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: July 4, 2004
COMMISSION FILE NUMBER: 1-10827
PAR PHARMACEUTICAL COMPANIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (845) 425-7100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes X No
----- -----
Number of shares of Common Stock outstanding as of August 9, 2004:
33,945,956
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
JULY 4, DECEMBER 31,
ASSETS 2004 2003
------ ---- ----
Current assets:
Cash and cash equivalents $51,088 $162,549
Available-for-sale securities 198,955 195,500
Accounts receivable, net of allowances of
$41,958 and $40,357 178,578 157,707
Inventories, net 73,713 66,713
Prepaid expenses and other current assets 9,619 10,033
Unallocated purchase price 142,960 -
Deferred income tax assets 37,419 34,473
------ ------
Total current assets 692,332 626,975
Property, plant and equipment, at cost less
accumulated depreciation and amortization 53,411 46,813
Investment - Advancis 7,420 7,500
Intangible assets, net 32,860 35,564
Goodwill 24,662 24,662
Deferred charges and other assets 6,261 6,899
Non-current deferred income tax assets, net 15,012 14,399
------ ------
Total assets $831,958 $762,812
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $206 $122
Accounts payable 26,987 20,157
Payables due to distribution agreement partners 94,881 88,625
Accrued salaries and employee benefits 5,401 7,363
Accrued expenses and other current liabilities 18,783 24,654
Income taxes payable 38,922 26,252
------ ------
Total current liabilities 185,180 167,173
Long-term debt, less current portion 200,360 200,211
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: 34,608,947 and 34,318,163
shares 346 343
Additional paid-in capital 183,744 171,931
Retained earnings 284,546 224,480
Accumulated other comprehensive loss (2,488) (1,673)
Treasury stock at cost: 500,000 shares (20,077) -
------ --------
Total stockholders' equity 446,071 395,081
------- -------
Total liabilities and stockholders' equity $831,958 $762,812
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
2
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
(In Thousands, Except Per Share Amounts)
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JULY 4, JUNE 29, JULY 4, JUNE 29,
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Net product sales $422,099 $209,485 $211,060 $108,801
Other product related revenues 2,199 12,788 1,471 7,060
----- ------ ----- -----
Total revenues 424,298 222,273 212,531 115,861
Cost of goods sold 280,629 106,000 139,414 54,891
------- ------- ------- ------
Gross margin 143,669 116,273 73,117 60,970
Operating expenses (income):
Research and development 16,662 11,120 10,184 4,651
Selling, general and administrative 30,736 30,105 16,481 18,215
Settlements (2,846) - (2,846) -
----- ------ ----- ------
Total operating expenses 44,552 41,225 23,819 22,866
Operating income 99,117 75,048 49,298 38,104
Other expense, net (75) (44) (53) (10)
Interest (expense) income, net (573) 333 (294) 164
--- --- --- ---
Income before provision for income
taxes 98,469 75,337 48,951 38,258
Provision for income taxes 38,403 29,758 19,091 15,112
------ ------ ------ ------
Net income 60,066 45,579 29,860 23,146
Retained earnings, beginning of
period 224,480 101,947 254,686 124,380
------- ------- ------- -------
Retained earnings, end of period $284,546 $147,526 $284,546 $147,526
======= ======= ======= =======
Net income per share of common stock:
Basic $1.75 $1.38 $.87 $.70
==== ==== === ===
Diluted $1.70 $1.34 $.85 $.68
==== ==== === ===
Weighted average number of common
shares outstanding:
Basic 34,359 33,021 34,267 33,153
====== ====== ====== ======
Diluted 35,247 33,953 34,930 34,197
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements.
