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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 March 30, 2003
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 No.)
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes X No
----------- -----------
Number of shares of Common Stock outstanding as of May 9, 2003:
33,286,896
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
MARCH 30, DECEMBER 31,
ASSETS 2003 2002
------ ---- ----
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 85,487 $65,121
Accounts receivable, net of allowances of
$40,019 and $36,257 72,177 55,018
Inventories, net 51,397 51,591
Prepaid expenses and other current assets 4,307 6,381
Deferred income tax assets 26,973 32,873
------ ------
Total current assets 240,341 210,984
Property, plant and equipment, at cost less
accumulated depreciation and amortization 30,401 27,055
Unexpended industrial revenue bond proceeds 2,000 2,000
Intangible assets, net 34,387 35,692
Goodwill 24,662 24,662
Other assets 1,054 1,064
----- -----
Total assets $332,845 $301,457
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $544 $596
Accounts payable 15,553 14,637
Payables due to distribution agreement partners 18,386 18,163
Accrued salaries and employee benefits 4,142 5,175
Accrued expenses and other current liabilities 11,554 10,034
Income taxes payable 32,526 26,074
------ ------
Total current liabilities 82,705 74,679
------ ------
Long-term debt, less current portion 1,534 2,426
----- -----
Deferred income tax liabilities, net 3,139 3,562
----- -----
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01 per share; authorized:
90,000,000 shares; issued and outstanding:
32,942,109 and 32,804,480 shares 329 328
Additional paid-in capital 120,758 118,515
Retained earnings 124,380 101,947
------- -------
Total shareholders' equity 245,467 220,790
------- -------
Total liabilities and shareholders' equity $ 332,845 $301,457
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
(In Thousands, Except Per Share Amounts)
(Unaudited)
THREE MONTHS ENDED
------------------
MARCH 30, MARCH 31,
2003 2002
---- ----
Revenues:
Net product sales $100,684 $80,508
Other revenues 5,728 -
----- --------
Total revenues 106,412 80,508
Cost of goods sold 51,109 41,233
------ ------
Gross margin 55,303 39,275
------ ------
Operating expenses (income):
Research and development 6,469 2,874
Selling, general and administrative 11,890 7,516
Settlements - (9,051)
Acquisition termination charges - 4,268
-------- -----
Total operating expenses 18,359 5,607
------ -----
Operating income 36,944 33,668
Other (expense) income (34) 111
Interest income, net 169 254
--- ---
Income before provision for income taxes 37,079 34,033
Provision for income taxes 14,646 13,273
------ ------
Net income 22,433 20,760
Retained earnings, beginning of period 101,947 22,493
------- ------
Retained earnings, end of period $124,380 $43,253
======= ======
Net income per share of common stock:
Basic $.68 $.65
=== ===
Diluted $.67 $.63
=== ===
Weighted average number of
common shares outstanding:
Basic 32,886 32,048
====== ======
Diluted 33,634 32,868
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
3
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
------------------
MARCH 30, MARCH 31,
2003 2002
---- ----
Cash flows from operating activities:
Net income $22,433 $20,760
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income taxes 5,477 (145 )
Depreciation and amortization 1,750 930
Inventory reserves (881) 1,698
Allowances against accounts receivable 3,762 (16,561)
Settlements - (9,051 )
Tax benefit from exercise of stock options 1,092 170
Other - 5
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (20,921) 36,736
Decrease (increase) in inventories 1,075 (14,544)
Decrease (increase) in prepaid expenses and
other assets 2,379 (6,496)
Increase in accounts payable 916 4,853
Increase (decrease) in payables due to distribution
agreement partners 223 (10,363)
Increase in accrued expenses and other liabilities 487 1,741
Increase in income taxes payable 6,452 2,010
----- -----
Net cash provided by operating activities 24,244 11,743
------ ------
Cash flows from investing activities:
Capital expenditures (4,086) (2,055)
----- -----
Net cash used in investing activities (4,086) (2,055)
----- -----
Cash flows from financing activities:
Proceeds from issuances of Common Stock 1,152 175
Principal payments under long-term debt and
other borrowings (944) (59)
--- --
Net cash provided by financing activities 208 116
--- ---
Net increase in cash and cash equivalents 20,366 9,804
Cash and cash equivalents at beginning of period 65,121 67,742
------ ------
Cash and cash equivalents at end of period $85,487 $77,546
====== ======
Supplement disclosure of cash flow information
Cash paid during the year for: Taxes $ 1,625 $11,238
------- =======
Interest 33 42
======= -------
The accompanying notes are an integral part of these consolidated financial
statements.
4
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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. In addition, the Company develops and manufactures, in small
quantities, complex synthetic active pharmaceutical ingredients through its
wholly-owned subsidiary, FineTech Ltd. ("FineTech"), based in Haifa, Israel, and
sells a limited number of mature brand name drugs through an agreement with
Bristol Myers Squibb ("BMS"). 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.
NOTE 1 - BASIS OF PREPARATION:
The accompanying consolidated financial statements at March 30, 2003 and
for the three-month periods ended March 30, 2003 and March 31, 2002 are
unaudited; however, in the opinion of the Company's management, such statements
include all adjustments (consisting of normal recurring accruals) necessary to
present a fair statement of the information presented therein. The consolidated
balance sheet at December 31, 2002 was derived from the Company's audited
consolidated financial statements at such date.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
financial statements and these notes do not include all disclosures required by
accounting principles generally accepted in the United States for audited
financial statements. Accordingly, these statements should be read in
conjunction with the Company's most recent annual financial statements.
Results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years. Certain items on the consolidated
financial statements for the prior year have been reclassified to conform to the
current year's financial statement presentation.
NOTE 2 - STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB Opinion 25") and complies
with the disclosure provisions SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under APB Opinion 25, compensation expense is based
on the difference, if any, on the date of grant, between the fair value of the
Company's common stock and the exercise price.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123" ("SFAS 148") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
standard amends the disclosure requirements of SFAS 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.
