UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2003
Commission File Number 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 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 August 7, 2003:
33,807,186
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
(Unaudited)
ASSETS JUNE 29, DECEMBER 31,
------ 2003 2002
----------- ------------
Current assets:
Cash and cash equivalents $107,123 $65,121
Accounts receivable, net of allowances of
$31,765 and $36,257 99,140 55,310
Inventories, net 57,576 51,591
Prepaid expenses and other current assets 5,874 6,089
Deferred income tax assets 30,210 32,873
------ ------
Total current assets 299,923 210,984
Property, plant and equipment, at cost less
accumulated depreciation and amortization 37,326 27,055
Unexpended industrial revenue bond proceeds 2,000 2,000
Intangible assets, net 34,838 35,692
Goodwill 24,662 24,662
Other assets 697 1,064
--- -----
Total assets $399,446 $301,457
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $504 $596
Accounts payable 22,654 14,637
Payables due to distribution agreement partners 20,441 18,163
Accrued salaries and employee benefits 7,286 5,175
Accrued expenses and other current liabilities 11,427 10,034
Income taxes payable 46,122 26,074
------ ------
Total current liabilities 108,434 74,679
------- ------
Long-term debt, less current portion 1,445 2,426
----- -----
Deferred income tax liabilities, net 3,085 3,562
----- -----
Commitments and contingencies
Shareholders' equity:
Preferred Stock, par value $.0001 per share; authorized
6,000,000 shares; none issued and outstanding
Common Stock, par value $.01 per share; authorized
90,000,000 shares; issued and outstanding 33,454,343
and 32,804,480 shares 334 328
Additional paid-in capital 138,622 118,515
Retained earnings 147,526 101,947
------- -------
Total shareholders' equity 286,482 220,790
------- -------
Total liabilities and shareholders' equity $399,446 $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)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Net product sales $209,485 $182,263 $108,801 $101,755
Other revenues 12,788 - 7,060 -
-------- -------- -------- --------
Total revenues 222,273 182,263 115,861 101,755
Cost of goods sold 106,000 96,573 54,891 55,340
-------- -------- -------- --------
Gross margin 116,273 85,690 60,970 46,415
Operating expenses (income):
Research and development 11,120 6,937 4,651 4,063
Selling, general and administrative 30,105 16,363 18,215 8,847
Settlements - (9,051) - -
Acquisition termination charges - 4,278 - 10
-------- -------- -------- --------
Total operating expenses 41,225 18,527 22,866 12,920
-------- -------- -------- --------
Operating income 75,048 67,163 38,104 33,495
Other expense, net (44) (102) (10) (213)
Interest income, net 333 381 164 127
-------- -------- -------- --------
Income before provision for income taxes 75,337 67,442 38,258 33,409
Provision for income taxes 29,758 26,302 15,112 13,029
-------- -------- -------- --------
Net income 45,579 41,140 23,146 20,380
Retained earnings, beginning of period 101,947 22,493 124,380 43,253
-------- -------- -------- --------
Retained earnings, end of period $147,526 $63,633 $147,526 $63,633
======== ======== ======== ========
Net income per share of common stock:
Basic $1.38 $1.28 $.70 $.64
======== ======== ======== ========
Diluted $1.34 $1.25 $.68 $.62
======== ======== ======== ========
Weighted average number of
common shares outstanding:
Basic 33,021 32,069 33,153 32,089
======== ======== ======== ========
Diluted 33,953 32,869 34,197 32,898
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
-3-
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
SIX MONTHS ENDED
----------------
JUNE 29, JUNE 30,
2003 2002
---- ----
Cash flows from operating activities:
Net income $45,579 $41,140
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes 2,186 (8,867)
Depreciation and amortization 3,916 2,358
Inventory reserves 602 1,403
Allowances against accounts receivable (4,492) (17,381)
Settlements - (9,051)
Stock option activity 8,901 (2,254)
Other - (23)
Changes in assets and liabilities:
Increase in accounts receivable (39,338) (1,331)
Increase in inventories (6,587) (15,894)
Increase in prepaid expenses and other assets (1,024) (7,898)
Increase in accounts payable 8,017 6,105
Increase (decrease) in payables due to distribution
agreement partners 2,278 (16,651)
Increase in accrued expenses and other liabilities 3,504 1,250
Increase in income taxes payable 20,048 19,328
--------- ---------
Net cash provided by (used in) operating activities 43,590 (7,766)
--------- ---------
Cash flows from investing activities:
Capital expenditures (11,727) (3,551)
Acquisition of FineTech - (32,581)
Proceeds from sale of fixed assets - 28
--------- ---------
Net cash used in investing activities (11,727) (36,104)
--------- ---------
Cash flows from financing activities:
Proceeds from issuances of Common Stock 11,212 698
Principal payments under long-term debt and other borrowings (1,073) (123)
--------- ---------
Net cash provided by financing activities 10,139 575
--------- ---------
Net increase (decrease) in cash and cash equivalents 42,002 (43,295)
Cash and cash equivalents at beginning of period 65,121 67,742
--------- ---------
Cash and cash equivalents at end of period $107,123 $24,447
========= =========
Supplemental disclosure of cash flow information
Cash paid during the six months for:
Taxes $1,583 $18,095
========= =========
Interest $58 $76
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
-4-
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 29, 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
principally 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 Laboratories 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 the 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.
As of June 24, 2003, the Company changed its state of incorporation from
New Jersey to Delaware. The reincorporation was approved by the holders of a
majority of the Company's outstanding shares of common stock, voting in person
or by proxy, at its Annual Meeting of Shareholders held on June 19, 2003. The
reincorporation was effected by merging the Company with and into Pharmaceutical
Resources, Inc., a Delaware corporation and then a wholly-owned subsidiary of
the Company, with the Delaware corporation surviving (the "Merger"). The
reincorporation was effected primarily because the Company's board of directors
believed that governance under Delaware law would permit the Company to manage
its corporate affairs more effectively and efficiently than under New Jersey
law. The reincorporation did not result in any change in the Company's business,
management, assets, liabilities, board of directors, or location of its
principal facilities or headquarters.
Pursuant to the Merger, each share of common stock of the New Jersey
corporation was automatically converted into one share of common stock, $.01 par
value, of the Delaware corporation. It was not necessary for shareholders to
exchange their existing stock certificates in the New Jersey corporation for
stock certificates of the Delaware corporation.