3
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
SIX MONTHS ENDED
----------------
JULY 4, JUNE 29,
2004 2003
---- ----
Cash flows provided by operating activities:
Net income $60,066 $45,579
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income taxes (3,528) 2,186
Depreciation and amortization 5,681 3,916
Inventory reserves 196 602
Allowances against accounts receivable 1,601 (4,492)
Stock option activity 397 2,961
Gain on sale of property (2,812) -
Other 77 -
Changes in assets and liabilities:
Increase in accounts receivable (22,472) (39,338)
Increase in inventories (7,196) (6,587)
Increase in prepaid expenses and other assets (1,514) (1,024)
Increase in accounts payable 6,755 8,017
Increase in payables due to distribution agreement partners 6,256 2,278
(Decrease) increase in accrued expenses and other liabilities (7,833) 3,504
Increase in income taxes payable 15,437 25,988
------ ------
Net cash provided by operating activities 51,111 43,590
------ ------
Cash flows from investing activities:
Capital expenditures (11,243) (11,727)
Acquisition of Kali Laboratories, Inc., net of cash acquired (138,366) -
Acquisition of available-for-sale securities (252,871) -
Proceeds from sale of available-for-sale securities 248,650 -
Proceeds from sale of fixed assets 4,980 -
----- ------
Net cash used in investing activities (148,850) (11,727)
-------- ------
Cash flows from financing activities:
Proceeds from issuances of common stock 6,122 11,212
Repurchases of common stock (20,077) -
Issuance of debt 399 -
Principal payments under long-term debt and other borrowings (166) (1,073)
--- -----
Net cash (used in) provided by financing activities (13,722) 10,139
------ ------
Net (decrease) increase in cash and cash equivalents (111,461) 42,002
Cash and cash equivalents at beginning of period 162,549 65,121
------- ------
Cash and cash equivalents at end of period $51,088 $107,123
====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Taxes $26,492 $1,583
====== =====
Interest $2,962 $58
===== ==
Non-cash transactions:
Tax benefit from exercise of stock options $2,767 $5,940
===== =====
Issuance of warrants $2,530 $-
=====
Decrease in fair value of available-for-sale securities $(815) $-
and investments === =
The accompanying notes are an integral part of these consolidated financial statements.
4
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Par Pharmaceutical Companies, 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 Company ("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. On June 9, 2004, the Company acquired Kali
Laboratories, Inc. ("Kali"), a generic pharmaceutical research and development
company located in Somerset, New Jersey, for $140,430 in cash and $2,530 in
warrants. Under the terms of the agreement, the Company purchased all of the
capital stock of Kali. The acquisition did not require the approval of PRX's
stockholders. The transaction will be accounted for using the purchase method.
On May 26, 2004, the Company changed its name from Pharmaceutical
Resources, Inc. to Par Pharmaceutical Companies, Inc. by amending its
Certificate of Incorporation, following approval of the name change by the
Company's stockholders at the Company's annual stockholders meeting on that
date.
NOTE 1 - BASIS OF PREPARATION:
The accompanying consolidated financial statements at July 4, 2004 and for
the six-month and three-month periods ended July 4, 2004 and June 29, 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
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 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:
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JULY 4, JUNE 29, JULY 4, JUNE 29,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $60,066 $45,579 $29,860 $23,146
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - 1,263 - 1,263
Deduct: Stock-based employee compensation
expense determined under the fair value
based method, net of related tax effects (11,185) (5,311) (3,551) (2,672)
------ ----- ----- -----
Pro forma net income $48,881 $41,531 $26,309 $21,737
====== ====== ====== ======
Net income per share of common stock:
As reported -Basic $1.75 $1.38 $.87 $.70
==== ==== === ===
As reported -Diluted $1.70 $1.34 $.85 $.68
==== ==== === ===
Pro forma -Basic $1.42 $1.26 $.77 $.66
==== ==== === ===
Pro forma -Diluted $1.39 $1.22 $.75 $.64
==== ==== === ===
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 six and three-month periods has been estimated at the date of
grant using the Black-Scholes stock option pricing model, based on the following
assumptions:
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JULY 4, JUNE 29, JULY 4, JUNE 29,
2004 2003 2004 2003
---- ---- ---- ----
Risk-free interest rate 4.0% 4.0% 4.0% 4.0%
Expected term 4.9 years 4.8 years 4.9 years 3.5 years
Expected volatility 62.1% 63.6% 61.9% 64.0%
It is also assumed that no dividends will be paid during the entire term of
the options. The weighted average fair values of options granted in the
six-month periods ended July 4, 2004 and June 29, 2003 were $33.27 and $18.42,
respectively. The weighted average fair values of options granted in the
three-month periods ended July 4, 2004 and June 29, 2003 were $24.46 and $23.51,
respectively.
