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 September 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 3 No
32,769,517
Number of shares of Common Stock outstanding as of November 8, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
SEPTEMBER DECEMBER
ASSETS 30, 2002 31, 2001
------ -------- --------
Current assets:
Cash and cash equivalents $33,782 $67,742
Accounts receivable, net of allowances of
$41,355 and $47,168 64,880 38,009
Inventories 48,217 31,458
Prepaid expenses and other current assets 5,686 4,156
Deferred income tax assets 45,171 34,485
-------- --------
Total current assets 197,736 175,850
Property, plant and equipment, net of
accumulated depreciation and amortization 28,062 24,345
Other assets 13,618 8,426
Intangible assets, net of accumulated
amortization 24,787 8,305
Goodwill 24,643 -
-------- --------
Total assets $288,846 $216,926
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $207 $239
Accounts payable 22,504 18,007
Payables due to distribution agreement partners 19,251 32,295
Accrued salaries and employee benefits 5,038 2,859
Accrued expenses and other current liabilities 6,477 4,817
Income taxes payable 29,041 14,766
-------- --------
Total current liabilities 82,518 72,983
Long-term debt, less current portion 922 1,060
Accrued pension liability 331 331
Deferred income tax liabilities, net 3,843 4,129
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01 per share;
authorized 90,000,000 shares;
issued and outstanding 32,703,674 and
32,035,189 shares 327 320
Additional paid-in capital 117,629 115,610
Retained earnings 83,276 22,493
-------- --------
Total shareholders' equity 201,232 138,423
-------- --------
Total liabilities and shareholders' equity $288,846 $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)
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
(*RESTATED) (*RESTATED)
SEPT. 30, SEPT. 29, SEPT. 30, SEPT. 29,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $282,500 $182,925 $100,237 $127,924
Cost of goods sold 149,858 111,448 53,285 75,996
------- ------- ------- -------
Gross margin 132,642 71,477 46,952 51,928
Operating expenses:
Research and development 10,590 7,436 3,653 3,779
Selling, general and administrative 27,457 15,928 11,094 6,974
------- ------- ------- -------
Total operating expenses 38,047 23,364 14,747 10,753
------- ------- ------- -------
Operating income 94,595 48,113 32,205 41,175
Settlements 9,051 - - -
Other (expense) income (4,492) 431 (112) 67
Interest income (expense) 490 (580) 109 (138)
------- ------- ------- -------
Income before provision for income taxes 99,644 47,964 32,202 41,104
Provision for income taxes 38,861 10,532 12,559 7,372
------- ------- ------- -------
NET INCOME 60,783 37,432 19,643 33,732
Retained earnings (accumulated deficit):
Beginning of period 22,493 (31,429) 63,633 (27,729)
------- ------- ------- -------
End of period $83,276 $6,003 $83,276 $6,003
======= ======= ======= =======
NET INCOME PER SHARE OF COMMON STOCK:
BASIC $1.89 $1.24 $.60 $1.09
======= ======= ======= =======
DILUTED $1.84 $1.17 $.59 $1.04
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 32,194 30,106 32,476 30,871
======= ======= ======= =======
DILUTED 32,962 31,902 33,152 32,428
======= ======= ======= =======
* 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)
NINE MONTHS ENDED
-----------------
(*RESTATED)
SEPT. 30, SEPT. 29,
2002 2001
---- ----
Cash flows from operating activities:
Net income $60,783 $37,432
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred income taxes (10,972) (10,721)
Depreciation and amortization 3,857 2,481
Write-off of inventories 3,085 1,195
Allowances against accounts receivable (5,813) 12,987
Settlements (9,051) -
Tax effect from exercise of stock options (159) 11,254
Other (23) 146
Changes in assets and liabilities:
Increase in accounts receivable (20,802) (103,564)
Increase in inventories (19,776) (4,919)
Increase in prepaid expenses and other assets (9,343) (3,848)
Increase in accounts payable 4,398 1,143
(Decrease) increase in payables due to distribution agreement partners (13,044) 52,150
Increase in accrued expenses and other current liabilities 3,916 3,078
Increase in income taxes payable 14,275 8,693
------- -------
Net cash provided by operating activities 1,331 7,507
------- -------
Cash flows from investing activities:
Capital expenditures (4,736) (2,743)
Acquisition of FineTech, net of cash acquired (32,598) -
Proceeds from sale of fixed assets 28 19
------- -------
Net cash used in investing activities (37,306) (2,724)
------- -------
Cash flows from financing activities:
Proceeds from issuances of Common Stock 2,185 7,362
Net proceeds from revolving credit line - (9,646)
Principal payments under long-term debt and other borrowings (170) (212)
------- -------
Net cash provided by financing activities 2,015 (2,496)
------- -------
Net (decrease) increase in cash and cash equivalents (33,960) 2,287
Cash and cash equivalents at beginning of period 67,742 222
------- -------
Cash and cash equivalents at end of period $33,782 $2,509
------- -------
Supplemental disclosure of cash flow information Cash paid during the year for:
Taxes $35,717 $1,653
------- -------
Interest $102 $587
------- -------
* 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
SEPTEMBER 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 September 30, 2002
and for the nine-month and three-month periods ended September 30, 2002 and
September 29, 2001 are unaudited; however, in the opinion of the Company's
management, such consolidated 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 FineTech Ltd. ("FineTech"), which
is based in Haifa, Israel from International Specialty Products ("ISP"). The
acquisition was accounted for as a purchase under Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations", and the
accompanying consolidated financial statements include the operating results of
FineTech from the date of acquisition.
Pursuant to accounting requirements of the Securities and Exchange
Commission ("SEC") 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 accounting policies and Notes to
Consolidated Financial Statements included in the Company's most recent annual
financial statements.
The results of operations for interim periods are not necessarily
indicative of those that may be achieved for a full fiscal year.
RESTATEMENT OF PRIOR YEAR RESULTS
Certain items in the consolidated financial statements for the nine and
three-month periods ended September 29, 2001 have been restated due to a change
in the manner 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. The Company previously accounted for the sale
of the Common Stock and the distribution agreement as separate transactions. In
restating its consolidated financial statements, the Company accounted for the
two transactions 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, is
attributed to the distribution agreement. Under the restatement, 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 received by
the Company by $6,500,000. That $6,500,000 was assigned to the Genpharm
Distribution Agreement, with a corresponding increase in shareholders' equity.
Additionally, the Company recorded a deferred tax liability of $4,333,000 and a
corresponding increase in the financial reporting basis of the distribution
agreement 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 value
assigned to the Genpharm Distribution Agreement of $10,833,000 is being
amortized on a straight-line basis over fifteen years beginning in the third
quarter of fiscal 1998, and the net amount is included in intangible assets. The
amortization is included as a non-cash charge in selling, general and
administrative expenses.
--5--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
In addition, certain items in the Company's consolidated financial
statements have been restated to reflect the reversal of a price protection
reserve originally recorded in the third quarter of 2001 related to the
Company's fluoxetine (Prozac(R)) product launch in August 2001. The Company had
intended to record the effect of the total projected price protection reserve
anticipated upon competition entering the market at the end of the Company's
exclusivity period in late-January 2002 over the entire exclusivity period based
on its net sales in each period. However, because the total projected price
protection reserve was based on customer inventories at the end of the
exclusivity period, the accounting treatment requires that the entire reserve be
recorded only in the periods in which the remaining inventory would have been
sold. As a result, the Company restated its results for the third quarter 2001
(reversing the reserve in such quarter) and recorded the entire price protection
reserve in the fourth quarter of 2001 and January 2002. The restatement related
to price protection resulted in increases in net sales of $28,200,000, gross
margin of $10,365,000 and net income of $6,882,000 in the third quarter of 2001.
The impact of the restatements described above on the previously reported
results for the nine and three-month periods ended September 29, 2001 were as
follows:
NINE MONTHS ENDED THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF SEPTEMBER 29, SEPTEMBER 29,
- -------------------------- 2001 2001
---------------------------------- ----------------------------------
OPERATIONS AND RETAINED EARNINGS REPORTED RESTATED REPORTED RESTATED
- -------------------------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
Net Sales $154,725 $182,925 $99,724 $127,924
Gross margin 61,112 71,477 41,563 51,928
Selling, general and administrative 15,385 15,928 6,793 6,974
Operating income 38,291 48,113 30,991 41,175
Net income 30,912 37,432 26,850 33,732
Retained earnings (as of Sept. 29, 1,289 6,003 1,289 6,003
2001)
Net income per share of common stock:
Basic $1.03 $1.24 $0.87 $1.09
Diluted $0.97 $1.17 $0.83 $1.04
ACCOUNTS RECEIVABLE:
SEPTEMBER 30, DECEMBER 31,
2002 2001
(IN THOUSANDS)
Accounts receivable $106,235 $85,177
------- ------
Allowances:
Doubtful accounts 1,006 998
Returns and allowances 16,112 4,847
Price adjustments 24,237 41,323
------- ------
41,355 47,168
------- ------
Accounts receivable,
net of allowances $64,880 $38,009
The accounts receivable amounts above at September 30, 2002 and December 31, 2001 are net of provisions for customer rebates
of $17,822,000 and $14,081,000, and chargebacks of $102,195,000 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
made during an applicable monthly, quarterly or annual period.
--6--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
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 increased chargebacks are primarily
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 generally offers price protection, also known as
shelf-stock adjustments, with respect to sales of new generic drugs for which it
has a market exclusivity period. Price protection accounts for the fact that the
price of such drugs typically will decline, sometimes substantially, 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 Company's industry, generally provide for a credit to customers with respect
to the customer's remaining inventory at the end of the exclusivity period for
the difference between the Company's new price and the price at which the
Company originally sold 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 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 substantially declined from the sales price the Company charged
during the exclusivity period. Through September 30, 2002, the Company issued
price protection credits of approximately $27,400,000 and reduced the reserve by
approximately $5,800,000 for price protection on the 40 mg that was no longer
necessary. Pursuant to a distribution agreement with a strategic partner, the
reduction of the reserve had a favorable impact on the Company's gross margin of
approximately $1,160,000 in the second quarter of 2002. The Company expects that
the remaining price protection reserve of approximately $1,200,000 at September
30, 2002 will be sufficient.
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.
Based on these factors, the Company did not record a price protection reserve
for such product as of September 30, 2002. The Company will continue to evaluate
the effect of potential competition and will record a price protection reserve
when it deems necessary.
INVENTORIES:
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
(IN THOUSANDS)
Raw materials and supplies $15,377 $11,574
Work in process and finished goods 32,840 19,884
------ ------
$48,217 $31,458
====== ======
--7--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
OTHER ASSETS:
Included in other assets are amounts paid for contractual rights acquired
by the Company to a process, product or other legal right that has multiple or
alternative future uses which support its realizability. These values are
capitalized and amortized over the period in which the related cash flows are
generated. All costs that are capitalized are subject to periodic impairment
testing.
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. Par intends to vigorously defend its
position in the pending litigation with Pharmacia. Pursuant to this agreement,
Par made payments of $2,500,000 in fiscal year 2001 and $2,500,000 in the first
quarter of fiscal year 2002 to Breath Ltd., which are included in other assets
on the consolidated balance sheets (see "-Legal Proceedings").
