synthetic chemical processes used in the production of complex organic compounds
for the pharmaceutical industry. FineTech also manufactures complex synthetic
active pharmaceutical ingredients for companies in the branded and generic
pharmaceutical industries at its manufacturing facility in Haifa, Israel. This
facility operates in compliance with FDA current good manufacturing practices
(cGMP) standards. FineTech had revenues of approximately $6,000,000 in 2001;
however, the purchase is not expected to have a material effect on the Company's
earnings in fiscal year 2002. The Company expects to transfer a portion of
FineTech's personnel and technological resources to a laboratory facility in the
northeastern United States. FineTech will be operated as an independent, wholly
owned subsidiary of PRI and will provide immediate chemical synthesis
capabilities and strategic opportunities to the Company and other customers.
The purchase price for FineTech has been allocated to assets and
liabilities based on management's estimates of fair value through a third party
valuation firm. The following table sets forth the allocation of the purchase
price (in thousands):
--8--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
Current assets $971
Property, plant and equipment 1,045
Intellectual property 6,580
Goodwill 24,626
------
Total assets acquired 33,222
Current liabilities 22
--
Total liabilities assumed 22
--
Net assets acquired $33,200
======
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill will not be amortized, however will be tested for impairment using a
fair value approach at least annually. The intellectual property, included in
intangible assets on the consolidated balance sheets, consists of trademarks,
patents, product and core technology, and research contracts. The values of
these intangible assets are being amortized on a straight-line basis over
estimated useful lives of 6 to 10 years.
CHANGES IN SHAREHOLDERS' EQUITY:
Changes in the Company's Common Stock and Additional Paid-in Capital
accounts during the six months ended June 30, 2002 were as follows:
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL
------ ------ -------
Balance, December 31, 2001 32,035,189 $320,000 $ 115,610,000
Exercise of stock options 122,689 2,000 594,000
Compensatory arrangements 3,425 -- (2,152,000)
---------- -------- -------------
Balance, June 30, 2002 32,161,303 $322,000 $ 114,052,000
========== ======== =============
RESEARCH AND DEVELOPMENT AGREEMENTS:
GENERICS (UK) LTD.:
The Company, Israel Pharmaceutical Resources L.P. ("IPR"), and Generics
(UK) Ltd. ("Generics"), a subsidiary of Merck KGaA, entered into an agreement
(the "Development Agreement"), dated as of August 11, 1998, pursuant to which
Generics agreed to fund one-half the costs of the operating budget of IPR, the
Company's research and development operation in Israel, in exchange for the
exclusive distribution rights outside of the United States to products developed
by IPR after the date of the Development Agreement. In addition, Generics agreed
to pay IPR a perpetual royalty for all sales of the products by Generics or its
affiliates outside the United States. To date, no such products have been
brought to market by Generics and no royalty has been paid. The Development
Agreement has an initial term of five years and automatically renews for
additional periods of one year subject to earlier termination upon six months'
notice in certain circumstances. Pursuant to the Development Agreement, Generics
funded approximately $788,000 for fiscal year 2001 and approximately $340,000
for the first six months of fiscal year 2002, fulfilling their funding
requirements through June 30, 2002. Under the Development Agreement, Generics is
not required to fund more than $1,000,000 in any one calendar year.
RHODES TECHNOLOGIES, INC.:
In April 2002, the Company entered into an agreement with Rhodes
Technologies, Inc. ("RTI"), an associated company of Purdue Pharma L.P., to
establish a joint venture partnership in the United States. The new joint
venture will be named SVC Pharma and will be owned equally by both parties. SVC
Pharma will utilize, on a case-by-case basis, advanced technologies and patented
processes to develop, manufacture, market and distribute certain unique,
proprietary pharmaceutical products. Under the terms of the agreement, when both
partners agree to pursue a specific project, each partner will contribute
resources to the new enterprise. RTI will provide scientific and technological
expertise in the development of non-infringing, complex molecules. In addition
to providing chemical synthesis capabilities, RTI will provide the manufacturing
capacity for sophisticated intermediate and active pharmaceutical ingredients.
Par will provide development expertise in dosage formulation and will be
--9--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
responsible for marketing, sales and distribution. The companies will share
equally in expenses and profits. SVC Pharma has identified several candidates
for drug development, the first of which has the potential to be marketed by the
Company in either fiscal year 2003 or 2004. The Company expects to begin funding
the first project pursuant to the agreement in the latter part of this year.
PRODUCT DEVELOPMENT AGREEMENTS:
NORTEC DEVELOPMENT ASSOCIATES, INC.:
In May 2002, the Company entered into an agreement with Nortec
Development Associates, Inc. (a Glatt company) ("Nortec") to develop an extended
release generic version of a currently marketed branded extended release
pharmaceutical product, which according to the Company's market research, had
sales of approximately $300 million during the last twelve months. Under the
terms of the agreement, the Company obtained an exclusive license to utilize
Glatt's CPS(TM) Technology in its ANDA submission for the potential product
covered in the agreement. If formulation and development are successful, the
ANDA for the drug will be submitted to the FDA in 2003 and will include a
Paragraph IV certification. CPS(TM) Technology is Glatt's new proprietary drug
delivery system for the development and production of drug pellets with
controlled release properties. The Company and Nortec have agreed to collaborate
on the formulation, while Par will serve as the exclusive marketer and
distributor of the product. As part of the agreement, the product selection
criteria took into consideration Nortec's ability to develop difficult extended
release formulations and Par's experience in patent challenge opportunities.
Glatt is considered by many in the pharmaceutical industry to be a leader in
fluid bed technology for the pharmaceutical and related industries. A
significant percentage of currently marketed generic and branded controlled
release products utilize Glatt's technology.
In June 2002, the Company expanded its collaboration with Nortec to
develop an extended release generic version of another currently marketed,
branded extended release pharmaceutical product, which according to the
Company's market research, had sales of approximately $150 million during the
last twelve months. Under the terms of the new agreement, Par has also obtained
an exclusive license to utilize Nortec/Glatt's CPS(TM) Technology in its ANDA
submission for the potential product covered in the agreement. If successful in
development, the Company expects to submit an ANDA to the FDA for the product in
2003. The Company and Nortec have agreed to collaborate on the formulation,
while Par will serve as the exclusive marketer and distributor of the product.
Pursuant to these agreements with Nortec, the Company made non-refundable
payments totaling $625,000, which were charged to research and development
expenses in the second quarter of 2002. In addition, the Company agreed to pay a
total of $1,175,000 in various installments related to the achievement of
certain milestones in the development of the two potential products and $600,000
for each product on the day of the first commercial sale.
DISTRIBUTION AND SUPPLY AGREEMENTS:
GENPHARM, INC.