NOTE 3 - AVAILABLE-FOR-SALE SECURITIES:
At July 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 July 4, 2004:
UNREALIZED
---------- FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Debt securities issued by various state
and local municipalities and agencies $128,900 $- $(128) $128,772
Securities issued by United States
government and agencies 70,851 - (668) 70,183
------ - ---- ------
Total $199,751 - $(796) $198,955
======= = === =======
6
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 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. The following table summarizes the contractual
maturities of debt securities at July 4, 2004 and December 31, 2003:
JULY 4, 2004 DECEMBER 31, 2003
------------ -----------------
FAIR FAIR
COST VALUE COST VALUE
---- ----- ---- -----
Less than one year $70,851 $70,183 $10,080 $10,050
Due in 1-2 years - - - -
Due in 2-5 years 10,600 10,600 - -
Due after 5 years 118,300 118,172 185,450 185,450
------- ------- ------- -------
Total $199,751 $198,955 $195,530 $195,500
======= ======= ======= =======
In addition to the short-term investments described above, the Company paid
$10,000 to purchase 1,000 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 6,000 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 July 4, 2004, the fair value of the Company's
investment in Advancis was $7,420, 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 $2,580 that was charged to accumulated other comprehensive
loss, net of taxes of $1,006, at July 4, 2004.
NOTE 4 - ACCOUNTS RECEIVABLE:
JULY 4, DECEMBER 31,
2004 2003
---- ----
Trade accounts receivable, net of customer
rebates and chargebacks $218,344 $196,888
Other accounts receivable 2,192 1,176
----- -----
220,536 198,064
------- -------
Allowances:
Doubtful accounts 1,847 1,756
Returns 13,506 13,256
Price adjustments and allowances 26,605 25,345
------ ------
41,958 40,357
------ ------
Accounts receivable,
net of allowances $178,578 $157,707
======= =======
The trade accounts receivable amounts presented above at July 4, 2004 and
December 31, 2003 are net of provisions for customer rebates of $18,883 and
$23,793, and of chargebacks of $143,919 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. The increase in the chargeback
reserve is primarily attributable to ribavirin, the generic version of
Schering-Plough Corporation's ("Schering's") Rebetol(R), which the Company began
selling in April 2004.
7
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 since been granted United States Food and Drug
Administration ("FDA") approval to market generic versions of megestrol acetate
oral suspension and have launched products that compete with the Company's
product. In July 2004, Par entered into a legal settlement with one of the
competitors, Teva Pharmaceuticals USA, Inc. ("Teva USA"), pursuant to which Par
will grant a license to Teva USA for a limited number of units and Par will
receive a royalty on Teva USA's net sales of megestrol acetate oral suspension
(see "Note 12 -Commitments, Contingencies and Other Matters-Legal Proceedings"
and "Note 13 - Subsequent Events"). Sales and gross margins on megestrol acetate
oral suspension continued to decline in fiscal year 2004 due to the effects of
competition; however the product is expected to continue to be a significant
contributor to the Company's overall results in future periods. Net sales of
megestrol acetate oral suspension were approximately $18,300 for the second
quarter of 2004, decreasing $3,700 from approximately $22,000 for the second
quarter of 2003. Megestrol acetate oral suspension net sales were approximately
$37,000 for the six-month period ended July 4, 2004 compared to $42,600 for the
same six-month period in 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 of 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 $8,400 and $23,200,
respectively, for the three and six-month periods ended July 4, 2004 compared to
approximately $24,600 and $44,500, respectively, for the corresponding periods
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.
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 marketing exclusivity period in respect of
paroxetine ended on March 8, 2004 and two additional competitors launched
competing paroxetine products in the second quarter of 2004. The additional
competition had an adverse effect on the Company's revenues and gross margins
derived from paroxetine in the second quarter of 2004, which will continue in
subsequent periods. As a result of the competition, the Company had price
8
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
protection reserves of approximately $5,900 for paroxetine at July 4, 2004. The
Company will continue to evaluate the effects of competition and will record
additional price protection reserves when, if and to the extent that it deems
necessary.
