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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: April 4, 2004
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 May 11, 2004:
34,239,891
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
APRIL 4, DECEMBER 31,
ASSETS 2004 2003
------ ---- ----
Current assets:
Cash and cash equivalents $95,416 $162,549
Available for sale securities 290,668 195,500
Accounts receivable, net of allowances of
$31,917 and $40,357 168,948 157,707
Inventories, net 78,434 66,713
Prepaid expenses and other current assets 18,979 10,033
Deferred income tax assets 32,681 34,473
------ ------
Total current assets 685,126 626,975
Property, plant and equipment, at cost less
accumulated depreciation and amortization 48,582 46,813
Investment - Advancis 9,160 7,500
Intangible assets, net 34,052 35,564
Goodwill 24,662 24,662
Deferred charges and other assets 6,641 6,899
Non-current deferred income tax assets, net 13,487 14,399
------ ------
Total assets $821,710 $762,812
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $225 $122
Accounts payable 35,207 20,157
Payables due to distribution agreement partners 95,195 88,625
Accrued salaries and employee benefits 3,962 7,363
Accrued expenses and other current liabilities 16,591 24,654
Income taxes payable 36,278 26,252
------ ------
Total current liabilities 187,458 167,173
Long-term debt, less current portion 200,410 200,211
Other long-term liabilities 347 347
Commitments and contingencies
Stockholders' 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: 34,496,449 and 34,318,163 shares 345 343
Additional paid-in capital 179,067 171,931
Retained earnings 254,686 224,480
Accumulated other comprehensive loss (603) (1,673)
------- -------
Total stockholders' equity 433,495 395,081
------- -------
Total liabilities and stockholders' equity $821,710 $762,812
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
2
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
(In Thousands, Except Per Share Amounts)
(Unaudited)
THREE MONTHS ENDED
------------------
APRIL 4, MARCH 30,
2004 2003
---- ----
Revenues:
Net product sales $211,039 $100,684
Other product related revenues 728 5,728
--- -----
Total revenues 211,767 106,412
Cost of goods sold 141,215 51,109
------- ------
Gross margin 70,552 55,303
Operating expenses (income):
Research and development 6,478 6,469
Selling, general and administrative 14,255 11,890
------ ------
Total operating expenses 20,733 18,359
Operating income 49,819 36,944
Other expense (22) (34)
Interest (expense) income, net (279) 169
--- ---
Income before provision for income taxes 49,518 37,079
Provision for income taxes 19,312 14,646
------ ------
Net income 30,206 22,433
Retained earnings, beginning of period 224,480 101,947
------- -------
Retained earnings, end of period $254,686 $124,380
======= =======
Net income per share of common stock:
Basic $.88 $.68
======= =======
Diluted $.85 $.67
======= =======
Weighted average number of
common shares outstanding:
Basic 34,498 32,886
====== ======
Diluted 35,555 33,634
====== ======
The accompanying notes are an integral part of these consolidated financial statements.
3
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
------------------
APRIL 4, MARCH 30,
2004 2003
---- ----
Cash flows provided by operating activities:
Net income $30,206 $22,433
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income taxes 2,704 5,477
Depreciation and amortization 2,911 1,750
Inventory reserves 284 (881)
Allowances against accounts receivable (8,440) 3,762
Gain on sale of property (2,812) -
Stock option activity 392 456
Other (692) -
Changes in assets and liabilities:
Increase in accounts receivable (2,801) (20,921)
(Increase) decrease in inventories (12,005) 1,075
Decrease in prepaid expenses and other assets 1,307 2,379
Increase in accounts payable 15,021 916
Increase in payables due to distribution agreement partners 6,570 223
(Decrease) increase in accrued expenses and other liabilities (11,509) 487
Increase in income taxes payable 12,327 7,544
-------- -------
Net cash provided by operating activities 33,463 24,700
-------- -------
Cash flows from investing activities:
Capital expenditures (5,156) (4,086)
Note receivable (10,000) -
Acquisition of available for sale investments (95,168) -
Proceeds from sale of fixed assets 4,980 -
-------- -------
Net cash used in investing activities (105,344) (4,086)
-------- -------
Cash flows from financing activities:
Proceeds from issuances of Common Stock 4,445 696
Issuance of debt 399 -
Principal payments under long-term debt and other borrowings (96) (944)
-------- -------
Net cash provided by (used in) financing activities 4,748 (248)
-------- -------
Net (decrease) increase in cash and cash equivalents (67,133) 20,366
Cash and cash equivalents at beginning of period 162,549 65,121
-------- -------
Cash and cash equivalents at end of period $95,416 $85,487
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Taxes $4,929 $1,625
======== =======
Interest $2,922 $33
======== =======
Non-cash transactions:
Tax benefit from exercise of stock options $2,301 $1,092
======== =======
Increase in fair value of available for sale securities $1,688 $ -
======== =======
The accompanying notes are an integral part of these consolidated financial statements.
4
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 4, 2004
(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 between Par and 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 product in oral suspension form. In April
2004, the Company entered into a definitive agreement to acquire Kali
Laboratories, Inc. ("Kali"), a generic pharmaceutical research and development
company located in Somerset, New Jersey, for up to approximately $135,000 in
cash and warrants. Under the terms of the agreement, the Company will purchase
all of the capital stock of Kali. The acquisition will not require the approval
of PRX's stockholders. The transaction will be accounted for using the purchase
method and is expected to close in the second quarter of 2004.
NOTE 1 - BASIS OF PREPARATION:
The accompanying consolidated financial statements at April 4, 2004 and for
the three-month periods ended April 4, 2004 and March 30, 2003 are unaudited; in
the opinion of the Company's management, however, such statements include all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the information presented therein. The consolidated balance sheet at
December 31, 2003 was derived from the Company's audited consolidated financial
statements at such date.
Pursuant to accounting requirements of the Securities and Exchange
Commission (the "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.
Results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years. Certain items in 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 the 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. SFAS 148 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.
5
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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:
THREE MONTHS ENDED
------------------
APRIL 4, MARCH 30,
2004 2003
---- ----
Net income, as reported $30,206 $22,433
Deduct: Stock-based employee compensation expense determined
under the fair value- based method, net of related tax effects (7,634) (2,638)
----- -----
Pro forma net income $22,572 $19,795
====== ======
Net income per share of common stock:
As reported -Basic $.88 $.68
====== ======
As reported -Diluted $.85 $.67
====== ======
Pro forma -Basic $.65 $.60
====== ======
Pro forma -Diluted $.63 $.59
====== ======
As permitted under SFAS 123, the Company has 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-based method of SFAS 148. The fair value of the options granted during each of the three-month
periods has been estimated at the date of grant using the Black-Scholes stock option pricing model, based
on the following assumptions:
THREE MONTHS ENDED
------------------
APRIL 4, MARCH 30,
2004 2003
---- ----
Risk-free interest rate 4.0% 4.3%
Expected term 5.0 years 4.9 years
Expected volatility 59.0% 63.7%
It is assumed that no dividends will be paid for the entire term of the options. The weighted
average per share fair values of options granted in the first quarter of fiscal years 2004 and 2003 were
$32.85 and $17.88, respectively.
NOTE 3 - AVAILABLE FOR SALE SECURITIES:
At April 4, 2004 and December 31, 2003, all of the Company's investments in marketable securities
were classified as available-for-sale and, as a result, were reported at fair value. The following is a
summary of the Company's available-for-sale securities at April 4, 2004:
UNREALIZED
---------- FAIR
COST GAIN LOSS VALUE
---- ---- ---- ------
Debt securities issued by various state and local
municipalities and agencies $230,998 $- $(48) $230,950
Securities issued by United States
government and agencies 59,642 76 - 59,718
------- -- - ------
Total $290,640 76 $(48) $290,668
======= == == =======
6
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The following is a summary of the Company's available-for-sale securities
at December 31, 2003:
UNREALIZED
---------- FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Debt securities issued by various state and local
municipalities and agencies $185,450 $- $- $185,450
Securities issued by United States
government and agencies 10,080 - (30) 10,050
------ ---- -- ------
Total $195,530 - $(30) $195,500
======= ==== ==== =======
All of the securities are available for immediate sale and have been classified as short-term. There were
no proceeds from the sale of securities in fiscal years 2004 or 2003. The following table summarizes the
contractual maturities of debt securities at April 4, 2004 and December 31, 2003:
APRIL 4, 2004 DECEMBER 31, 2003
------------- -----------------
FAIR FAIR
COST VALUE COST VALUE
---- ----- ---- -----
Less than one year $59,642 $59,718 $10,080 $10,050
Due in 1-2 years - - - -
Due in 2-5 years - - - -
Due after 5 years 230,998 230,950 185,450 185,450
------- ------- ------- -------
Total $290,640 $290,668 $195,530 $195,500
======= ======= ======= =======
In addition to the short-term investments described above, the Company paid $10,000 to purchase one
million shares of the common stock of Advancis Pharmaceutical Corporation ("Advancis"), a pharmaceutical
company based in Germantown, Maryland, at $10 per share in its initial public offering of six million shares
on October 16, 2003. The transaction closed on October 22, 2003. The Company's investment represented an
ownership position of 4.4% of the outstanding common stock of Advancis. As of April 4, 2004, the fair value
of the Company's investment in Advancis was $9,160, based on the market value of the common stock of Advancis
at that date. To date, the Company has recorded an unrealized loss on the investment of $840 that was charged
to accumulated other comprehensive loss, net of taxes of $327, at April 4, 2004.