Pursuant to the Genpharm Distribution Agreement, the Company has the
exclusive distribution rights within the United States and certain other United
States territories to approximately 40 generic pharmaceutical products. To date,
18 of such products have obtained FDA approval and are currently being marketed
by Par. The remaining products are either being developed, have been identified
for development, or have been submitted to the FDA for approval. Currently,
there are seven ANDAs for potential products (two of which have been tentatively
approved) that are covered by the Genpharm Distribution Agreement pending with,
and awaiting approval from, the FDA. Genpharm is required to use commercially
reasonable efforts to develop the products and is responsible for the completion
of product development and obtaining all applicable regulatory approvals. The
Company pays Genpharm a percentage of the gross profits on all sales of products
covered by the Genpharm Distribution Agreement.
On July 31, 2001, Alphapharm Pty Ltd. ("Alphapharm"), an Australian
subsidiary of Merck KGaA, was granted final approval by the FDA for flecainide
acetate tablets, the generic version of Minnesota Mining and Manufacturing
Companys' ("3Ms'") Tambocor(R), which according to the Company's market
research, had sales of approximately $110 million in 2001. In June 2002 the
Company began shipping flecainide acetate, which is indicated for the prevention
of paroxysmal supraventricular tochycardias (PSUT) and documented ventricular
arrhythmia. Flecainide acetate is covered under the Genpharm Distribution
--10--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
Agreement. The FDA awarded generic marketing exclusivity for flecainide acetate
to Par through October 2002. Par's launch of flecainide acetate is under license
from 3M. Under terms of the agreement, Par will pay 3M a licensing fee based on
a percentage of Par's flecainide sales. The parties have also agreed to dismiss
all outstanding claims in settling patent litigation between them and counter
claims between the parties, thereby allowing Par to ship flecainide without risk
of any future litigation from 3M.
The Company and Genpharm entered into a distribution agreement (the
"Genpharm Additional Product Agreement"), dated November 27, 2000, pursuant to
which Genpharm granted the Company exclusive distribution rights within the
United States and certain other United States territories with respect to five
generic pharmaceutical products not included in the Company's other distribution
agreements with Genpharm. To date, two of such products have obtained FDA
approval and are currently being marketed by Par. The remaining products are
either being developed or have been identified for development. Genpharm and the
Company are sharing the costs of developing the products and for obtaining all
applicable regulatory approvals. The Company will pay Genpharm a percentage of
the gross profits on all sales made by the Company of products included in the
Genpharm Additional Product Agreement.
DR. REDDY'S LABORATORIES LTD.
In April 2001, the Company and Dr. Reddy's Laboratories Ltd. ("Reddy"), a
producer of bulk active ingredients for the pharmaceutical industry and a
developer and manufacturer of finished dosage forms located in India, entered
into a broad-based co-marketing and development agreement (the "Reddy
Development and Supply Agreement") covering up to 14 generic pharmaceutical
products, three of which have been filed with, and awaiting approval from, the
FDA, to be marketed exclusively by Par in the United States and certain other
United States territories. Reddy is required to use commercially reasonable
efforts to develop the products covered by the Reddy Development and Supply
Agreement, and is responsible for the completion of product development and for
obtaining all applicable regulatory approvals. The Company will pay Reddy a
percentage of the gross profits on sales of the products sold by Par in
accordance with the Reddy Development and Supply Agreement. To date, three of
such products have obtained FDA approval, two of which are currently being
marketed by Par.
The products covered by the Reddy Development and Supply Agreement are in
addition to four products currently being marketed by the Company under prior
agreements with Reddy. Pursuant to these agreements, the Company pays Reddy a
certain percentage of the gross profits on sales of any products covered under
such agreements.
BASF CORPORATION:
In April 1997, Par entered into a Manufacturing and Supply Agreement (the
"BASF Supply Agreement") with BASF Corporation ("BASF"), a manufacturer of
pharmaceutical products. Under the BASF Supply Agreement, Par agreed to purchase
minimum quantities of certain products manufactured by BASF, and to phase out
Par's manufacturing of those products. As part of the agreement, BASF
discontinued its direct sale of those products. The agreement had an initial
term of three years and would have renewed automatically for successive two-year
periods until December 31, 2005, if Par had met certain purchase thresholds.
Since Par did not meet the minimum purchase requirement of one product in the
third and final year of the agreement, BASF had the right to terminate the
agreement with a notice period of one year. BASF has not given Par such notice
and to ensure continuance of product supply, BASF and the Company have agreed to
continue to operate under terms similar to those of the BASF Supply Agreement.
PAYABLES DUE TO DISTRIBUTION AGREEMENT PARTNERS:
As of June 30, 2002 and December 31, 2001, the Company had payables due
to all distribution agreement partners of approximately $15,644,000 and
$32,295,000, respectively.
SHORT-TERM DEBT:
In December 1996, Par entered into a Loan and Security Agreement (the
"Loan Agreement") with General Electric Capital Corporation ("GECC"). The Loan
Agreement, as amended, provides Par with a revolving line of credit expiring
March 2005. Pursuant to the Loan Agreement, Par is permitted to borrow up to the
lesser of (i) the borrowing base established under the Loan Agreement or (ii)
$30,000,000. The borrowing base is limited to 85% of eligible accounts
--11--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
receivable plus 50% of eligible inventory of Par, each as determined from time
to time by GECC. The interest rate charged on the line of credit is based upon a
per annum rate of 2.25% above the 30-day commercial paper rate for high-grade
unsecured notes adjusted monthly. The line of credit with GECC is secured by the
assets of Par, PRX and certain subsidiaries, other than real property, and is
guaranteed by PRX and certain of its subsidiaries. In connection with such
facility, Par, PRX and their subsidiaries have established a cash management
system pursuant to which all cash and cash equivalents received by any of such
entities are deposited into a lockbox account over which GECC has sole operating
control if there are amounts outstanding under the line of credit. The deposits
would then be applied on a daily basis to reduce the amounts outstanding under
the line of credit. The revolving credit facility is subject to covenants based
on various financial benchmarks. As of June 30, 2002, the borrowing base was
approximately $27,000,000. To date, no debt is outstanding under the Loan
Agreement.
INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions
of SFAS 109, which requires the Company to recognize deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. At June 30, 2002 and December 31, 2001, the Company
had deferred income tax assets of $43,222,000 and $34,485,000, respectively,
consisting of temporary differences, primarily related to accounts receivable
reserves, and net deferred income tax liabilities of $3,999,000 and $4,129,000,
respectively, primarily related to the Genpharm Distribution Agreement.