NOTE 5 -INVENTORIES, NET:
JULY 4, DECEMBER 31,
2004 2003
---- ----
Raw materials and supplies, net $24,104 $21,551
Work-in-process and finished goods, net 49,609 45,162
------ ------
$73,713 $66,713
====== ======
NOTE 6 - ACQUISITION OF KALI:
On June 9, 2004, the Company completed its acquisition of Kali for $140,430
in cash and $2,530 in warrants. The purchase price included forgiving a $10,000
loan made by the Company to Kali in March 2004. Under the terms of the
agreement, the Company purchased 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
expands 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. The Company's
results for the six months ended July 4, 2004 include the results of Kali from
the acquisition date.
The pro forma adjustments in the tables below are based upon available
information and assumptions that the Company believes are reasonable. The
unaudited condensed consolidated pro forma financial statements do not purport
to represent what the consolidated results of operations of the Company would
actually have been if the acquisition had occurred on the dates referred to
below, nor do they purport to project the results of operations of the Company
for any future period.
The unaudited condensed consolidated pro forma statements of operations
data were prepared by combining the Company's statement of operations for the
twelve months ended December 31, 2003 and for the six and three month periods
ended July 4, 2004 and June 29, 2003 with Kali's statements of operations for
the same periods, giving effect to the acquisition as though it occurred on
January 1, 2003. The unaudited condensed consolidated pro forma statements of
operations do not give effect to any restructuring costs or any potential cost
savings or other operating efficiencies that could result from the acquisition,
or any non-recurring charges or credits resulting from the transaction such as
in-process research and development charges.
The unaudited condensed consolidated pro forma financial statements should
be read in conjunction with the historical financial statements of the Company
included in its Annual Report on Form 10-K for the year ended December 31, 2003.
Condensed Consolidated Pro Forma Statement of Operations Data
Six Months Ended Three Months Ended
Twelve Months ---------------- ------------------
Ended Dec. 31, July 4, June 29, July 4, June 29,
2003 2004 2003 2004 2003
---- ---- ---- ---- ----
Total revenue $662,695 $425,082 $223,907 $212,989 $116,700
Net income $121,125 $56,990 $45,540 $27,511 $23,052
Net income per basic share of common stock $3.62 $1.66 $1.38 $.80 $.70
==== ==== ==== === ===
Net income per diluted share of common stock $3.50 $1.62 $1.34 $.79 $.67
==== ==== ==== === ===
9
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 7 - UNALLOCATED PURCHASE PRICE:
The estimated fair value of the Kali assets acquired was not readily
determinable at July 4, 2004. Therefore, the net purchase price of Kali is
currently being reflected on Par's balance sheet as unallocated purchase price
of $142,960. A valuation is being performed by independent specialists to
determine the fair value of Kali's research and development organization as of
the date of acquisition. The Company believes that a substantial portion of the
unallocated purchase price will be valued as in-process research and development
and will be written off in 2004 in accordance with purchase accounting for
acquisitions.
NOTE 8 - INTANGIBLE ASSETS, NET:
JULY 4, DECEMBER 31,
2004 2003
---- ----
Trademark licensed from BMS $5,000 $5,000
BMS Asset Purchase Agreement, net of accumulated
amortization of $3,900 and $3,064 7,800 8,636
Product license fees, net of accumulated amortization
of $2,449 and $1,135 8,356 9,170
Genpharm Distribution Agreement, net of accumulated
amortization of $4,333 and $3,972 6,500 6,861
Intellectual property, net of accumulated amortization
of $1,563 and $1,202 5,017 5,378
Genpharm Profit Sharing Agreement, net of accumulated
amortization of $2,313 and $1,981 187 519
--- ---
$32,860 $35,564
====== ======
The Company recorded amortization expense related to intangible assets of
$3,204 and $2,457, respectively, for the six-month periods, and $1,692 and
$1,448, respectively, for the three-month periods, ended July 4, 2004 and June
29, 2003. Amortization expense related to the intangible assets currently being
amortized is expected to total approximately $5,647 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 July 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. Breath filed an
Abbreviated New Drug Application ("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. 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. In July 2004, the District Court for the
District of New Jersey issued an Opinion and Order dismissing Pharmacia's
Corporation's claim of infringement on one patent; however, the Court also ruled
that two other patents included in the litigation are valid, enforceable and
infringed by Par. Par intends to appeal certain portions of the Court's decision
and if unsuccessful in that appeal, Par will reevaluate the recoverability of
the product license fees related to latanoprost (see "Note 12 -Commitments,
Contingencies and Other Matters-Legal Proceedings" and "Note 13 -Subsequent
Events").