NOTE 4 - ACCOUNTS RECEIVABLE:
APRIL 4, DECEMBER 31,
2004 2003
---- ----
Trade accounts receivable, net of customer rebates and chargebacks $200,144 $196,888
Other accounts receivable 721 1,176
-------- --------
Allowances:
Doubtful accounts 1,847 1,756
Returns 12,895 13,256
Price adjustments and allowances 17,175 25,345
------ ------
31,917 40,357
------ ------
Accounts receivable,
net of allowances $168,948 $157,707
======== =======
The trade accounts receivable amounts presented above at April 4, 2004 and December 31, 2003 are net of
provisions for customer rebates of $22,530 and $23,793, and of chargebacks of $72,286 and $75,598,
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 that they resell to specific healthcare providers on the basis of prices negotiated between the
Company and the providers.
7
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The accounts receivable allowances include provisions for doubtful
accounts, returns and price adjustments and allowances. 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. The Company may conduct sales or trade-show promotions through which
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 that 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 market exclusivity periods. 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 shelf-stock adjustments 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 to the customer. In addition, the Company
may offer price protection with respect to existing products for which it
anticipates significant price erosion through increases 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.
Two generic competitors have been granted United States Food and Drug
Administration ("FDA") approval to market generic versions of megestrol acetate
oral suspension, but, as of December 31, 2003, had only a minimal impact on the
Company's net sales of the product. The Company expects that sales and gross
margins on megestrol acetate oral suspension will begin to decline in fiscal
year 2004 due to the effects of competition. Net sales of megestrol acetate oral
suspension were approximately $18,700 for the first quarter of 2004, decreasing
$1,870 compared to the first quarter of 2003. The Company will continue to
evaluate the effects of competition and will record a price protection reserve
when, if and to the extent that it deems necessary.
As a result of generic competition beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing exclusivity period,
the sales price for fluoxetine 10 mg and 20 mg tablets and 40 mg capsules
substantially declined from the price that the Company had charged during the
exclusivity period. Despite pricing declines, fluoxetine 40 mg capsules was a
significant sales and gross margin contributor in fiscal years 2002 and 2003. In
the first quarter 2004, however, competitive factors led to additional pricing
pressure on fluoxetine 40 mg capsules, resulting in lower net sales and gross
margins. Net sales of fluoxetine were approximately $14,900, for the most recent
quarter, decreasing $5,027 compared to the first quarter of the prior year. The
Company will continue to evaluate the effects of competition and will record a
price protection reserve when, if and to the extent that it deems necessary.
In fiscal year 2003, Par obtained the marketing rights to paroxetine, the
generic version of GlaxoSmithKline's ("GSK") Paxil(R), in connection with a
litigation settlement (the "GSK Settlement") between the Company, GSK and
certain of its affiliates, and Pentech Pharmaceuticals, Inc. ("Pentech"). As a
result of the GSK Settlement, Par and GSK entered into an agreement (the "GSK
Supply Agreement") pursuant to which Par began marketing paroxetine, supplied
and licensed from GSK, in the Commonwealth of Puerto Rico in May 2003 and the
United States in September 2003. The Company believes that other generic drug
manufacturers have filed Abbreviated New Drug Applications ("ANDAs") in respect
of paroxetine and that the marketing exclusivity period ended on March 8, 2004.
In May 2004, one additional competitor announced it would launch a competing
paroxetine product shortly; however, the Company cannot now predict with
certainty the timing of launches by any additional competitors or the potential
effect of such competition on its sales. The Company will continue to evaluate
the effects of competition and will record a price protection reserve when, if
and to the extent that it deems necessary.
8
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 5 -INVENTORIES, NET:
APRIL 4, DECEMBER 31,
2004 2003
---- ----
Raw materials and supplies, net $23,252 $21,551
Work-in-process and finished goods, net 55,182 45,162
------ ------
$78,434 $66,713
====== ======
NOTE 6 - PREPAID EXPENSES AND OTHER CURRENT ASSETS:
In March 2004, the Company made a loan to Kali that is included in prepaid expenses and other current assets
on the Company's consolidated balance sheets. The loan, evidenced by a note in the principal amount of $10,000,
bears interest at the annual rate of 2.3%. The principal of and all of the accrued interest on the note will
become due and payable in full on the earlier of March 30, 2005 and immediately upon the consummation of any
transaction that results in a change of control of Kali, as defined in the note. In April 2004, the Company
entered into a definitive agreement to acquire all of the capital stock of Kali (see "Note 12-Subsequent
Events").
NOTE 7 - INTANGIBLE ASSETS, NET:
APRIL 4, DECEMBER 31,
2004 2003
---- ----
Trademark licensed from BMS $5,000 $5,000
BMS Asset Purchase Agreement, net of accumulated amortization
of $3,482 and $3,064 8,218 8,636
Product license fees, net of accumulated amortization of $1,562 and $1,135 8,743 9,170
Genpharm Distribution Agreement, net of accumulated amortization
of $4,153 and $3,972 6,680 6,861
Intellectual property, net of accumulated amortization of $1,383 and $1,202 5,198 5,378
Genpharm Profit Sharing Agreement, net of accumulated amortization
of $2,287 and $1,981 213 519
--- ---
$34,052 $35,564
====== ======
The Company recorded amortization expense related to intangible assets of $1,512 and $1,009, respectively,
for the three-month periods ended April 4, 2004 and March 30, 2003. Amortization expense related to the
intangible assets currently being amortized is expected to total approximately $5,147 in 2004, $3,773 in 2005,
$3,115 in 2006, $3,115 in 2007, $3,115 in 2008 and $5,300 thereafter. Intangible assets not being amortized at
April 4, 2004 and December 31, 2003 were product license fees of $6,999 and a trademark licensed from BMS of
$5,000.
The product license fees of $6,999 consist of payments made by Par pursuant to agreements with Breath Ltd.
of the Arrow Group ("Breath") and FineTech related to latanoprost ophthalmic solution 0.005%, the generic
equivalent of Pharmacia Corporation's Xalatan(R), a glaucoma medication. In April 2004, the trial related to
Par's ANDA filing of latanoprost has concluded and the parties are awaiting the District Court's decision (see
"Note 11 -Commitments, Contingencies and Other Matters-Legal Proceedings").
NOTE 8 - 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 April 4, 2004 and December 31, 2003, the Company had net current
deferred income tax assets of $32,681 and $34,473 and net non-current deferred income tax assets of $13,487 and
$14,399, respectively. Current deferred income tax assets in both periods consisted primarily of temporary
differences related to accounts receivable reserves, and non-current deferred income tax assets in both periods
included the tax benefit related to purchased call options.
9
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9 - CHANGES IN SHAREHOLDERS' EQUITY:
Changes in the Company's Common Stock and Additional Paid-in Capital accounts during the three-month
period ended April 4, 2004 were as follows:
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE
SHARES AMOUNT CAPITAL GAINS (LOSSES)
------ ------ ------- --------------
Balance, January 1, 2004 34,318 $343 $171,931 $(1,673)
Comprehensive income:
Unrealized gains on marketable
securities, net of tax - - - 1,070
Exercise of stock options 177 2 4,385 -
Tax benefit from exercise of stock options - - 2,301 -
Employee stock purchase program 1 - 58 -
Compensatory arrangements - - 392 -
------ ----- --- --------
Balance, April 4, 2004 34,496 $345 $179,067 $(603)
====== === ======= ===
THREE MONTHS ENDED
------------------
APRIL 4, MARCH 30,
COMPREHENSIVE INCOME: 2004 2003
---- ----
Net income $30,206 $22,433
Other comprehensive gains:
Unrealized gains on marketable securities, net of tax 1,070 -
----- ---------
Comprehensive income $31,276 $22,433
====== ======
NOTE 10 - EARNINGS PER SHARE:
The following is a reconciliation of the amounts used to calculate basic and diluted earnings per share:
THREE MONTHS ENDED
APRIL 4, MARCH 30,
2004 2003
---- ----
Net income $30,206 $22,433
Basic:
Weighted average number of common
shares outstanding 34,498 32,886
Net income per share of common stock $.88 $.68
=== ===
Assuming dilution:
Weighted average number of common
shares outstanding 34,498 32,886
Effect of dilutive options 1,057 748
----- ---
Weighted average number of common
shares outstanding 35,555 33,634
Net income per share of common stock $.85 $.67
=== ===
Outstanding options of 1,244 and 29 as of April 4, 2004 and March 30, 2003, 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 during the respective periods. In addition, outstanding warrants sold
concurrently with the prior sale of senior subordinated convertible notes in September 2003 were not included
in the computation of diluted earnings per share as of April 4, 2004. The warrants are exercisable for an
aggregate of 2,253 shares at an exercise price of $105.20 per share.