As a result of the reincorporation, the Company became the successor issuer
to the New Jersey corporation under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and succeeded to the New Jersey corporation's
reporting obligations thereunder. Pursuant to Rule 12g-3(a) under the Exchange
Act, the Company's common stock is deemed registered under Section 12(b) of the
Exchange Act.
On May 23, 2003, Par also changed its state of incorporation from New
Jersey to Delaware. The Par reincorporation was effected by merging Par with and
into Par Pharmaceutical, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company, with the Delaware corporation surviving. The Par
reincorporation was approved by the Company as the sole shareholder of each of
the merging entities. The Par reincorporation was effected primarily because
Par's board of directors believed that governance under Delaware law would
permit Par to manage its corporate affairs more effectively and efficiently than
under New Jersey law. The Par reincorporation was not submitted for a vote to
the Company's shareholders because such approval was not required under
applicable law. In connection with and prior to Par's reincorporation, Par
contributed its New Jersey operations to Par, Inc., a newly-formed Delaware
corporation and a wholly-owned subsidiary of Par. Par, Inc. provides certain
managerial and administrative services to Par on a fee basis.
NOTE 1 - BASIS OF PREPARATION:
The accompanying consolidated financial statements at June 29, 2003 and for
the six-month and three-month periods ended June 29, 2003 and June 30, 2002,
respectively, are unaudited; however, in the opinion of the Company's
management, such statements include all adjustments (consisting of normal
recurring accruals) necessary to provide 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
consolidated financial statements and these notes do not include all disclosures
required by accounting principles generally accepted in the United States for
audited financial statements. Accordingly, these statements should be read in
conjunction with the Company's most recent annual consolidated financial
statements.
-5-
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 period have been reclassified to conform to
the current period'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 of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under
APB Opinion 25, compensation expense is based on any difference as of the date
of a stock option grant, between the fair value of the Company's common stock
and the option's per share 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 effects of the method
used on reported results.
The following table illustrates the effects 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 its stock-based employee compensation:
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $45,579 $41,140 $23,146 $20,380
Add: Total stock-based employee compensation
expense included in reported net income,
net of related tax effects 1,263 - 1,263 -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (5,311) (3,440) (2,672) (1,843)
-------- ------- -------- -------
Pro forma net income $41,531 $37,700 $21,737 $18,537
======== ======== ======== ========
As reported -Basic $1.38 $1.28 $.70 $.64
======== ======== ======== ========
As reported -Diluted $1.34 $1.25 $.68 $.62
======== ======== ======== ========
Pro forma -Basic $1.26 $1.18 $.66 $.58
======== ======== ======== ========
Pro forma -Diluted $1.22 $1.15 $.64 $.56
======== ======== ======== ========
As permitted under SFAS 123, the Company elected to follow APB Opinion 25
and related interpretations in accounting for stock-based compensation 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 compensation to employees under the
fair value method of that Standard. The fair value of options granted during
each of the six and three-month periods ended June 29, 2003 and June 30, 2002,
respectively, has been estimated at the date of grant using the Black-Scholes
stock option pricing model, based on the following assumptions:
-6-
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Risk free interest rate 4.0% 4.3% 4.0% 4.3%
Expected term 4.8 years 5.8 years 3.5 years 5.8 years
Expected volatility 63.6% 69.0% 64.0% 69.0%
It is also assumed that no dividends will be paid during the entire term of
the options. The weighted average fair values of options granted in the
six-month periods ended June 29, 2003 and June 30, 2002 were $18.42 and $14.55,
respectively. The weighted average fair values of options granted in the
three-month periods ended June 29, 2003 and June 30, 2002 were $23.51 and
$14.55, respectively.
NOTE 3 - ACCOUNTS RECEIVABLE: JUNE 29, DECEMBER 31,
2003 2002
---- ----
(IN THOUSANDS)
Trade accounts receivable, net of rebates
and chargebacks $123,846 $90,812
Other accounts receivable 7,059 755
-------- -------
Allowances:
Doubtful accounts 1,456 1,156
Returns and allowances 13,750 18,868
Price adjustments 16,559 16,233
-------- -------
31,765 36,257
Accounts receivable,
net of allowances $99,140 $55,310
======== =======
The trade accounts receivable amounts presented above at June 29, 2003 and
December 31, 2002 are net of provisions for customer rebates of $25,161 and
$13,610, and for chargebacks of $67,667 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 provided to wholesale customers 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 pay within a specified period of time. Sales or
trade show promotions may be conducted 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 provided to a customer when the Company lowers its invoice pricing and
provides a credit for the difference between the old and new invoice prices for
the inventory the customer has on hand at the time of the price reduction.
The Company will generally offer price protection for sales of new generic
drugs for which it has a market exclusivity period. Such 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 shelf-stock adjustment 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. In addition, the Company may also offer
price protection with respect to existing products for which it anticipates
significant price erosion through an increase in competition.
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
-7-
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
the second quarter of 2002, but, as of June 29, 2003, had 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 at some time in the third quarter of
2003. At this time, the Company cannot predict the effect of another generic
competitor in the market. Under its accounting policies, the Company did not
record a price protection reserve for such product as of June 29, 2003. The
Company will continue to evaluate the effects of the competition and will record
a price protection reserve when, and as it deems necessary.
The Company recorded other revenues of $12,788 and $7,060 in the six and
three-month periods ended June 29, 2003 related to its share of Genpharm, Inc.'s
("Genpharm"), a Canadian subsidiary of Merck KGaA, omeprazole gross 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 such term is defined in the agreement, generated
from the sale of omeprazole, the generic version of Astra Zeneca's ("Astra")
Prilosec(R). Under the terms of an agreement with Kremers Urban Development Co.
("KUDCo"), a subsidiary of Schwarz Pharma AG of Germany, Genpharm received an
initial 15% share of KUDCo's profits, as such term is defined in the agreement,
through early May 2003 with a subsequent reduction over time based on a number
of factors. In fiscal year 2002, the Company had agreed to reduce 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 district court decision in which it prevailed, but before any
decision was reached on appeal. Astra has appealed the district court's patent
infringement decision. The impact of KUDCo's omeprazole sales on the Company's
future revenues is presently unclear to the Company 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 overall
generic sales of omeprazole. In August 2003, a generic competitor also began
selling a form of omeprazole that competes with the prescription form of
Prilosec(r). The Company understands that this generic competitor has initiated
litigation against KUDCo alleging patent infringement. The Company expects that
the impact of this competition will reduce its revenues from omeprazole in
future periods.