NOTE 9 - 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
10
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. 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.
NOTE 10 - CHANGES IN STOCKHOLDERS' EQUITY:
Changes in the Company's common stock and additional paid-in capital
accounts during the six-month period ended July 4, 2004 were as follows:
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK
------------ PAID-IN COMPREHENSIVE --------------
SHARES AMOUNT CAPITAL LOSS SHARES AMOUNT
------ ------ ------- ---- ------ ------
Balance, January 1, 2004 34,318 $343 $171,931 $(1,673) - -
Comprehensive loss:
Unrealized loss on marketable
securities, net of tax - - - (815) - -
Exercise of stock options 242 3 5,965 - - -
Issuance of warrants - - 2,530 - - -
Tax benefit from exercise of stock
options - - 2,767 - - -
Employee stock purchase program 4 - 154 - - -
Compensatory arrangements 45 - 397 - - -
Common stock acquired for treasury - - - - 500 (20,077)
------ ---- -------- ----- --- ------
Balance, July 4, 2004 34,609 $346 $183,744 $(2,488) 500 $(20,077)
====== === ======= ===== === ======
COMPREHENSIVE LOSS:
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JULY 4, JUNE 29, JULY 4, JUNE 29,
2004 2003 2004 2003
---- ---- ---- ----
Net income $60,066 $45,579 $29,860 $23,146
Other comprehensive loss:
Unrealized loss on
marketable securities, net of tax (815) - (1,885) -
--- --------- ----- ---------
Comprehensive loss $59,251 $45,579 $27,975 $23,146
====== ====== ====== ======
In April 2004, the Company's board of directors (the "board") authorized
the purchase of up to $50,000 worth of the Company's common stock. The purchases
are 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. At July 4, 2004, the Company had purchased 500 shares of its common
stock for approximately $20,077 pursuant to the buyback program. The following
table sets forth (a) the number of shares purchased, (b) the average price paid
per share, (c) the total number of shares purchased as part of a publicly
announced plan and (d) the approximate dollar value that may yet be purchased
under the plan.
TOTAL TOTAL NUMBER OF APPROXIMATE DOLLAR
NUMBER OF AVERAGE SHARES PURCHASED VALUE THAT MAY
SHARES PRICE PAID AS PART OF A PUBLICLY YET BE PURCHASED
PURCHASED (a) PER SHARE (b) ANNOUNCED PLAN (c) UNDER THE PLAN (d)
------------- ------------- --------------------- -------------------
May 2, 2004 through May 29, 2004 406 $40.08 406 $33,712
May 30, 2004 through July 4, 2004 94 $40.49 94 $29,922
-- --
For the three-month
period ended July 4, 2004 500 500
=== ===
11
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 11 - EARNINGS PER SHARE:
The following is a reconciliation of the amounts used to calculate basic
and diluted earnings per share:
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JULY 4, JUNE 29, JULY 4, JUNE 29,
2004 2003 2004 2003
---- ---- ---- ----
Net income $60,066 $45,579 $29,860 $23,146
Basic:
Weighted average number of common
shares outstanding 34,359 33,021 34,267 33,153
Net income per share of common stock $1.75 $1.38 $.87 $.70
==== ==== === ===
Assuming dilution:
Weighted average number of common
shares outstanding 34,359 33,021 34,267 33,153
Effect of dilutive options 888 932 663 1,044
--- --- --- -----
Weighted average number of common
shares outstanding 35,247 33,953 34,930 34,197
Net income per share of common stock $1.70 $1.34 $.85 $.68
==== ==== === ===
Outstanding options and warrants of 1,270 and 110 at the end of the
six-month periods ended July 4, 2004 and June 29, 2003, respectively, and 1,420
and 105 at the end of the three-month periods ended July 4, 2004 and June 29,
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 July 4, 2004. The warrants are exercisable for
an aggregate of 2,253 shares at an exercise price of $105.20 per share.
NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
LEGAL PROCEEDINGS:
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.