10
NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
LEGAL PROCEEDINGS:
On March 9, 2004, the Congress of California Seniors brought an action
against GSK and the Company concerning the sale of paroxetine in the State of
California. On April 28, 2004, GSK, with the consent of the Company, removed the
action from state court to federal court in California. The Company intends to
defend vigorously the claims set forth in the complaint.
On September 25, 2003, the Office of the Attorney General of the
Commonwealth of Massachusetts filed a complaint in federal district court in
Boston against Par and 12 other leading generic pharmaceutical companies,
alleging principally that Par and such other companies violated, through their
marketing and sales practices, state and federal laws, including allegations of
common law fraud and violations of Massachusetts false statements statutes, by
inflating generic pharmaceutical product prices paid for by the Massachusetts
Medicaid program. Par has waived service of process with respect to the
complaint. The complaint seeks injunctive relief, treble damages, disgorgement
of excessive profits, civil penalties, reimbursement of investigative and
litigation costs (including experts' fees) and attorneys' fees. In addition, on
September 25, 2003, Par and a number of other generic and brand pharmaceutical
companies were sued by a New York county, which has alleged violations of laws
(including the Racketeer Influenced and Corrupt Organizations Act, common law
fraud and obtaining funds by false statements) related to participation in the
Medicaid program. The complaint seeks declaratory relief; actual, statutory and
treble damages, with interest; punitive damages; an accounting; a constructive
trust and restitution; attorneys' and experts' fees and costs. This case was
transferred to the District of Massachusetts for coordinated and consolidated
pre-trial proceedings. Par and the other defendants involved in the litigation
filed a motion to dismiss on January 29, 2004. Par intends to defend vigorously
the claims asserted in both complaints. The Company cannot predict with
certainty at this time the outcome or the effects on the Company of such
litigations. Accordingly, no assurance can be given that such litigations or any
other similar litigation by other states or jurisdictions, if instituted, will
not have a material adverse effect on the Company's financial condition, results
of operations, prospects or business.
In October 2003, Apotex Pharmaceutical Healthcare, Inc. ("Apotex") filed a
complaint against Par in the United States District Court for the Eastern
District of Pennsylvania, alleging violations of state and federal antitrust
laws as a result of the Company's settlement with GSK and the GSK Supply
Agreement. Par filed a motion to dismiss the action in its entirety in December
2003 and a briefing on that motion was completed in April 2004. Par intends to
defend vigorously this action, and may assert counterclaims against Apotex and
claims against third parties.
In August 2003, Teva Pharmaceuticals USA, Inc. ("Teva USA") filed a lawsuit
against the Company and Par in the United States District Court for the District
of Delaware after having received approval from the FDA to launch a generic
version of BMS's Megace(R), which generic product competes with the Company's
megestrol acetate oral suspension product. In the lawsuit, Teva USA seeks a
declaration that its product has not infringed and will not infringe any of
Par's four patents relating to megestrol acetate oral suspension. On August 22,
2003, Par filed a counterclaim against Teva USA alleging willful infringement of
one of Par's four patents relating to megestrol acetate oral suspension. Par
moved to dismiss the action with respect to the other three patents for lack of
subject matter jurisdiction and the motion was granted. The Company intends to
pursue its counterclaim against Teva USA and vigorously defend the lawsuit. A
trial date has been scheduled by the Court for April 2005.
On July 15, 2003, the Company and Par filed a lawsuit against Roxane
Laboratories, Inc. ("Roxane") in the United States District Court for the
District of New Jersey. The Company and Par alleged that Roxane had infringed
Par's U.S. Patents numbered 6,593,318 and 6,593,320 relating to megestrol
acetate oral suspension. Roxane has denied these allegations and has
counterclaimed for declaratory judgments of non-infringement and invalidity of
both patents.
On May 28, 2003, Asahi Glass Company ("Asahi Glass") filed a lawsuit
against Par and several other parties in the United States District Court for
the Northern District of Illinois alleging, among other things, violations of
state and federal antitrust laws relating to the settlement of GSK's patent
action against Pentech in respect of paroxetine. Pentech had granted Par rights
under Pentech's ANDA for paroxetine capsules. Pursuant to the GSK Settlement,
11
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
reached between the parties on April 18, 2003, Pentech and Par acknowledged that
the patent held by GSK is valid and enforceable and would be infringed by
Pentech's proposed capsule product and GSK agreed to allow Par to distribute in
Puerto Rico substitutable generic paroxetine immediate release tablets supplied
and licensed from GSK for a royalty payable to GSK. In addition, Par was granted
the right under the GSK Settlement to distribute the drug in the United States
if another generic version fully substitutable for Paxil(R) became available in
the United States. Par denied any wrongdoing in connection with the Asahi Glass
antitrust action and it filed a motion to dismiss the complaint on August 22,
2003. In October 2003, the court dismissed all of the state and federal
antitrust claims against Par. Subsequent to the October 2003 decision in the
District Court, the remaining state law claims were dismissed with prejudice and
Asahi filed an appeal with the United States Court of Appeals for the Federal
Circuit, which is presently pending. Briefing in that appeal should be concluded
later this year.
In February 2003, Abbott, Fornier Industrie et Sante and Laboratoires
Fournier S.A. filed a complaint in the United States District Court for the
District of New Jersey against Par, alleging that Par's generic version of
TriCor(R) (fenofibrate) infringes one or more claims of their patents. The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously this lawsuit and has filed an answer and a counterclaim, alleging
non-infringement and patent invalidity. At this time, it is not possible for the
Company to predict the outcome of this litigation with any certainty.
On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil")
filed a lawsuit against Kali in the United States District Court for the
District of New Jersey. Ortho-McNeil alleged that Kali infringed U.S. Patent No.
5,336,691 (the "691 patent") by submitting a Paragraph IV certification to the
FDA for approval of tablets containing tramadol hydrochloride and acetaminophen.
Par is Kali's exclusive marketing partner for these tablets. Kali has denied
Ortho-McNeil's allegation, asserting that the `691 patent was not infringed and
is invalid and/or unenforceable, and that the lawsuit is barred by unclean
hands. Kali also has counterclaimed for declaratory judgments of
non-infringement, invalidity and unenforceability of the `691 patent.
Breath filed an ANDA (currently pending with the FDA) for latanoprost,
which was developed by Breath 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) identified in
"Approved Drug Products with Therapeutic Equivalence Evaluations" are invalid,
unenforceable and/or will not be infringed by Par's generic version of
Xalatan(R). Par believes that its ANDA is the first to be filed for this drug
with a Paragraph IV certification. Pursuant to agreements with Breath and
FineTech, the Company had recorded product license fees of $6,999, which are
included in intangible assets on its consolidated balance sheets. As a result of
the filing of the ANDA, Pharmacia Corporation, Pharmacia AB, Pharmacia
Enterprises, S.A., Pharmacia and Upjohn Company (collectively, "Pharmacia") and
the Trustees of Columbia University in the City of New York ("Columbia"), filed
a lawsuit against Par on December 21, 2001 in the United States District Court
for the District of New Jersey, alleging patent infringement. Pharmacia and
Columbia sought an injunction enjoining approval of the Company's ANDA and the
marketing of its generic product prior to the expiration of their patents. On
February 8, 2002, Par answered the complaint and filed a counterclaim, which
sought a declaration that the patents-in-suit are invalid, unenforceable and/or
not infringed by Par's products and that the extension of the term of one of the
patents was invalid. All parties are seeking to recover their respective
attorneys' fees. The trial concluded in April 2004 and the parties are awaiting
the District Court's decision.
Par entered into a licensing agreement with developer Paddock Laboratories
("Paddock") to market testosterone 1% gel, a generic version of Unimed
Pharmaceuticals, Inc.'s ("Unimed") product Androgel(R). The product, if
successfully brought to market, would be manufactured by Paddock and marketed by
Par. Paddock has filed an ANDA (which is currently pending with the FDA) for the
testosterone 1% gel product. As a result of the filing of the ANDA, Unimed and
Laboratories Besins Iscovesco ("Besins"), co-assignees of the patent-in-suit,
filed a lawsuit against Paddock in the United States District Court for the
Northern District of Georgia alleging patent infringement on August 22, 2003.
Par has an economic interest in the outcome of this litigation by virtue of its
licensing agreement with Paddock. Unimed and Besins are seeking an injunction to
prevent Paddock from manufacturing the generic product. On November 18, 2003,
Paddock answered the complaint and filed a counterclaim, which seeks a
declaration that the patent-in-suit is invalid and/or not infringed by Paddock's
product. This case is currently in discovery. At this time, the Company is not
12
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
able to predict with any certainty the outcome of this litigation.
The Company and/or Par are parties to certain other litigation matters,
including product liability and patent actions; the Company believes that these
actions are incidental to the conduct of its business and that their ultimate
resolution thereof will not have a material adverse effect on its financial
condition, results of operations or liquidity. The Company intends to vigorously
defend or, in cases where the Company is plaintiff, to prosecute these actions.
OTHER MATTERS:
In June 2003, the Company received notice from the U.S. Congress that the
Committee on Energy and Commerce (the "Committee") had begun an industry-wide
(brand and generic product) investigation into pharmaceutical reimbursements and
rebates under Medicaid, to which the Company has responded. In order to conduct
the investigation, the Committee requested certain pricing and other
information, which the Company delivered in August 2003, relating to certain
drugs produced by these pharmaceutical manufacturers. Because the investigation
has only recently begun, it is premature to speculate what action, if any, the
federal government may take and what impact any such action could have on the
Company's business, prospects or financial condition.