The following table illustrates the effect on net income and net income per
share of common stock if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation:
THREE MONTHS ENDED
------------------
MARCH 30, MARCH 31,
2003 2002
---- ----
NET INCOME AS REPORTED $22,433 $20,760
Total stock-based employee compensation expense
based method for all awards, net of related tax
effects (2,638) (1,597)
----- -----
PRO FORMA NET INCOME $19,795 $19,163
NET INCOME PER SHARE OF COMMON STOCK:
AS REPORTED -BASIC $.68 $.65
AS REPORTED -DILUTED $.67 $.63
PRO FORMA -BASIC $.60 $.60
PRO FORMA - DILUTED $.59 $.58
As permitted under SFAS 123, the Company elected to follow APB Opinion 25
and related interpretations in accounting for stock-based awards to its
employees. Pro-forma information regarding net income is required by SFAS 123,
as amended by SFAS 148. This required information is to be determined as if the
Company had accounted for its stock-based awards to employees under the fair
value method of that standard. The fair value of options granted during the
three-month periods ended March 30, 2003 and March 31, 2002, has been estimated
at the date of grant using the Black-Scholes stock option pricing model, based
on the following weighted average assumptions:
THREE MONTHS ENDED
------------------
MARCH 30, MARCH 31,
2003 2002
---- ----
Risk free interest rate 4.3% 4.3%
Expected term 4.9 years 3.0 years
Expected volatility 63.7% 67.7%
It is assumed that no dividends will be paid for the entire term of the
options. The weighted average fair values of options granted in the first
quarter of fiscal years 2003 and 2002 were $17.88 and $14.28, respectively.
NOTE 3 - ACCOUNTS RECEIVABLE:
MARCH 30, DECEMBER 31,
2003 2002
---- ----
Gross accounts receivable $112,196 $91,275
------- ------
Allowances:
Doubtful accounts 1,306 1,156
Returns and allowances 17,940 18,868
Price adjustments 20,773 16,233
------ ------
40,019 36,257
Accounts receivable,
net of allowances $72,177 $55,018
====== ======
The gross accounts receivable amounts above at March 30, 2003 and December
31, 2002 are net of provisions for customer rebates of $18,478 and $13,610, and
chargebacks of $57,866 and $63,141, respectively. Customer rebates are price
reductions generally given to customers as an incentive to increase sales
volume. Rebates are generally based on a customer's volume of purchases made
during an applicable monthly, quarterly or annual period. Chargebacks are price
adjustments given to a wholesale customer for product it resells to specific
healthcare providers on the basis of prices negotiated between the Company and
the provider.
The accounts receivable allowances include provisions for doubtful
accounts, returns and price adjustments. Price adjustments include cash
discounts, sales promotions and shelf-stock adjustments. Cash or terms discounts
are given to customers that timely pay within a specified period of time. Sales
or trade show promotions may be run by the Company where additional discounts
may be given on a new product or certain existing products as an added incentive
for the customer to purchase the Company's products. Shelf-stock adjustments are
typically given to a customer when the Company lowers its invoice pricing and
provides a credit for the difference between the old invoice price and the new
invoice price for the inventory the customer has on hand at the time of the
5
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
price reduction. With respect to sales of new generic drugs for which it has a
market exclusivity period, the Company will generally offer price protection and
issue shelf-stock adjustments. Price protection accounts for the fact that the
prices of such drugs typically will decline, sometimes substantially, when
additional generic manufacturers introduce and market a comparable generic
product following the expiration of an exclusivity period. Such price protection
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
expiration 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 megestrol acetate oral suspension, the
generic version of BMS's Megace(R) Oral Suspension, expired in mid-January 2002.
One generic competitor was granted United States 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, but has not captured significant market share. In
addition, a second potential generic competitor was granted FDA approval for
megestrol acetate oral suspension in May 2003 and has announced it expects to
launch the product early in the third quarter of 2003. At this time, the Company
cannot predict the effect of another generic competitor in the market. According
to its accounting policies, the Company did not record a price protection
reserve for such product as of March 30, 2003. The Company will continue to
evaluate the effects of the potential competition and will record a price
protection reserve when and if it deems necessary.
The Company recorded other revenues of $5,728 and a corresponding
receivable in the first quarter 2003 related to its share of Genpharm, Inc.'s
("Genpharm"), a Canadian subsidiary of Merck KGaA, omeprazole profits. In
January 1999, the Company and Genpharm, entered into a profit sharing agreement
(the "Genpharm Profit Sharing Agreement") pursuant to which the Company receives
a portion of the profits, as defined in the Agreement, generated from the sale
of omeprazole, the generic version of Astra Zeneca's ("Astra") Prilosec(R). In
November 2001, the FDA granted Genpharm 180-day marketing co-exclusivity for 10
mg and 20 mg doses of omeprazole. The exclusivity would have allowed only
Genpharm and/or Andrx Corporation ("Andrx"), a pharmaceutical company located in
Fort Lauderdale, Florida, to enter the market during the exclusivity period.
Under the Genpharm Profit Sharing Agreement, the Company was entitled to receive
at least 30% of profits generated by Genpharm based on the sale of omeprazole.
In November 2002, Genpharm and Andrx, in conjunction with KUDCo, a subsidiary of
Schwarz Pharma AG of Germany, relinquished exclusivity rights for 10 mg and 20
mg doses of omeprazole, thereby allowing KUDCo to enter the market with a
generic version of Prilosec(R). As a result, KUDCo received final ANDA approval
from the FDA for its generic version of Prilosec(R). Under the terms of an
agreement with KUDCo, Genpharm is receiving an initial 15% share of KUDCo's
profits, as defined in
6
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
their agreement, with a subsequent reduction over time based on a number of
factors. The Company reduced its share of Genpharm's profit derived from
omeprazole pursuant to the Genpharm Profit Sharing Agreement from 30% to 25%. In
December 2002, KUDCo launched omeprazole following a successful district court
decision, but before any decision was reached on appeal. Astra has appealed the
district court's patent infringement decision. The full impact of KUDCo's
omeprazole launch on the Company's revenues is presently unclear since, among
other things, Astra has introduced a new drug, Nexium(R), in an apparent 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.