EARNINGS PER SHARE:
The Company presents earnings per share data in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS 128"), which establishes the standards for the
computation and presentation of basic and diluted earnings per share data. Under
SFAS 128, the dilutive effect of stock options is excluded from the calculation
of basic earnings per share but included in diluted earnings per share except in
periods of net loss where inclusion would be anti-dilutive. The following is a
reconciliation of the amounts used to calculate basic and diluted earnings per
share:
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
(*RESTATED) (*RESTATED)
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
NET INCOME $41,140 $ 3,700 $20,380 $ 2,204
BASIC:
Weighted average number of common
shares outstanding 32,069 29,725 32,089 29,790
NET INCOME PER SHARE OF COMMON STOCK $ 1.28 $ .12 $ .64 $ .07
======= ======= ======= =======
ASSUMING DILUTION:
Weighted average number of common
shares outstanding 32,069 29,725 32,089 29,790
Effect of dilutive options 800 1,717 809 1,847
------- ------- ------- -------
Weighted average number of common and common
equivalent shares outstanding 32,869 31,442 32,898 31,637
NET INCOME PER SHARE OF COMMON STOCK $ 1.25 $ .12 $ .62 $ .07
======= ======= ======= =======
* Restated as described in Notes to Consolidated Financial Statements.
--12--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
The Company had outstanding options of 2,361,890 and 2,163,539 at the end
of the six-month and three-month periods ended June 30, 2002 that were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the Common Stock in the
period. As of June 30, 2002 and 2001, all incremental shares from assumed
conversions of the Company's outstanding options and warrants were included in
the computation of diluted earnings per share in both periods.
NEW ACCOUNTING STANDARDS:
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"), which is effective for the Company as of January 1, 2003. SFAS 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The Company is
evaluating the impact of the adoption of SFAS 146, but does not believe it will
have a material impact on the Company's financial position, result of operations
and cash flows.
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
RETIREMENT PLANS:
The Company has a defined contribution social security integrated
retirement plan (the "Retirement Plan") which provides retirement benefits to
eligible employees as defined in the Retirement Plan. The Company suspended
employer contributions to the Retirement Plan effective December 30, 1996.
Consequently, participants in the Retirement Plan will no longer be entitled to
any employer contributions under such plan for 1996 or subsequent years. The
Company also maintains a retirement savings plan (the "Retirement Savings Plan")
whereby eligible employees are permitted to contribute from 1% to 25% of their
compensation to the Retirement Savings Plan. The Company contributes an amount
equal to 50% of the first 6% of compensation contributed by the employee.
Participants of the Retirement Savings Plan become vested with respect to 20% of
the Company's contributions for each full year of employment with the Company
and thus become fully vested after five full years. In fiscal year 1998, the
Company merged the Retirement Plan into the Retirement Savings Plan.
LEGAL PROCEEDINGS:
Par has filed an ANDA (currently pending with the FDA) for latanoprost
(Xalatan(R)), which was developed by Breath Ltd. of the Arrow Group pursuant to
a joint manufacturing and marketing agreement with the Company, seeking approval
to engage in the commercial manufacture, sale and use of the latanoprost product
in the United States. Par's ANDA includes a Paragraph IV certification that the
existing patents in connection with Xalatan(R) are invalid, unenforceable or
will not be infringed by Par's generic product. Par has reason to believe that
its ANDA is the first to be filed for this drug with a Paragraph IV
certification. As a result of the filing of the ANDA, Pharmacia Corporation,
Pharmacia AB, Pharmacia Enterprises, S.A., Pharmacia and Upjohn Company and the
Trustees of Columbia University in the City of New York filed lawsuits against
the Company on December 14, 2001 in the United States District Court for the
District of Delaware and on December 21, 2001 in the United States District
Court for the District of New Jersey alleging patent infringement. Pharmacia and
Columbia are seeking an injunction to prevent the Company from marketing its
generic product prior to the expiration of their patents. On February 8, 2002,
Par answered the complaint brought in the District of New Jersey and filed a
counterclaim, which seeks a declaration that the patents-in-suit are invalid,
unenforceable and/or not infringed by Par's products. Par also seeks a
declaratory judgment that the extension of the term of one of the patents is
invalid. All parties are seeking to recover their respective attorneys' fees. On
February 25, 2002, the lawsuit brought in the District of Delaware was dismissed
pursuant to a stipulation of the parties. The case in the District of New Jersey
is currently in fact discovery. Par intends to vigorously defend the lawsuit. At
this time, it is not possible for the Company to predict the outcome of the
plaintiffs' prayer for injunctive relief or their claim for attorneys' fees.
Par, among others, is a defendant in three lawsuits filed in United
States District Court for the Eastern District of North Carolina (filed on
August 1, 2001, October 30, 2001 and November 16, 2001, respectively) by
aaiPharma Inc., involving patent infringement allegations connected to a total
of three patents related to polymorphic forms of fluoxetine (Prozac(R)). Par
--13--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
intends to vigorously litigate these cases. While the outcome of litigation is
never certain, Par believes that it will prevail in these litigations.
On August 1, 2001 Alpharma USPD, Inc. filed a lawsuit in the U.S.
District Court for the District of Maryland seeking a declaratory judgment that
Alpharma's megestrol acetate formulation does not infringe U.S. Patent No.
6,028,065 granted to the Company and/or that the Company's patent is invalid.
The Company is involved in certain other litigation matters, including
certain product liability and patent actions, and actions by former employees,
and believes these actions are incidental to the conduct of its business and
that the ultimate resolution thereof will not have a material adverse effect on
its financial condition, results of operations or liquidity. The Company intends
to vigorously defend these actions.
OTHER MATTERS:
In December 2001, the Company committed to making an equity investment of
up to $2,437,000 over a period of time in HighRapids, Inc. ("HighRapids"), a
Delaware Corporation and software developer. HighRapids is the surviving
corporation of a merger with Authorgenics, Inc., a Florida corporation.
HighRapids will utilize the Company's cash infusion for working capital and
operating expenses. Through June 30, 2002 the Company had invested approximately
$438,000 of its planned investment. The Company has the exclusive right to
market to the pharmaceutical industry certain laboratory software currently in
development by HighRapids. PRX's Chief Executive Officer and a director of the
Company, each holds shares of HighRapids common stock (less than 1%), which were
acquired prior to the Company acquiring its interest in HighRapids.
SUBSEQUENT EVENTS:
In July 2002, the Company entered into an agreement with Three Rivers
Pharmaceuticals ("Three Rivers") to market and distribute ribavirin 200 mg
capsules, the generic version of Schering-Plough's Rebetol(R), which according
to the Company's market research had U.S. sales of approximately $250 million
for the first six months of 2002. Ribavirin, a synthetic nucleoside analogue
with antiviral activity, is indicated for the treatment of hepatitis C, a
chronic condition suffered by approximately 4 million Americans. Three Rivers
filed an ANDA with a Paragraph IV certification with the FDA in August 2001 and
is currently in litigation with the patent holders. Under the terms of the
agreement, Three Rivers will supply the product to Par and will be responsible
for managing the regulatory process and ongoing patent litigation. Par will have
the exclusive right to sell the product in non-hospital markets upon FDA
approval and final marketing clearance. According to current FDA practice, Par
believes it may be entitled to co-exclusively market the generic product
ribavirin for up to 180 days, during which time only one other company could be
approved to market another generic version of the drug. If successful, Par could
introduce ribavirin in the 2003 to 2004 timeframe.