NOTE 12 - SUBSEQUENT EVENTS:
In April 2004, the Company's marketing partner, Three Rivers Pharmaceutical
LLC ("Three Rivers"), received final approval from the FDA for ribavirin 200 mg
capsules, the generic version of Schering-Plough Corporation's ("Schering's")
Rebetol(R), which is indicated for the treatment of chronic hepatitis. Three
Rivers was awarded 180 days of shared marketing exclusivity, commencing at
launch, for being the first to file an ANDA containing a Paragraph IV
certification. Under the terms of its agreement with Three Rivers, Par has
exclusive marketing rights to sell Three Rivers' ribavirin product, which Par
launched in early April 2004. In addition to the competitor with shared
exclusivity, Warrick Pharmaceuticals, a subsidiary of Schering, also launched a
generic ribavirin product in the United States in April 2004. As a result of
launching the product, Schering will not receive a royalty from Three Rivers on
net sales of Three Rivers' and Par's generic ribavirin. Due to the additional
competition, the pricing pressure on ribavirin at launch was more substantial
than the Company had previously anticipated.
In April 2004, the Company entered into a definitive agreement to acquire
Kali for up to approximately $135,000 in cash and warrants. Under the terms of
the agreement, the Company will purchase all of the capital stock of Kali. The
acquisition will not require the approval of PRX's stockholders. The
transaction, which is subject to certain conditions, will be accounted for using
the purchase method and is expected to close in the second quarter of 2004. With
25 products in development, another 14 filed and awaiting regulatory approval,
and a research and development organization of 55 employees, the acquisition of
Kali would immediately and significantly expand the Company's research and
development capabilities. Included as part of the Company's purchase of Kali is
a lease, with a purchase option, of a 45,000-square foot manufacturing facility
in Somerset, New Jersey.
L. William Seidman was selected to the Company's board of directors (the
"board"), effective April 15, 2004. For more than the past five years, Mr.
Seidman has been Chief Commentator for CNBC-TV, Publisher of Bank Director
magazine and an independent consultant in the financial services industry.
In April 2004, the board authorized the purchase of up to $50,000 worth of
the Company's common stock. The purchases are expected to be made, subject to
compliance with applicable securities laws, from time to time in the open market
or in privately negotiated transactions. Common stock acquired through the
buyback program will be available for general corporate purposes. Pursuant to
the buyback program, the Company had purchased 275 shares of its common stock
for approximately $11,053 through May 11, 2004.
On May 3, 2004, Pentech filed an action against the Company in the United
States District Court for the Northern District of Illinois. This action alleges
that the Company is in breach of its contract with Pentech relating to the
supply and marketing of paroxetine. The Company believes that it is in
compliance with its agreement with Pentech and intends to vigorously defend this
action.
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 KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, TRENDS
AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH
COULD CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE
EXPRESSED HEREIN. THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE TYPICALLY BY
USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS," "ANTICIPATES,"
"CONTINUING," "ONGOING," "EXPECTS," "BELIEVES," OR SIMILAR WORDS AND PHRASES.
FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN THIS
DOCUMENT INCLUDE (I) INCREASED COMPETITION FROM NEW AND EXISTING COMPETITORS AND
PRICING PRACTICES FROM SUCH COMPETITORS (ESPECIALLY UPON COMPLETION OF
EXCLUSIVITY PERIODS), (II) PRICING PRESSURES RESULTING FROM THE CONTINUED
CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (III) THE AMOUNT OF FUNDS
AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND DEVELOPMENT
JOINT VENTURES, (IV) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR DELAYS AND
UNANTICIPATED COSTS IN OBTAINING REGULATORY APPROVALS, (V) CONTINUATION OF
DISTRIBUTION RIGHTS UNDER SIGNIFICANT AGREEMENTS, (VI) THE CONTINUED ABILITY OF
DISTRIBUTED PRODUCT SUPPLIERS TO MEET FUTURE DEMAND, (VII) THE COSTS AND OUTCOME
OF ANY THREATENED OR PENDING LITIGATIONS, INCLUDING PATENT AND INFRINGEMENT
CLAIMS, (VIII) UNANTICIPATED COSTS, DELAYS AND LIABILITIES IN INTEGRATING
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.
OVERVIEW
In the first quarter 2004, the Company increased sales and earnings over
the corresponding period of 2003; however, due to competition involving certain
key products, including fluoxetine 40 mg capsules and megestrol acetate oral
suspension, and delays in expected new product approvals such as ribavirin, the
Company could not match its results for the third and fourth quarters of 2003.
Net sales of the Company's top selling product, paroxetine, which the Company
began selling in the United States through a distribution agreement with GSK in
September 2003, remained strong, increasing over the immediately preceding two
quarters. The Company is making an effort to introduce new products in fiscal
year 2004 to offset sales and gross margin declines resulting from competition
involving certain of its significant products. The Company seeks to reduce its
dependence on its top selling products, by adding additional products through
its internal development program, new and existing distribution agreements or
acquisitions of complementary products or businesses.
Net sales and gross margin derived from generic pharmaceutical products
often follow a pattern based on regulatory and competitive factors believed by
management to be unique to the generic pharmaceutical industry. As the patent(s)
for a brand name product and the related exclusivity period expires, the first
generic manufacturer to receive regulatory approval for a generic equivalent of
the product is often able to capture a substantial share of the market. However,
as other generic manufacturers receive regulatory approvals for competing
products, the market share, and the price, of that product, will typically
decline, often significantly, depending on several factors, including the number
of competitors, the price of the brand product and the pricing strategy of the
new competitors. A large portion of the Company's historical revenues has been
derived from the sales of generic drugs during the 180-day marketing exclusivity
period and from the sale of generic products where there is limited competition.
In fiscal year 2003, Par obtained the marketing rights to paroxetine in
connection with the GSK Settlement. As a result of the GSK Settlement, Par and
GSK entered into the GSK Supply Agreement, pursuant to which Par began marketing
paroxetine, supplied and licensed from GSK, in the United States in September
2003 and the Commonwealth of Puerto Rico in May 2003. The GSK Settlement
provides that the Company's right to distribute paroxetine will be suspended if,
at any time, there is not another generic version fully substitutable for Paxil
available for purchase in the United States. On September 8, 2003, another
generic drug manufacturer, Apotex, launched a generic version of Paxil(R). In
April 2002, GSK launched a longer-lasting, newly patented version of the drug,
Paxil CR(R). The Company expects Paxil CR(R)'s market share to continue to grow
in fiscal year 2004, which may cause the Company's sales of paroxetine tablets
to decrease. The Company believes that other generic drug manufacturers have
14
filed ANDAs in respect of paroxetine and that the marketing exclusivity period
ended on March 8, 2004. In May 2004, one additional competitor announced it
would launch a competing paroxetine product shortly; however, the Company cannot
now predict with certainty the timing of launches by any additional competitors
or the potential effect of such competition on its sales and gross margins.
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.
Two generic competitors have been granted FDA approval to market generic
versions of megestrol acetate oral suspension, but, as of December 31, 2003, had
only a minimal impact on the Company's net sales of the product. The Company
expects sales and gross margins on megestrol acetate oral suspension will begin
to decline in fiscal year 2004 due to the effects of competition. Net sales of
megestrol acetate oral suspension were approximately $18,700 for the first
quarter of 2004, decreasing $1,870 compared to the first quarter of 2003. The
Company will continue to evaluate the effects of competition and will record a
price protection reserve when, if and to the extent that it deems necessary.
As a result of generic competition beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing exclusivity period,
the sales prices for fluoxetine 10 mg and 20 mg tablets and 40 mg capsules had
substantially declined from the prices that the Company had charged during the
exclusivity period. Despite pricing declines, fluoxetine 40 mg capsules was a
significant sales and gross margin contributor in fiscal years 2002 and 2003. In
the first quarter 2004, competitive factors led to additional pricing pressure
on fluoxetine 40 mg capsules resulting in lower sales and gross margins. The
Company will continue to evaluate the effects of competition and will record a
price protection reserve when, if and to the extent that it deems necessary.
In April 2004, the Company's marketing partner, Three Rivers, received
final approval from the FDA for ribavirin 200 mg capsules. Three Rivers was
awarded 180 days of shared marketing exclusivity, commencing at launch, for
being the first to file an ANDA containing a Paragraph IV certification. Under
the terms of its agreement with Three Rivers, Par has exclusive marketing rights
to sell Three Rivers' ribavirin product, which Par launched in early April 2004.
In addition to the competitor with shared exclusivity, Warrick Pharmaceuticals,
a subsidiary of Schering, launched a generic ribavirin product in the United
States in April 2004. As a result of launching the product, Schering will not
receive a royalty from Three Rivers on net sales of Three Rivers' and Par's
generic ribavirin. Due to the additional competition, the pricing pressure on
ribavirin at launch was more substantial than the Company had previously
anticipated.