In April 1999, the Company entered into an agreement with FineTech for the
right to use a process for the pharmaceutical bulk active latanoprost. Pursuant
to this agreement, the Company paid FineTech approximately $2,000,000 in fiscal
years 2000 and 2001, which is included in other assets on the consolidated
balance sheets, for a completed process together with its technology transfer
package and patent. The Company will pay royalties to FineTech on gross margins
from sales of all products developed pursuant to this agreement.
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
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 other assets on the consolidated balance sheets, for two of the
products, loratadine 10 mg tablets and mirtazapine tablets, which have been
tentatively approved by the FDA and are 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:
SEPTEMBER 30,DECEMBER 31,
2002 2001
(IN THOUSANDS)
BMS Asset Purchase Agreement, net of
accumulated amortization of $975 $10,725 -
Genpharm Distribution Agreement, net of
accumulated amortization of
$3,070 and $2,528 7,763 8,305
Intellectual property, net of
accumulated amortization o f$281 6,299 -
------ -----
$24,787 $8,305
====== =====
Intangible assets include the estimated fair values of certain
distribution rights of the Company to certain products of third parties and the
intellectual property acquired with the acquisition of FineTech (see
"-Acquisition of FineTech"). The values of the distribution rights are
capitalized and amortized on a straight-line basis over the products estimated
useful lives of 7 to 15 years. The values of the intellectual property,
consisting of trademarks, patents, product and core technology, and research
contracts, are amortized on a straight-line basis over their estimated useful
lives of 6 to 10 years.
--8--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
On March 5, 2002 the Company entered into an agreement with BMS (the "BMS
Asset Purchase Agreement") and acquired the United States rights to five of
BMS's brand products including the antihypertensives Capoten(R) anD Capozide(R),
the cholesterol-lowering medications Questran(R) and QuestRan Light(R), and
Sumycin(R), an antibiotic. Pursuant to the BMS Asset PurchAse Agreement, the
Company paid approximately $1,024,000 in March 2002, agreed to make an
additional payment of approximately $1,025,000 in the first quarter of 2003, and
terminated its outstanding litigation against BMS involving megestrol acetate
oral suspension and buspirone. The Company determined, through an independent
third party appraisal, the fair value of the BMS Asset Purchase 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 fair value of the BMS Asset Purchase Agreement is amortized on a
straight-line basis over seven years beginning in March 2002, and the net amount
is included in intangible assets. The amortization is included as a non-cash
charge in cost of goods sold.
The Company recorded amortization expense related to intangible assets of
$1,798,000 and $767,000, respectively, for the nine and three-month periods
ended September 30, 2002. Annual amortization expense related to these
intangible assets in each of the next five years is expected to be $3,070,000
per year.
ACQUISITION OF FINETECH:
On March 15, 2002, the Company announced the termination of negotiations
with ISP related to the Company's 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 $1,254,000 in related acquisition costs, both of
which are included in other expense in fiscal year 2002.
The Company subsequently purchased FineTech, based in Haifa, Israel, from
ISP in April 2002 for approximately $32,000,000 and $1,217,000 in related
acquisition costs financed by its cash-on-hand. The Company acquired the
physical facilities, intellectual property and patents of FineTech and retained
all of 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
fiscal year 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 is 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.
The purchase price for FineTech has been allocated to assets and
liabilities based on management's estimates of fair value through an independent
third party valuation firm. The following table sets forth the allocation of the
purchase price (in thousands):
Current assets $971
Property, plant and equipment 1,045
Intellectual property 6,580
Goodwill 24,643
------
Total assets acquired 33,239
Current liabilities 22
--
Total liabilities assumed 22
--
Net assets acquired $33,217
======
--9--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
the goodwill will not be amortized, but will be tested for impairment using a
fair value approach at least annually.
CHANGES IN SHAREHOLDERS' EQUITY:
Changes in the Company's Common Stock and additional paid-in capital
accounts during the nine months ended September 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 662,546 7,000 2,020,000
Compensatory arrangements 5,939 - (1,000)
Balance, September 30, 2002 32,703,674 $327,000 $117,629,000
========== ======== ============
RESEARCH AND DEVELOPMENT VENTURES:
The Company is committed to developing new products that have limited
competition and longer product life cycles. To augment its internal development
program, the Company seeks to enter into research and development ventures where
it can share development costs while using the expertise of its partners. As of
September 30, 2002, the Company had entered into the following research and
development ventures.
RHODES TECHNOLOGIES, INC.:
In April 2002, the Company entered into an agreement with Rhodes
Technologies, Inc. ("RTI"), an affiliated 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
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 fiscal year 2004. The Company expects to begin funding the first
project pursuant to the agreement in the fourth quarter of fiscal year 2002. The
Company will account for the expenses of SVC Pharma as a joint venture and will
charge its portion of those expenses to research and development as incurred.
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 $788,000 for fiscal year 2001 and $577,000 for the first nine months of
fiscal year 2002, fulfilling their funding requirements through September 30,
2002. Under the Development Agreement, Generics is not required to fund more
than $1,000,000 in any one calendar year. The expenses of IPR are included in
research and development as incurred, net of the funding from Generics.
--10--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
PRODUCT DEVELOPMENT AGREEMENTS:
In addition to research and development ventures, the Company seeks to
enter into other development agreements with third parties with respect to the
development of new products and technologies. To date, the Company has entered
into several of these types of agreements and advanced funds to several
non-affiliated companies for products in various stages of development. Amounts
related to contractual rights acquired by the Company to products which have not
yet been approved by the FDA where the Company has no alternative future use for
the product, are expensed as research and development costs. Similarly, funding
by the Company of the research and development efforts of others are charged to
research and development expense. In fiscal year 2002, the Company entered into
the following product development agreements it believes are significant.
THREE RIVERS PHARMACEUTICALS, LLC.
In July 2002, the Company and Three Rivers Pharmaceuticals, LLC ("Three
Rivers") entered into a license and distribution agreement, which was amended in
October 2002, (the "Three Rivers Distribution Agreement") to market and
distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's
Rebetol(R). 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. Under the terms of the Three Rivers
Distribution Agreement, Three Rivers will supply the product and be responsible
for managing the regulatory process and ongoing patent litigation. Upon FDA
approval and final marketing clearance, Par will have the exclusive right to
sell the product in non-hospital markets and will be required to pay Three
Rivers a percentage of the gross profits as defined in the agreement. In
addition, the Company paid Three Rivers $1,000,000 in November 2002 and agreed
to pay Three Rivers $500,000 at such time Par commercially launches the product.
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. 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.
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. Under the terms of the agreement, the Company obtained the right to
utilize Nortec/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.
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. Under the terms of the new
agreement, Par also obtained the right 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 $1,000,000, which was charged to research and development
expenses in fiscal year 2002. In addition, the Company agreed to pay a total of
$800,000 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. In addition to these
payments, the Company agreed to pay Nortec a royalty on net sales of the
products, as defined in the agreements.
--11--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
DISTRIBUTION AND SUPPLY AGREEMENTS:
A significant portion of the Company's product line is made up of
distributed products, which consist of products manufactured under contract and
licensed products, sold through various distribution agreements with its
strategic partners. The Company's significant distribution and supply agreements
as of September 30, 2002, include the following agreements.
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 are 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. 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 with Reddy, the Company pays
Reddy a certain percentage of the gross profits, as defined in each agreement,
on sales of all products covered under such 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, as defined in the
agreement, 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). In June 2002, the Company begaN shipping
flecainide acetate, covered under the Genpharm Distribution Agreement, which is
indicated for the prevention of paroxysmal supraventricular tochycardias (PSUT)
and documented ventricular arrhythmia. Although 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 the terms of an
agreement with 3M, Par will pay a licensing fee to 3M 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, as defined in the agreement, on all sales made by the Company
of products included in the Genpharm Additional Product Agreement.
--12--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
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 three ANDA's for potential products covered under the
Genpharm 11 Product Agreement, two of which have been tentatively approved,
pending with, and awaiting approval from, the FDA.
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.
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
receivable plus 50% of eligible inventory of Par, each as determined from time
to time by GECC. As of September 30, 2002, the borrowing base was approximately
$27,000,000. 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 collateralized
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. In November 2002,
GECC waived certain events of default related to financial covenants and amended
the financial covenants in the Loan Agreement. 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 September 30, 2002 and December 31, 2001, the
Company had deferred income tax assets of $45,171,000 and $34,485,000,
respectively, consisting of temporary differences, primarily related to accounts
receivable reserves, and net deferred income tax liabilities of $3,843,000 and
$4,129,000, respectively, primarily related to the Genpharm Distribution
Agreement. The increase in the deferred tax asset is primarily due to an
increase in the Company's provision for chargebacks (see "-Accounts
Receivable").
--13--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
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:
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
(*RESTATED) (*RESTATED)
SEPT. 30, SEPT. 29, SEPT. 30, SEPT. 29,
2002 2001 2002 2001
---- ---- ---- ----
(In Thousands, Except Per Share Amounts)
NET INCOME $60,783 $37,432 $19,643 $33,732
BASIC:
Weighted average number of common
shares outstanding 32,194 30,106 32,476 30,871
NET INCOME PER SHARE OF COMMON STOCK $1.89 $1.24 $.60 $1.09
======= ======= ======= =======
ASSUMING DILUTION:
Weighted average number of common
shares outstanding 32,194 30,106 32,476 30,871
Effect of dilutive options 768 1,796 676 1,557
------- ------- ------- -------
Weighted average number of common and common
equivalent shares outstanding 32,962 31,902 33,152 32,428
NET INCOME PER SHARE OF COMMON STOCK $1.84 $1.17 $.59 $1.04
======= ======= ======= =======
* Restated as described in Notes to Consolidated Financial Statements.
The Company had outstanding options of 2,107,958 and 2,088,828 at the end
of the nine-month and three-month periods ended September 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 for such
period. As of September 29, 2001, none of the Company's outstanding options and
warrants was excluded from the computation of diluted earnings per share due to
their exercise price. As of September 30, 2002 and 2001, all incremental shares
from assumed conversions of the Company's outstanding options and warrants in
the three and nine-month periods were included in the computation of diluted
earnings per share.
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
or cash flows.
--14--
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
COMMITMENTS:
In December 2001, Par entered into an agreement with Elan Transdermal
Technologies, Inc. ("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 $1,000,000, which
was charged to research and development expenses, for products covered under
this agreement in the first nine months of 2002. In addition, the Company has
commitments under other product research and development, distribution and
supply agreements, which are described elsewhere in this Form 10-Q.
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' motion for injunctive relief or their claim for attorneys' fees.
Par, among others, is a defendant in three lawsuits filed in the 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 defend 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. ("Alpharma"") 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 (the `065 patent) granted to the Company and/or that the `065 patent
is invalid. The Company moved to dismiss Alpharma's declaratory judgment
complaint on the grounds that the court lacked subject matter jurisdiction, and
the Maryland court granted the Company's motion. On February 7, 2002 the Company
commenced a lawsuit against Alpharma in the U.S. District Court for the Southern
District of New York for infringement of the `065 patent and U.S. Patent No.
6,268,356 B1 granted to the Company. Alpharma filed a counterclaim in that
action for a declaration that its megestrol acetate formulation does not
infringe the Company's patents and/or that the asserted patents are invalid. One
of Alpharma's invalidity challenges is based on its alleged earlier invention of
the subject matter described and claimed in the Company's asserted patents. Both
the Company and Alpharma seek payment of their attorneys' fees in the lawsuit.