NOTE 4 - INVENTORIES, NET:
JUNE 29, DECEMBER 31,
2003 2002
---- ----
Raw materials and supplies $18,274 $17,400
Work in process and finished goods 39,302 34,191
------- -------
$57,576 $51,591
======= =======
Included in selling, general and administrative expenses are shipping costs
of $1,349 and $1,337, respectively, for the six-month periods, and $742 and
$745, respectively, for the three-month periods, ended June 29, 2003 and June
30, 2002.
NOTE 5 - INTANGIBLE ASSETS, NET:
JUNE 29, DECEMBER 31,
2003 2002
---- ----
BMS Asset Purchase Agreement, net of accumulated
amortization of $2,229 and $1,393 $9,471 $10,307
Product License fees, net of accumulated
amortization of $422 and $0 10,380 9,199
Genpharm Distribution Agreement, net of accumulated
amortization of $3,611 and $3,250 7,222 7,583
Intellectual property, net of accumulated amortization
of $841 and $451 5,739 6,129
Genpharm Profit Sharing Agreement, net of accumulated
amortization of $474 and $26 2,026 2,474
------- -------
$34,838 $35,692
======= =======
The Company recorded amortization expense related to intangible assets of
$2,457 and $1,031, respectively, for the six-month periods, and $1,448 and $711,
respectively, for the three-month periods, ended June 29, 2003 and June 30,
-8-
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
2002. Annual amortization expense in each of the next five years related to the
intangible assets currently being amortized is expected to be approximately
$5,412 in 2003, $5,955 in 2004, $3,758 in 2005, $3,115 in 2006, $3,115 in 2007
and $8,445 thereafter.
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 the eligible
accounts receivable plus 50% of the eligible inventory of Par, each as
determined from time to time by GECC. As of June 29, 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
credit facility, the Company has 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. As of June 29, 2003, no debt was outstanding under the
Loan Agreement.
NOTE 7 - INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes", which requires the Company to
recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. At June 29, 2003
and December 31, 2002, the Company had current deferred income tax assets of
$30,210 and $32,873, respectively, consisting of temporary differences,
primarily related to accounts receivable reserves, and net deferred income tax
liabilities of $3,085 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 six-month period ended June 29, 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 647 6 11,093
Compensatory arrangements 3 - 9,014
Balance, June 29, 2003 33,454 $334 $138,622
====== ==== ========
Compensatory arrangements include the tax treatment related to the exercise
of stock options.
NOTE 9 - DISTRIBUTION AND SUPPLY AGREEMENTS:
SMITHKLINE BEECHAM CORPORATION.
In connection with the legal settlement referred to in Note 12-Commitments,
Contingencies and Other Matters - Legal Proceedings, the Company entered into a
license and supply agreement (the "GSK Supply Agreement") with Smithkline
Beecham Corporation ("GSK") and certain of its affiliates, dated April 16, 2003,
pursuant to which Par is marketing a substitutable generic paroxetine
hydrochloride immediate release tablet supplied and licensed from GSK in the
Commonwealth of Puerto Rico. Under the GSK Supply Agreement, GSK has agreed to
manufacture the product and Par agreed to pay GSK a
-9-
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
royalty based on Par's net sales of the product. Par will also be entitled to
distribute the same product in the U.S. market once another generic paroxetine
hydrochloride immediate release tablet fully substitutable for Paxil(R) becomes
available there (see "Commitments, Contingencies and Other Matters-Legal
Proceedings").
NOTE 10 - EARNINGS PER SHARE:
The Company had outstanding stock options of 4,353 and 1,859 at the end of
the six-month periods and 4,262 and 2,058 at the end of the three-month periods
ended June 29, 2003 and June 30, 2002, respectively, that 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 6 and 2,362 at the end of the six-month
periods ended June 29, 2003 and June 30, 2002 and 9 and 2,164 at the end of the
three-month periods ended June 29, 2003 and June 30, 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:
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income $45,579 $41,140 $23,146 $20,380
BASIC:
Weighted average number of common
shares outstanding 33,021 32,069 33,153 32,089
Net income per share of common stock $1.38 $1.28 $.70 $.64
======= ======= ======= =======
ASSUMING DILUTION:
Weighted average number of common
shares outstanding 33,021 32,069 33,153 32,089
Effect of dilutive options 932 800 1,044 809
------- ------- ------- -------
Weighted average number of common and common
equivalent shares outstanding 33,953 32,869 34,197 32,898
Net income per share of common stock $1.34 $1.25 $.68 $.62
======= ======= ======= =======
NOTE 11 - NEW ACCOUNTING PRONOUNCEMENTS:
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
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 the characteristics of a derivative that contains
financing components. This Statement is effective for contracts entered 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 prospectively. 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 relate 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.
In January 2003 the FASB issued Financial Interpretation Number ("FIN") No.
46, "Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No. 46
addresses whether certain types of entities, referred to as variable interest
entities ("VIEs"), should be consolidated in a company's financial statements. A
VIE is an entity that either (1) has equity investors that lack certain
essential characteristics of a controlling financial interest (including the
ability to control the entity, the obligation to absorb the entity's expected
losses and the right to receive the entity's expected residual returns), or (2)
lacks sufficient equity to finance its own activities without financial support
provided by other entity's, which in turn would be expected to absorb at least
some of the expected losses of the VIE. An entity should consolidate a VIE if it
stands to absorb a majority of the VIE's expected losses or to receive a
majority of the VIE's expected residual returns. The Company has evaluated the
impact of the adoption of FIN No. 46, and does not believe it will have a
material impact on its consolidated financial position or consolidated results
of operations.
In November 2002 the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" ("FIN No. 45"), an interpretation of FASB Statements No.
5, 57 and 107 and rescission of FASB Interpretation No. 34. FIN No. 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. The initial recognition and measurement provisions of FIN No. 45
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of this interpretation did not have a material
impact on the Company's consolidated financial position or results of
operations.