--14--
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS IN THIS FORM 10-Q MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO
FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES
OF CURRENT PRODUCTS AND THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED
PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD
CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED
HEREIN. THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE TYPICALLY BY USE OF
WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS," "ANTICIPATES,"
"CONTINUING," "ONGOING," "EXPECTS," "BELIEVES," OR SIMILAR WORDS AND PHRASES.
FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN THIS FORM
10-Q INCLUDE, AMONG OTHERS, (I) INCREASED COMPETITION FROM NEW AND EXISTING
COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS (ESPECIALLY UPON
COMPLETION OF EXCLUSIVITY PERIODS), (II) PRICING PRESSURES RESULTING FROM THE
CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (III) THE AMOUNT
OF FUNDS AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND
DEVELOPMENT JOINT VENTURES, (IV) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR
DELAYS AND UNANTICIPATED COSTS IN OBTAINING REGULATORY APPROVALS, (V)
CONTINUATION OF DISTRIBUTION RIGHTS UNDER SIGNIFICANT AGREEMENTS, (VI) THE
CONTINUED ABILITY OF DISTRIBUTED PRODUCT SUPPLIERS TO MEET FUTURE DEMAND, (VII)
THE COSTS AND OUTCOME OF ANY THREATENED OR PENDING LITIGATION, INCLUDING PATENT
AND INFRINGEMENT CLAIMS AND (VIII) GENERAL INDUSTRY AND ECONOMIC CONDITIONS. ANY
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q ARE MADE ONLY AS OF THE
DATE HEREOF, BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE
HEREOF, AND, SUBJECT TO APPLICABLE LAW TO THE CONTRARY, THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
GENERAL
The Company experienced significant sales, gross margin and net income
growth in both the six and three-month periods ended June 30, 2002 when compared
to the corresponding periods of the prior year. Net income of $41,140,000 for
the six-month period of 2002 increased $37,440,000 from $3,700,000 for the same
period of 2001. Revenue increases of $127,262,000, or 231%, from fiscal year
2001 led to the significant improvement, reflecting the continuing success of
new products, particularly megestrol acetate oral suspension (Megace(R) Oral
Suspension) and fluoxetine (Prozac(R)) 40 mg capsules, introduced since July
2001. Net sales were $182,263,000 in the most recent six-month period compared
to net sales of $55,001,000 for the same period of last year. Improved gross
margins followed the sales growth, increasing to $85,690,000, or 47% of net
sales, in fiscal year 2002, from $19,549,000, or 36% of net sales, in the same
period of the prior year. Results for the six months ended June 30, 2002
included increased spending of $3,280,000 on research and development and
$7,409,000 on selling, general and administrative costs, primarily due to
additional personnel costs and marketing programs, shipping costs and legal fees
associated with new product launches. Additionally, the Company recorded net
settlement income of $9,051,000 in the first quarter of 2002 related to the
termination of its litigation with BMS and other expense of $4,278,000 in
connection with its termination of the acquisition of the entire ISP FineTech
fine chemical business. The Company subsequently purchased a portion of ISP's
fine chemical business, FineTech based in Haifa, Israel, from ISP in April 2002.
FineTech had revenues of approximately $6,000,000 in 2001 however; this purchase
is not expected to have a material effect on the Company's earnings in fiscal
year 2002.
The Company's net income for the second quarter 2002 increased
$18,176,000 to $20,380,000 compared to $2,204,000 in the second quarter of the
prior year, reflecting the increased sales and gross margin growth described
above. Second quarter 2002 sales and gross margins of $101,755,000 and
$46,415,000 (46% of net sales), respectively, improved significantly over prior
year second quarter sales and gross margins of $29,297,000 and 11,121,000 (38%
of net sales). Research and development expenses of $4,063,000 for the most
recent three-month period were 92% higher than $2,119,000 incurred in the same
quarter of 2001. Selling, general and administrative costs of $8,847,000 in the
second quarter 2002 increased $4,088,000 from the same quarter of the prior
year, primarily due to increased legal, shipping, marketing and personnel costs.
In July 2001 and August 2001, the FDA granted approvals for three ANDA
submissions, one each by Par, Reddy and Alphapharm, for megestrol acetate oral
suspension, fluoxetine 40 mg capsules and fluoxetine 10 mg and 20 mg tablets,
respectively, which as first-to-file opportunities entitled the Company to
180-days of marketing exclusivity for the products. The Company began marketing
megestrol acetate oral suspension, which is not subject to any profit sharing
--15--
agreements, in July 2001. In August 2001, the Company began marketing fluoxetine
40 mg capsules covered under the Reddy Development and Supply Agreement and
fluoxetine 10 mg and 20 mg tablets covered under the Genpharm Additional Product
Agreement. Generic competitors of the Company received 180-days marketing
exclusivity for another generic version of fluoxetine 10 mg and 20 mg capsules,
which the Company also began selling following the end of the exclusivity period
in the first quarter of 2002. As expected, additional generic competitors, with
comparable products to all three strengths of the Company's fluoxetine, began
entering the market in the first quarter of 2002, severely eroding the pricing
the Company received during the exclusivity periods, particularly on the 10 mg
and 20 mg strengths. Although the Company has recently learned of another
generic approval for megestrol acetate oral suspension in the first quarter of
2002, to date the Company had not experienced any significant generic
competition on this product (see "Notes to Consolidated Financial
Statements-Accounts Receivable" ).
Critical to sustaining the improvement in the Company's financial
condition is the introduction of new manufactured and distributed products at
selling prices that generate significant gross margin. The Company, through its
internal development program and strategic alliances, is committed to developing
new products that have limited competition and longer product life cycles. In
addition to new product introductions expected as part of its various strategic
alliances, the Company plans to continue to invest in its internal research and
development efforts while seeking additional products for sale through new and
existing distribution agreements, additional first-to-file opportunities,
vertical integration with raw material suppliers and unique dosage forms and
strengths to differentiate its products in the marketplace. The Company is
engaged in efforts, subject to FDA approval and other factors, to introduce new
products as a result of its research and development efforts and distribution
and development agreements with third parties. No assurance can be given that
the Company will obtain or develop any additional products for sale (see
"-Financial Condition-Liquidity and Capital Resources").
The generic drug industry in the United States continues to be highly
competitive. The factors contributing to the intense competition and affecting
both the introduction of new products and the pricing and profit margins of the
Company, include, among other things: (i) introduction of other generic drug
manufacturer's products in direct competition with the Company's significant
products, (ii) consolidation among distribution outlets through mergers,
acquisitions and the formation of buying groups, (iii) ability of generic
competitors to quickly enter the market after patent expiration or exclusivity
periods, diminishing the amount and duration of significant profits, (iv)
willingness of generic drug customers, including wholesale and retail customers,
to switch among pharmaceutical manufacturers and (v) pricing and product
deletions by competitors.