Critical to the growth of the Company is the introduction of new
manufactured and distributed products at selling prices that generate
significant gross margins. The Company, through its internal development program
and strategic alliances and relationships, is committed to developing new
products that have limited competition and longer product life cycles. In
addition to expected new product introductions as part of its various strategic
alliances and relationships, the Company plans to continue to invest
significantly 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 complementary products and
businesses, additional first-to-file opportunities, selective vertical
integration with raw material suppliers and unique dosage forms to differentiate
its products in the marketplace.
In addition to its own product development program, the Company has several
strategic alliances through which it co-develops and distributes products. These
strategic alliances afford the Company many advantages, including additional
resources for increased activity, expertise for dissimilar products or
technologies, and a sharing of both the costs and risks of new product
development. As a result of its internal program and these strategic alliances,
the Company's pipeline of potential products includes 25 ANDAs (five of which
have been tentatively approved), three of which are for products developed by
Kali, pending with, and awaiting approval from, the FDA. The Company pays a
percentage of the gross profits or sales to its strategic partners on sales of
products covered by its distribution agreements. Generally, products that the
Company develops internally, without having to split any profits with its
strategic partners, contribute higher gross margins than products covered under
distribution agreements. 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.
In April 2004, the Company entered into a definitive agreement to acquire
Kali for up to approximately $135,000 in cash and warrants. Under the terms of
the agreement, the Company will purchase all of the capital stock of Kali. With
25 products in development, another 14 filed and awaiting FDA approval, and a
research and development organization of 55 employees, the acquisition of Kali
15
would immediately and significantly expand the Company's research and
development capabilities. Kali's 14 ANDAs include three products the Company
plans to market. The Company will be due royalty income from the other potential
products, which are subject to licensing agreements entered into before the
Company's acquisition of Kali. Included as part of the Company's purchase of
Kali is a lease, with a purchase option, of a 45,000-square foot manufacturing
facility in Somerset, New Jersey.
The Company believes its acquisition of Kali would fit into its
comprehensive business plan by significantly expanding its research and
development capabilities and substantially increasing the size of its product
portfolio. The acquisition would immediately increase the Company's pending
ANDAs from 25 to 36. The Company now expects to submit, together with its
strategic partners, at least 20 ANDAs in 2004. The acquisition would also add
diversity to the Company's development pipeline and provides four additional
first-to-file product opportunities strategically enhancing the prospects for
sustained long-term growth.
The Company also plans to submit its first New Drug Application ("NDA")
early in the third quarter of 2004 for a next-generation megestrol acetate oral
suspension product. If cleared for marketing, the product will utilize the
Megace(R) brand name, which Par licensed from BMS. In addition, a second
505(b)(2) NDA submission is planned for 2005 through Advancis. The Company has a
signed a letter of intent with Advancis to develop and market a low dose
pulsatile form of the antibiotic amoxicillin, utilizing Advancis' proprietary
PULSYS(TM) technology. If successfully developed, amoxicillin PULSYS(TM) would
be a once-daily version of the antibiotic amoxicillin that is administered for
fewer days with improved therapeutic effect.
RESULTS OF OPERATIONS
GENERAL
The Company's net income of $30,206 for the three-month period ended April
4, 2004 increased $7,773, from $22,433, for the three-month period ended March
30, 2003. Total revenues of $211,767 in the first quarter 2004 increased 99%,
from $106,412 in the first quarter 2003, primarily due to additional net sales
of paroxetine. The revenue growth resulted in higher gross margin dollars, which
increased to $70,552, or 33% of total revenues, in the most recent quarter, from
$55,303, or 52% of total revenues, in the corresponding quarter of 2003.
Research and development spending of $6,478 in the first quarter 2004 remained
at approximately the same level as the corresponding quarter of the prior year;
however, the Company expects to significantly increase its research and
development spending over the remainder of 2004. First quarter 2004 selling,
general and administrative costs were $14,255 compared to $11,890 in the
corresponding quarter of 2003. Selling, general and administrative costs in 2004
are net of a $2,812 gain on the sale of the Company's facility in Congers, New
York.
Sales and gross margins of the Company's products are principally dependent
upon (i) the pricing practices of competitors and any removal of competing
products from the market, (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 to the Company 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 and amount of customer service.
REVENUES
Revenues in the first quarter 2004 of $211,767 increased $105,355, or 99%,
from first quarter 2003 revenues of $106,412, primarily due to additional sales
from paroxetine and other new products. Net sales of paroxetine, which the
Company launched in September 2003 in the United States and is sold through the
GSK Supply Agreement, totaled approximately $104,544 in the first quarter of
2004. Additionally, net sales of other new products, including metformin ER
(Glucophage XR(R)), introduced in December 2003, mercaptopurine (Purinethol(R)),
introduced in February 2004, and torsemide (Demadex(R)), introduced in the
second quarter of 2003, contributed to the growth of revenues in 2004 and
partially offset lower sales of certain existing products, particularly
tizanidine (Zanaflex(R)). Net sales of fluoxetine and megestrol acetate oral
suspension were approximately $14,900 and $18,700, respectively, for the most
16
recent quarter, decreasing $5,027 and $1,870, respectively, compared to the
first quarter of the prior year. In addition, the Company's other product
related revenues in the first quarter 2004 of $728 generated from a profit
sharing agreement with Genpharm related to omeprazole decreased from $5,728 in
the corresponding period of 2003. Net sales of distributed products, which
consist of products manufactured under contract and licensed products, were
approximately 79% and 54%, respectively, of the Company's net sales in the first
quarter of fiscal years 2004 and 2003. Presently, 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 its suppliers to
meet expected demand could adversely affect the Company's future sales.
At this time, it is difficult to predict with accuracy the effects of
potential competition on future sales of paroxetine. Several market
uncertainties exist, including the possibility and timing of additional generic
competitors entering the market or the right of GSK, under the GSK Supply
Agreement, to suspend Par's right to distribute paroxetine if, at any time,
another generic version of Paxil(R) is not being marketed. In May 2004, one
additional competitor announced it would launch a competing paroxetine product
shortly. In addition, further pricing pressure due to competitive factors on
fluoxetine 40 mg and megestrol acetate oral suspension is expected to adversely
affect net sales and gross margins on these products in future periods.
Pursuant to an agreement with Genpharm, the Company receives a portion of
the profits, as defined in the agreement, generated from Kremers Urban
Development Co.'s ("KUDCo"), a subsidiary of Schwarz Pharma AG of Germany, sales
of omeprazole, the generic version of Astra Zeneca's Prilosec(R). In the third
quarter of 2003, two generic competitors began selling forms of omeprazole that
also compete with the prescription form of Prilosec(R), significantly reducing
the Company's share of profits related to omeprazole from approximately $12,800
for the first six months of fiscal year 2003 to $2,900 for the last six-months
of 2003. The Company expects that the impact of this competition will continue
to have an adverse effect on its omeprazole sales in future periods.
GROSS MARGIN
The Company's gross margin of $70,552 (33% of total revenues) in the first
quarter 2004 increased $15,249 from $55,303 (52% of total revenues) for the
first quarter 2003. The gross margin dollar increase was achieved primarily as a
result of contributions from sales of new products. In accordance with the GSK
Settlement and the Pentech Supply and Marketing Agreement, Par pays royalties to
GSK and Pentech on sales of paroxetine. As a result of these agreements, the
Company's gross margin as a percentage of its total revenues declined as net
sales of paroxetine after the allocation of profit splits yielded a
significantly lower gross margin percentage than the Company's average gross
margin as a percentage of total revenues of its other products in the
corresponding quarter of 2003.
As discussed above, the Company experienced lower sales and gross margins
for fluoxetine 40 mg capsules and megestrol acetate oral suspension in the first
quarter 2004. The Company's gross margins for paroxetine could also decline
when, if and as, additional manufacturers introduce and market comparable
generic products. Despite the possibility of additional competition on these
products, the Company anticipates all three products will remain as significant
contributors to its overall performance in fiscal year 2004.
Inventory write-offs of $1,980 in the first quarter 2004 increased from
$412 in the first quarter 2003. The inventory write-offs, taken in the normal
course of business, were related primarily to the disposal of finished products
due to short shelf lives and work in process inventory not meeting the Company's
quality control standards. The write-offs in the first quarter of 2004 included
the write-off of inventory for a product whose launch was delayed, as well as
normally occurring write-offs resulting from increased production required to
meet higher sales and inventory levels. The Company maintains inventory levels
that it believes are appropriate to optimize its customer service.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
The Company's first quarter expenditure of $6,478 in research and
development in 2004 was comparable to $6,469 spent in the first quarter of the
prior fiscal year. The Company expects its research and development spending to
increase substantially over the last three quarters of 2004. As previously
discussed, the Company executed a definitive agreement in April 2004 to acquire
17
Kali. The Company expects to utilize Kali, when acquired, to develop products
principally for its own new product pipeline. Although there can be no such
assurance, the Company believes that, with the addition of Kali, its research
and development expenses could approach $55,000 for fiscal year 2004.
The Company currently has 11 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 expects that at least eight of the
potential products in active development will be the subjects of biostudies
during fiscal year 2004.