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
12
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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. On August 4, 2004, Par and a
number of other generic and brand pharmaceutical companies were also sued by the
City of New York, which has alleged violations of laws related to participation
in its Medicaid program. Par intends to defend vigorously the claims asserted in
such 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 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 sought 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 in the
lawsuit, U.S. Patent No. 6,593,318 (the "`318 patent"). In July 2004, Par and
Teva USA entered into a settlement of the lawsuit (see "Note 13 -Subsequent
Events").
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,
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. Par and Asahi entered into a settlement agreement on June 18, 2004,
pursuant to which Par and Pentech paid Asahi $1,100.
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.
13
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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. Summary
judgment papers were served on opposing counsel on May 28, 2004; however under
New Jersey practice the summary judgment papers will not be filed with the Court
until the briefing is complete.
As a result of Par's filing of the ANDA for latanoprost, Pharmacia and
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 sought to recover their
respective attorneys' fees. The trial concluded in March 2004 and in July 2004,
the District Court for the District of New Jersey issued an Opinion and Order
dismissing Pharmacia's Corporation's claim of infringement on one patent;
however, the Court also ruled that two other patents included in the litigation
are valid, enforceable and infringed by Par. Par intends to appeal certain
portions of the Court's decision. Pursuant to agreements with Breath and
FineTech related to latanoprost, the Company had recorded product license fees
of $6,999, which are included in intangible assets on its consolidated balance
sheets. If unsuccessful in its appeal, Par will reevaluate the recoverability of
these product license fees (see "Note 13 -Subsequent Events").
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
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.
L. William Seidman and Joseph E. Smith were selected to the Company's
board, effective April 15, 2004 and May 26, 2004, respectively. Mr. Seidman
served as Chairman of the Federal Deposit Insurance Corporation from October
1985 to October 1991 and Chairman of the Resolution Trust Company from 1989 to
October 1991. From 1982 to 1985, he was Dean of the College of Business at
14
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Arizona State University, Tempe, Arizona. 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. Mr.
Smith possesses over thirty years of experience as an executive in the
pharmaceutical industry and, prior to his retirement in 1997, served in various
leadership positions with Warner-Lambert Company since 1989.
In June 2004, Par named Shankar Hariharan, Ph.D. as executive vice
president and chief scientific officer ("CSO"). Dr. Hariharan becomes Par's
first CSO and will be responsible for research and development, scientific and
regulatory affairs and quality assurance. Dr. Hariharan joins Par from Forest
Laboratories, Inc. where he most recently served as senior vice president,
Forest Research Institute.
NOTE 13 - SUBSEQUENT EVENTS:
The trial related to latanoprost following the Pharmacia and Columbia
(collectively, the "Plaintiffs") lawsuit against Par on December 21, 2001 in the
United States District Court for the District of New Jersey, alleging patent
infringement, concluded in March 2004 and on July 6, 2004 the Court issued an
Opinion and Order ordering that judgment be entered in favor of the Plaintiffs
on their claims of infringement of U.S. Patent Nos. 4,599,353 (expires July 28,
2006) and 5,296,504 (expires March 22, 2011); that the effective date of
approval of Par's ANDA shall be a date which is not earlier than the dates of
expiration of those patents; and that Par is enjoined from engaging in the
commercial manufacture, use, offer to sell, or sale within the United States, or
importation into the United States, of any drug product covered by, or the use
of which is covered by, those two patents. As to the third patent asserted by
the Plaintiffs, U.S. Patent No. 5,422,368, the Court dismissed the Plaintiffs'
infringements claims and declared that the patent is unenforceable due to
inequitable conduct. The Court further dismissed all parties' claims for
attorneys' fees. Both Par and the Plaintiffs have filed notices of appeal. Par
is appealing the Court's decision only insofar as it relates to U.S. Patent No.
5,296,504.
In July 2004, Par and Teva USA entered into a settlement of the lawsuit
regarding megestrol acetate oral suspension. As part of the judgment and order
of permanent injunction entered by the parties, Teva USA acknowledged that the
claims of the `318 patent are valid and enforceable in all respects and that
Teva USA's product infringes the `318 patent. As part of the settlement, Par has
granted a license to Teva USA for a limited number of units, and in return, Par
will receive a royalty on Teva USA's sales of megestrol acetate oral suspension.