NET SALES
Net sales of $182,263,000 for the six months ended June 30, 2002
increased $127,262,000, or 231%, from net sales of $55,001,000 for the six
months ended June 30, 2001. The sales increase was primarily due to new products
introduced since July of the prior year, particularly fluoxetine, sold under
distribution agreements with Reddy and Genpharm, and megestrol acetate oral
suspension manufactured by the Company. Net sales of fluoxetine and megestrol
acetate oral suspension for the first six months of 2002 were approximately
$57,052,000 and $43,715,000, respectively. Net sales of distributed products,
which consist of products manufactured under contract and licensed products,
were approximately 58% and 56%, respectively, of the Company's net sales in the
six-month periods ended June 30, 2002 and 2001. The Company is substantially
dependent upon distributed products for its sales, and as the Company introduces
new products under its distribution agreements, it is expected that this trend
will continue. Any inability by suppliers to meet expected demand could
adversely affect future sales.
Net sales in the second quarter of 2002 increased $72,458,000, or 247%,
from net sales of $29,297,000 for the corresponding quarter of 2001, primarily
due to sales of new products. The sales increase included net sales of
fluoxetine and megestrol acetate oral suspension of approximately $31,182,000
and $24,314,000, respectively. Net sales of distributed products were
approximately 58% of the Company's total net sales in the most recent quarter
compared to approximately 54% of the total for the same quarter of last year.
The Company's exclusivity period for fluoxetine ended in late-January
2002. With respect to fluoxetine, the Company established a price protection
reserve during the exclusivity period of approximately $34,400,000, based on its
estimate that between eight and ten additional generic manufacturers would
introduce and market comparable products for the 10 mg and 20 mg tablets and
between one and three additional manufacturers would introduce and market a
comparable product for the 40 mg capsules. As a result of the introduction of
these competing generic products during the first quarter of 2002, the sales
price for fluoxetine has substantially declined from the price the Company
charged during the exclusivity period. Accordingly, the Company's sales and
--16--
gross margins generated by fluoxetine in fiscal year 2002 have been and will
continue to be adversely affected in future periods.
The Company's exclusivity period for megestrol acetate oral suspension
ended in mid-January 2002. One generic competitor was granted FDA approval to
market another generic version of megestrol acetate oral suspension and began
shipping the product to a limited number of customers in the second quarter of
2002. In addition, a second potential generic competitor entered into a
settlement agreement with BMS pursuant to which the public record states that
the present formulation of the generic company's product infringes a BMS patent.
However, at this time the Company has no information as to whether the
settlement agreement provides for the generic competitor to enter the market at
some point in the future. The Company has patents that cover its unique
formulation for megestrol acetate oral suspension and will avail itself of all
legal remedies and will take all of the necessary steps to protect its
intellectual property rights. Although competitors may be taking the necessary
steps to enter the market, the Company believes they are less likely to
successfully enter this market because of patents owned by BMS or the Company.
Megestrol acetate oral suspension is still anticipated to be a significant
profit contributor for the remainder of fiscal year 2002, despite the potential
of competition. Based on these factors and the Company not experiencing any
significant competition to date, the Company did not record a price protection
reserve for megestrol acetate oral suspension as of June 30, 2002, but will
continue to evaluate the effect of potential competition and will record a price
protection reserve when it deems necessary.
Sales of the Company's products are principally dependent upon, among
other things, (i) pricing levels and competition, (ii) market penetration for
the existing product line, (iii) the continuation of existing distribution
agreements, (iv) introduction of new distributed products, (v) approval of ANDAs
and introduction of new manufactured products, including potential exclusivity
periods, and (vi) the level of customer service. Although there can be no
assurance, the Company anticipates introducing new products throughout fiscal
year 2002 and increasing sales of certain existing products to offset the loss
of sales and gross margins from competition on any of its significant products.
The Company will continue to implement measures to reduce the overall impact of
its top products, including adding additional products through new and existing
distribution agreements, manufacturing process improvements and cost reductions.
GROSS MARGIN
The gross margin for the six-month period ended June 30, 2002 of
$85,690,000 (47% of net sales) increased $66,141,000 from $19,549,000 (36% of
net sales) in the corresponding period of the prior year. The gross margin
improvement was achieved primarily as a result of additional contributions from
sales of higher margin new products, particularly megestrol acetate oral
suspension and fluoxetine, and to a lesser extent, increased sales of certain
existing products.
In the six-month period ended June 30, 2002, megestrol acetate oral
suspension contributed approximately $35,860,000 to the margin improvement while
fluoxetine, particularly the 40 mg strength, which is subject to profit sharing
agreements with Reddy and Genpharm, contributed approximately $22,247,000 to the
margin improvement. As discussed above, additional manufacturers of generic
drugs have introduced and began marketing comparable fluoxetine products at the
end of the Company's exclusivity period adversely affecting the Company's sales
volumes, selling prices and gross margins for the products, particularly the 10
mg and 20 mg strengths. As a result, the Company's gross margin from fluoxetine
is expected to decline in future periods. The affects of gross margin declines
from lower pricing on the 40 mg capsule have been offset, however, by an
increase in the Company's profit sharing percentage under an agreement with
Reddy. The Company's gross margin for megestrol acetate oral suspension could
also decline if additional manufacturers introduce and market comparable generic
products.
The gross margin for the second quarter of 2002 was $46,415,000 (46% of
net sales) compared to $11,121,000 (38% of net sales) in the corresponding
quarter of the prior year. Additional gross margin contributions from higher
margin new products, particularly megestrol acetate oral suspension and
fluoxetine which contributed approximately $19,772,000 and $12,049,000,
respectively, generated the higher margins in the second quarter of 2002.
Inventory write-offs amounted to $2,742,000 and $977,000 for the
six-month and three-month periods ended June 30, 2002, respectively, compared to
$466,000 and $181,000 in the corresponding periods of the prior year. The
increases in both periods were primarily attributable to increased production to
meet higher sales and inventory levels. Part of the increase in the six-month
period was also due to both the write-off of inventory for a product whose
launch was delayed due to unexpected patent issues and certain raw material not
meeting the Company's quality control standards. The inventory write-offs, taken
--17--
in the normal course of business, are related primarily to work in process
inventory not meeting the Company's quality control standards and the disposal
of finished products due to short shelf lives.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and development expenses of $6,937,000 for the six months ended
June 30, 2002 increased $3,280,000, or 90%, from $3,657,000 for the
corresponding period of the prior year. The increased costs were primarily
attributable to additional payments of $2,631,000 for development work performed
for the Company by unaffiliated companies, particularly Elan Transdermal
Technologies, Inc. ("Elan"), related to the development of a clonidine
transdermal patch and other products and, to a lesser extent, higher costs for
personnel and the acquisition of FineTech. The Company's domestic research and
development program is integrated with IPR, its research operation in Israel.