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 and submitting the corresponding ANDAs to the FDA and,
subsequently, has agreed to manufacture the potential products covered under the
Agreement. Par is to 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 two ANDAs for potential products covered by the Genpharm 11 Product
Agreement pending with, and awaiting approval from, the FDA. Under the Genpharm
11 Product Agreement, the Company is currently marketing one product and
receiving royalties on another product marketed by an unaffiliated company.
The Company and Genpharm have also entered into a distribution agreement
(the "Genpharm Distribution Agreement"), dated March 25, 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 eight 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.
Genpharm and the Company share the costs of developing products covered
under an agreement (the "Genpharm Additional Product Agreement"), dated November
27, 2000. Currently, there is one ANDA for a potential product covered by the
Genpharm Additional Product Agreement pending with, and awaiting approval from,
the FDA. The Company is currently marketing two products under the Genpharm
Additional Product Agreement.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $14,255 for the first
quarter 2004, which reflected total costs of $17,067 (8% of total revenues) net
of a gain of $2,812 on the sale of the Company's facility in Congers, New York,
and an increase of $5,177 from $11,890 (11% of total revenues) in the
corresponding quarter of last year. The increase in 2004 was primarily
attributable to higher legal fees of $1,334, personnel costs of $997, including
those for information systems assessments, and, to a lesser extent, product
liability insurance, and marketing costs associated with new product
introductions. Distribution costs include those related to shipping product to
the Company's customers, primarily through the use of a common carrier or an
external distribution service. Shipping costs of $634 in the first quarter 2004
increased from $607 in the corresponding quarter of the prior year. Although
overall sales volumes increased in fiscal year 2004, shipping costs remained at
approximately the same level as fiscal year 2003 due to a reduced amount of
reliance on an external distribution service. The Company anticipates it will
continue to incur a high level of legal expenses related to the costs of
litigation relating to potential new product introductions (see "Notes to
Consolidated Financial Statements-Note 11-Commitments, Contingencies and Other
Matters-Legal Proceedings"). Although there can be no such assurance, selling,
general and administrative costs are expected to increase by 10% to 20% in
fiscal year 2004 primarily due to increased legal fees and marketing activities.
Par owned a facility of approximately 33,000 square feet located on six
acres in Congers, New York (the "Congers Facility"). In March 2004, the Company
sold the Congers Facility to Ivax Pharmaceuticals New York, LLC for $4,980 and
recorded a gain on the sale of $2,812.
18
INTEREST EXPENSE/INCOME
Net interest expense was $279 for the first quarter 2004 compared to net
interest income of $169 for the first quarter 2003. Net interest expense for the
first quarter 2004 includes interest payable on the Company's convertible notes,
partially offset by interest income derived primarily from short-term
investments. Net interest income in the first quarter of 2003 was primarily
derived from money market and other short-term investments.
INCOME TAXES
The Company recorded provisions for income taxes of $19,312 and $14,646,
respectively, for the three-month periods ended April 4, 2004 and March 30, 2003
based on the applicable federal and state tax rates for those periods (see
"Notes to Consolidated Financial Statements-Note 8-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, 2003. 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, 2003.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $95,416 at April 4, 2004 decreased $67,133
from $162,549 at December 31, 2003, primarily due to the purchase of
available-for-sale securities. The Company had cash provided by operations of
$33,463, gross proceeds of $4,980 from the sale of the Congers Facility and
$4,445 from the issuance of shares of Common Stock upon the exercise of stock
options. In the first quarter 2004, the Company made a loan to Kali of $10,000
and invested $5,156 in capital improvements, primarily for Phase II of the
expansion of its laboratories in Spring Valley, New York, and new production
machinery. The Company's cash balances are deposited primarily with financial
institutions in money market funds and overnight investments.
Working capital, which is current assets minus current liabilities, of
$497,668 increased $37,866, from $459,802 at December 31, 2003, primarily due to
increases in the Company's available-for-sale securities, partially offset by a
decrease in cash. Increases in the Company's accounts receivables and inventory
were partially offset by higher accounts payable and amounts due to distribution
agreement partners, particularly those due to GSK. The available for sale
securities includes debt securities issued by state and local municipalities and
agencies and securities issued by the United States government and agencies and
all are available for immediate sale. The working capital ratio, which is
calculated by dividing current assets by current liabilities, was 3.65x at April
4, 2004 compared to 3.75x at December 31, 2003. The Company believes that its
strong working capital ratio indicates the ability to meet its ongoing and
foreseeable obligations.
In September 2003, the Company sold an aggregate principal amount of
$200,000 of senior subordinated convertible notes pursuant to Rule 144A under
the Securities Act of 1933, as amended. Net proceeds of $177,945 from the notes,
which were net of underwriting costs of $5,250 and the net payment of $16,805
from the purchase of call options and sale of warrants, were used to purchase
available for sale securities in October 2003. The Company intends to use its
current liquidity to support the expansion of its business, including the
acquisition of Kali, increasing its research and development activities,
entering into product license arrangements and possibly acquiring other
complementary businesses and products, and for general corporate purposes.
As of April 4, 2004, the Company had payables owed to distribution
agreement partners of $95,195 related primarily to amounts due pursuant to
profit sharing agreements, particularly amounts owed to GSK on paroxetine. The
Company expects to pay these amounts out of its working capital during the
second quarter of 2004.
19
The dollar values of the Company's material contractual obligations and
commercial commitments as of April 4, 2004 were as follows:
Amounts Due by Period
---------------------
Total Monetary Apr.-Dec. 31 2005 to 2008 to 2010 and
Obligation Obligation 2004 2007 2009 thereafter
---------- ---------- ---- ---- ---- ----------
Operating leases $17,206 $2,343 $7,284 $4,485 $3,094
Convertible notes* 200,000 - - - 200,000
Other 635 171 464 - -
--- --- --- ------- --------
Total obligations $217,841 $2,514 $7,748 $4,485 $203,094
======= ===== ===== ===== =======
*The convertible notes mature on September 30, 2010, unless earlier converted or repurchased.
In addition to its internal research and development costs, the Company, from time to time,
enters into agreements with third parties for 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 are generally dependent on a third party achieving certain milestones or the timing of
third-party research and development or legal expenses. Due to the uncertainty of the timing or
realization of such commitments, these obligations are not included in the table above; however, the
agreements that contain such commitments that the Company believes are material are described below.
Payments made pursuant to these agreements are either capitalized or expensed according to the
Company's accounting policies.
Par and Nortec Development Associates, Inc. (a Glatt company) ("Nortec"), entered into an
agreement, dated October 22, 2003, in which the two companies agreed to develop additional products
that are not part of the two previous agreements between Par and Nortec. During the first two years of
the agreement, Par is obligated to make aggregate initial research and development payments to Nortec
in the amount of $3,000, of which $1,500 was paid by Par in fiscal year 2003, $1,000 is due in fiscal
year 2004 and $500 is due in fiscal year 2005. On or before October 15, 2005, Par has 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 Par 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 agreement for
$4,000, and the remaining 50% from its owners at the end of the fourth year for an additional $11,000.
The parties have agreed to certain revenue and royalty sharing arrangements before and after Par's
acquisition, if any, of Nortec.
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 its first commercial sale (if any).
Par entered into the Advancis Licensing Agreement, dated September 4, 2003, with Advancis to
market the antibiotic Clarithromycin XL. Pursuant to this agreement, Advancis is responsible for the
development and manufacture of the product, while Par will be responsible for marketing, sales and
distribution. If certain provisions in the agreement are met, Par has agreed to pay Advancis an
aggregate amount of up to $6,000, based on the achievement of certain milestones contained in the
agreement. An ANDA for the product is expected to be submitted to the FDA in the near future. Pursuant
to the agreement, Par has agreed to pay Advancis a certain percentage of the gross profits, as defined
in the Agreement, on all sales of the product if it is successfully developed and introduced into the
market.
Par entered into an agreement with BMS, dated August 6, 2003, to license the brand name Megace(R)
to be used for a potential new product currently in development. The product, if successfully
developed, would be a line extension of the Company's megestrol acetate oral suspension products.
Pursuant to this agreement, Par paid BMS $5,000 in August 2003, which is included in intangible assets
on the Company's consolidated balance sheets at April 4, 2004. As part of this agreement, Par also
provided BMS with funding of approximately $400 in fiscal year 2003 to support the active promotion of
the brand name, which was expensed as incurred, and will provide an additional $1,600 throughout 2004
to help retain brand equity and awareness among physicians.
20
In November 2002, the Company amended the Pentech Supply and Marketing
Agreement, dated November 2001, with Pentech to market paroxetine capsules.
Pursuant to the agreement, the Company paid all legal expenses up to $2,000,
which were expensed as incurred, to obtain final regulatory approval. Legal
expenses in excess of $2,000 were fully credited against profit payments to
Pentech. The Company had agreed to reimburse Pentech for costs associated with
the project of up to $1,300 for fiscal year 2003. In fiscal year 2003, the
Company paid Pentech $771 of these costs, which were charged to research and
development expenses as incurred. Pursuant to this agreement, Par and Pentech
share in net profits on Par's sales of paroxetine.