-10-
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
LEGAL PROCEEDINGS: On May 28, 2003, Asahi Glass Company ("Asahi Glass")
filed a complaint in the United States District Court for the Northern District
of Illinois against GlaxoSmithKline P.L.C. and affiliated entities, Pentech
Pharmaceuticals and Par alleging, among other things, violations of state and
federal anti-trust laws arising out of the Supply and Distribution Agreement
between GlaxoSmithKline and Par. Par denies any wrongdoing in connection with
this action and expects to file a motion to dismiss the complaint in August
2003. In the event the action continues following the court's determination of
the motion to dismiss, Par intends to defend vigorously this action and may
assert counterclaims against Asahi Glass and others.
On April 18, 2003, GSK and PRX, through its principal subsidiary Par,
announced that Pentech Pharmaceuticals, Inc. ("Pentech") and GSK had reached a
settlement of 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 Abbreviated New Drug Application ("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.
Under 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, the Company believes, GSK is
appealing that ruling. The litigation and the settlement do not involve Paxil
CR(TM).
Breath Ltd. of the Arrow Group filed an ANDA (currently pending with the
FDA) for latanoprost (Xalatan(R)), which was developed by Breath Ltd. 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" are invalid, unenforceable
and/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 the expert discovery stage. Par intends to vigorously defend the lawsuit and
pursue its counterclaim and the declaratory judgment sought by it. At this time,
it is not possible for the Company to predict the outcome of the plaintiffs'
claim for injunctive relief, Par's counterclaim or the 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 three
patents related to polymorphic forms of fluoxetine (Prozac(R)). In March 2003,
Par settled its lawsuits with aaiPharma Inc. The settlement has not had a
material adverse effect on the Company's financial position or results of
operation.
-11-
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company and/or Par is a party in certain other litigation matters,
including product liability and patent actions, and the Company believes these
actions are incidental to the conduct of its business and that the ultimate
resolution will not have a material adverse effect on its financial condition,
results of operations or liquidity. The Company intends to vigorously defend or,
in cases where the Company is plaintiff, prosecute these actions.
OTHER MATTERS:
The Company announced on June 19, 2003 that Kenneth I. Sawyer, its
chairman, president and chief executive officer, would retire, effective as of
July 1, 2003. Mr. Sawyer did retire on July 1, 2003 and the board of directors
is conducting a search for a new chairman and chief executive officer of PRX. In
the interim, Scott Tarriff, president and chief executive officer of Par, and
Arie L. Gutman, Ph.D., president and chief executive officer of PRX's FineTech
subsidiary, will both report to the Company's lead outside director. During this
transition period, Mr. Sawyer will remain a director and be available to consult
with the Company. The Company recorded a charge of $3,635, included in selling,
general and administrative expenses on the consolidated statements of
operations, in the second quarter of 2003 for Mr. Sawyer's retirement package,
consisting of expenses for accelerated stock options, a severance payment, the
remainder of his 2003 salary and benefits.
In December 2001, the Company made its 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. High Rapids is a software developer and
the 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 June 29, 2003, the Company had invested
$1,008. 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 June 29, 2003, the Company held approximately 36% 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. Mr. Sawyer 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") entered
into a license and distribution agreement under which the Company has agreed 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 a patent litigation case
involving Rebetol(R) brand ribavirin. Under the terms of the settlement,
Schering 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.
Three Rivers was also in litigation with ICN Pharmaceuticals Inc. ("ICN")
regarding certain patents that ICN asserts relate to ribavirin. On July 16,
2003, the United States District Court for the Central District of California
granted summary judgment of non-infringement regarding ribavirin to Three Rivers
(see "-Subsequent Events").
NOTE 13 - SUBSEQUENT EVENTS:
On July 15, 2003, the Company announced that two additional patents
relating to megestrol acetate oral suspension have been issued to it by the U.S.
Patent Office. The Patent Office issued U.S. Patent Nos. 6,593,318 and 6,593,320
to the Company. The Company presently holds four patents relating to megestrol
oral suspension. The first two patents, U.S. Patent No. 6,028,065 and U.S.
-12-
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Patent No. 6,268,356, were issued on February 22, 2000 and July 31, 2001,
respectively.
On July 16, 2003, the Company announced that the United States District
Court for the Central District of California had granted summary judgment of
non-infringement regarding ribavirin to Three Rivers. The district court
determined that the Three Rivers' product does not infringe any of three patents
asserted by ICN in the litigation. Par has exclusive marketing rights for the
Three Rivers' ribavirin product. Three Rivers had earlier reached a settlement
of its patent litigation with Schering Plough Pharmaceuticals, so this decision
appears to resolve the remaining ongoing patent barriers to FDA approval of the
ANDA filed by Three Rivers. The timing of Par's launch of this product is
uncertain at this time. Three Rivers has not obtained FDA approval, and the FDA
has not made a determination of whether a generic 180-day exclusivity period
will be awarded solely to a generic competitor involved in the lawsuit or Three
Rivers jointly with one or both of the other two generic competitors involved in
the lawsuit. The patent holder, ICN, may appeal the court decision.
-13-
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 RISKS, UNCERTAINTIES, TRENDS AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD
CAUSE ACTUAL RESULTS AND PERFORMANCE 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 $45,579 for the six-month period ended June 29,
2003 increased $4,439 from $41,140 for the six-month period ended June 30, 2002.
Total revenues of $222,273 in the first six months of fiscal year 2003 increased
$40,010 from $182,263 in the corresponding period of fiscal year 2002, primarily
due to additional net sales of new products introduced following the end of the
second quarter 2002 and other revenues from a profit sharing agreement with
Genpharm related to omeprazole (Prilosec(R)). The revenue growth helped produce
higher gross margins, which increased to $116,273, or 52% of total revenues, in
the most recent six months, from $85,690, or 47% of total revenues, in the
corresponding six-month period of 2002. In addition, the Company continued to
invest in research and development activities. Six-month spending on research
and development of $11,120 in 2003 increased 60% from $6,937 for the
corresponding six-month period of 2002. Selling, general and administrative
costs of $30,105 in the most recent six-month period increased $13,742 from the
corresponding period of the prior year, primarily due to a charge of $3,635 in
the second quarter 2003 related to a retirement package for the Company's
chairman, president and chief executive officer, higher legal fees, insurance
costs and other costs that the Company believes were required to support its
growth, including expenses related to reviewing information systems, additional
facilities, personnel and strategic analysis. 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 $4,278 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.