NOTE 4 -INVENTORIES, NET:
MARCH 30, DECEMBER 31,
2003 2002
---- ----
Raw materials and supplies, net $18,819 $17,400
Work in process and finished goods, net 32,578 34,191
------ ------
$51,397 $51,591
======= =======
Included in selling, general and administrative expenses are shipping
costs of $607 and $592, respectively, for the three-month periods ended March
30, 2003 and March 31, 2002
..
NOTE 5 - INTANGIBLE ASSETS, NET:
MARCH 30, DECEMBER 31,
2003 2002
---- ----
BMS Asset Purchase Agreement, net of
accumulated amortization of $1,811 and
$1,393 $9,889 $10,307
Product License fees 8,903 9,199
Genpharm Distribution Agreement, net of
accumulated amortization of $3,431 and $3,250 7,402 7,583
Intellectual property, net of accumulated
amortization of $661 and $451 5,919 6,129
Genpharm Profit Sharing Agreement, net of
accumulated amortization of $226 and $26 2,274 2,474
----- -----
$34,387 $35,692
======= =======
The Company recorded amortization expense related to intangible assets of
$1,009 and $320, respectively, for the three-month periods ended March 30, 2003
and March 31, 2002. Annual amortization expense in each of the next five years
related to these intangible assets currently being amortized, is expected to be
approximately $4,174 in 2003, $4,530 in 2004, $3,115 in 2005, $3,115 in 2006,
$3,115 in 2007 and $8,444 thereafter.
Pursuant to the Genpharm Profit Sharing Agreement, the Company paid a
non-refundable fee of $2,500, which is included in intangible assets, net of
accumulated amortization, on the consolidated balance sheets. The Company is
amortizing the fee over the cash flows generated by omeprazole over its
estimated useful life. Amortization of $200 for the first quarter 2003 was
charged to cost of goods sold.
NOTE 6 - 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 in December 2002, provides Par with a revolving line of
credit expiring in 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. 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 March 30, 2003, the borrowing base was
approximately $27,000. The interest rate charged on any borrowings under 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 the Company, other than
its real property, and is guaranteed by the Company. In connection with such
facility, the Company 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 contains covenants based on various financial
benchmarks. To date, no debt is outstanding under the Loan Agreement.
NOTE 7 - INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which requires the Company to recognize deferred tax assets and
7
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 March 30, 2003 and December 31, 2002, the Company
had current deferred income tax assets of $26,973 and $32,873, respectively,
consisting of temporary differences, primarily related to accounts receivable
reserves, and net deferred income tax liabilities of $3,139 and $3,562,
respectively, primarily related to a distribution agreement with Genpharm.
NOTE 8 - CHANGES IN SHAREHOLDERS' EQUITY:
Changes in the Company's Common Stock and Additional Paid-in Capital
accounts during the three-month period ended March 30, 2003 were as follows:
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL
------ ------ -------
Balance, December 31, 2002 32,804 $328 $118,515
Exercise of stock options 136 1 635
Compensatory arrangements 2 - 1,608
- - -----
Balance, March 30, 2003 32,942 $329 $120,758
====== === =======
Compensatory arrangements include the tax treatment related to the exercise
of stock options.
NOTE 9 - EARNINGS PER SHARE:
Outstanding options of 4,410 and 1,701 as of March 30, 2003 and March 31,
2002, respectively, were included in the computation of diluted earnings per
share because the exercise prices were lower than the average market price of
the Common Stock in the respective periods. Outstanding options and warrants of
9 and 2,034 as of March 30, 2003 and March 31, 2002, respectively, were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the Common Stock in the
respective periods. The following is a reconciliation of the amounts used to
calculate basic and diluted earnings per share:
THREE MONTHS ENDED
------------------
MARCH 30, MARCH 31,
2003 2002
---- ----
NET INCOME $22,433 $20,760
BASIC:
Weighted average number of common
shares outstanding 32,886 32,048
NET INCOME PER SHARE OF COMMON STOCK $.68 $.65
=== ===
ASSUMING DILUTION:
Weighted average number of common
shares outstanding 32,886 32,048
Effect of dilutive options 748 820
--- ---
Weighted average number of common
shares outstanding 33,634 32,868
NET INCOME PER SHARE OF COMMON STOCK $.67 $.63
=== ===
8
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS:
In April, 2003 the FASB issued SFAS No. 149, "Amendment of Statements 133
of Derivative Instruments and Hedging Activities." This Statement amends
Statement 133 for decisions made (1) as part of the Derivatives Implementation
Group process that effectively required amendments to Statement 133, (2) In
connection with other Board projects dealing with financial instruments, and (3)
in connection with implementation issues raised in relation to the application
of the definition of a derivative, in particular, the meaning of an initial net
investment that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors,
the meaning of underlying and characteristics of a derivative that contains
financial components. This Statement is effective for contracts into or modified
after June 30, 2003, except as stated below and for hedging relationships
designated after June 30, 2003. In addition, except as stated below, all
provisions of this Statement should be applied perspectively. The provisions of
this Statement that relate to Statement 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should continue
to be applied in accordance with their respective effective dates. In addition,
certain provisions, which relates to forward purchases or sales of when-issued
securities or other securities that do not yet exist, should be applied to both
existing contracts and new contracts entered into after June 30, 2003. The
adoption of this standard is not expected to have a material impact on the
Company's financial position or results of operations.
NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
LEGAL PROCEEDINGS:
Breath Ltd. filed an Abbreviated New Drug Application ("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
9
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
agreement with the Company, seeking approval to engage in the commercial
manufacture, sale and use of one latanoprost drug product in the United States.