In July 2002, the Company and Three Rivers entered into the Three Rivers
Distribution Agreement, which was amended in October 2002, to market and
distribute ribavirin 200 mg capsules, the generic version of Schering's
Rebetol(R). Under the terms of the agreement, Three Rivers has agreed to supply
the product and was responsible for managing the regulatory process and patent
litigation. Par has the exclusive right to sell the product in non-hospital
markets and has agreed to 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 expense, and paid Three
Rivers and additional $500 when Par launched the product in April 2004.
Pursuant to the Genpharm 11 Product Agreement, Genpharm has agreed to
develop products, submit all corresponding ANDAs to the FDA and subsequently
manufacture the products covered under the agreement. Par has agreed to serve as
exclusive U.S. marketer and distributor of the products, pay a share of the
costs, including development and legal expenses incurred to obtain final
regulatory approval, and pay to Genpharm a percentage of the gross profits, as
defined in the agreement, on all sales of products covered by the agreement. In
the second quarter of 2002, the Company paid Genpharm a non-refundable fee of
$2,000, which is included in intangible assets, net of accumulated amortization,
on the Company's consolidated balance sheets, for two of the products. Pursuant
to the agreement, the Company's share of development and legal costs related to
the other products has been expensed as incurred. The Company will also be
required to make an additional non-refundable payment of up to $414 based upon
FDA acceptance of certain filings, as described in the agreement.
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. HighRapids 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
utilizing the Company's cash infusion for working capital and operating
expenses. Through April 4, 2004, the Company had invested $1,506 of its
potential investment. Due to HighRapids' current operating losses and the
Company's evaluation of its short-term prospects for profitability, the
investments were expensed as incurred and included in other expense on the
Company's consolidated statements of operations.
In April 2001, Par entered into a licensing agreement with Aveva Drug
Delivery Systems, (formerly Elan Transdermal Technologies, Inc.) ("Aveva"), a
U.S. subsidiary of Nitto Denko, to market a generic clonidine transdermal patch
(Catapres TTS(R)). Under such agreement, Aveva is responsible for the
development and manufacture of the product, while Par is responsible for its
marketing, sale and distribution. Pursuant to the agreement, Par paid Aveva
$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
Aveva $1,000 upon FDA approval of the product and royalties on 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, including the proceeds from the issuance of its convertible
notes. The Company anticipates that its capital spending in fiscal year 2004
will not exceed the level in fiscal year 2003. Implementation of the Company's
business plan may require additional debt and/or equity financing and there can
be no assurance that the Company will be able to obtain any additional required
financing when needed and on terms acceptable or favorable to it.
21
FINANCING
At April 4, 2004, the Company's total outstanding long-term debt, including
the current portion, was $200,635. The amount consisted primarily of senior
subordinated convertible notes and capital leases for computer equipment. In
September 2003, the Company sold an aggregate principal amount of $200,000 of
senior subordinated convertible notes pursuant to Rule 144A under the Securities
Act of 1933, as amended. The notes bear interest at an annual rate of 2.875%,
payable semi-annually on March 30 and September 30 of each year. The first
payment of $2,875 was made on March 29, 2004. The notes are convertible into
shares of Common Stock at an initial conversion price of $88.76 per share, only
upon the occurrence of certain events. The notes mature on September 30, 2010,
unless earlier converted or repurchased. The Company may not redeem the notes
prior to their maturity date.
SUBSEQUENT EVENTS
In April 2004, the Company's marketing partner, Three Rivers, received
final approval from the FDA for ribavirin 200 mg capsules. Three Rivers was
awarded 180 days of shared marketing exclusivity, commencing at launch, for
being the first to file an ANDA containing a Paragraph IV certification. Under
the terms of its agreement with Three Rivers, Par has exclusive marketing rights
to sell Three Rivers' ribavirin product, which Par launched in early April 2004.
In addition to the competitor with shared exclusivity, Warrick Pharmaceuticals,
a subsidiary of Schering, also launched a generic ribavirin product in the
United States in April 2004. As a result of its launching the product, Schering
will not receive a royalty from Three Rivers on net sales of Three Rivers' and
Par's generic ribavirin. Due to the additional competition, the pricing pressure
on ribavirin at launch was more substantial than the Company had previously
anticipated.
In April 2004, the Company entered into a definitive agreement to acquire
Kali for up to approximately $135,000 in cash and warrants. Under the terms of
the agreement, the Company will purchase all of the capital stock of Kali. The
acquisition, which is subject to various conditions, will not require the
approval of PRX's stockholders. The transaction will be accounted for using the
purchase method and is expected to close in the second quarter of 2004. With 25
products in development, another 14 filed and awaiting regulatory approval, and
a research and development organization of 55 employees, the acquisition of
Kali, if completed, would immediately and significantly expand the Company's
research and development capabilities. Included as part of the Company's
purchase of Kali is a lease, with a purchase option, of a 45,000-square foot
manufacturing facility in Somerset, New Jersey.
L. William Seidman was selected to the board, effective April 15, 2004. For
more than the past five years, Mr. Seidman has been Chief Commentator for
CNBC-TV, Publisher of Bank Director magazine and an independent consultant in
the financial services industry.
In April 2004, the board authorized the purchase of up to $50,000 worth of
the Company's common stock. The purchases are expected to be made, subject to
compliance with applicable securities laws, from time to time in the open market
or in privately negotiated transactions. Common stock acquired through the
buyback program will be available for general corporate purposes. Pursuant to
the buyback program, the Company had purchased 275 shares of its common stock
for approximately $11,053 through May 11, 2004.
On May 3, 2004, Pentech filed an action against the Company in the United
States District Court for the Northern District of Illinois. This action alleges
that the Company is in breach of its contract with Pentech relating to the
supply and marketing of paroxetine. The Company believes that it is in
compliance with its agreement with Pentech and intends to vigorously defend this
action.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to market risk primarily from changes in the market
values of its investments in marketable debt and government agency securities.
These instruments are classified as available for sale securities for financial
reporting purposes and have minimal or no interest risk due to their short-term
nature. Professional portfolio managers managed 100% of these available for sale
securities at April 4, 2004. Additional investments are made in overnight
deposits and money market funds. These instruments are classified as cash and
cash equivalents for financial reporting purposes and have minimal or no
interest risk due to their short-term nature.
22
The following table summarizes the available for sale securities that
subject the Company to market risk at April 4, 2004 and December 31, 2003:
APRIL 4, DEC. 31,
2004 2003
---- ----
Debt securities issued by various state and local
municipalities and agencies $230,950 $185,450
Securities issued by United States government and agencies 59,718 10,050
------ ------
Total $290,668 $195,500
======= =======
AVAILABLE FOR SALE SECURITIES:
The primary objectives for the Company's investment portfolio are liquidity and safety of principal.
Investments are made to achieve the highest rate of return while retaining safety of principal. The
Company's investment policy limits investments to certain types of instruments issued by institutions and
governmental agencies with investment-grade credit ratings. A significant change in interest rates could
affect the market value of the $290,668 in available-for-sale securities that have a maturity greater than
one year.
The Company is also subject to market risk in respect of its investment in Advancis, which is subject
to fluctuations in the price of Advancis common stock, which is publicly traded. The Company paid $10,000 to
purchase one million shares of the common stock of Advancis, at $10 per share, in its initial public
offering of six million shares on October 16, 2003. The transaction closed on October 22, 2003. The value of
the Company's investment in Advancis as of April 4, 2004 was $9,160.
ITEM 4. CONTROLS AND PROCEDURES.
Based on an evaluation under the supervision and with the participation of the Company's management,
the Company's principal executive officer and principal financial officer have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were effective as of April 4, 2004 to ensure that information required to
be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Commission's rules and forms.
There were no changes in the Company's internal control over financial reporting identified in
management's evaluation during the first quarter of fiscal 2004 that have materially affected or are
reasonably likely to materially affect the Company's internal controls over financial reporting.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- -------------------------
On March 9, 2004, the Congress of California Seniors brought an action
against GSK and the Company concerning the sale of paroxetine in the State of
California. On April 28, 2004, GSK, with the consent of the Company, removed the
action from state court to federal court in California. The Company intends to
defend vigorously the claims set forth in the complaint.
On September 25, 2003, the Office of the Attorney General of the
Commonwealth of Massachusetts filed a complaint in federal district court in
Boston against Par and 12 other leading generic pharmaceutical companies,
alleging principally that Par and such other companies violated, through their
marketing and sales practices, state and federal laws, including allegations of
common law fraud and violations of Massachusetts false statements statutes, by
inflating generic pharmaceutical product prices paid for by the Massachusetts
Medicaid program. Par has waived service of process with respect to the
complaint. The complaint seeks injunctive relief, treble damages, disgorgement
of excessive profits, civil penalties, reimbursement of investigative and
litigation costs (including experts' fees) and attorneys' fees. In addition, on
September 25, 2003, Par and a number of other generic and brand pharmaceutical
companies were sued by a New York county, which has alleged violations of laws
(including the Racketeer Influenced and Corrupt Organizations Act, common law
fraud and obtaining funds by false statements) related to participation in the
Medicaid program. The complaint seeks declaratory relief; actual, statutory and
treble damages, with interest; punitive damages; an accounting; a constructive
trust and restitution; attorneys' and experts' fees and costs. This case was
transferred to the District of Massachusetts for coordinated and consolidated
pre-trial proceedings. Par and the other defendants involved in the litigation
filed a motion to dismiss on January 29, 2004. Par intends to defend vigorously
the claims asserted in both complaints. The Company cannot predict with
certainty at this time the outcome or the effects on the Company of such
litigations. Accordingly, no assurance can be given that such litigations or any
other similar litigation by other states or jurisdictions, if instituted, will
not have a material adverse effect on the Company's financial condition, results
of operations, prospects or business.