On August 5, 2004, the Company purchased 875 shares of common stock of New
River Pharmaceuticals Inc. ("New River") in an initial public offering for $8
per share. Par's investment of $7,000 represents an ownership position of 4.9
percent of the outstanding common stock of New River. New River, based in
Radford, Virginia, is a specialty pharmaceutical company focused on developing
novel pharmaceuticals that are safer and improved versions of widely-prescribed
drugs, including amphetamines and opioids. Utilizing its proprietary
Carrierwave(TM) technology, New River is currently developing versions of
amphetamines and opioids that are designed to provide overdose protection, abuse
resistance and less potential for addiction while providing efficacy comparable
to the active pharmaceutical ingredients on which they are based.
15
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
For the six and three-month periods ended July 4, 2004, the Company
increased total revenues and earnings over the corresponding periods of 2003;
however, due to competition involving certain key products, including paroxetine
tablets, fluoxetine 40 mg capsules and megestrol acetate oral suspension, and
lower than expected sales of 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, began to
receive pricing pressure in the second quarter 2004, as additional competition
entered the market following the marketing exclusivity period. In addition,
several market factors contributed to a less than successful launch of
ribavirin, which the Company had anticipated replacing a portion of the lost
revenues from competition on other products in fiscal year 2004. The Company is
making an effort to introduce new products during the remainder of fiscal year
2004 and beyond 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 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'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
16
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. Additionally, the
market size for Rebetol has declined due to the success of Copegus(R), a new
product introduced by Hoffman La-Roche Inc. in 2003, which has taken significant
market share from Rebetol(R).
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 total market for paroxetine tablets to
decrease. The marketing exclusivity period in respect of paroxetine ended on
March 8, 2004 and two additional competitors launched competing paroxetine
products in the second quarter of 2004. The additional competition had an
adverse effect on the Company's revenues and gross margins derived from
paroxetine in the second quarter of 2004, which will continue in subsequent
periods.
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 since been granted FDA approval to market generic
versions of megestrol acetate oral suspension and have launched products that
compete with the Company's product. In July 2004, Par entered into a legal
settlement with one of the competitors, Teva USA, pursuant to which Par will
grant a license to Teva USA for a limited number of units and Par will receive a
royalty on Teva USA's net sales of megestrol acetate oral suspension. Sales and
gross margins on megestrol acetate oral suspension continued to decline in
fiscal year 2004 due to the effects of competition; however the product is
expected to continue to be a significant contributor to the Company's overall
results in future periods. Net sales of megestrol acetate oral suspension were
approximately $18,300 for the second quarter of 2004, decreasing $3,700 from
approximately $22,000 for the second quarter of 2003. Megestrol acetate oral
suspension net sales were approximately $37,000 for the six-month period ended
July 4, 2004 compared to $42,600 for the same six-month period in 2003.
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 of 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 $8,400 and $23,200,
respectively, for the three and six-month periods ended July 4, 2004 compared to
approximately $24,600 and $44,500, respectively, for the corresponding periods
of 2003.
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, including the integration of
Kali, and these strategic alliances, the Company's pipeline of potential
products includes 38 ANDAs (five of which have been tentatively approved),
pending with, and awaiting approval from, the FDA. The Kali ANDAs include those
17
for potential products that would be marketed by other companies through
licensing agreements entered into before the Company's acquisition of Kali,
where the Company would be due royalty income. 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 June 2004, the Company acquired Kali for $140,430 in cash and $2,530 in
warrants. Under the terms of the agreement, the Company purchased all of the
capital stock of Kali. The Company believes its acquisition of Kali fits into
its business plan by expanding its research and development capabilities and
increasing the size of its product portfolio. The acquisition also diversifies
the Company's development pipeline and provides four additional first-to-file
product opportunities, enhancing the prospects for sustained long-term growth.
Kali's operation includes 25 products in development, another 14 filed and
awaiting FDA approval, and a research and development organization of 55
employees. Kali's 14 ANDAs include three potential products the Company plans to
market and other potential products from which the Company will be due royalty
income, if successfully launched by third parties. 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.