Par subsequently acquired ownership of the ANDA, which includes a Paragraph IV
certification that the patents in connection with Xalatan(R) that are identified
in "Approved Drug Products with Therapeutic Equivalence Evaluations" (the
"Orange Book") are invalid, unenforceable or will not be infringed by Par's
generic product. Par believes 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 Par 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 is also seeking 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 expert discovery. Par intends
to vigorously defend the lawsuit and pursue its counterclaim. At this time, it
is not possible for the Company to predict the outcome of the plaintiffs' claim
for injunctive relief, its counterclaim or their claims for attorneys' fees.
Par, among others, was 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)). In
March 2003, Par settled its lawsuits with aaiPharma Inc. The settlement did not
have a material adverse effect on the Company's financial position or results of
operation.
The Company is involved in certain other litigation matters, including
product liability and patent actions, 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 all of these actions.
OTHER MATTERS:
In December 2001, the Company made the first payment of a potential equity
investment of up to $2,438 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. Pursuant to an
agreement between the Company and HighRapids, effective December 1, 2001, the
Company, subject to its ongoing evaluation of HighRapids' operations, has agreed
to purchase units, consisting of secured debt, evidenced by 7% secured
promissory notes, up to an aggregate principal amount of $2,425 and up to an
aggregate of 1,330 shares of the common stock of HighRapids. HighRapids is the
surviving corporation of a merger with Authorgenics, Inc., a Florida
corporation. HighRapids is to utilize the Company's cash infusion for working
capital and operating expenses. Through March 30, 2003, the Company had invested
$888 of its potential investment. Due to HighRapids current operating losses and
the Company's evaluation of its short-term prospects for profitability, the
investment is expensed as incurred and included in other expense on the
consolidated statements of operations. As of March 30, 2003, the Company held
approximately 33% of the outstanding common stock of HighRapids and has the
exclusive right to market to the pharmaceutical industry certain regulatory
compliance and laboratory software currently in development. HighRapids has
provided and is currently providing certain software services to the Company.
PRX's Chief Executive Officer is the President, Chief Executive Officer and a
director of HighRapids, for which he receives no compensation. Another director
of the Company owns shares of HighRapids' common stock (less than 1%) that he
acquired prior to the commitment of the Company discussed above.
The Company and Three Rivers Pharmaceuticals, LLC ("Three Rivers") have a
license and distribution agreement under which the Company expects to market and
distribute ribavirin 200 mg capsules, the generic version of Schering-Plough's
("Schering's") Rebetol(R), which is indicated for the treatment of chronic
hepatitis, following approval by the FDA. In February 2003, Three Rivers reached
a settlement with Schering in the patent litigation case involving Rebetol(R)
10
brand ribavirin. Under the terms of the settlement, Schering has provided a
non-exclusive license to Three Rivers for all its U.S. patents relating to this
product. In return for this license, Three Rivers has agreed to pay Schering a
reasonable royalty based upon net sales of Three Rivers' and Par's generic
ribavirin product. The parties were in litigation in the U.S. District Court for
the Western District of Pennsylvania. The agreement is subject to the Court's
dismissal of the relevant lawsuits.
Three Rivers is also currently in litigation with Ribapharm, Inc. regarding
certain patents that Ribapharm asserts relate to ribavirin. A trial date in that
litigation is scheduled for June 2003. Three Rivers does not have tentative
approval from the FDA at this time.
NOTE 12 - SUBSEQUENT EVENTS:
On April 18, 2003, GlaxoSmithKline ("GSK") and PRX, through its subsidiary
Par, announced that Pentech Pharmaceuticals, Inc. ("Pentech") and GSK reached a
settlement in their patent litigation over Pentech's proposed generic capsule
version of GSK's anti-depressant Paxil(R) (paroxetine hydrochloride). Pentech
granted Par rights under Pentech's ANDA for paroxetine hydrochloride capsules.
The settlement allows Par to distribute in Puerto Rico substitutable generic
paroxetine hydrochloride immediate release tablets supplied and licensed from
GSK for a royalty to be paid to GSK. The Company began distributing the product
in Puerto Rico in May 2003. Par will be entitled to distribute the same product
in the U.S. market once another generic version fully substitutable for Paxil(R)
becomes available there.
In the settlement, Pentech and Par acknowledge that the GSK patent covering
the hemihydrate form of paroxetine hydrochloride is valid and enforceable and
would be infringed by Pentech's proposed capsule product, for which Pentech has
applied for FDA approval. The same GSK patent was found valid and enforceable in
a separate patent infringement case in the U.S. District Court for the Northern
District of Illinois (Chicago) against Apotex Inc. ("Apotex"). Apotex was found
not to infringe, and GSK is appealing that ruling. The litigation and the
settlement do not involve Paxil CR(TM).
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CERTAIN STATEMENTS IN THIS DOCUMENT 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, TRENDS
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
DOCUMENT INCLUDE (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 LITIGATIONS, INCLUDING PATENT AND INFRINGEMENT
CLAIMS, (VIII) UNANTICIPATED COSTS IN ABSORBING ACQUISITIONS, (IX) OBTAINING OR
LOSING 180-DAY MARKETING EXCLUSIVITY ON PRODUCTS AND (X) GENERAL INDUSTRY AND
ECONOMIC CONDITIONS. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT
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.
THE FINANCIAL DATA CONTAINED IN THIS SECTION IS IN THOUSANDS.
RESULTS OF OPERATIONS
GENERAL
The Company's net income of $22,433 for the three-month period ended March
30, 2003 increased $1,673 from $20,760 for the three-month period ended March
31, 2002. Total revenues of $106,412 in the first quarter 2003 increased 32%,
from $80,508 in the first quarter 2002, primarily due to additional net sales of
new products introduced in 2002 and other revenues from a profit sharing
agreement with Genpharm related to omeprazole (Prilosec(R)). The revenue growth
continued to produce higher gross margins, which increased to $55,303, or 52% of
net sales, in the most recent quarter, from $39,275, or 49% of net sales, in the
corresponding quarter of 2002. The improved results were achieved while the
Company continued to invest in research and development. First quarter 2003
spending on research and development of $6,469 increased 125%, from $2,874 for
the corresponding quarter of 2002. First quarter 2003 selling, general and
administrative costs of $11,890 increased $4,374 from the corresponding quarter
of the prior year, primarily due to legal fees associated with potential new
product launches, and higher costs related to insurance, information system
improvements, marketing programs, distribution and personnel. Prior year results
included income from settlements of $9,051 related to the Company's termination
of its litigation with BMS and acquisition termination charges of $4,268 in
connection with its termination of negotiations with International Specialty
Products ("ISP") related to the Company's purchase of the combined ISP FineTech
fine chemical business based in Haifa, Israel and Columbus, Ohio.