The Company's net income for the second quarter of 2003 was $23,146
compared to $20,380 for the second quarter of the prior year, reflecting both
revenue and gross margin increases, primarily from new products and other
revenues related to omeprazole. Second quarter 2003 revenues and gross margin of
$115,861 and $60,970 (53% of total revenues), respectively, improved over the
prior year's second quarter revenues and gross margin of $101,755 and $46,415
(46% of total revenues). Research and development expenses of $4,651 for the
most recent three-month period were 14% higher than $4,063 incurred in the
corresponding quarter of 2002. Selling, general and administrative costs
increased $9,368 to $18,215 in the second quarter 2003 from $8,847 in the
corresponding quarter of the prior year due primarily to a one-time charge
associated with the retirement package described above, higher insurance costs
and additional costs required to support the Company's growth.
-14-
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 25 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 therefore without the requirement to share
gross profits with any strategic partners, contribute higher gross margins than
products covered under its 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
Company to 180-day marketing exclusivity periods for the products. The Company
began marketing megestrol acetate oral suspension, which is not subject to any
profit sharing agreement, in July 2001. In August 2001, the Company began
marketing fluoxetine 40 mg capsules under a distribution agreement with Reddy
and fluoxetine 10 mg and 20 mg tablets under a distribution agreement with
Genpharm. Generic competitors of the Company received 180-day marketing
exclusivity periods 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 periods. 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 FDA approval for a generic megestrol acetate oral suspension in the
first quarter of 2002, the Company still maintained a significant share of the
market for this product as of June 29, 2003; however, a second generic
competitor received FDA approval for megestrol acetate oral suspension in May
2003. The Company expects this second competitor to enter the market at some
time during 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 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 the Company's reliance on these
key products.
Critical to the continued growth of the Company is its 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 and relationships, is committed to developing new
products that have limited competition and longer product life cycles. In
addition to expected new product introductions and relationships, the Company
plans to continue to invest in its internal research and development efforts
while, at the same time, seeking acquisitions of complimentary products and
businesses, 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 through 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 or, even if developed, that they will be
commercially viable. Execution of these strategies may require additional debt
or equity financing and there can be no assurance that the Company will be able
to obtain any required financing when needed and on terms exceptable or
favorable to it.
Sales and gross margins of the Company's products are principally dependent
upon (i) the pricing of 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) the extent of market
penetration for the existing product line and (xi) the level of customer
service.
REVENUES
Total revenues of $222,273 for the six months ended June 29, 2003 increased
$40,010, or 22%, from $182,263 for the corresponding period of 2002. The
increase in revenues was primarily due to higher net sales of new products,
including tizanidine (Zanaflex(R)) and nizatidine (Axid(R)), introduced in July
2002 and sold under distribution agreements with Reddy and Genpharm,
respectively, and torsemide (Demadex(R)) and minocycline (Minocin(R)),
introduced in the second quarter 2003. In addition, the Company recognized other
-15-
revenues of $12,788 in the first six months of 2003 from a profit sharing
agreement with Genpharm related to omeprazole. Net sales of fluoxetine and
megestrol acetate oral suspension decreased $10,563 and $1,156, respectively, in
fiscal 2003. Net sales of distributed products, which consist of products
manufactured under contract and licensed products, were approximately 54% and
58%, respectively, of the Company's net sales in the first six months of 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 expects that this dependence will continue. Any
inability by suppliers to meet expected demand could adversely affect future
sales.
Total revenues in the second quarter 2003 of $115,861 increased $14,106, or
14%, from $101,755 for the corresponding quarter of 2002, primarily due to sales
of new products and additional revenues of $7,060 related to omeprazole. The
increased revenues in the second quarter 2003 were achieved despite decreases in
net sales of $5,588 and $2,281 for fluoxetine and megestrol acetate oral
suspension, respectively, compared to the second quarter of the prior year. Net
sales of distributed products were approximately 52% of the Company's total net
sales in the most recent quarter compared to approximately 58% of the total for
the corresponding quarter of last year.
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 district
court decision in which it prevailed, but before any decision was reached on
appeal. Astra has appealed the district court's patent infringement decision.
The impact of KUDCo's omeprazole sales on the Company's future revenues is
presently unclear to the Company 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 August 2003, a generic competitor also began selling a form of
omeprazole that competes with the prescription form of Prilosec(R). The Company
understands that this generic competitor has initiated litigation against KUDCo
alleging patent infringement. The Company expects that the impact of this
competition will reduce its revenues from omeprazole in future periods. 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 process and litigations. The development and legal expenses were
substantially recovered by Genpharm in 2002. Although there can no such
assurance, the Company anticipates revenues of up to $7,000 for the remainder of
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 at some point in the third quarter of 2003. At
this time, the Company cannot predict accurately the effect of another generic
competitor in the market. Megestrol acetate oral suspension is anticipated by
the Company to be a significant profit contributor for the remainder of fiscal
year 2003, despite the competition. In accordance with its accounting policies,
the Company did not record a price protection reserve for megestrol acetate oral
suspension as of June 29, 2003. The Company will continue to evaluate the effect
of competition and will record a price protection reserve when, if and as it
deems necessary.
GROSS MARGIN
The Company's gross margin of $116,273 (52% of total revenues) in the first
six months of fiscal year 2003 increased $30,583 from $85,690 (47% of total
revenues) for the corresponding period of fiscal year 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 new products, as described above.
In the six-month period ended June 29, 2003, lower gross 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 following the end of the
-16-
Company's exclusivity period. 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, and as, additional manufacturers introduce and market comparable generic
products. Megestrol acetate oral suspension contributed approximately $34,743 in
gross margin for the six-month period of 2003 compared to $35,860 in the
corresponding period of the prior year.
Gross margin for the second quarter of 2003 was $60,970 (53% of total
revenues) compared to $46,415 (46% of total revenues) in the corresponding
quarter of the prior year. Additional gross margin contributions from omeprazole
revenues and higher margin new products, particularly tizanidine and torsemide,
generated the higher gross margins in the second quarter of 2003.
Inventory write-offs were $1,317 and $905 for the six-month and three-month
periods ended June 29, 2003, respectively, compared to $2,742 and $977,
respectively, for the corresponding periods of the prior year. The higher
six-month 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 research and development expenses of $11,120 for the six
months ended June 29, 2003 increased $4,183, or 60%, from $6,937 for the six
months ended June 30, 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 raw material and development work done by SVC Pharma, the
Company's joint venture partnership.