In October 2003, Apotex filed a complaint against Par in the United States
District Court for the Eastern District of Pennsylvania alleging violations of
state and federal antitrust laws as a result of the Company's settlement with
GSK and the GSK Supply Agreement. Par filed a motion to dismiss the action in
its entirety in December 2003 and a briefing on that motion was completed in
April 2004. Par intends to defend vigorously this action, and may assert
counterclaims against Apotex and claims against third parties.
In August 2003, Teva USA filed a lawsuit against the Company and Par in the
United States District Court for the District of Delaware after having received
approval from the FDA to launch a generic version of BMS's Megace(R), which
generic product competes with the Company's megestrol acetate oral suspension
product. In the lawsuit, Teva USA seeks a declaration that its product has not
infringed and will not infringe any of Par's four patents relating to megestrol
acetate oral suspension. On August 22, 2003, Par filed a counterclaim against
Teva USA alleging willful infringement of one of Par's four patents relating to
megestrol acetate oral suspension. Par moved to dismiss the action with respect
to the other three patents for lack of subject matter jurisdiction and the
motion was granted. The Company intends to pursue its counterclaim against Teva
USA and vigorously defend the lawsuit. A trial date has been scheduled by the
Court for April 2005.
On July 15, 2003, the Company and Par filed a lawsuit against Roxane in the
United States District Court for the District of New Jersey. The Company and Par
alleged that Roxane had infringed Par's U.S. Patents numbered 6,593,318 and
6,593,320 relating to megestrol acetate oral suspension. Roxane has denied these
allegations and has counterclaimed for declaratory judgments of non-infringement
and invalidity of both patents.
On May 28, 2003, Asahi Glass filed a lawsuit against Par and several other
parties in the United States District Court for the Northern District of
Illinois alleging, among other things, violations of state and federal antitrust
laws relating to the settlement of GSK's patent action against Pentech in
respect of paroxetine. Pentech had granted Par rights under Pentech's ANDA for
paroxetine capsules. Pursuant to the GSK Settlement reached between the parties
on April 18, 2003, Pentech and Par acknowledged that the patent held by GSK is
valid and enforceable and would be infringed by Pentech's proposed capsule
product and GSK agreed to allow Par to distribute in Puerto Rico substitutable
generic paroxetine immediate release tablets supplied and licensed from GSK for
a royalty payable to GSK. In addition, Par was granted the right under the GSK
Settlement to distribute the drug in the United States if another generic
version fully substitutable for Paxil(R) became available in the United States.
24
Par denied any wrongdoing in connection with the Asahi Glass antitrust action
and it filed a motion to dismiss the complaint on August 22, 2003. In October
2003, the court dismissed all of the state and federal antitrust claims against
Par. Subsequent to the October 2003 decision in the District Court, the
remaining state law claims were dismissed with prejudice and Asahi filed an
appeal with the United States Court of Appeals for the Federal Circuit, which is
presently pending. Briefing in that appeal should be concluded later this year.
In February 2003, Abbott, Fornier Industrie et Sante and Laboratoires
Fournier S.A. filed a complaint in the United States District Court for the
District of New Jersey against Par, alleging that Par's generic version of
TriCor(R) (fenofibrate) infringes one or more claims of their patents. The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously this lawsuit and has filed an answer and a counterclaim, alleging
non-infringement and patent invalidity. At this time, it is not possible for the
Company to predict the outcome of this litigation with any certainty.
On November 25, 2002, Ortho-McNeil filed a lawsuit against Kali in the
United States District Court for the District of New Jersey. Ortho-McNeil
alleged that Kali infringed U.S. Patent No. 5,336,691 (the "`691 patent") by
submitting a Paragraph IV certification to the FDA for approval of tablets
containing tramadol hydrochloride and acetaminophen. Par is Kali's exclusive
marketing partner for these tablets. Kali has denied Ortho-McNeil's allegation,
asserting that the `691 patent was not infringed and is invalid and/or
unenforceable, and that the lawsuit is barred by unclean hands. Kali also has
counterclaimed for declaratory judgments of non-infringement, invalidity and
unenforceability of the `691 patent.
Breath filed an ANDA (currently pending with the FDA) for latanoprost,
which was developed by Breath 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) identified in
"Approved Drug Products with Therapeutic Equivalence Evaluations" are invalid,
unenforceable and/or will not be infringed by Par's generic version of
Xalatan(R). Par believes that its ANDA is the first to be filed for this drug
with a Paragraph IV certification. Pursuant to agreements with Breath and
FineTech, the Company had recorded product license fees of $6,999, which are
included in intangible assets on its consolidated balance sheets. As a result of
the filing of the ANDA, Pharmacia Corporation, Pharmacia AB, Pharmacia
Enterprises, S.A., Pharmacia and Upjohn Company (collectively, "Pharmacia") and
the Trustees of Columbia University in the City of New York ("Columbia"), filed
a lawsuit against Par on December 21, 2001 in the United States District Court
for the District of New Jersey, alleging patent infringement. Pharmacia and
Columbia sought an injunction enjoining approval of the Company's ANDA and the
marketing of its generic product prior to the expiration of their patents. On
February 8, 2002, Par answered the complaint and filed a counterclaim, which
sought a declaration that the patents-in-suit are invalid, unenforceable and/or
not infringed by Par's products and that the extension of the term of one of the
patents was invalid. All parties are seeking to recover their respective
attorneys' fees. The trial concluded in April 2004 and the parties are awaiting
the District Court's decision.
Par entered into a licensing agreement with developer Paddock to market
testosterone 1% gel, a generic version of Unimed's product Androgel(R). The
product, if successfully brought to market, will be manufactured by Paddock and
marketed by Par. Paddock has filed an ANDA (which is currently pending with the
FDA) for the testosterone 1% gel product. As a result of the filing of the ANDA,
Unimed and Besins, co-assignees of the patent-in-suit, filed a lawsuit against
Paddock in the United States District Court for the Northern District of Georgia
alleging patent infringement on August 22, 2003. Par has an interest in the
outcome of this litigation by virtue of its licensing agreement with Paddock.
Unimed and Besins are seeking an injunction to prevent Paddock from
manufacturing the generic product. On November 18, 2003, Paddock answered the
complaint and filed a counterclaim, which seeks a declaration that the
patent-in-suit is invalid and/or not infringed by Paddock's product. This case
is currently in discovery. At this time, the Company is not able to predict with
any certainty the outcome of this litigation.
The Company and/or Par are parties to certain other litigation matters,
including product liability and patent actions; the Company believes that these
actions are incidental to the conduct of its business and that their ultimate
resolution thereof will not have a material adverse effect on its financial
condition, results of operations or liquidity. The Company intends to vigorously
defend or, in cases where the Company is plaintiff, to prosecute these actions.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits:
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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.
(b) Reports on Form 8-K:
Current Reports on Forms 8-K, dated March 9, 2004 (Item 7) and March
11, 2004 (Item 7) reflect the Commission's decision regarding the
Company's confidential treatment request related to the License
Agreement, dated as of August 6, 2003, by and between Mead Johnson &
Company, Bristol-Myers Squibb Company and Par Pharmaceutical, Inc.
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACEUTICAL RESOURCES, INC.
---------------------------------
(Registrant)
May 14, 2004 /s/ Scott L. Tarriff
---------------------------------
Scott L. Tarriff
PRESIDENT AND CHIEF EXECUTIVE OFFICER
May 14, 2004 /s/ Dennis J. O'Connor
----------------------------------
Dennis J. O'Connor
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
27
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
31.1 Certification by the President and Chief Executive Officer 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 President and Chief Executive Officer 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.
28
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE EXCHANGE ACT
I, Scott L. Tarriff, President and Chief Executive Officer of
Pharmaceutical Resources, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pharmaceutical
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report, based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting;
Date: May 14, 2004 /s/ Scott L. Tarriff
--------------------
Scott L. Tarriff
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE EXCHANGE ACT
I, Dennis J. O'Connor, Chief Financial Officer of Pharmaceutical Resources,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pharmaceutical
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report, based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting;
Date: May 14, 2004 /s/ Dennis J. O'Connor
----------------------
Dennis J. O'Connor
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pharmaceutical Resources, Inc. (the
"Company") on Form 10-Q for the period ended April 4, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Scott
L. Tarriff, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Scott L. Tarriff
- --------------------
Scott L. Tarriff
President and Chief Executive Officer
May 14, 2004
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pharmaceutical Resources, Inc. (the
"Company") on Form 10-Q for the period ended April 4, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Dennis
J. O'Connor, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Dennis J. O'Connor
- ----------------------
Dennis J. O'Connor
Chief Financial Officer
May 14, 2004