In addition to its own product development program, the Company has several
strategic alliances through which it co-develops and distributes products. As a
result of its internal program and these strategic alliances, the Company's
pipeline of potential products includes 28 ANDAs (seven of which have been
tentatively approved), pending with, and awaiting approval from, the FDA. The
Company pays a percentage of the gross profits on sales of products covered by
its distribution agreements to its strategic partners. Generally, products that
the Company develops internally, and without having to split gross profits with
any strategic partners, contribute higher gross margins than products covered
under distribution agreements.
In July 2001 and August 2001, the FDA granted approvals for three ANDA
submissions, one each by Par, Dr. Reddy's Laboratories Ltd. ("Reddy") and
Alphapharm Pty Ltd., an Australian subsidiary of Merck KGaA, 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
12
Company to 180-day 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 a distribution agreement with Reddy and
fluoxetine 10 mg and 20 mg tablets covered under a distribution agreement with
Genpharm. Generic competitors of the Company received 180-day marketing
exclusivity for the generic version of fluoxetine 10 mg and 20 mg capsules,
which the Company began selling in the first quarter of 2002 following the
expiration of such other parties' exclusivity period. As the Company expected,
additional generic competitors, with products comparable to all three strengths
of its fluoxetine products, began entering the market in the first quarter of
2002, eroding the pricing that 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, the
Company still maintains a significant share of the market for this product;
however, a second generic competitor received FDA approval for megestrol acetate
oral suspension in May 2003. The Company expects the second competitor to enter
the market early in the third quarter 2003. Although megestrol oral suspension
and fluoxetine 40 mg capsules are expected to 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 somewhat reduced its
reliance on each of these key products.
Critical to the continued growth of the Company is the introduction of new
manufactured and distributed products at selling prices that generate
significant gross margins. 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.
Sales and gross margins of the Company's products are principally dependent
upon (i) pricing and product deletions by competitors, (ii) the introduction of
other generic drug manufacturers' products in direct competition with the
Company's significant products, (iii) the 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) the continuation of existing distribution agreements, (v) the introduction
of new distributed products, (vi) the consolidation among distribution outlets
through mergers, acquisitions and the formation of buying groups, (vii) the
willingness of generic drug customers, including wholesale and retail customers,
to switch among generic pharmaceutical manufacturers, (viii) the approval of
ANDAs and introduction of new manufactured products, (ix) the granting of
potential marketing exclusivity periods, (x) market penetration for the existing
product line and (xi) the level of customer service.
REVENUES
Revenues in the first quarter 2003 of $106,412 increased $25,904, or 32%,
from first quarter 2002 revenues of $80,508. The revenue increase was primarily
due to higher net sales of new products introduced in 2002, particularly
tizanidine (Zanaflex(R)) and nizatidine (Axid(R)), which are sold under
distribution agreements with Reddy and Genpharm, respectively, and the addition
of five older brand products, which are sold pursuant to an agreement with BMS.
In addition, the Company recognized other revenues of $5,728 in the first
quarter 2003 from a profit sharing agreement with Genpharm related to
omeprazole. Net sales in the first quarter 2003 of fluoxetine, particularly the
10 mg and 20 mg tablets, decreased $4,790, while megestrol acetate oral
suspension net sales increased $1,125 compared to the first quarter of the prior
year. Net sales of distributed products, which consist of products manufactured
under contract and licensed products, were approximately 54% and 56%,
respectively, of the Company's net sales in the first quarter of fiscal years
2003 and 2002. The Company is substantially dependent upon distributed products
for its overall sales, and, as the Company continues to introduce new products
under its distribution agreements, it is expected that this dependence will
continue. Any inability by suppliers to meet expected demand could adversely
affect future sales.
Pursuant to the Genpharm Profit Sharing Agreement, the Company receives a
portion of the profits, as defined in the Agreement, generated from KUDCo's sale
of omeprazole. In December 2002, KUDCo launched omeprazole following a
successful district court decision, but before any decision was reached on
appeal. Astra has appealed the district court's patent infringement decision.
13
The full impact of KUDCo's omeprazole launch on the Company's revenues is
presently unclear since, among other things, Astra has introduced a new drug,
Nexium(R), in an apparent 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. In
December 2002, the Company began recognizing revenues related to its share of
Genpharm profits, which were significantly reduced as Genpharm recovered
out-of-pocket development and legal expenses incurred during the product
development and litigation process. The development and legal expenses were
substantially recovered by Genpharm in 2002. The Company anticipates recording
revenues of up to $20,000 in fiscal year 2003 from its share of the profits on
omeprazole.
The Company's exclusivity period for fluoxetine expired in late-January
2002. As a result of generic competition beginning in the first quarter of 2002,
the sales price for fluoxetine has substantially declined from the price that
the Company charged during the exclusivity period. Accordingly, the Company's
sales and gross margins generated by fluoxetine following the expiration of the
exclusivity period have been, and will continue to be, adversely affected.
The Company's exclusivity period for megestrol acetate oral suspension
expired 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 was granted FDA
approval for megestrol acetate oral suspension in May 2003 and has announced it
expects to launch the product early in the third quarter of 2003. At this time,
the Company cannot predict the effect of another generic competitor in the
market. Megestrol acetate oral suspension is still anticipated by the Company to
be a significant profit contributor for fiscal year 2003, despite the potential
of competition. In accordance with its accounting policies, the Company did not
record a price protection reserve for megestrol acetate oral suspension as of
March 30, 2003. The Company will continue to evaluate the effect of potential
competition and will record a price protection reserve when, if and as it deems
necessary.