The parties currently are engaged in discovery in that matter. While the outcome
of litigation is uncertain, the Company believes its position in the litigation
is strong based, among other things, on the findings of the Patent Office Board
of Appeals and Interferences in its October 18, 2002 decision in the
interference proceeding involving the Company and Alpharma (see "-Subsequent
Events"). Alpharma currently does not have FDA approval to sell its megestrol
--15--
acetate formulation and is not currently marketing a megestrol acetate oral
suspension.
The Company is involved in certain other litigation matters, including
product liability and patent actions, as well as 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 made the first installment of a total agreed
equity investment of up to $2,437,000 to be made over a period of time in
HighRapids, Inc. ("HighRapids"), a Delaware Corporation and software developer
and owner of patented rights to an artificial intelligence generator. 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 September 30, 2002 the Company had
invested $591,000 in High Rapids. The remainder of the investment is subject to
the Company's ongoing evaluation of HighRapids operations. Due to HighRapids
current operating losses and the Company's evaluation of its short-term
prospects for profitability, the investment was expensed as incurred and
included in other expense on the consolidated statements of operations. The
Company has the exclusive right to market to the pharmaceutical industry certain
regulatory compliance and 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:
The Company has prevailed against Alpharma in an interference proceeding
before the United States Patent and Trademark Office concerning the Company's
patents and applications relating to megestrol acetate oral suspension
formulations. The decision was issued on October 18, 2002 by a three-judge panel
of the Patent Office Board of Patent Appeals and Interferences. In the
interference proceeding, Alpharma was alleging earlier invention of subject
matter described and claimed in the Company's issued U.S. Patent Nos. 6,028,065,
and 6,268,356 and related patent application. The interference was declared
earlier this year based on a competing patent application filed by Alpharma. The
Patent Office Board determined that the Company had priority of the invention
over Alpharma. The Company's patents relating to its megestrol acetate
formulation remain valid and in force. On February 7, 2002, the Company
commenced a lawsuit against Alpharma for infringement of the Company's patents
in the United States District Court for the Southern District of New York.
In November 2001, the FDA granted Genpharm, a strategic partner of the
Company, 180 days' marketing co-exclusivity for 10 mg and 20 mg doses of
omeprazole, the generic version of Astra Zeneca's ("Astra") Prilosec(R). The
exclusivity allowed only Genpharm and/or Andrx Corporation ("Andrx") to enter
the market during the exclusivity period. Under a profit sharing agreement with
Genpharm, the Company was entitled to receive at least 30% of profits generated
by Genpharm based on the sale of omeprazole. The timing and value of the
arrangement depended on the final outcome of litigation between Genpharm and
Astra, among other factors.
In November 2002, the Company announced that Genpharm and Andrx in
conjunction with KUDCo, a subsidiary of Schwarz Pharma AG of Germany, had
relinquished its exclusivity rights for 10 mg and 20 mg doses of omeprazole
allowing KUDCo to enter the market with a generic version of Prilosec(R). As a
result, KUDCo has received final ANDA approval from the FDA for its generic
version of Prilosec(R). The terms of the agreement initially provide Genpharm a
15% share of KUDCo's profits with a subsequent reduction over a period of time
based on a number of factors. The Company reduced its share of Genpharm's profit
derived from omeprazole from 30% to 25%. KUDCo has announced that they plan to
launch omeprazole "at risk" before the end of fiscal year 2002 because Astra is
appealing the court's patent infringement decision. The full extent of KUDCo's
omeprazole launch on the Company's revenues is unclear since, among other
things, Astra has introduced a new drug, Nexium(R), in an attempt to switch
consumers using Prilosec(R) and Astra's decision to market a non-prescription
form of Prilosec(R) along with Proctor & Gamble, all of which may reduce generic
sales of omeprazole.
--16--
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, (VIII) UNANTICIPATED COSTS IN ABSORBING ANY
ACQUISITIONS AND (IX) 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.
PRIOR YEAR NUMBERS GIVE EFFECT TO THE RESTATEMENT DESCRIBED IN THE NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS.
RESULTS OF OPERATIONS
GENERAL
The Company experienced significant sales, gross margin and net income
growth in the nine-month period ended September 30, 2002 when compared to the
nine months ended September 29, 2001. Net income of $60,783,000 for the
nine-month period of 2002 increased $23,351,000 from $37,432,000 for the same
period of 2001. The net income in the prior year includes the favorable impact
of the reversal of a previously established valuation allowance of $9,092,000
related to net operating loss ("NOL") carryforwards. Net sales were $282,500,000
in the most recent nine-month period, an increase of $99,575,000, or 54%, from
fiscal year 2001. The increased revenues were primarily the result of new
product introductions in fiscal year 2002 and the continuing success of
megestrol acetate oral suspension (Megace(R) Oral Suspension), introduced in the
third quarter of 2001. The revenue increases were achieved despite lower sales
of fluoxetine (Prozac(R)) 10 mg and 20 mg tablets, which were introduced with
180-day exclusivity in August 2001 and have since experienced severe price
competition in fiscal year 2002. The sales growth generated higher gross margins
of $132,642,000, or 47% of net sales, in fiscal year 2002, compared to
$71,477,000, or 39% of net sales, in the same period of the prior year. Results
for the nine months ended September 30, 2002 included increased spending on
research and development and selling, general and administrative expenses of
$3,154,000 and $11,529,000, respectively, primarily due to increased activity
with outside development partners, and additional personnel costs, 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 $4,254,000 in connection with its termination of the
acquisition of the entire ISP FineTech fine chemical business based in Haifa,
Israel and Columbus, Ohio. The Company subsequently purchased FineTech based in
Haifa, Israel, from ISP in April 2002. 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's net income for the third quarter ended September 30, 2002
decreased $14,089,000 to $19,643,000 compared to $33,732,000 in the third
quarter of the prior year, primarily due to lower sales of products launched in
the prior year with 180-days exclusivity and increased operating expenses. In
addition, net income in the third quarter of 2001 was favorably impacted by the
reversal of the valuation allowance related to NOL carryforwards as described
above. Third quarter 2002 sales and gross margins of $100,237,000 and
$46,952,000 (47% of net sales), respectively, decreased over prior year third
quarter sales and gross margins of $127,924,000 and $51,928,000 (41% of net
sales). The level of sales in last year's third quarter, reflect in part, the
--17--
initial inventory stocking associated with fluoxetine and megestrol acetate oral
suspension. Research and development expenses of $3,653,000 for the most recent
three-month period were comparable to $3,779,000 incurred in the same quarter of
2001. Selling, general and administrative costs of $11,094,000 in the third
quarter of 2002 increased $4,120,000 from the same quarter of the prior year,
primarily due to increased legal fees, and to a lesser extent, shipping 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
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 the generic version of fluoxetine 10 mg and 20 mg capsules,
which the Company also began selling in the first quarter of 2002 following the
end of such other party's exclusivity period. As expected, additional generic
competitors, with comparable products to all three strengths of the Company's
fluoxetine products, 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. Despite another generic
approval for megestrol acetate oral suspension in the first quarter of 2002, to
date the Company still maintains a significant share of the market for this
product. Although megestrol oral suspension and fluoxetine 40 mg capsules
continue to contribute significantly to the Company's overall performance, the
rapid growth of the Company's product line through new product introductions,
and to a lesser extent, increased sales of certain existing products have
reduced its reliance on each of these key products (see "Notes to Consolidated
Financial Statements-Accounts Receivable" ).
Critical to the continued growth of the Company 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 or exclusivity period
expirations, diminishing the amount and duration of significant profits from any
one product, (iv) willingness of generic drug customers, including wholesale and
retail customers, to switch among generic pharmaceutical manufacturers and (v)
pricing and product deletions by competitors.
NET SALES
Net sales of $282,500,000 for the nine-month period ended September 30,
2002 increased $99,575,000, or 54%, from net sales of $182,925,000 for the same
period ended September 29, 2001. The sales increase was primarily due to higher
sales of megestrol acetate oral suspension, introduced in late July 2001, new
products introduced in fiscal year 2002, particularly tizanidine (Zanaflex(R)),
metformin (Glucophage(R)), flecainide (Tambocor(R)) and nizatidine (Axid(R)),
sold under distribution agreements with Reddy or Genpharm, and the addition of
five BMS brand products pursuant to the BMS Asset Purchase Agreement. Net sales
of fluoxetine and megestrol acetate oral suspension for the first nine months of
2002 were approximately $71,635,000 and $62,709,000, respectively, compared to
$84,721,000 and $21,906,000, respectively in the corresponding periods of the
prior year. Net sales of distributed products, which consist of products
manufactured under contract and licensed products, were approximately 59% and
69%, respectively, of the Company's net sales in the nine-month periods ended
September 30, 2002 and September 29, 2001. The Company is substantially
--18--
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.
Third quarter 2002 net sales of $100,237,000 decreased $27,687,000, or
22%, from net sales of $127,924,000 for the corresponding quarter of 2001,
primarily due to much higher sales in last year's quarter from the introduction
of fluoxetine with 180-day exclusivity in August 2001. A decrease of $70,138,000
in fluoxetine net sales, when compared to the same period of the prior year, was
partially offset by the introduction of new products as described above. Net
sales of distributed products were approximately 62% of the Company's total net
sales in the most recent quarter compared to approximately 74% of the total for
the same quarter of last year.
The Company's exclusivity period for fluoxetine ended in late-January
2002. The Company established a price protection reserve with respect to
fluoxetine 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
gross margins generated by fluoxetine in fiscal year 2002 have been and will
continue to be adversely affected in future periods (see "Notes to Consolidated
Financial Statements-Accounts Receivable" ).
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 it will be difficult for them 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 and beyond, despite the
potential of competition. Based on these factors, the Company did not record a
price protection reserve for megestrol acetate oral suspension as of September
30, 2002. The Company 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 it will continue to introduce new products in
the future while 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.
GROSS MARGIN
The gross margin for the nine-month period ended September 30, 2002 of
$132,642,000 (47% of net sales) increased $61,165,000 from $71,477,000 (39% of
net sales) in the corresponding period of the prior year. The gross margin
improvement was achieved primarily through the additional contributions from
sales of higher margin new products, including megestrol acetate oral
suspension, and to a lesser extent, increased sales of certain existing
products.
Megestrol acetate oral suspension contributed approximately $34,515,000 to the
margin improvement in the nine-month period ended September 30, 2002. As
discussed above, additional generic drug manufacturers introduced 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 such
products, particularly the 10 mg and 20 mg strengths. The affects of gross
margin declines from lower pricing on the fluoxetine 40 mg capsule have been
offset, however, by an increase in the Company's profit sharing percentage under
--19--
an agreement with Reddy. Although the aggregate sales of the fluoxetine products
in the comparable nine-month periods has declined, the increased profit sharing
percentage on the 40 mg capsule offset the lower margin contributions from the
10 mg and 20 mg strengths. The Company's gross margin for megestrol acetate oral
suspension could also decline if additional manufacturers enter the market with
comparable generic products.
The gross margin for the third quarter of 2002 was $46,952,000 (47% of net
sales) compared to $51,928,000 (41% of net sales) in the corresponding quarter
of the prior year. Additional gross margin contributions from higher margin new
products partially offset a decrease of $22,504,000 in the aggregate margin
contribution from all strengths of fluoxetine.