Research and development expenses for the second quarter of 2003 were
$4,651 compared to $4,063 for the corresponding quarter of 2002. The increase
was primarily attributable to higher spending for raw material.
Although there can be no such assurance, the Company expects its total
annual research and development expenses for fiscal year 2003 to exceed the
total for fiscal year 2002 by approximately up to 30% to 40%. The increase is
expected as a result of increased internal development activity, projects with
third parties and research and development venture activity.
The Company currently has ten ANDAs for potential products (two tentatively
approved) pending with, and awaiting approval from, the FDA as a result of its
own product development program. The Company has in process or expects to
commence biostudies for at least eight additional products during the remainder
of fiscal year 2003.
The Company and Genpharm have 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 by this Agreement. Currently,
there are four ANDAs for potential products (one tentatively approved) that are
covered by the Genpharm 11 Product Agreement pending with, and awaiting approval
from, the FDA. The Company is currently marketing one product under the Genpharm
11 Product Agreement.
The Company and Genpharm have 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 five ANDAs for potential products (three 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.
-17-
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 $30,105 (14% of total
revenues) for the six months ended June 29, 2003 increased $13,742 from $16,363
(9% of total revenues) for the corresponding period of last year. The increase
in 2003 was primarily attributable to a charge of $3,635 related to a retirement
package for the Company's chairman, president and chief executive officer,
higher product liability and directors and officers insurance costs totaling
$2,004, legal fees associated with potential new product launches of $1,941 and,
to a lesser extent, a royalty paid to GSK on sales of paroxetine in Puerto Rico.
In addition, the Company incurred expenses it believes are necessary to support
the Company's continued growth, including costs for personnel of $1,903,
corporate strategic planning of $900, additional warehouse and administrative
office facilities of $673, information system reviews of $660 and accounting
fees of $504. Distribution costs include those related to shipping product to
the Company's customers, primarily through the use of common carriers or an
external distribution service. Shipping costs of $1,349 in the first six months
of 2003 approximated costs of $1,337 in the corresponding period of the prior
year. The Company anticipates that it will continue to incur a high level of
legal expenses related to the costs of litigation connected with potential new
product introductions (see "Notes to Consolidated Financial
Statements-Commitments, Contingencies and Other Matters-Legal Proceedings").
Selling, general and administrative costs are expected to continue to increase
over the remainder of 2003.
The Company announced on June 19, 2003 that Kenneth I. Sawyer, its
chairman, president and chief executive officer, would retire, effective as of
July 1, 2003. Mr. Sawyer did retired on July 1, 2003 and the board of directors
is conducting a search for a new chairman and chief executive officer of PRX. In
the interim, both Scott Tarriff, president and chief executive officer of Par,
and Arie L. Gutman, Ph.D., president and chief executive officer of PRX's
FineTech subsidiary, will report to the Company's lead outside director. During
this transition period, Mr. Sawyer will remain a director and be available to
consult with the Company. A one-time charge of $3,635 associated with Mr.
Sawyer's retirement package was recorded in the second quarter of 2003. The
retirement package consists of expenses for accelerated stock options, a
severance payment, the remainder of his 2003 salary and benefits.
Selling, general and administrative costs of $18,215 (16% of total
revenues) for the second quarter 2003 increased $9,368 from $8,847 (9% of total
revenues) for the corresponding quarter of last year. The increased costs in the
second quarter 2003 consisted of higher costs for Mr. Sawyer's retirement
package, insurance, personnel, information system improvements, facility
expansion and legal fees. Distribution costs include those related to shipping
product to the Company's customers, primarily through the use of common carriers
or an external distribution service. Shipping costs of $742 in the second
quarter 2003 approximated costs of $745 in the corresponding quarter of the
prior year.
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
were 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 these 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 the seven-year period beginning in
March 2002, with the net amount included in intangible assets on the Company's
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
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 $1,278 in related acquisition costs, both of which were
included in acquisition termination charges on the consolidated statements of
operations.
-18-
OTHER EXPENSE
Other expenses for the six-month and three-month periods ended June 29,
2003 of $44 and $10, respectively, decreased from $102 and $213, respectively,
in the corresponding periods of 2002. Other expenses recorded in the second
quarter of 2002 included those related to the withdrawal of the Company's shelf
registration statement during the quarter. Included in other expense in all
covered periods was the Company's investment in High Rapids, which was partially
offset by net rental income from the Company's Congers facility.
INTEREST INCOME
Net interest income of $333 and $164, respectively, for the six-month and
three-month periods ended June 29, 2003 and $381 and $127 for the corresponding
periods of the prior fiscal year was primarily derived from money market and
other short-term investments.
INCOME TAXES
The Company recorded provisions for income taxes of $29,758 and $15,112,
respectively, and $26,302 and $13,029, respectively, for the six-month and
three-month periods ended June 29, 2003 and June 30, 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 $107,123 at June 29, 2003 increased $42,002
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 the Company's
common stock from the exercise of stock options. The Company invested $11,727 in
capital improvements during the first six months of 2003, primarily for the
expansion of its laboratories in Spring Valley, New York, its administrative
offices in Woodcliff Lake, New Jersey and its 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 balances are deposited primarily with financial
institutions in money market funds and overnight investments. Working capital,
which includes cash and cash equivalents, increased $55,184 to $191,489 at June
29, 2003 from $136,305 at December 31, 2002, primarily from increases in the
Company's cash position, accounts receivable and inventories partially offset by
higher income tax and accounts payable. The working capital ratio of 2.77x at
June 29, 2003 was comparable to the ratio of 2.83x at December 31, 2002.
A summary of the Company's material contractual obligations and commercial
commitments as of June 29, 2003 were as follows:
AMOUNTS DUE IN FISCAL YEARS
---------------------------
TOTAL JUL-DEC 2005 AND
OBLIGATION OBLIGATION 2003 2004 THEREAFTER
- ---------- ---------- ---- ---- ----------
Operating leases $19,741 $1,490 $2,937 $15,314
Industrial revenue bond 1,820 185 381 1,254
Other 129 80 49 -
------- ------ ------ ------
Total obligations $21,690 $1,755 $3,367 $16,568
======= ====== ====== =======
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 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.
-19-
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 (50%) percent 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. The remaining terms of the agreement are
expected to be finalized in the third quarter of 2003.