GROSS MARGIN
The Company's gross margin of $55,303 (52% of net sales) in the first
quarter 2003 increased $16,028 from $39,275 (49% of net sales) for the first
quarter 2002. The gross margin improvement was achieved primarily as a result of
revenues from omeprazole received pursuant to the Genpharm Profit Sharing
Agreement and additional contributions from sales of higher margin new products
as described above.
In the three-month period ended March 30, 2003, lower margin contributions
from fluoxetine 10 mg and 20 mg, which are subject to profit sharing agreements
with Genpharm, were substantially offset by a higher margin contribution from
fluoxetine 40 mg due to an increase in the Company's profit sharing percentage
under its agreement with Reddy. As discussed above, additional generic
manufacturers introduced and began marketing comparable fluoxetine products
following the expiration of the Company's exclusivity period in January 2002,
adversely affecting the Company's sales volumes, selling prices and gross
margins for the products, particularly the 10 mg and 20 mg strengths. The
Company's gross margin for megestrol acetate oral suspension could also decline
when additional manufacturers introduce and market comparable generic products.
Megestrol acetate oral suspension contributed approximately $16,780 in gross
margin for the first quarter 2003 compared to $16,088 in the corresponding
quarter of the prior year.
Inventory write-offs of $412 in the first quarter 2003 decreased from
$1,765 in the first quarter 2002. The higher write-offs in 2002 included 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,
were 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
The Company's investment of $6,469 in research and development increased
substantially for the quarter ended March 30, 2003 from $2,874 for the
corresponding quarter of 2002. The higher expenses were primarily attributable
to biostudies, including the Company's share of Genpharm's biostudy costs for
products covered under their distribution agreements. In addition, higher costs
were incurred for development work performed for the Company by unaffiliated
companies and development work done by FineTech and SVC Pharma, the Company's
joint venture partnership.
Total research and development costs for fiscal year 2003 are expected to
exceed the total for fiscal year 2002 by approximately 30% to 40%. The increase
14
is expected as a result of increased internal development activity and projects
with third parties, increased research and development venture activity and the
inclusion of FineTech activities for a full year.
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 ten additional products during
fiscal year 2003.
The Company and Genpharm entered into a distribution agreement (the
"Genpharm 11 Product Agreement"), dated April 2002, pursuant to which Genpharm
is developing products, submitting the corresponding ANDAs to the FDA and,
subsequently, has agreed to manufacture the potential products covered under the
Agreement. Par will serve as the 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 five ANDAs for potential products (two tentatively
approved) covered under the Genpharm 11 Product Agreement pending with, and
awaiting approval from, the FDA.
The Company and Genpharm also entered into a distribution agreement (the
"Genpharm Distribution Agreement"), dated March 1998. 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 six ANDAs for potential products (two tentatively approved)
that are covered by the Genpharm Distribution Agreement pending with, and
awaiting approval from, the FDA. The Company is currently marketing 19 products
under the Genpharm Distribution Agreement.
Genpharm and the Company share the costs of developing products covered
under an agreement (the "Genpharm Additional Product Agreement"), dated November
27, 2000. The Company is currently marketing two products under the Genpharm
Additional Product Agreement.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs of $11,890 (11% of net sales) for
the first quarter 2003 increased $4,374 from $7,516 (9% of net sales) in the
corresponding quarter of last year. The increase in 2003 was primarily
attributable to higher legal fees of $1,320, personnel costs of $945 and, to a
lesser extent, costs for information system improvements, product liability
insurance, marketing and distribution costs associated with new product
introductions and higher sales volumes. Distribution costs include those related
to shipping product to the Company's customers, primarily through the use of a
common carrier or an external distribution service. Shipping costs of $607 in
the first quarter 2003 were comparable to $592 in the corresponding quarter of
the prior year. The Company anticipates it will continue to incur a high level
of legal expenses related to the cost of litigation connected with potential new
product introductions (see "Notes to Consolidated Financial
Statements-Commitments, Contingencies and Other Matters-Legal Proceedings").
Although there can be no such assurance, selling, general and administrative
costs for the full year in 2003 are expected to increase by approximately 10% to
15% from fiscal year 2002.
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. To obtain the rights to the five products, the
Company agreed to terminate its outstanding litigation against BMS involving
megestrol acetate oral suspension and buspirone, and paid approximately $1,024
in March 2002 and $1,025 in April 2003. The Company determined, through an
independent third party appraisal, the fair value of the product rights received
to be $11,700, which exceeded the cash consideration of $2,049 and associated
costs of $600 by $9,051. The $9,051 value was assigned to the litigation
settlements and recorded as settlement income in the first quarter of 2002. The
fair value of the product rights received is being amortized on a straight-line
basis over seven years beginning in March 2002, with the net amount included in
intangible assets on the consolidated balance sheets.
ACQUISITION TERMINATION CHARGES
On March 15, 2002, the Company terminated its negotiations with ISP related
to the Company's purchase of the combined 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
15
circumstances that occurred following the announcement of the proposed
transaction. Pursuant to the termination of negotiations, the Company paid ISP a
$3,000 break-up fee in March 2002, which was subject to certain credits and
offsets, and incurred $1,268 in related acquisition costs, both of which were
included in acquisition termination charges on the consolidated statements of
operations in the first quarter 2002.
OTHER EXPENSE/INCOME
Other expense was $34 for the first quarter 2003 compared to other income
of $111 for the first quarter 2002. Other income in 2002 included a purchase
option pursuant to a lease agreement.
INTEREST INCOME
Net interest income of $169 and $254, respectively, for the first quarters
ended in 2003 and 2002 was primarily derived from money market and other
short-term investments.