Inventory write-offs amounted to $3,085,000 and $343,000 for the
nine-month and three-month periods ended September 30, 2002, respectively,
compared to $1,195,000 and $729,000 in the corresponding periods of the prior
year. The increases were primarily attributable to normally occurring write-offs
resulting from increased production to meet higher sales and inventory levels.
In addition, the nine-month period included 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 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 $10,590,000 for the nine months ended
September 30, 2002 increased $3,154,000, or 42%, from $7,436,000 for the
corresponding period of the prior year. The increased costs were primarily
attributable to additional payments of $3,445,000 for development work performed
for the Company by unaffiliated companies, particularly 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. These
expenses were partially offset by lower biostudy costs related to products
co-developed with Genpharm in fiscal year 2001.
Total research and development costs for fiscal year 2002 are expected to
exceed the total for fiscal year 2001 by approximately 35%. The Company expects
that as a result of its purchase of FineTech, increased internal development
activity and projects with third parties, research and development expenses will
continue to increase in fiscal year 2003.
For the three-month period ended September 30, 2002, research and
development expenses of $3,653,000 were comparable to $3,779,000 for the same
three-month period of the prior year. Increased costs for outside development
work and the acquisition FineTech were offset by lower costs for bio-studies
related to products co-developed with Genpharm in fiscal year 2001.
The Company purchased FineTech, based in Haifa, Israel, from ISP in April
2002. The Company has enjoyed a long-standing relationship with FineTech for
more than seven years. One of the Company's potential first-to-file products,
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 (see "Notes to
Consolidated Financial Statements-Acquisition of FineTech").
The Company currently has nine ANDAs for potential products (three
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 two additional products during the
remainder of fiscal year 2002.
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 three ANDA's for potential products covered under the
Genpharm 11 Product Agreement, two of which have been tentatively approved,
pending with, and awaiting approval from, the FDA (see "Notes to Consolidated
Financial Statements-Other Assets").
--20--
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.").
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 $27,457,000 for the
nine-month period ended September 30, 2002 increased $11,529,000 from
$15,928,000 in the corresponding period ended September 29, 2001. The increase
as a percentage of net sales however, represents only a 1% increase to 10% of
net sales in the current nine-month period from 9% in last year's nine-month
period. The increase in the current nine-month period was primarily attributable
to additional legal fees, marketing programs, personnel and shipping costs
associated with new product introductions and higher sales volumes. 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"). Although there can be no
assurance, selling, general and administrative costs in fiscal year 2003 are not
expected to increase substantially from fiscal year 2002.
For the third quarter of 2002, selling, general and administrative costs
of $11,094,000 (11% of net sales) increased $4,120,000 from $6,974,000 (5% of
net sales) for the corresponding quarter of the prior year primarily due to
higher legal fees, and to a lesser extent, increased shipping and personnel
costs.
SETTLEMENTS
On March 5, 2002 the Company entered into the BMS Asset Purchase Agreement
and 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, which based on the Company's market research, 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 an independent third party
appraisal, the fair value of the BMS Asset Purchase 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 (see
"Notes to Consolidated Financial Statements-Intangible Assets").
OTHER EXPENSE/INCOME
Other expenses were $4,492,000 and $112,000 for the nine-month and
three-month periods ended September 30, 2002, respectively, compared to other
income of $431,000 and $67,000 in the corresponding periods of 2001. Other
expenses in the current nine-month period included approximately $4,254,000
incurred in connection with the terminated acquisition of the entire ISP
FineTech fine chemical business in March 2002.
INTEREST INCOME/EXPENSE
Interest income of $490,000 and $109,000 for the nine-month and
three-month periods ended September 30, 2002, respectively, was primarily
derived from money market and other short-term investments. Interest expense of
$580,000 and $138,000, respectively, in the corresponding nine and three-month
periods of 2001 was due to outstanding balances on the Company's line of credit
with GECC in the prior year.
--21--
INCOME TAXES
The Company recorded provisions for income taxes of $38,861,000 and
$10,532,000, respectively, and $12,559,000 and $7,372,000, respectively, for the
nine-month and three-month periods ended September 30, 2002 and September 29,
2001 based on applicable federal and state tax rates. The provisions in both
periods of fiscal year 2001 were net of tax benefits of $9,092,000 related to
previously unrecognized NOL carryforwards (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
0eport 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.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $33,782,000 at September 30, 2002 decreased
$33,960,000 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 other capital projects. Working capital, which includes cash and cash
equivalents increased to $115,218,000 at September 30, 2002 from $102,867,000 at
December 31, 2001. The working capital ratio of 2.40x at September 30, 2002 was
comparable 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, some of which are described below, are expected to total
approximately $15,000,000 for fiscal year 2002.
In July 2002, the Company and Three Rivers entered into the Three Rivers
Distribution Agreement, as amended, to market and distribute ribavirin 200 mg
capsules, the generic version of Schering-Plough's Rebetol(R). Under the terms
of the Three Rivers Distribution Agreement, Three Rivers will supply the product
and 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 and pay
Three Rivers a percentage of the gross profits as defined in the agreement. The
Company paid Three Rivers $1,000,000 in November 2002 and agreed to pay Three
Rivers $500,000 at such time Par commercially launches the product.
The Company made non-refundable payments totaling $1,000,000 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 $800,000 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.
In April 2002, the Company entered into the Genpharm 11 Product Agreement
pursuant to which Genpharm has agreed to develop 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, as defined in the agreement, on all sales of the 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 for
two of the products. 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.
--22--
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 $1,254,000 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
$1,217,000 in related acquisition costs financed by its cash-on-hand (see-"Notes
to Consolidated Financial Statements-Acquisition of FineTech").
As of September 30, 2002 the Company had payables due to distribution
agreement partners of $19,251,000, related primarily to amounts due pursuant to
profit sharing agreements with strategic partners. The Company expects to pay
these amounts out of its working capital in the fourth 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 $1,000,000 for products covered under this agreement in the first nine
months of 2002.
In December 2001, the Company made the first installment of a total agreed
equity investment of up to $2,437,000 to be made over a period of time in
HighRapids. HighRapids will utilize the Company's cash infusion for working
capital and operating expenses. Through September 30, 2002, the Company had
invested $591,000 of its planned investment. The remainder of the investment is
subject to the Company's ongoing evaluation of HighRapids operations (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.
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 addition, Par will pay all legal expenses up to $2,000,000 and a
share thereafter, as provided in the agreement, incurred in connection with
Paragraph IV litigation related to the product.
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 the
nine-month ended September 30, 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 $788,000 for fiscal year 2001 and $577,000 for the first nine
months of fiscal year 2002, fulfilling their funding requirements through
September 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").
--23--
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,
while 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.
FINANCING
At September 30, 2002, the Company's total outstanding long-term debt,
including the current portion, amounted to $1,129,000. 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. As of September 30, 2002, the borrowing base was approximately
$27,000,000. 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 collateralized
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. In November 2002,
GECC waived certain events of default related to financial covenants and amended
the financial covenants in the Loan Agreement. To date, no debt is outstanding
under the Loan Agreement.
SUBSEQUENT EVENTS:
The Company has prevailed against Alpharma in an interference proceeding
before the United States Patent and Trademark Office concerning the Company's
patents and applications relating to megestrol acetate oral suspension
formulations. The decision was issued on October 18, 2002 by a three-judge panel
of the Patent Office Board of Patent Appeals and Interferences. In the
interference proceeding, Alpharma was alleging earlier invention of subject
matter described and claimed in the Company's issued U.S. Patent Nos. 6,028,065,
and 6,268,356 and related patent application. The interference was declared
earlier this year based on a competing patent application filed by Alpharma. The
Patent Office Board determined that the Company had priority of the invention
over Alpharma. The Company's patents relating to its megestrol acetate
formulation remain valid and in force. On February 7, 2002, the Company
commenced a lawsuit against Alpharma for infringement of the Company's patents
in the United States District Court for the Southern District of New York.
Alpharma does not currently have FDA approval and is not currently marketing a
megestrol oral suspension.
In November 2001, the FDA granted Genpharm, a strategic partner of the
Company, 180 days' marketing co-exclusivity for 10 and 20 mg doses of
omeprazole, the generic version of Astra's Prilosec(R). The exclusivity allowed
only Genpharm and/or Andrx to enter the market during the exclusivity period.
Under a profit sharing agreement with Genpharm, the Company was entitled to
receive at least 30% of profits generated by Genpharm based on the sale of
omeprazole. The timing and value of the arrangement depended on the final
outcome of litigation between Genpharm and Astra, among other factors.
In November 2002, the Company announced that Genpharm and Andrx in
conjunction with KUDCo, a subsidiary of Schwarz Pharma AG of Germany, had
relinquished its exclusivity rights for 10 mg and 20 mg doses of omeprazole
allowing KUDCo to enter the market with a generic version of Prilosec(R). As a
result, KUDCo has received final ANDA approval from the FDA for its generic
version of Prilosec(R). The terms of the agreement initially provide Genpharm a
15% share of KUDCo's profits with a subsequent reduction over a period of time
based on a number of factors. The Company reduced its share of Genpharm's profit
derived from omeprazole from 30% to 25%. KUDCo has announced that they plan to
--24--
launch omeprazole "at risk" before the end of fiscal year 2002 because Astra is
appealing the court's patent infringement decision. The full extent of KUDCo's
omeprazole launch on the Company's revenues is unclear since, among other
things, Astra has introduced a new drug, Nexium(R), in an attempt to switch
consumers using Prilosec(R) and Astra's decision to market a non-prescription
form of Prilosec(R) along with Proctor & Gamble, all of which may reduce generic
sales of omeprazole.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Pharmaceutical Resources' management, including the Chief Executive
Officer and Chief Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based on that evaluation, as of a date within 90 days of the filing
of this report, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures were effective in ensuring
that material information relating to the Company with respect to the period
covered by this report was made known to them. Subsequent to the date of that
evaluation, there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls.
--25--
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 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 (the
`065 patent) granted to the Company and/or that the `065 patent is invalid. The
Company moved to dismiss Alpharma's declaratory judgment complaint on the
grounds that the court lacked subject matter jurisdiction, and the Maryland
court granted the Company's motion. On February 7, 2002 the Company commenced a
lawsuit against Alpharma in the U.S. District Court for the Southern District of
New York for infringement of the `065 patent and U.S. Patent No. 6,268,356 B1
granted to the Company. Alpharma filed a counterclaim in that action for a
declaration that its megestrol acetate formulation does not infringe the
Company's patents and/or that the asserted patents are invalid. One of
Alpharma's invalidity challenges is based on its alleged earlier invention of
the subject matter described and claimed in the Company's asserted patents. Both
the Company and Alpharma seek payment of their attorneys' fees in the lawsuit.
The parties currently are engaged in discovery in that matter. While the outcome
of litigation is uncertain, the Company believes its position in the litigation
is strong based, among other things, on the findings of the Patent Office Board
of Appeals and Interferences in its October 18, 2002 decision in the
interference proceeding involving the Company and Alpharma. Alpharma currently
does not have FDA approval to sell its megestrol acetate formulation and is not
currently marketing a megestrol acetate oral suspension.