In the second quarter of 2002, the Company made non-refundable payments
totaling $1,000 pursuant to 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 district court decision in which it prevailed,
but before any decision was reached on appeal. Astra has appealed the district
court's patent infringement decision. In the first six months of 2003, the
Company recognized $12,788 of revenues related to its share of profits and
expects to record up to $7,000 in additional such revenues over the remainder of
fiscal year 2003. As of June 29, 2002, the Company has received cash payments of
$6,483 from Genpharm pursuant to this agreement and although there can be no
such assurance, expects to receive approximately $12,000 in additional cash
payments over the remainder of fiscal year 2003.
In November 2002, the Company amended its agreement with Pentech (the
"Supply and Marketing Agreement"), dated November 2001, to market paroxetine
hydrochloride capsules. Pursuant to the Supply and Marketing Agreement, the
Company 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 of
up to $1,300 for fiscal year 2003, which are charged to research and development
expenses as they are incurred. In the first six months of 2003, the Company
incurred $514 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 June 29, 2003, the Company had payables owed to distribution
agreement partners of $20,441, 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 third quarter of 2003.
In December 2001, the Company made its 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 June 29, 2003, the Company had invested $1,008 of
-20-
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").
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 is responsible for the development
and manufacture of the product, while Par is 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 years. In addition, Par has agreed to 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 borrowings against its line of credit
with GECC, if and to the extent available. The Company has altered its plans to
move a portion of FineTech's operation, including personnel and technological
resources to a laboratory facility in Rhode Island. The Company is currently
evaluating alternatives related to the proceeds from the industrial revenue bond
that were to be used for this operation (see "-Financing"). In fiscal year 2003,
the Company expects its capital spending to increase due to the expansion of its
laboratories and initiatives related to improvements to its information systems.
Although there can be no such 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 any erosion of
gross margins from competition on any of its significant products. In addition
to expected new product introductions as part of its various strategic alliances
and relationships, the Company plans to continue to invest in its internal
research and development efforts while, at the same time, seeking additional
products for sale through new and existing distribution agreements or
acquisitions of complimentary products and businesses, 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 also seeks to reduce the overall impact of its top selling products by
adding additional products through new and existing distribution agreements.
Execution of the Company's strategies may require additional debt or equity
financing and there can be no assurance that the Company will be able to obtain
any required financing when needed and on terms acceptable or favorable to it.
FINANCING
At June 29, 2003, the Company's total outstanding long-term debt, including
the current portion, amounted to $1,949. 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 on January 1,
2008. The bond bears interest at 4.27% per annum and is subject to covenants
based on various financial benchmarks. Execution of the Company's strategies may
require additional debt or equity financing and there can be no assurance that
the Company will be able to obtain any required financing when needed and on
terms acceptable or favorable to it.
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 the eligible
accounts receivable plus 50% of the eligible inventory of Par, each as
determined from time to time by GECC. As of June 29, 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 credit
facility, the Company has 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. As of the date hereof, no debt is outstanding under the Loan
Agreement.
SUBSEQUENT EVENTS:
On July 15, 2003, the Company announced that two additional patents
relating to megestrol acetate oral suspension have been issued to it by the U.S.
Patent Office. The Patent Office issued U.S. Patent Nos. 6,593,318 and 6,593,320
to the Company. The Company presently holds four patents relating to megestrol
oral suspension. The first two patents, U.S. Patent No. 6,028,065 and U.S.
Patent No. 6,268,356, were issued on February 22, 2000 and July 31, 2001,
respectively.
-21-
On July 16, 2003, the Company announced that the United States District
Court for the Central District of California had granted summary judgment of
non-infringement regarding ribavirin to Three Rivers. The district court
determined that the Three Rivers' product does not infringe any of three patents
asserted by ICN Pharmaceuticals in the litigation. Par has exclusive marketing
rights for the Three Rivers' ribavirin product. Three Rivers had earlier reached
a settlement of its patent litigation with Schering Plough Pharmaceuticals, so
this decision appears to resolve the remaining ongoing patent barriers to FDA
approval of the ANDA filed by Three Rivers. The timing of Par's launch of this
product is uncertain at this time. Three Rivers has not obtained FDA approval,
and FDA has not made a determination of whether a generic 180-day exclusivity
period will be awarded solely to a generic competitor involved in the lawsuit or
Three Rivers jointly with one or both of the other two generic
competitorsinvolved in the lawsuit. The patent holder, ICN Pharmaceuticals, may
be able to appeal the court decision.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Based on the evaluation by the Executive Vice President and Chief Financial
Officer of the Company as of the end of the period covered by this quarterly
report, the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are
effectively designed to ensure that the information required to be included in
this report has been recorded, processed, summarized and reported on a timely
basis. There has not been any change in the Company's internal controls over
financial reporting that have materially affected, or is reasonably likely to
materially affect, the Company's internal controls over financial reporting.
-22-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------ -----------------
On May 28, 2003, Asahi Glass Company filed a complaint in the United States
District Court for the Northern District of Illinois against GlaxoSmithKline
P.L.C. and affiliated entities, Pentech Pharmaceuticals and Par alleging, among
other things, violations of state and federal anti-trust laws arising out of the
Supply and Distribution Agreement between GlaxoSmithKline and Par. Par denies
any wrongdoing in connection with this action and expects to file a motion to
dismiss the complaint in August 2003. In the event the action continues
following the court's determination of the motion to dismiss, Par intends to
defend vigorously this action and may assert counterclaims against Asahi Glass
and others.
On April 18, 2003, GSK and PRX, through its principal subsidiary Par,
announced that Pentech and GSK had reached a settlement of 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.
Under 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, the Company believes, GSK is appealing that ruling.
The litigation and the settlement do not involve Paxil CR(TM).
Breath Ltd. of the Arrow Group filed an ANDA (currently pending with the
FDA) for latanoprost (Xalatan(R)), which was developed by Breath Ltd. 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" are invalid, unenforceable
and/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 the expert discovery stage. Par intends to vigorously defend the lawsuit and
pursue its counterclaim and the declaratory judgment sought by it. At this time,
it is not possible for the Company to predict the outcome of the plaintiffs'
claim for injunctive relief, Par's counterclaim or the 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 three
patents related to polymorphic forms of fluoxetine (Prozac(R)). In March 2003,
Par settled its lawsuits with aaiPharma Inc. The settlement has not had a
material adverse effect on the Company's financial position or results of
operation.