INCOME TAXES
The Company recorded provisions for income taxes of $14,646 and $13,273,
respectively, for the three-month periods ended March 30, 2003 and March 31,
2002 based on the applicable federal and state tax rates for those periods. (see
"Notes to Consolidated Financial Statements-Income Taxes").
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's critical accounting policies are set forth in its Annual
Report on Form 10-K for the year ended December 31, 2002. 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, 2002.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $85,487 at March 30, 2003 increased $20,366
from $65,121 at December 31, 2002, primarily due to cash provided by operations
and, to a lesser extent, proceeds from the issuance of shares of Common Stock
from the exercise of stock options. In the first quarter 2003, the Company
invested $4,086 in capital improvements, primarily for the expansion of its
laboratories in Spring Valley, New York, administrative offices in Woodcliff
Lake, New Jersey and warehouse facilities in Montebello, New York. In addition,
the Company purchased new production machinery for its packaging lines and made
improvements in its information technology. The Company's cash balance is
primarily deposited with financial institutions in money market funds and
overnight investments. Working capital, which includes cash and cash
equivalents, increased $21,331 to $157,636 at March 30, 2003 from $136,305 at
December 31, 2002, primarily from increases in the Company's cash position and
accounts receivable. The working capital ratio of 2.91x at March 30, 2003 was
comparable to the 2.83x at December 31, 2002.
A summary of the Company's material contractual obligations and commercial
commitments as of March 30, 2003 were as follows:
AMOUNTS DUE IN FISCAL YEARS
---------------------------
TOTAL 2005 AND
OBLIGATION OBLIGATION 2003 2004 THEREAFTER
---------- ---------- ---- ---- ----------
Operating leases $21,054 $2,812 $2,927 $15,315
Industrial revenue bond 1,911 397 381 1,133
Other 167 147 20 -
--- --- -- --------
Total obligations $23,132 $3,356 $3,328 $16,448
====== ===== ===== ======
In addition to its internal research and development costs, 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 or has future commitments with several
non-affiliated companies for products in various stages of development. These
types of payments or commitments, certain of which are described below, are
either capitalized or expensed according to the Company's accounting policies.
16
The Company and Nortec Development Associates, Inc. (a Glatt company)
("Nortec"), have entered into a binding agreement in principle, dated March 3,
2003 (subject to final negotiation and execution of a definitive agreement), in
which the two companies will develop additional products that are not part of
the two previous agreements between the Company and Nortec. During the first two
years of the Company's arrangement with Nortec, Par will be obligated to make
aggregate initial research and development payments to Nortec in the amount of
$3,000, of which $500 has already been paid. On or before the second anniversary
of the agreement the Company will have the option to either (i) terminate the
arrangement with Nortec, in which case the initial research and development
payments will be credited against any development costs that the Company shall
owe Nortec at that time, or (ii) acquire all of the capital stock of Nortec over
the subsequent two years, including the first fifty percent (50%) of the capital
stock of Nortec over the third and fourth years of the arrangement for $4,000,
and the remaining capital stock of Nortec from its owners at the end of the
fourth year for an additional $11,000. Certain terms of the agreement are
expected to be finalized in the second quarter 2003.
In the second quarter of 2002, the Company made non-refundable payments
totaling $1,000 pursuant to its other agreements with Nortec, which were charged
to research and development expenses as incurred. Pursuant to the agreements,
the Company agreed to pay a total of $800 in various installments related to the
achievement of certain milestones in the development of two potential products
and $600 for each product on the day of the first commercial sale.
Pursuant to the Genpharm Profit Sharing Agreement, Genpharm has agreed to
pay the Company its share of profits related to KUDCo's sale of omeprazole 60
days after the month in which the product was sold. In December 2002, KUDCo
launched omeprazole following a successful district court decision, but before
any decision was reached on appeal. Astra has appealed the district court's
patent infringement decision. In first quarter 2003 and December 2002, the
Company recognized $5,728 and $755, respectively, of revenues related to its
share of Genpharm profits. The Company anticipates recording up to $20,000 in
revenue and receiving up to $17,000 in cash in fiscal year 2003 from its share
of the profits on omeprazole. To date, the Company received cash payments from
Genpharm of $4,083 pursuant to this Agreement.
In November 2002, the Company amended an agreement with Pentech (the
"Supply and Marketing Agreement"), dated November 2001, to market paroxetine
hydrochloride capsules. Pursuant to the Supply and Marketing Agreement, Par is
responsible for all legal expenses up to $2,000, which have been expensed as
incurred, to obtain final regulatory approval. Legal expenses in excess of
$2,000 are fully creditable against future profit payments. The Company has
agreed to reimburse Pentech for costs associated with the project up to $1,300
for fiscal year 2003, which are charged to research and development expenses as
they are incurred. In the first quarter 2003, Par incurred $257 in research and
development costs pursuant to the Supply and Marketing Agreement.
In July 2002, the Company and Three Rivers entered into a distribution
agreement (the "Three Rivers Distribution Agreement"), which was amended in
October 2002, 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 in November 2002, which was charged to research and development during
the period, and has agreed to pay Three Rivers $500 at such time as Par
commercially launches the product.
As of March 30, 2003 the Company had payables due to distribution agreement
partners of $18,386, 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 during the second quarter of 2003.
In December 2001, the Company made the first payment of a potential equity
investment of up to $2,438 to be made over a period of time in HighRapids.
Pursuant to an agreement between the Company and HighRapids, effective December
1, 2001, the Company, subject to its ongoing evaluation of HighRapids'
operations, has agreed to purchase units, consisting of secured debt, evidenced
by 7% secured promissory notes, up to an aggregate principal amount of $2,425
and up to an aggregate of 1,330 shares of the common stock of HighRapids.
HighRapids is to utilize the Company's cash infusion for working capital and
operating expenses. Through March 30, 2003, the Company had invested $888 of its
potential investment. Due to HighRapids' current operating losses and the
Company's evaluation of its short-term prospects for profitability, the
investments were expensed as incurred and included in other expense on the
consolidated statements of operations (see-"Notes to Consolidated Financial
Statements-Commitments, Contingencies and Other Matters-Other Matters").