The Company is involved in certain other litigation matters, including
product liability and patent actions, as well as, 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 the Company's universal shelf registration statement, because
utilization of the shelf registration had become unlikely. Furthermore, the
Company believes it now has adequate cash resources available for general
corporate and other purposes. The $110 million registration statement on Form
--26--
S-3 was originally filed with the SEC in December 2001. The Company filed its
request for withdrawal on Form RW with the SEC on June 20, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits:
10.18.12 Twelfth Amendment and Waiver to Loan and Security Agreement, dated as
of November 13, 2002, among the Company, General Electric Capital
Corporation, and the other parties named herein.
10.41 License and Distribution Agreement, dated July 3, 2002, between the
Company and Three Rivers Pharmaceuticals, LLC. *
10.42 First Amendment to License and Distribution Agreement, dated October
18, 2002, between the Company and Three Rivers Pharmaceuticals, LLC.
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.
(b) Reports on Form 8-K:
None.
--27--
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)
November 14, 2002 /s/ Kenneth I. Sawyer
-----------------------
Kenneth I. Sawyer
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS
(Principal Executive Officer)
November 14, 2002 /s/ Dennis J. O'Connor
-----------------------
Dennis J. O'Connor
VICE PRESIDENT - CHIEF FINANCIAL
OFFICER AND SECRETARY
(Principal Accounting and Financial Officer)
--28--
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth I. Sawyer, Chief Executive Officer of Pharmaceutical Resources,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pharmaceutical
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Kenneth I. Sawyer
---------------------------
Kenneth I. Sawyer
Chief Executive Officer
--29--
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dennis J. O'Connor, Chief Financial Officer of Pharmaceutical Resources,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pharmaceutical
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Dennis J. O'Connor
---------------------------
Dennis J. O'Connor
Chief Financial Officer
--30--
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.18.12 Twelfth Amendment and Waiver to Loan and Security
Agreement, dated as of November 13, 2002, among the
Company, General Electric Capital Corporation, and
the other parties named herein.
10.41 License and Distribution Agreement, dated July 3,
2002, between the Company and Three Rivers
Pharmaceuticals, LLC. *
10.42 First Amendment to License and Distribution
Agreement, dated October, 2002, between the Company
and Three Rivers Pharmaceuticals, LLC.
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.
--31--
EXHIBIT 10.18.12
TWELFTH AMENDMENT AND WAIVER TO
LOAN AND SECURITY AGREEMENT
---------------------------
TWELFTH AMENDMENT AND WAIVER, dated as of November 13, 2002
(this "AMENDMENT"), to the Loan and Security Agreement referred to below by and
among GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation ("LENDER"),
PAR PHARMACEUTICAL, INC., a New Jersey corporation ("BORROWER"), PHARMACEUTICAL
RESOURCES, INC., a New Jersey corporation ("PARENT"), and the other Credit
Parties signatory thereto.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Lender, Borrower and Credit Parties are parties to
that certain Loan and Security Agreement, dated as of December 15, 1996 (as
amended, supplemented or otherwise modified prior to the date hereof, the "LOAN
AGREEMENT"); and
WHEREAS, Lender, Borrower and Credit Parties have agreed to
amend the Loan Agreement, and Lender has agreed to waive the violation of the
Minimum Tangible Net Worth covenant contained in the Loan Agreement in the
manner, and on the terms and conditions, provided for herein.
NOW THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt, adequacy and sufficiency of which
are hereby acknowledged, the parties to this Amendment hereby agree as follows:
1. DEFINITIONS. Capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Loan Agreement.
2. AMENDMENT TO SECTION 5 OF THE LOAN AGREEMENT. As of the
Amendment Effective Date (as defined below), SECTION 5(B) of the Loan Agreement
is hereby amended and restated in its entirety to read as follows:
"(b) except as otherwise permitted in this Section 5 below,
make any investment (including any investment in or advance to
any other Person for research and development) in, or make or
accrue loans or advances of money to, any Person, other than
(i) investments for research and development in Persons which
are not Credit Parties which, together with the aggregate
amount of research and development expenses of the Credit
Parties, do not in the aggregate exceed (A) $10,250,000 for
the Fiscal Year ending December 31, 2001, (B) $22,500,000 for
the Fiscal Year ending December 31, 2002, (C) $25,000,000 for
the Fiscal Year ending December 31, 2003 and (D) $25,000,000
for the Fiscal Year ending December 31, 2004; and (ii)
investments for working capital and general corporate purposes
in the form of intercompany loans or capital contributions
from any Credit Party to any other Credit Party (except
Parent), PROVIDED that (A) each Credit Party shall record all
intercompany transactions on its books and records in a manner
satisfactory to Lender, (B) no Default or Event of Default
would occur and be continuing after giving effect to any such
proposed intercompany loan or capital contribution, and (C)
the aggregate amount outstanding at any time of all such
intercompany loans and capital contributions made by any
Credit Party to another Credit Party other than Parent shall
not exceed $5,000,000 in any Fiscal Year (less any dividends
under Section 5(l)(iv) below made in such Fiscal Year);"
3. AMENDMENT TO SCHEDULE F TO THE LOAN AGREEMENT. As of the
Amendment Effective Date, SCHEDULE F to the Loan Agreement is hereby amended and
restated in its entirety to read as set forth in SCHEDULE F hereto.
4. WAIVER. Lender hereby waives as of the Amendment Effective
Date, all Events of Default under SECTION 8.1(B) of the Loan Agreement solely
arising out of the failure of Parent and its Subsidiaries to maintain, on a
consolidated basis, the minimum Tangible Net Worth required by SECTION 4.2 of
the Loan Agreement and paragraph 2 of SCHEDULE F to the Loan Agreement for the
Fiscal Quarters ended June 30, 2002 and September 30, 2002.
5. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter
into this Amendment, each Credit Party hereby represents and warrants that:
A. The execution, delivery and performance of this
Amendment and the performance of the Loan Agreement, as
amended hereby (the "AMENDED LOAN AGREEMENT"), by each Credit
Party: (i) are within their respective corporate powers; (ii)
have been duly authorized by all necessary corporate and
shareholder action; and (iii) are not in contravention of any
provision of their respective certificates or articles of
incorporation or by-laws or other organizational documents.
B. This Amendment has been duly executed and delivered
by or on behalf of each Credit Party.
C. Each of this Amendment and the Amended Loan
Agreement constitutes a legal, valid and binding obligation of
each Credit Party enforceable against each Credit Party in
accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights
generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
D. No Default (other than those waived pursuant hereto)
has occurred and is continuing both before and after giving
effect to this Amendment.
E. No action, claim or proceeding is now pending or, to
the knowledge of each Credit Party, threatened against any
Credit Party, at law, in equity or otherwise, before any
court, board, commission, agency or instrumentality of any
federal, state, or local government or of any agency or
subdivision thereof, or before any arbitrator or panel of
arbitrators, which challenges any Credit Party's right, power,
or competence to enter into this Amendment or, to the extent
applicable, perform any of its obligations under this
Amendment, the Amended Loan Agreement or any other Loan
Document, or the validity or enforceability of this Amendment,
the Amended Loan Agreement or any other Loan Document or any
action taken under this Amendment, the Amended Loan Agreement
or any other Loan Document.
F. The representations and warranties of the Credit
Parties contained in the Loan Agreement and each other Loan
Document shall be true and correct on and as of the Amendment
Effective Date with the same effect as if such representations
and warranties had been made on and as of such date, except
that any such representation or warranty which is expressly
made only as of a specified date need be true only as of such
date.
2
6. NO OTHER AMENDMENT/WAIVERS. Except as expressly provided in
Sections 2 and 3 hereof, the Loan Agreement shall be unmodified and shall
continue to be in full force and effect in accordance with its terms. Except as
expressly provided in Section 4 hereof, this Amendment shall not be deemed a
waiver of any term or condition of any Loan Document and shall not be deemed to
prejudice any right or rights which Lender may now have or may have in the
future under or in connection with any Loan Document or any of the instruments
or agreements referred to therein, as the same may be amended from time to time.
7. OUTSTANDING INDEBTEDNESS; WAIVER OF CLAIMS. Each Credit
Party hereby acknowledges and agrees that as of the date hereof the aggregate
outstanding principal amount of the Revolving Credit Loan is $0.00. Each Credit
Party hereby waives, releases, remises and forever discharges Lender and each
other Indemnified Person from any and all Claims of any kind or character, known
or unknown, which each Credit Party ever had, now has or might hereafter have
against Lender which relates, directly or indirectly, to any acts or omissions
of Lender or any other Indemnified Person on or prior to the date hereof. This
Amendment shall constitute a Loan Document for all purposes of the Loan
Agreement and each other Loan Document.
8. EXPENSES. Borrower hereby reconfirms its obligations
pursuant to Section 10.2 of the Loan Agreement to pay and reimburse Lender for
all reasonable out-of-pocket expenses (including, without limitation, reasonable
fees of counsel) incurred in connection with the negotiation, preparation,
execution and delivery of this Amendment and all other documents and instruments
delivered in connection herewith.
9. EFFECTIVENESS. This Amendment shall become effective as of
the date hereof (the "AMENDMENT EFFECTIVE DATE") only upon satisfaction in full
in the judgment of the Lender of each of the following conditions on or prior to
November 13, 2002:
A. AMENDMENT. Lender shall have received two original
copies of this Amendment duly executed and delivered by Lender and each Credit
Party.
B. PAYMENT OF EXPENSES. Borrower shall have paid to
Lender all costs and expenses owing in connection with this Amendment and the
other Loan Documents and due to Lender (including, without limitation,
reasonable legal fees and expenses).
C. REPRESENTATIONS AND WARRANTIES. The representations
and warranties of each Credit Party contained in this Amendment shall be true
and correct on and as of the Amendment Effective Date.
10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
11. COUNTERPARTS. This Amendment may be executed by the
parties hereto on any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
(SIGNATURE PAGE FOLLOWS)
3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered as of the day and year first above
written.
BORROWER:
---------
PAR PHARMACEUTICAL, INC.
By:/s/ Dennis J. O'Connor
----------------------
Name: Dennis J. O'Connor
Title: Vice President-CFO
LENDER:
-------
GENERAL ELECTRIC CAPITAL CORPORATION
By:/s/ MICHAEL LUSTBADER
---------------------
Name:Michael Lustbader
Its: Duly Authorized Signatory
PARENT:
-------
PHARMACEUTICAL RESOURCES, INC.
By: Dennis J. O'Connor
------------------
Name: Dennis J. O'Connor
Title: Vice President-CFO
(SIGNATURES CONTINUED ON NEXT PAGE)
Subsidiary Guarantors:
----------------------
NUTRICEUTICAL RESOURCES, INC.
By: Dennis J. O'Connor
------------------
Name: Dennis J. O'Connor
Title: Vice President-CFO
PARCARE, LTD.
By: Dennis J. O'Connor
------------------
Name: Dennis J. O'Connor
Title: Vice President-CFO
QUAD PHARMACEUTICALS INC.
By: Dennis J. O'Connor
------------------
Name: Dennis J. O'Connor
Title: Vice President-CFO
PRX PHARMACEUTICALS, INC.
By: Dennis J. O'Connor
------------------
Name: Dennis J. O'Connor
Title: Vice President-CFO
PAR PHARMA GROUP, LTD.