Research and development expenses at IPR for the most recent six-month period
were $610,000, net of Generics funding, compared to expenses of $576,000 for the
comparable period of last year. Annual research and development costs in fiscal
year 2002 are expected to exceed the total for fiscal year 2001 by approximately
44%.
The Company purchased FineTech, based in Haifa, Israel, from ISP in April
2002. FineTech specializes in the design and manufacture of proprietary
synthetic chemical processes used in the production of complex organic compounds
for the pharmaceutical industry. FineTech also manufactures complex synthetic
active pharmaceutical ingredients for companies in the branded and generic
pharmaceutical industries at its manufacturing facility in Haifa, Israel. The
Company expects to transfer a portion of FineTech's personnel and technological
resources to a laboratory facility in the northeastern United States. FineTech
will be operated as an independent, wholly owned subsidiary of PRX and will
provide immediate chemical synthesis capabilities and strategic opportunities to
the Company and other customers (see "Notes to Consolidated Financial
Statements-Acquisition of FineTech").
The Company has enjoyed a long-standing relationship with FineTech for
more than seven years. Two of the Company's six potential first-to-file
products, flecainide acetate and latanoprost, resulted from the Company's
relationship with FineTech. In addition, the Company and FineTech are currently
collaborating on two additional products of which ANDAs have already been filed
with the FDA .
For the three-month period ended June 30, 2002, research and development
expenses of $4,063,000 increased $1,944,000 from $2,119,000 for same three-month
period of the prior year primarily due to increased outside development costs
for Elan and Nortec. Research and development expenses at IPR for the most
recent three months were $287,000, net of Generics funding, compared to expenses
of $291,000 in the same period of the prior year.
The Company currently has seven ANDAs for potential products (two
tentatively approved) pending with, and awaiting approval from, the FDA as a
result of its own product development program. The Company has in process or
expects to commence biostudies for at least three additional products during the
remainder of fiscal year 2002. None of the potential products described above
are subject to any profit sharing arrangements.
Under the Genpharm 11 Product Agreement, Genpharm will develop the
products, submit all corresponding ANDAs to the FDA and subsequently manufacture
the products. Par will serve as exclusive U.S. marketer and distributor of the
products, pay a share of the costs, including development and legal expenses
incurred to obtain final regulatory approval, and pay Genpharm a percentage of
the gross profits on all sales of products covered under this agreement.
Currently there are two ANDA's for potential products covered under the Genpharm
11 Product Agreement, both of which have been tentatively approved, pending
with, and awaiting approval from, the FDA (see "Notes to Consolidated Financial
Statements-Deferred Charges and Other Assets").
Under the Genpharm Distribution Agreement, Genpharm pays the research and
development costs associated with the products covered by the Genpharm
Distribution Agreement. Currently, there are seven ANDAs for potential products
(two tentatively approved) that are covered by the Genpharm Distribution
Agreement pending with, and awaiting approval from, the FDA. To date, the
Company is marketing 18 products under the Genpharm Distribution Agreement.
Flecainide acetate tablets (Tambocor(R)), covered under the Genpharm
Distribution Agreement, received final approval from the FDA in July 2001 and
the Company began marketing the product in June 2002 (see "Notes to Consolidated
Financial Statements-Distribution and Supply Agreements-Genpharm, Inc.").
--18--
Genpharm and the Company share the costs of developing the products
covered under the Genpharm Additional Product Agreement. To date, the Company is
marketing two products under the Genpharm Additional Product Agreement (see
"Notes to Consolidated Financial Statements-Distribution and Supply
Agreements-Genpharm, Inc.").
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs of $16,363,000 for the six
months ended June 30, 2002 increased $7,409,000 from $8,954,000 in the
corresponding period ended June 30, 2001, however, the costs as a percentage of
net sales in the respective periods decreased to 9% in 2002 from 16% in 2001.
The higher dollar amount in the current six-month period was primarily
attributable to additional legal fees, marketing programs and shipping costs
associated with new product introductions and higher sales volumes, and to a
lesser extent, increased personnel costs. The Company anticipates it will
continue to incur a high level of legal expenses related to the costs of
litigation connected with certain potential new product introductions (see
"Notes to Consolidated Financial Statements-Commitments, Contingencies and Other
Matters-Legal Proceedings").
For the second quarter of 2002, selling, general and administrative costs
of $8,847,000 (9% of net sales) increased $4,088,000 from $4,759,000 (16% of net
sales) for the corresponding quarter of the prior year primarily due to higher
legal, shipping, marketing and personnel expenses.
SETTLEMENTS
On March 5, 2002 the Company acquired the United States rights to five
products from BMS. The products include the antihypertensives Capoten(R) and
Capozide(R), the cholesterol-lowering medications Questran(R) and Questran
Light(R), and Sumycin(R), an antibiotic. Based on the Company's market research,
these products are expected to generate annual net sales of approximately
$10,000,000. To obtain the rights to the five products, the Company paid
approximately $1,024,000 in March 2002 and agreed to make an additional payment
of approximately $1,025,000 in the first quarter of 2003. The Company also
agreed to terminate its outstanding litigation against BMS involving megestrol
acetate oral suspension and buspirone. The Company determined, through a third
party appraisal, the fair value of the agreement to be $11,700,000, which
exceeded the cash consideration of $2,049,000 and associated costs of $600,000
by $9,051,000. The $9,051,000 value was assigned to the litigation settlements
and included in settlement income in the first quarter of 2002.
OTHER EXPENSE/INCOME
Other expenses were $4,380,000 and $223,000 for the six-month and
three-month periods ended June 30, 2002, respectively, compared to other income
of $364,000 and $45,000 in the corresponding periods of 2001. Other expenses in
the current six-month period included approximately $4,278,000 incurred in
connection with the acquisition of the entire ISP FineTech fine chemical
business in March 2002. Other expenses recorded in the second quarter of 2002
are related to the withdrawal of the Company's universal shelf registration
statement during the quarter. Included in other income in fiscal year 2001 was a
payment from 3M to the Company releasing the parties from a prior product
agreement recorded in the first quarter of 2001.
INCOME TAXES
The Company recorded provisions for income taxes of $26,302,000 and
$3,160,000, respectively, and $13,029,000 and $1,862,000, respectively, for the
six-month and three-month periods ended June 30, 2002 and 2001 based on
applicable federal and state tax rates (see "Notes to Consolidated Financial
Statements-Income Taxes").
CRITICAL ACCOUNTING POLICIES ESTIMATES AND RISKS
The Company's critical accounting policies are set forth in it's Annual
Report on Form 10-K for the year ended December 31, 2001. There has been no
change, update or revision to the Company's critical accounting policies
subsequent to the filing of the Company's Form 10-K for the year ended December
31, 2001.