17
In April 2001, Par entered into a licensing agreement with Elan Transdermal
Technologies, Inc. ("Elan") to market a generic clonidine transdermal patch
(Catapres TTS(R)). Under such agreement, Elan will be responsible for the
development and manufacture of the product, while Par will be responsible for
marketing, sales and distribution. Pursuant to the agreement, the Company paid
Elan $1,167 in fiscal year 2001 and $833 in 2002, which were charged to research
and development expenses in the respective periods. In addition, Par will pay
Elan $1,000 upon FDA approval of the product and a royalty on all sales of the
product.
The Company expects to continue to fund its operations, including research
and development activities, capital projects, 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. In addition, the Company
expects to fund the purchase and installation of certain capital equipment for
FineTech in Rhode Island from an industrial revenue bond issued for that purpose
(see "-Financing"). In fiscal year 2003, the Company expects its increased
capital spending to continue due to the expansion of its laboratories and
initiatives related to improvements to its information systems. Although there
can be no assurance, the Company anticipates it will continue to introduce new
products and attempt to increase sales of certain existing products, in an
effort to offset the loss of sales and gross margins from competition on any of
its significant products. The Company also seeks to reduce the overall impact of
its top products by adding additional products through new and existing
distribution agreements.
FINANCING
At March 30, 2003, the Company's total outstanding long-term debt,
including the current portion, amounted to $2,078. The amount consisted
primarily of an industrial revenue bond and capital leases for computer
equipment. The industrial revenue bond, in the principal amount of $2,000, is to
be paid in equal monthly installments over a term of five years, maturing
January 1, 2008. The bond is secured by certain equipment of FineTech located in
Rhode Island, bears interest at 4.27% per annum and is subject to covenants
based on various financial benchmarks. In February 2003, the Company paid the
remaining balance on a mortgage loan.
In December 1996, Par entered into the Loan Agreement with GECC. The Loan
Agreement, as amended in December 2002, provides Par with a revolving line of
credit expiring in 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. 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 March 30, 2003, the borrowing base was
approximately $27,000. The interest rate charged on any borrowings under 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 the Company, other than
real property, and is guaranteed by the Company. In connection with such
facility, the Company 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 contains covenants based on various financial
benchmarks. To date, no debt is outstanding under the Loan Agreement.
SUBSEQUENT EVENTS
On April 18, 2003, GSK and PRX, through its subsidiary Par, announced that
Pentech and GSK reached a settlement in their patent litigation over Pentech's
proposed generic capsule version of GSK's anti-depressant Paxil(R) (paroxetine
hydrochloride). Pentech granted Par rights under Pentech's ANDA for paroxetine
hydrochloride capsules. The settlement allows Par to distribute in Puerto Rico
substitutable generic paroxetine hydrochloride immediate release tablets
supplied and licensed from GSK for a royalty to be paid to GSK. The Company
began distributing the product in Puerto Rico in May 2003. Par will be entitled
to distribute the same product in the U.S. market once another generic version
fully substitutable for Paxil(R) becomes available there.
In the settlement, Pentech and Par acknowledge that the GSK patent covering
the hemihydrate form of paroxetine hydrochloride is valid and enforceable and
would be infringed by Pentech's proposed capsule product, for which Pentech has
applied for FDA approval. The same GSK patent was found valid and enforceable in
a separate patent infringement case in the U.S. District Court for the Northern
District of Illinois (Chicago) against Apotex. Apotex was found not to infringe,
and GSK is appealing that ruling. The litigation and the settlement do not
involve Paxil CR(TM).
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of its
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in its periodic Securities and Exchange
Commission filings.
There were no significant changes in internal controls or in other factors
that could reasonably be expected to significantly affect these controls
subsequent to the date of the evaluation referred to above.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Breath, Ltd. 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 one
latanoprost drug product in the United States. Par subsequently acquired
ownership of the ANDA, which includes a Paragraph IV certification that the
patents in connection with Xalatan(R) that are identified in "Approved Drug
Products with Therapeutic Equivalence Evaluations" (the "Orange Book") are
invalid, unenforceable or will not be infringed by Par's generic product. Par
believes 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
Par 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 is also seeking 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 expert discovery. Par intends to vigorously defend the lawsuit and pursue its
counterclaim. At this time, it is not possible for the Company to predict the
outcome of the plaintiffs' claim for injunctive relief, its counterclaim or
their claims for attorneys' fees.
Par, among others, was 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)). In
March 2003, Par settled its lawsuits with aaiPharma Inc. The settlement did not
have a material adverse effect on the Company's financial position or results of
operation.
The Company is involved in certain other litigation matters, including
product liability and patent actions, 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 all of these actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits:
10.9.4 Employment Agreement, dated as of December 18, 2002, by and
between Pharmaceutical Resources, Inc., and Dr. Arie Gutman.
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.
(b) Reports on Form 8-K:
On April 23, 2003, the Company filed a Current Report on Form 8-K.
20
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)
May 14, 2003 /s/ KENNETH I. SAWYER
-----------------------------------------
Kenneth I. Sawyer
CHIEF EXECUTIVE OFFICE AND CHAIRMAN OF THE
BOARD OF DIRECTORS
(Principal Executive Officer)
May 14, 2003 /s/ DENNIS J. O'CONNOR
------------------------------------------
Dennis J. O'Connor
VICE PRESIDENT - CHIEF FINANCIAL OFFICER AND SECRETARY
(Principal Accounting and Financial Officer)
21
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:
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: May 14, 2003
/s/ KENNETH I. SAWYER
----------------------
Kenneth I. Sawyer
Chief Executive Officer
22
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:
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: May 14, 2003
/s/ DENNIS J. O'CONNOR
-----------------------
Dennis J. O'Connor
Chief Financial Officer
23
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
10.9.4 Employment Agreement, dated as of December 18, 2002, by
and between Pharmaceutical Resources, Inc., and Dr. Arie
Gutman.
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.
24