By: Dennis J. O'Connor
------------------
Name: Dennis J. O'Connor
Title: Vice President-CFO
(SIGNATURES CONTINUED ON NEXT PAGE)
2
PRI-RESEARCH, INC.
By: Dennis J. O'Connor
------------------
Name:Dennis J. O'Connor
Title: Vice President-CFO
3
Schedule F
FINANCIAL COVENANTS
1. FIXED CHARGE COVERAGE RATIO. Parent and its Subsidiaries on
a consolidated basis shall maintain for each Fiscal Quarter, commencing with the
Fiscal Quarter ending on or about March 31, 2002, a Fixed Charge Coverage Ratio
of not less than 2.00:1.00.
2. MINIMUM TANGIBLE NET WORTH. Parent and its Subsidiaries on
a consolidated basis shall maintain, as at the end of each Fiscal Quarter,
Tangible Net Worth of not less than the amount for such period set forth below:
Fiscal Quarter Ending on or about: Minimum Tangible Net Worth
---------------------------------- --------------------------
December 31, 2002 113,924,000
March 31, 2003 118,924,000
June 30, 2003 123,924,000
September 30, 2003 128,924,000
December 31, 2003 133,924,000
March 31, 2004 138,924,000
June 30, 2004 143,924,000
September 30, 2004 148,924,000
December 31, 2004 153,924,000
3. CAPITAL EXPENDITURES. Parent and its Subsidiaries on a
consolidated basis shall not make aggregate Capital Expenditures in excess of
$7,500,000 for the Fiscal Year ending on or about December 31, 2001, $12,000,000
for the Fiscal Year ending on or about December 31, 2002 , $15,000,000 for the
Fiscal Year ending on or about December 31, 2003, and $15,000,000 for the Fiscal
Year ending on or about December 31, 2004 and each Fiscal Year thereafter.
For purposes of this covenant in SCHEDULE F the following terms shall have the
meanings set forth below:
"EBITDA" shall mean, for any period, the Net Income (Loss) of
Parent and its Subsidiaries on a consolidated basis for such period, PLUS
interest expense, income tax expense, amortization expense, depreciation expense
and extraordinary losses and MINUS extraordinary gains, in each case, of Parent
and its Subsidiaries on a consolidated basis for such period determined in
accordance with GAAP to the extent included in the determination of such Net
Income (Loss).
"FIXED CHARGE COVERAGE RATIO" shall mean, for any period, the
ratio of the following for Parent and its Subsidiaries on a consolidated basis
determined in accordance with GAAP; (a) EBITDA for such period LESS (i) Capital
Expenditures for such period which are not financed through the incurrence of
any Indebtedness (excluding the Revolving Credit Loan) and (ii) taxes to the
extent accrued or otherwise payable with respect to such period to (b) the sum
of (i) interest expense paid or accrued in respect of any Indebtedness during
such period, PLUS (ii) regularly scheduled payments of principal paid or that
were required to be paid on Indebtedness (excluding the Revolving Credit Loan)
during such period.
"NET INCOME (LOSS)" shall mean with respect to any Person and
for any period, the aggregate net income (or loss) after taxes of such Person
for such period, determined in accordance with GAAP.
"TANGIBLE NET WORTH" shall mean, with respect to any Person at
any date, all amounts which, in accordance with GAAP, would be included under
stockholders' equity on a consolidated balance sheet of such Person at such date
LESS the aggregate of all intangibles in conformity with GAAP (including
Intellectual Property, goodwill, organization expenses, treasury stock, all
deferred financing and unamortized debt discount expenses, and all current and
non-current deferred tax benefits; provided, that with respect to deferred tax
benefits, only such amounts in excess of $50,000,000 shall be included and
subtracted from shareholders' equity and amounts equal to or less than
$50,000,000 shall be excluded from the foregoing calculation).
2
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH SECURITIES AND EXCHANGE COMMISSION
ASTERISKS DENOTE SUCH OMISSION
EXHIBIT 10.41
LICENSE AND DISTRIBUTION AGREEMENT made as of the 3rd day of July, 2002
between Three Rivers Pharmaceuticals, LLC, a limited liability company existing
under the laws of the State of Pennsylvania, with its principal place of
business at 312 Commerce Park Drive, Cranberry Township, Pennsylvania ("Three
Rivers") and PAR PHARMACEUTICAL, INC., a corporation incorporated and existing
under the laws of the State of New Jersey with its principal offices at One Ram
Ridge Road, Spring Valley, New York 10977 ("PAR").
Defined terms used in this Agreement shall have the meanings set forth in
Section 1, except as otherwise provided herein.
WHEREAS, Three Rivers has filed Abbreviated New Drug Application ** ******
for the Finished Product; and
WHEREAS, Three Rivers wishes to grant, and PAR wishes to obtain, the
exclusive right to distribute, market and sell the Product in the Territory
during the Term of this Agreement under the terms and conditions set forth
herein; and
WHEREAS, Three Rivers intends to contract with a third party to
manufacture and supply to PAR all of PAR's requirements for the Product during
the Term of this Agreement under the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1) DEFINITIONS
-----------
For the purposes of this Agreement the following terms shall have
the following meanings:
a) "AFFILIATE" shall mean, with respect to either party, all entities
which, directly or indirectly, are controlled by, or are under
common control with such party. For the purpose of this definition,
"control" means beneficial ownership of greater than 50% of the
voting stock of such corporation or other business entity, or a
greater than 50% interest in the income of such corporation or other
business entity, or the power to direct or cause the direction of
the management and policies of such corporation or other business
entity whether by ownership of voting securities, by contract or
otherwise.
b) "ANDA" shall mean Abbreviated New Drug Application ** ****** filed
with the FDA by Three Rivers for Marketing Authorization for the
Finished Products.
c) "CGMP" shall mean current Good Manufacturing Practices as required
by the rules and regulations of the FDA.
d) "CONFIDENTIAL INFORMATION" shall mean and include all information
which may be disclosed by either party to the other party either
pursuant to this Agreement or pursuant to any preceding agreement
concerning the Finished Product, any technology, marketing
strategies or business of such party, including that relating
directly to the Finished Product, and any technology generated by
either party as a result of the rights granted and obligations
arising under this Agreement but shall not include information which
the receiving party can show: (1) either is or becomes available to
the public other than as a result of disclosure by the receiving
party; or (2) at the time of receipt is already in the possession of
the receiving party or becomes lawfully available to the receiving
party on a non-confidential basis from a third party entitled to
make that disclosure.
e) "FDA" shall mean the U. S. Food and Drug Administration, or any
successor body.
f) "FINISHED PRODUCT" shall mean the generic pharmaceutical product
ribavirin U.S.P. 200 mg capsules.
g) "FOB" shall have the meaning set forth in the Incoterms.
h) "GAAP" shall mean United States generally accepted accounting
principles consistently applied.
i) "INCOTERMS" shall mean the 1990 edition of the International
Commercial terms published by the International Chamber of Commerce,
as may be amended or modified from time to time.
j) "INSTITUTIONAL SALES" shall be defined as sales to the United States
Veterans Administration, governmental agencies, hospitals, nursing
homes, correctional facilities government funded facilities and
other facilities commonly accepted in the trade as constituting
"institutional" parties.
k) "INTELLECTUAL PROPERTY RIGHTS" shall include all rights and
interests, vested or arising out of any patent, copyright, design,
trademark, trade secrets or goodwill whether arising by common law
or by statute or any right to apply for registration under a statute
in respect of those or like rights.
l) "LITIGATION(S)" shall mean the actions entitled RIBAPHARM, INC. V.
THREE RIVERS PHARMACEUTICALS, LLC, Civil Action No. 02-3231,
currently pending in the U.S. District Court for the Eastern
District of Pennsylvania; and SCHERING CORPORATION V. THREE RIVERS
PHARMACEUTICALS, LLC, Civil Action
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH SECURITIES AND EXCHANGE COMMISSION
ASTERISKS DENOTE SUCH OMISSION
No. 01-1894, pending in the U.S. District Court for the Western
District of Pennsylvania.
m) "MARKETING AUTHORIZATION" shall mean the grant of registration
approval from the FDA necessary to permit the manufacture, storage,
promotion, sale and marketing of such Finished Product in the
Territory.
n) "NET COSTS" shall mean Three Rivers' direct cost of Finished
Product, plus the parties' joint commercial expenses in connection
with the promotion and sales of the Finished Product; provided,
however, that such commercial expenses shall not exceed ** of Net
Sales.
o) "NET PROFITS" shall mean Net Sales less Net Costs.
p) "NET SALES" shall mean the parties' (including their Affiliates)
gross invoiced sales of Finished Product to third parties, less, to
the extent related to the sale of such Finished Product:
(1) any statutory or contractual liability for rebates to be paid
to any government entity including, but not limited to,
rebates to be paid pursuant to the Medicaid rebate legislation
and state and local government rebate programs;
(2) any cash discounts for prompt payment of invoices by
customers; and
(3) any adjustments granted to customers for allowances or credits
for returned or expired Finished Products, retroactive price
adjustments, free product provided to customers in lieu of
discounts or rebates, damaged Finished Product, rebates,
allowances, chargebacks, payments to customers in respect of
margin-sharing arrangements, or other discounts, all as
calculated in accordance with US generally accepted accounting
principles (GAAP) consistently applied.
q) "PURCHASE ORDER" shall have the meaning set forth in Section 7.
r) "REGULATORY AUTHORITY" means any and all bodies and organizations,
including, without limitation, the FDA, regulating the manufacture,
importation, distribution, use and sale of API and the Finished
Products in the Territory.
s) "TERRITORY" shall mean the U.S. and its territories, possessions,
and the Commonwealth of Puerto Rico.
t) "U.S." means the United States of America and its territories and
possessions.
2) REGISTRATION OBLIGATIONS OF THREE RIVERS:
----------------------------------------
a) Three Rivers shall use its best efforts to obtain Marketing
Authorization from the FDA for the Product. Three Rivers shall
respond promptly and completely to all deficiency letters received
from FDA, and shall comply in all respects with FDA requirements for
Marketing Authorization for the Product. PAR shall use reasonable
commercial efforts to make available PAR's regulatory personnel to
consult with Three Rivers regarding, without limitation, the
prosecution of the ANDA and regulatory strategy.
b) Three Rivers shall diligently pursue the defense of the claims
asserted in the Litigation, together with any counterclaims asserted
by Three Rivers in the Litigation. Three Rivers shall continue to be
represented by counsel reasonably acceptable to PAR.
c) Three Rivers shall contract with a reputable third party contract
manufacturer reasonably acceptable to PAR who shall manufacture
PAR's requirements of Finished Product. Three Rivers shall provide
PAR with a copy of the contract manufacturing agreement, the
material terms of which shall be subject to PAR's reasonable
approval and consent.
d) Three Rivers shall ensure that its contract manufacturer (i)
manufactures the Product in accordance with cGMP; (ii) at all times
maintains its facilities in compliance with cGMP; (iii) clears any
pre-approval inspection conducted by the FDA in respect of the
Product; and (iv) promptly and completely addresses any observations
made by FDA in connection with any pre-approval or general cGMP
compliance audit of its premises relating to the Finished Product.
e) Three Rivers shall promptly provide PAR with copies of all
correspondence received from the FDA with respect to the Product or
the ANDA.