--19--
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $24,447,000 at June 30, 2002 decreased
$43,295,000 from $67,742,000 at December 31, 2001 due primarily to the Company's
use of funds to finance the acquisition of FineTech and, to a lesser extent, to
fund operations and capital projects. Working capital, which includes cash and
cash equivalents decreased to $92,542,000 at June 30, 2002 from $102,867,000 at
December 31, 2001. The working capital ratio was 2.11x at June 30, 2002 compared
to 2.41x at December 31, 2001.
The Company, from time to time, enters into agreements with third parties
with respect to the development of new products and technologies. To date, the
Company has entered into agreements and advanced funds to several non-affiliated
companies for products in various stages of development. These types of payments
are expensed as incurred and included in research and development costs. Annual
research and development expenses, including payments to non-affiliated
companies, are expected to total approximately $16,000,000 for fiscal year 2002.
The Company made non-refundable payments totaling $625,000 pursuant to
its agreements with Nortec entered into in the second quarter of 2002, which
were charged to research and development expenses during the period. In
addition, the Company agreed to pay a total of $1,175,000 in various
installments related to the achievement of certain milestones in the development
of the two potential products and $600,000 for each product on the day of the
first commercial sale (see-"Notes to Consolidated Financial Statements-Product
Development Agreements-Nortec Development Associates, Inc.").
On March 15, 2002, the Company announced the termination of negotiations
with ISP related to the purchase of the entire ISP FineTech fine chemical
business, based in Haifa, Israel and Columbus, Ohio. At that time, the Company
discontinued negotiations with ISP as a result of various events and
circumstances that occurred since the announcement of the proposed transaction.
Pursuant to the termination of the purchase, the Company paid ISP a $3,000,000
break-up fee in March 2002, which was subject to certain credits and offsets,
and incurred approximately $1,278,000 in related acquisition costs, both of
which were included in other expense in the first quarter of 2002. The Company
subsequently purchased FineTech, a portion of ISP's fine chemical business based
in Haifa, Israel, from ISP in April 2002 for approximately $32,000,000 and
$1,200,000 in related acquisition costs financed by its cash-on-hand (see-"Notes
to Consolidated Financial Statements-Acquisition of FineTech").
As of June 30, 2002 the Company had payables due to distribution
agreement partners of $15,644,000, related primarily to amounts due on
fluoxetine pursuant to profit sharing agreements with strategic partners. The
Company expects to pay these amounts out of its working capital in the third
quarter of 2002.
In December 2001, Par entered into an agreement with Elan to develop a
range of modified release drugs over the next five years. Under the terms of the
agreement, the companies will identify two drug candidates for development at
the beginning of each year, commencing in the first quarter of 2002. Elan will
be responsible for the development and manufacture of all products, while Par
will be responsible for marketing, sales and distribution. Par will reimburse
Elan for research and development costs and Elan will receive a royalty from the
sale of the products. Pursuant to the agreement, Par will pay Elan up to
$1,500,000 per calendar year in monthly installments beginning on the date of
the commencement of the development program for each product. The Company paid
Elan $750,000 for products covered under this agreement in the first six months
of 2002.
In December 2001, the Company committed to making an equity investment of
up to $2,437,000 over a period of time in HighRapids. HighRapids will utilize
the Company's cash infusion for working capital and operating expenses. Through
June 30, 2002, the Company had invested approximately $438,000 of its planned
investment (see-"Notes to Consolidated Financial Statements-Commitments,
Contingencies and Other Matters-Other Matters").
In November 2001, the Company entered into joint development and
marketing agreement with Breath Ltd. of the Arrow Group to pursue the worldwide
distribution of latanoprost ophthalmic solution 0.005% (Xalatan(R)). Pursuant to
this agreement, Par paid Breath Ltd. $2,500,000 in fiscal year 2001 and an
additional $2,500,000 in the first quarter of 2002.
--20--
In November 2001, the Company entered into a license agreement with
Pentech Pharmaceuticals, Inc. ("Pentech") to market paroxetine hydrochloride
capsules. Pursuant to this agreement, Par paid Pentech $200,000 in fiscal year
2001 and will pay an additional $400,000 based on the achievement of certain
milestones.
In April 2001, Par entered into a licensing agreement with Elan to market
a generic clonidine transdermal patch (Catapres TTS(R)). Elan will be
responsible for the development and manufacture of all products, while Par will
be responsible for marketing, sales and distribution. Pursuant to the agreement,
the Company paid Elan $1,167,000 in fiscal year 2001 and $833,000 in fiscal year
2002. In addition, Par will pay Elan $1,000,000 upon FDA approval of the product
and a royalty on all sales of the product.
The Company, IPR and Generics entered into the Development Agreement,
dated August 11, 1998, pursuant to which Generics agreed to fund one-half of the
costs of IPR's operating budget in exchange for the exclusive distribution
rights outside of the United States to the products developed by IPR after the
date of the agreement. In addition, Generics agreed to pay IPR a perpetual
royalty for all sales of the products by Generics or its affiliates outside the
United States. To date, no such products have been brought to market by Generics
and no royalty has been paid to IPR. Pursuant to the Development Agreement,
Generics funded approximately $788,000 for fiscal year 2001 and $340,000 for the
first six months of fiscal year 2002, fulfilling their funding requirements
through June 30, 2002. Under the Development Agreement, Generics is not required
to fund more than $1,000,000 in any one calendar year (see "Notes to
Consolidated Financial Statements-Research and Development Agreements").
The Company expects to fund its operations, including research and
development activities and its obligations under the existing distribution and
development arrangements discussed herein, out of its working capital and, if
necessary, with available borrowings against its line of credit with GECC, if
and to the extent available (see "-Financing"). Although there can be no
assurance, the Company anticipates it will continue to introduce new products
during fiscal year 2002 and increase sales of certain existing products to
offset the loss of sales and gross margins from competition on any of its
significant products. The Company will continue to implement measures to reduce
the overall impact of its top products, including adding additional products
through new and existing distribution agreements, manufacturing process
improvements and cost reductions.
FINANCING
At June 30, 2002, the Company's total outstanding long-term debt,
including the current portion, amounted to $1,176,000. The amount consists
primarily of an outstanding mortgage loan with a bank and capital leases for
computer equipment.