The Company and/or Par is a party in certain other litigation matters,
including product liability and patent actions, and the Company believes these
actions are incidental to the conduct of its business and that in the ultimate
resolution will not have a material adverse effect on its financial condition,
results of operations or liquidity. The Company intends to vigorously defend or,
in cases where the Company is plaintiff, prosecute these actions.
-23-
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ------ -----------------------------------------
As of June 24, 2003, the Company changed its state of incorporation from
New Jersey to Delaware. The reincorporation was approved by the holders of a
majority of the Company's outstanding shares of common stock, voting in person
or by proxy, at its Annual Meeting of Shareholders held on June 19, 2003. The
reincorporation was effected by merging the Company with and into Pharmaceutical
Resources, Inc., a Delaware corporation and then a wholly-owned subsidiary of
the Company, with the Delaware corporation surviving (the "Merger").
Pursuant to the Merger, each share of common stock of the New Jersey
corporation was automatically converted into one share of common stock, $.01 par
value, of the Delaware corporation. It is not necessary for Company shareholders
to exchange their existing stock certificates of the New Jersey corporation for
stock certificates of the Delaware corporation.
For further information about the reincorporation and for a description of
the material differences between the rights of shareholders under the Business
Corporation Act of the State of New Jersey and the rights of stockholders under
the General Corporation Law of the State of Delaware, please refer to the
Company's Proxy Statement, filed with the Commission on May 13, 2003, which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
The Company's 2003 Annual Meeting of Shareholders was held on June 19,
2003. The votes for each proposal were as follows:
Proposal I - Approval of Election of two Class I Directors.
Proposal I Results For Withheld
- ------------------ --- --------
Peter S. Knight 28,204,694 1,226,295
Scott L. Tarriff 28,954,292 476,697
Proposal II - Approval of the Reincorporation of the Company in Delaware.
Broker
Proposal II Results For Against Abstain Non-Votes
- ------------------- --- ------- ------- ---------
20,930,202 1,119,443 368,715 8,012,629
Proposal III - Approval of Amendment to 2001 Performance Equity Plan to Increase
the Aggregate Number of Shares Reserved for Issuance From 4,000,000 to
5,500,000.
Broker
Proposal III Results For Against Abstain Non-Votes
- -------------------- --- ------- ------- ---------
18,462,926 3,880,166 75,267 7,012,630
Proposal IV - Approval of Amendment to 1997 Directors' Stock Option Plan to
Increase the Aggregate Number of Shares that may be Issued under the Plan From
450,000 to 650,000 and Extending the Expiration Date of the Plan from October
28, 2007 to October 28, 2013.
Broker
Proposal IV Results For Against Abstain Non-Votes
- ------------------- --- ------- ------- ---------
18,480,013 3,660,415 277,931 7,012,630
ITEM 5. OTHER INFORMATION.
- ------ -----------------
In June 2003, a large group of brand and generic pharmaceutical
manufacturers, including the Company, received notice from the U.S. Congress
that the Committee on Energy and Commerce (the "Committte") had begun an
industry-wide investigation into pharmaceutical reimbursements and rebates under
Medicaid. In order to conduct the investigation, the Committee has requested
certain pricing and other information relating to certain drugs produced by
these pharmaceutical manfacturers because the investigation has only recently
begun, the Company is not in a position to determine what action, if any, the
federal government may take and what the impact such action could have on our
business, prospects or financial conditions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits:
10.9.4 Amendment to Employment Agreement, dated as of June 2003,
by and between Pharmaceutical Resources, Inc., and Scott L.
Tarriff.
10.9.5 Terms of Separation from Employment, Consulting, and
Post-Employment Obligations, dated as of June 18, 2003,
between Pharmaceutical Resources, Inc. and Kenneth I.
Sawyer.
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10.48 Amended and Restated License and Supply Agreement, dated as
of April 16, 2003, among SB Pharmco Puerto Rico Inc.,
SmithKline Beecham Corporation, Beecham Group p.l.c. and
Par Pharmaceutical, Inc.*
10.49 Amended and Restated Settlement Agreement, dated as of
April 16, 2003, among SmithKline Beecham Corporation,
Beecham Group p.l.c. and Par Pharmaceutical, Inc. and
Pentech Pharmaceuticals, Inc.*
31.1 Certification by the Executive Vice President pursuant to
Rule 13a-14(a) of the Exchange Act.
31.2 Certification by the Chief Financial Officer pursuant to
pursuant to Rule 13a-14(a) of the Exchange Act.
32.1 Certification by the Executive Vice President pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 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 these exhibits have been omitted and
have been filed with the Securities and Exchange Commission
pursuant to a request for confidential treatment thereof.
(b) Reports on Form 8-K:
On July 28, 2003, July 9, 2003 and June 23, 2003, the Company filed
Current Reports on Form 8-K.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
August 11, 2003 /s/ Scott L. Tarriff
--------------------
Scott L. Tarriff
EXECUTIVE VICE PRESIDENT
August 11, 2003 /s/ Dennis J. O'Connor
----------------------
Dennis J. O'Connor
VICE PRESIDENT; CHIEF FINANCIAL OFFICER AND
SECRETARY
(Principal Accounting and Financial Officer)
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.9.4 Amendment to Employment Agreement, dated as of June 18, 2003, by
and between Pharmaceutical Resources, Inc., and Scott L. Tarriff.
10.9.5 Terms of Separation from Employment, Consulting, and
Post-Employment Obligations, dated as of June 18, 2003, between
Pharmaceutical Resources, Inc. and Kenneth I. Sawyer.
10.48 Amended and Restated License and Supply Agreement, dated as of
April 16, 2003, among SB Pharmco Puerto Rico Inc., SmithKline
Beecham Corporation, Beecham Group p.l.c. and Par Pharmaceutical,
Inc.*
10.49 Amended and Restated Settlement Agreement, dated as of April 16,
2003, among SmithKline Beecham Corporation, Beecham Group p.l.c.
and Par Pharmaceutical, Inc. and Pentech Pharmaceuticals, Inc.*
31.1 Certification by the Executive Vice President pursuant to Rule
13a-14(a) of the Exchange Act.
31.2 Certification by the Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act.
32.1 Certification by the Executive Vice President pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 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 these exhibits have been omitted and have
been filed with the Securities and Exchange Commission pursuant to
a request for confidential treatment thereof.
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