3) APPOINTMENT; MILESTONE PAYMENT OBLIGATIONS OF PAR
-------------------------------------------------
a) Subject to the terms and conditions set forth in this Agreement,
Three Rivers grants to PAR the sole and exclusive right to market,
promote, distribute and sell the Finished Product in the Territory
pursuant to the ANDA, with the sole and limited exception of
Institutional Sales. Other than Institutional Sales of Finished
Product or sales of the Finished Product for use in clinical
studies, Three Rivers and its affiliates shall not sell Finished
Product to any other party, whether directly or indirectly, in the
Territory. If Three Rivers makes sales of the Finished Product for
use in clinical studies prior to the commercial launch date it shall
be entitled to **** of the Net Profits thereon. Subsequent to
commercial launch any Net Profits arising from sales related to
clinical studies shall be split **/** (in favor of Three Rivers) if
Three Rivers originates the sale and **/** (in favor of Three
Rivers) if PAR originates the sale.
b) In consideration of its appointment, PAR shall make the following
payments to Three Rivers to offset ongoing and future legal
expenses:
i) $250,000 on January 1, 2003;
ii) $68,200 per month commencing February 1, 2003 and for a period
of 11 months thereafter; and
iii) $500,000 at such time as PAR commercially launches the
Product.
2
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH SECURITIES AND EXCHANGE COMMISSION
ASTERISKS DENOTE SUCH OMISSION
4) INTELLECTUAL PROPERTY CLAIMS; CONTINGENT SUPPLEMENTAL FUNDING BY PAR:
---------------------------------------------------------------------
a) The Litigation, together with any other litigation against Three
Rivers or its affiliates arising out of claims by a third party that
the importation, manufacture, use, sale, or marketing of the product
infringes the Intellectual Property rights of such third party,
shall be controlled and managed by Three Rivers; provided, however,
that Three Rivers shall not enter into a settlement of the
Litigations on terms or conditions that (i) cause PAR to incur
economic or legal harm, or (ii) reduce the value of the exclusive
marketing rights granted to PAR under this Agreement without the
prior written consent of PAR.
b) Any and all claims brought against PAR alleging that PAR's
performance of its obligations under this Agreement infringe the
Intellectual Property rights of a third party shall be controlled
and managed by PAR.
c) Three Rivers has reviewed with qualified patent counsel patent
issues surrounding the manufacture and marketing of Finished Product
in the Territory and, in particular, claims made by the plaintiffs
in the Litigations. Based upon such review and written opinions
rendered by such patent counsel, Three Rivers believes, in good
faith, that its current plans to develop and market Finished Product
in the Territory will not violate any validly claimed right of any
third party, including, without limitation, those claimed by the
plaintiffs in the Litigation.
d) At all times during the pendency of the Litigations, Three Rivers
shall make available to PAR's designated legal counsel such
intellectual property, manufacturing/process, and regulatory
information with respect to the Finished Product as PAR's counsel
may reasonably request. PAR's legal counsel shall, in turn, be bound
to maintain the confidentiality of such information, and not to use
the information for any purpose other than counseling PAR with
respect to PAR's exercise of its rights and performance of its
obligations under this Agreement.
e) Three Rivers agrees to keep PAR's nominated legal counsel informed
with respect to the progress of the Litigation and to disclose to
PAR's counsel all material decisions issued by the courts in such
matters.
f) To the extent that litigation costs incurred by Three Rivers in
connection with the Litigation after January 1, 2003 exceed
$1,000,000, and upon submission of documentation by Three Rivers to
that effect reasonably acceptable to PAR, PAR agrees to negotiate in
good faith with Three Rivers the terms and conditions upon which PAR
would loan Three Rivers funds necessary to cover further costs
incurred in the defense of the Litigation up to an amount not to
exceed $500,000. The terms of any such loans shall be mutually
agreed upon and set forth in writing in a separate agreement
acceptable in form and substance to Three Rivers and PAR.
g) If Three Rivers should require additional funding to cover the costs
of the Litigation over and above the $500,000 referred to in Section
4(f), above, PAR agrees to negotiate in good faith with Three Rivers
regarding the terms under which additional funding may be provided;
provided, however, that PAR shall be under no obligation to provide
such funding unless the terms of such funding are mutually agreed
upon and set forth in writing in a separate agreement acceptable in
form and substance to Three Rivers and PAR.
5) MARKETING RIGHTS AND OBLIGATIONS OF PAR:
----------------------------------------
a) PAR accepts the appointment, and shall use reasonable commercial
efforts during the Term of this Agreement to market, promote,
distribute and sell the Finished Product in the Territory.
b) The Parties shall sell the Finished Product under a joint PAR/Three
Rivers label.
c) The Parties agree that PAR's management and its Board of Directors
shall retain the ultimate decision-making authority with respect to
the timing of PAR's commercial launch of the Product. In the event
that PAR elects not to commercially launch the product at a time
when Three Rivers believes in good faith that immediate
commercialization of the Product would be in the best interests of
Three Rivers, then PAR, in its sole discretion, may elect to
terminate this Agreement and return exclusive marketing rights to
Three Rivers. In the event that this Agreement is terminated by PAR
under the circumstances described in this Section 5(c), then Three
Rivers shall refund to PAR all amounts paid to Three Rivers or
loaned to Three Rivers by PAR pursuant to Section 3 and 4, together
with PAR's reasonable expenses associated with its participation
with Three Rivers in the project up to that time. The timing of such
repayment shall be not later than 180 days following Three Rivers'
commercial launch of the Finished Product.
d) In the event of a termination by PAR pursuant to Section 5(c), PAR
and Three Rivers shall meet and confer in good faith regarding the
terms upon which, if any, the parties could collaborate in the
future with respect to the Finished Product or other product
opportunities.
6) TERM AND RENEWAL: The term of this agreement shall be for an initial
period of ten (10) years from the date of commercial launch of the
Finished Product. Thereafter, the Agreement shall automatically be renewed
for additional one (1) year terms unless either party shall give notice of
its intent not to renew not less than 90 days prior to the expiration of
the initial term or any renewal term then in effect.
7) ORDERS OF FINISHED PRODUCT BY PAR: PAR shall purchase exclusively from
Three Rivers all of PAR's requirements for the Finished Product for
distribution and sale in the Territory.
a) Three Rivers (via its contract manufacturer) shall provide Finished
Product to PAR pursuant to purchase orders submitted by PAR to Three
3
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH SECURITIES AND EXCHANGE COMMISSION
ASTERISKS DENOTE SUCH OMISSION
Rivers during the term of this Agreement. The purchase orders
submitted by PAR shall set forth the quantity and delivery date for
such order, as well as other terms and conditions. The specified
delivery date shall be not less than ninety (90) days after the date
of PAR's submission of the purchase order to Three Rivers. Title and
all risk of loss shall not pass to PAR until delivery of Product FOB
Spring Valley, New York, or such other location as PAR may specify
in writing. Where there is a conflict between the terms of the
purchase order and this Agreement, the terms of this Agreement shall
control.
b) Thirty (30) days prior to the first day of each calendar quarter
following the commercial launch of the Finished Product and during
the Term of this Agreement, PAR shall provide Three Rivers with a
binding Purchase Order together with a non-binding forecast of its
requirements for the Product for the three (3) following calendar
quarters for Three Rivers' use in production planning with its
contract manufacturer.
c) Product supplied by Three Rivers pursuant to PAR's purchase orders
shall be transferred to PAR at the Transfer Price. For the purpose
of this Agreement, Transfer Price shall mean Three Rivers'direct
cost of the Finished Product.
d) Payment terms by PAR to Three Rivers for the Transfer Price shall be
net 60 days from PAR's receipt of such Product.
e) In distributing, marketing and selling, the Finished Product with
regards to non-Institutional Sales, PAR shall conduct its own
business in its own name and shall be solely responsible for
determining the prices to be charged for the Product.
f) Three Rivers and PAR shall enter into a Quality Agreement containing
terms with respect to product inspection and acceptance, rejections,
product recalls, and adverse event reporting as is usual and
customary in transactions of this nature.
8) DIVISION OF NET PROFITS: Net Profit earned from sales of the
Finished Product shall be split **/** in favor of Three Rivers for
Institutional Sales. Net Profit shall be split **/** in favor of
Three Rivers for all other sales, including, without limitation,
sales to wholesalers and retail chains.
9) RECONCILIATION AND ACCOUNTING:
-----------------------------
a) PAR shall, within 60 days after the close of each calendar half-year
during the Term of this Agreement, furnish to Three Rivers a written
report showing in specific detail: (i) PAR's actual gross sales of
Finished Product during the calendar half-year covered by such
report; (ii) a statement of the Net Sales from such gross sales;
(iii) a statement of PAR's Net Costs for Finished Product; and (iv)
a statement of Net Profits due and payable to Three Rivers and PAR,
respectively.
b) Three Rivers shall, within 60 days after the close of each calendar
half-year during the Term of this Agreement, furnish to PAR a
written report showing in specific detail: (i) Three Rivers' actual
gross Institutional Sales of Finished Product during the calendar
half-year covered by such report; (ii) a statement of the Net Sales
from such gross sales; (iii) a statement of Three Rivers' Net Costs
for Finished Product, and (iv) a statement of Net Profits due and
payable to Three Rivers and PAR, respectively
c) All such amounts due and payable to Three Rivers or PAR respectively
shall be paid by wire transfer within 10 business days of the
issuance of the report.
d) Three Rivers and PAR shall each have the right, not more than once
annually during the Term of this Agreement. to have an independent
certified public accountant reasonably acceptable to the other party
review the relevant books and records of the other party to confirm
that all payments required to be made hereunder have been made. Such
independent certified public accountant shall execute a
confidentiality agreement reasonably acceptable to the other party.
PAR and Three Rivers shall keep such relevant books and records for
the same period as it keeps similar records in the normal course of
its business.
10) REPRESENTATIONS AND WARRANTIES OF THREE RIVERS: Three Rivers
represents and warrants as follows:
-------------------------------------------------------------
a) Three Rivers has the corporate authority to enter into this
Agreement and to perform its obligations hereunder;
b) There are no legal, contractual or other restrictions, limitations
or conditions which might affect adversely its ability to perform
hereunder.
c) The Finished Product delivered to PAR shall not be misbranded or
adulterated in violation of Sections 501, 502 or 505 of the FD&C
Act, as amended.
d) In developing and manufacturing the Product, Three Rivers
(including, without limitation, its contract developer and/or
manufacturer) has complied with, and shall continue to comply with,
current Good Manufacturing Procedures, the Food Drug and Cosmetic
Act, and the rules and regulations and guidance of the FDA,
including the requirements for maintaining the ANDA.
e) Three Rivers, its contract developer, and its contract manufacturer
are not debarred under Section 2 of the Generic Drug Enforcement Act
4
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH SECURITIES AND EXCHANGE COMMISSION
ASTERISKS DENOTE SUCH OMISSION
of 1992, and do not and will not use in any capacity the services of
any person debarred under the Act.
f) After due inquiry, the manufacture, use or sale of the Finished
Product in the Territory shall not infringe the Intellectual
Property rights of any third party.
g) Three Rivers shall indemnify and hold PAR harmless for any loss,
including reasonable attorneys; fees (other than consequential
damages of PAR such as lost business or future profits) arising out
of (i) any claim by a third party alleging a defect in the design or
manufacture of the Finished Product or any failure of the Finished
Product to meet appropriate standards of identity, strength, quality
or purity, (ii) Three Rivers' material breach of this Agreement or
any of the representations or warranties made by Three Rivers
herein, (iii) the negligence of Three Rivers, its contract
manufacturer, or their respective officers, agents or affiliates in
the performance of their obligations hereunder, except to the extent
such claims arise out of the negligence of PAR or its agents or
affiliates in the performance of PAR's obligations hereunder.