In December 1996, Par entered into the Loan Agreement with GECC. The Loan
Agreement, as amended, provides Par with a revolving line of credit expiring
March 2005. Pursuant to the Loan Agreement, Par is permitted to borrow up to the
lesser of (i) the borrowing base established under the Loan Agreement or (ii)
$30,000,000. The borrowing base is limited to 85% of eligible accounts
receivable plus 50% of eligible inventory of Par, each as determined from time
to time by GECC. The interest rate charged on the line of credit is based upon a
per annum rate of 2.25% above the 30-day commercial paper rate for high-grade
unsecured notes adjusted monthly. The line of credit with GECC is secured by the
assets of Par, PRX and certain subsidiaries, other than real property, and is
guaranteed by PRX and certain of its subsidiaries. In connection with such
facility, Par, PRX and their subsidiaries have established a cash management
system pursuant to which all cash and cash equivalents received by any of such
entities are deposited into a lockbox account over which GECC has sole operating
control if there are amounts outstanding under the line of credit. The deposits
would then be applied on a daily basis to reduce the amounts outstanding under
the line of credit. The revolving credit facility is subject to covenants based
on various financial benchmarks. As of June 30, 2002, the borrowing base was
approximately $27,000,000. To date, no debt is outstanding under the Loan
Agreement.
SUBSEQUENT EVENTS:
In July 2002, the Company entered into an agreement with Three Rivers
Pharmaceuticals ("Three Rivers") to market and distribute ribavirin 200 mg
capsules, the generic version of Schering-Plough's Rebetol(R), which according
to the Company's market research had U.S. sales of approximately $250 million
for the first six months of 2002. Ribavirin, a synthetic nucleoside analogue
with antiviral activity, is indicated for the treatment of hepatitis C, a
chronic condition suffered by approximately 4 million Americans. Three Rivers
filed an ANDA with a Paragraph IV certification with the FDA in August 2001 and
--21--
is currently in litigation with the patent holders. Under the terms of the
agreement, Three Rivers will supply the product to Par and will be responsible
for managing the regulatory process and ongoing patent litigation. Par will have
the exclusive right to sell the product in non-hospital markets upon FDA
approval and final marketing clearance. According to current FDA practice, Par
believes it may be entitled to co-exclusively market the generic product
ribavirin for up to 180 days, during which time only one other company could be
approved to market another generic version of the drug. If successful, Par could
introduce ribavirin in the 2003 to 2004 timeframe.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
--22--
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Par has filed an ANDA (currently pending with the FDA) for latanoprost
(Xalatan(R)), which was developed by Breath Ltd. of the Arrow Group pursuant to
a joint manufacturing and marketing agreement with the Company, seeking approval
to engage in the commercial manufacture, sale and use of the latanoprost product
in the United States. Par's ANDA includes a Paragraph IV certification that the
existing patents in connection with Xalatan(R) are invalid, unenforceable or
will not be infringed by Par's generic product. Par has reason to believe that
its ANDA is the first to be filed for this drug with a Paragraph IV
certification. As a result of the filing of the ANDA, Pharmacia Corporation,
Pharmacia AB, Pharmacia Enterprises, S.A., Pharmacia and Upjohn Company and the
Trustees of Columbia University in the City of New York filed lawsuits against
the Company on December 14, 2001 in the United States District Court for the
District of Delaware and on December 21, 2001 in the United States District
Court for the District of New Jersey alleging patent infringement. Pharmacia and
Columbia are seeking an injunction to prevent the Company from marketing its
generic product prior to the expiration of their patents. On February 8, 2002,
Par answered the complaint brought in the District of New Jersey and filed a
counterclaim, which seeks a declaration that the patents-in-suit are invalid,
unenforceable and/or not infringed by Par's products. Par also seeks a
declaratory judgment that the extension of the term of one of the patents is
invalid. All parties are seeking to recover their respective attorneys' fees. On
February 25, 2002, the lawsuit brought in the District of Delaware was dismissed
pursuant to a stipulation of the parties. The case in the District of New Jersey
is currently in fact discovery. Par intends to vigorously defend the lawsuit. At
this time, it is not possible for the Company to predict the outcome of the
plaintiffs' prayer for injunctive relief or their claim for attorneys' fees.
Par, among others, is a defendant in three lawsuits filed in United
States District Court for the Eastern District of North Carolina (filed on
August 1, 2001, October 30, 2001 and November 16, 2001, respectively) by
aaiPharma Inc., involving patent infringement allegations connected to a total
of three patents related to polymorphic forms of fluoxetine (Prozac(R)). Par
intends to vigorously litigate these cases. While the outcome of litigation is
never certain, Par believes that it will prevail in these litigations.
On August 1, 2001 Alpharma USPD, Inc. filed a lawsuit in the U.S.
District Court for the District of Maryland seeking a declaratory judgment that
Alpharma's megestrol acetate formulation does not infringe U.S. Patent No.
6,028,065 granted to the Company and/or that the Company's patent is invalid.
The Company is involved in certain other litigation matters, including
certain product liability and patent actions, and actions by former employees,
and believes these actions are incidental to the conduct of its business and
that the ultimate resolution thereof will not have a material adverse effect on
its financial condition, results of operations or liquidity. The Company intends
to vigorously defend these actions.
ITEM 5. OTHER INFORMATION.
In June 2002 the Company's Board of Directors ("Board") determined it was
in the best interests of the Company and its shareholders to request the
withdrawal of PRX universal shelf registration statement. Since utilization of
the shelf registration had become unlikely, the Board decided to recommend its
withdrawal. Furthermore, PRX believes it now has adequate cash resources
available for general corporate and other purposes. The $110 million
registration statement on Form S-3 was originally filed with the Securities and
Exchange Commission ("SEC") in December 2002. The Company filed its request for
withdrawal on Form RW with the SEC on June 20, 2002.
--23--
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
11 Product Development Agreement, effective April 2002, between the
Company and Genpharm, Inc. *
SVC Pharma LP Limited Partnership Agreement dated April 2002, among
the Company, UDF LP, a Delaware limited partnership, and the other
parties named therein.
Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Certain portions of this exhibit have been omitted and have been
filed with the SEC pursuant to a request for confidential treatment
thereof.
(b) Reports on Form 8-K:
On May 2, 2002, May 7, 2002 and May 9, 2002 the Company filed a
Current Report on Form 8-K.
--24--
SIGNATURE
Pursuant to the requirements 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.
PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
August 14, 2002 /s/ Kenneth I. Sawyer
------------------------------------------
Kenneth I. Sawyer
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS
(Principal Executive Officer)
August 14, 2002 /s/ Dennis J. O'Connor
------------------------------------------
Dennis J. O'Connor
VICE PRESIDENT - CHIEF FINANCIAL OFFICER
AND SECRETARY
(Principal Accounting and Financial Officer)
--25--
EXHIBIT INDEX
Exhibit
Number Description Page Number
- ------- ----------- -----------
10.36 11 Product Development Agreement,
effective April 2002, between the Company
and Genpharm, Inc. *
10.37 SVC Pharma LP Limited Partnership Agreement,
dated April 2002, among the Company, UDF LP.,
a Delaware limited partnership, and the other
parties named therein.
99.1 Certification by the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by the Chief Financial
Officer pursuant to 18 U.S.C. Section
1350, as adopted, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Certain portions of this exhibit have been omitted and have been filed with
the SEC pursuant to a request for confidential treatment thereof.
--26--