11) REPRESENTATIONS AND WARRANTIES OF PAR: PAR represents and warrants as
follows:
----------------------------------------------------------------------
a) it has the corporate authority to enter into this Agreement and to
perform its obligations hereunder;
b) there are no legal, contractual or other restrictions, limitations
or conditions which might affect adversely its ability to perform
hereunder.
c) PAR is not debarred under Section 2 of the Generic Drug Enforcement
Act of 1992, and it does not and will not use in any capacity the
services of any person debarred under the Act.
d) PAR shall indemnify and hold Three Rivers harmless for any loss,
including reasonable attorneys; fees (other than consequential
damages of Three Rivers such as lost business or future profits)
arising out of (i) PAR's material breach of this Agreement or any of
the representations or warranties made by PAR herein, and (ii) the
negligence of PAR or its officers, agents or affiliates in the
performance of their obligations hereunder, except to the extent
such claims arise out of the negligence of Three Rivers, its
contract manufacturer, or their respective officers, agents or
affiliates in the performance of its obligations hereunder.
12) TERMINATION.
-----------
a) This Agreement may be terminated by either party upon the occurrence
of any of the following events: (i) a material breach by the other
party which shall go uncured for a period of 60 days after written
notice of breach is given to the breaching party by the
non-breaching party; (ii) if the other party files a petition for
bankruptcy or a similar proceeding is filed against such party and
is not stayed or discharged within 45 days of such filing or if such
party becomes insolvent, makes an assignment for the benefit of its
creditors, or goes into receivership or liquidation; or (iii) in the
event of a change of control of the other party or if a major
portion of the assets of the other party is disposed of or acquired
by another person or entity. The indemnification and confidentiality
obligations of the parties and the other obligations which by their
terms are intended to be performed after termination shall survive
termination of this Agreement and shall continue to be binding on
the parties.
b) This Agreement may be terminated by PAR pursuant to the terms of
Section 5(c) of this Agreement.
c) This Agreement may also be terminated by PAR in the event of a
material price decline in the market which, in the good faith
determination of PAR, makes the continued commercial marketing of
the Finished Product commercially impractical. In the event of a
termination due to a material price decline, the parties agree that
at least 90 days prior to the effective date of any such termination
the parties shall meet and confer with an objective of maintaining
an uninterrupted supply of the Finished Product to customers in the
Territory.
d) Following termination, PAR shall accept delivery and pay for all
Finished Product for which PAR had submitted a binding Purchase
Order prior to termination.
13) NOTICES. All Notices provided under this Agreement to be given or served
by either party on the other shall be given In writing and served
personally or by prepaid registered airmail post or by express mail or by
means of facsimile to the following respective addresses or to such other
addresses as the parties may hereafter advise each other in writing. It is
agreed and understood by the parties that any such notice shall be deemed
given and served the day transmitted by facsimile or a date three (3) days
after the date of express mail or mail by courier.
To: Three Rivers
Three Rivers Pharmaceuticals, LLC
312 Commerce Park Drive
5
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH SECURITIES AND EXCHANGE COMMISSION
ASTERISKS DENOTE SUCH OMISSION
Cranberry Township, Pennsylvania 16066
Attention: General Counsel
Fax: (724) 778-6101
To: PAR
PAR Pharmaceutical Inc.
One Ram Ridge Road
Spring Valley, New York 10977
Attention: President and CEO
Fax: (845) 573-5612
14) PRODUCT LIABILITY INSURANCE. Three Rivers and PAR agree that they shall
each obtain and maintain during the Term of this Agreement appropriate
product liability insurance having an aggregate policy limit of not less
than ten million dollars (US $10,000.00).
15) DEVELOPMENT COMMITTEE: Each party shall have equal representation in the
review and oversight of the development program for the Finished Product.
The parties shall keep each other informed of the respective development
programs. The committee shall establish an approximate timeline for
commercial launch highlighted by milestones.
16) RELATIONSHIP OF THREE RIVERS AND PAR The relationship between Three Rivers
and PAR that is created by this Agreement shall be that of vendor and
purchaser, and not that of a partnership, principal and agent, or joint or
co-venturers. In the performance of this Agreement, PAR shall have no
authority to assume or create any obligation or responsibility, either
expressed or implied, on behalf of or in the name of Three Rivers, or to
bind Three Rivers or its Affiliates in any manner whatsoever and Three
Rivers shall have no authority to assume or create any obligation or
responsibility, either express or implied, on behalf of or In the name of
PAR or to bind PAR or its Affiliates in any manner whatsoever. Each party
shall indemnify the other party for any claim asserted by any third party
that the acts of such party or any of its Affiliates created any
obligation or responsibility of the other party other than as expressly
set forth in this Section.
17) CONFIDENTIALITY: The existence of this Agreement and the terms hereof are
confidential, and shall not be disclosed to any third party who is not
bound by a written undertaking of confidentiality, except as otherwise
required by law.
18) GOVERNING LAW: This Agreement and any disputes arising hereunder or
relating hereto shall be governed by and construed under the laws of the
State of New York without giving effect to conflict of laws provisions
thereof.
19) ASSIGNMENT. Other than an assignment by a party to any of its Affiliates,
neither this Agreement nor any rights arising under it shall be assigned
by one party without the prior written consent of the other, and then only
upon approval of the other party and acceptance of the written
documentation of the assignment, which approval and acceptance shall not
be unreasonably withheld or delayed. In the event of an assignment by
either party to its Affiliate as permitted hereunder, the assigning party
shall not be released from its obligations hereunder and shall guarantee
the full performance by such Affiliate of such obligations. This Agreement
shall inure to the benefit of, and shall be binding upon, each of the
parties hereto and their respective successors and permitted assigns.
20) MODIFICATION: This Agreement replaces and supercedes any and all prior
agreements between the parties, whether oral or written, with respect to
the subject matter addressed herein. This Agreement may not be modified or
amended except in a writing signed by all parties hereto.
21) FORCE MAJEURE:
-------------
a) If due performance of this Agreement by any party is affected in
whole or in any part by reason of any event, omission, accident or
other matter beyond the reasonable control of such party (including,
without limitation, fire, any kind of labor unrest, lack of raw
materials or energy), the affected party shall give prompt notice
thereof to the other party and shall be under no liability for any
loss, damage, injury or expense suffered by the other party as the
result of such force majeure.
b) The party claiming force majeure shall, if requested by the other
party, promptly present reasonable and reliable evidence in support
of the force majeure claimed, together with an estimate of the
duration of such force majeure.
6
CONFIDENTIAL INFORMATION OMITTED AND FILED SEPARATELY
WITH SECURITIES AND EXCHANGE COMMISSION
ASTERISKS DENOTE SUCH OMISSION
c) The parties shall use all reasonable efforts to avoid or overcome
the causes affecting performance, and the party whose performance is
affected by such force majeure shall fulfill all outstanding
obligations as soon as practicable.
d) Should the force majeure continue for more than six (6) months the
party not claiming inability to perform by reason of such force
majeure shall be entitled to terminate this Agreement upon written
notice to the other as provided in Section 12, above.
ACCEPTED AND AGREED:
PAR PHARMACEUTICAL, INC.
By: /s/ Scott Tarriff
---------------------------
Name: Scott Tarriff
Title: President and CEO
THREE RIVERS PHARMACEUTICALS, LLC
By: /s/ Donald J. Kerrish
---------------------------
Name: Donald J. Kerrish
Title: President
7
EXHIBIT 10.42
FIRST AMENDMENT TO
THE LICENSE AND DISTRIBUTION AGREEMENT
BETWEEN
THREE RIVERS PHARMACEUTICALS, LLC
AND PAR PHARMACEUTICAL, INC.
This First Amendment to the License and Distribution Agreement (the
"Amendment"), dated as of October 18, 2002, is between Three Rivers
Pharmaceuticals, LLC, a Pennsylvania Corporation, having offices at Cranberry
Commerce Center, 312 Commerce Park Drive, Cranberry Township, PA 16066 and Par
Pharmaceutical, Inc, a New Jersey Corporation, having offices at One Ram Ridge
Road, Spring Valley, NY 10977.
WHEREAS, Three Rivers and Par have previously entered into that certain License
and Distribution Agreement dated as of July 3, 2002 (the License and Supply
Agreement); and,
WHEREAS, Three Rivers and Par wish to amend the License and Supply Agreement by
entering into this amendment on the terms and conditions and for the purposes
set forth herein.
NOW, THEREFORE, in consideration of the mutual convenants and promises set forth
herein, the receipt and sufficiency of which is hereby acknowledged, Three
Rivers and Par agree as follows:
I. AMENDMENTS.
A. SECTION 3B I, II, III; of the License and Supply Agreement shall be
deleted in its entirety and replaced with the new section 3b i and ii:
3b. In consideration of its appointment, Par shall make the following
payment to Three Rivers to offset ongoing and future legal expenses:
i.) $1,000,000 prior to December 1, 2002.
ii.) $500,000 at such time as Par commercially launches the Product.
B. ENTIRE AGREEMENT AMENDMENT. This Amendment together with the License and
Supply Agreement (as amended by this Amendment) constitute the complete
and entire understanding between the Parties with respect to the
activities anticipated hereunder and thereunder, superseding and replacing
all prior oral and written agreements, communications, representations,
proposals, or negotiations specifically relating to the activities
hereunder and thereunder and the subject matter hereof and thereof. No
change or addition to or variation nor amendment of the Amendment, nor any
cancellation or waiver of any of the terms or provisions hereof, nor any
alteration or modification of any of the terms and conditions hereof,
shall be effective or valid and binding on either Party unless in writing
and signed by a duly authorized representative of each Party. All terms of
the Agreement not specifically addressed or set forth in this Amendment
shall continue to apply in full force and effect and shall apply equally
to this Amendment itself (e.g. confidentiality, notice, etc.). To the
extent that there is any inconsistency between the terms of the License
and Supply Agreement and this Amendment, the terms of this amendment shall
govern.
C. COUNTERPARTS. This Amendment may be executed in counterparts, each of
which shall be deemed an original and all of which taken together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first set forth above.
THREE RIVERS PHARMACEUTICALS, LLC PAR PHARMACEUTICAL, INC.
By: /s/ Paul Fagan By: /s/ Scott Tarriff
---------------------- -----------------------
Name: Paul Fagan Name: /s/ Scott Tarriff
---------------------- -----------------------
Title: Vice President - General Counsel Title: President and Ceo
----------------------------------- -----------------------
8
EX-99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pharmaceutical Resources, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Kenneth I. Sawyer, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
/s/ Kenneth I. Sawyer
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Kenneth I. Sawyer
Chief Executive Officer
November 14, 2002
9
EX-99.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pharmaceutical Resources, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Dennis J. O'Connor, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the
Company.
/s/ Dennis J. O'Connor
- -------------------------
Dennis J. O'Connor
Chief Financial Officer
November 14, 2002
10