In June 2004, the Company submitted its first New Drug Application ("NDA")
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 an agreement 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 $60,066 for the six-month period ended July 4,
2004 increased $14,487, from $45,579, for the six-month period ended June 29,
2003. Total revenues of $424,298 in the six-month period of 2004 increased
$202,025, or 91%, from $222,273 in the first six months of 2003, primarily due
to additional net sales of new products. The revenue growth resulted in higher
gross margin dollars, which increased to $143,669, or 34% of total revenues, in
the most recent period, from $116,273, or 52% of total revenues, in the
corresponding period of 2003. Research and development spending in 2004 of
$16,662 increased 50% from $11,120 in the prior year and the Company expects to
continue to significantly increase its research and development spending over
the remainder of 2004. Selling, general and administrative costs were $30,736
compared to $30,105 in the corresponding six-month period 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 and 2003 costs include a charge of
$3,635 in the second quarter of 2003 related to a retirement package for the
Company's former chairman, president and chief executive officer. Included in
the six-month operating expenses was net settlement income of $2,846, recorded
in the second quarter of 2004, resulting primarily from the settlement of claims
against Akzo Nobel NV and Organon USA Inc. relating to anticompetitive practices
that delayed the availability of mirtazapine, a generic version of Remeron(R).
Net income for the three-month period ended July 4, 2004 was $29,860
compared to $23,146 for the corresponding period of the prior year reflecting
both revenue and gross margin increases, primarily from new products. Second
quarter 2004 revenues and gross margin of $212,531 and $73,117 (34% of total
revenues), respectively, improved over the prior year's second quarter revenues
and gross margin of $115,861 and $60,970 (53% of total revenues). Research and
development spending of $10,184 in the second quarter of 2004 increased 119%
from $4,651 in the prior year, primarily due to a payment to Advancis to fund
the development of a potential new product. Selling, general and administrative
costs were $16,481 in the second quarter of 2004 compared to $18,215, which
included a charge for a retirement package, in the corresponding quarter of
2003.
Included in the second quarter 2004 gross margin is income of $6,200, which
reflects a change in accounting estimate used in the calculation of the profit
split due to Pentech on paroxetine. The change in accounting estimate has
18
effectively reduced payables due under Par's agreement with Pentech relating to
the supply and marketing of paroxetine. The change in accounting estimate
follows Pentech's filing of an action against Par during the second quarter of
2004. Par believes that it is in compliance with its agreement with Pentech and
intends to vigorously defend this action.
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
Total revenues for the six-month period ended July 4, 2004 were $424,298,
increasing $202,025, or 91%, from revenues of $222,273 for the same six-month
period of 2003, 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 $181,900 in 2004. Additionally, net sales of other new products,
including glyburide and metformin hydrochloride (Glucovance(R)), introduced in
May 2004, metformin ER (Glucophage XR(R)), introduced in December 2003,
mercaptopurine (Purinethol(R)), introduced in February 2004, ribavirin,
introduced in April 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 fluoxetine and
tizanidine (Zanaflex(R)). The sales growth also benefited from increased sales
of lovastatin (Mevacor(R)). Net sales of fluoxetine and megestrol acetate oral
suspension were approximately $23,200 and $37,000, respectively, for the most
recent six-month period, decreasing $21,300 and $5,600, respectively, compared
to the first six-months of the prior year. The Company's other product related
revenues in 2004 of $2,199, generated from a profit sharing agreement with
Genpharm related to omeprazole and royalties received on Three Rivers sales of
ribavirin, decreased $10,589 from $12,788 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 total revenues in the first six-months 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.
Total revenues in the second quarter 2004 of $212,531 increased $96,670, or
83%, from revenues in the second quarter of 2003, primarily due to additional
sales from paroxetine and other new products, and increased sales of lovastatin.
Second quarter 2004 net sales of paroxetine totaled approximately $77,300, while
net sales of megestrol acetate oral suspension decreased $3,700 to $18,300 from
$22,000 in the same period a year ago, and net sales of fluoxetine decreased
$16,200 to $8,400 from $24,600 in the second quarter of 2004. Second quarter
sales of fluoxetine reflect the impact of increased generic competition and its
corresponding effect on pricing and market share. Net sales of ribavirin, which
was launched during the most recent quarter, totaled $12,600. The Company's
other product related revenues of $1,471 in the second quarter 2004 also
decreased from $7,060 in the corresponding period of 2003. Net sales of
distributed products were approximately 78% and 52%, respectively, of the
Company's total revenues in the second quarter of fiscal years 2004 and 2003.
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
19
of 2003. The Company expects that the impact of this competition will continue
to have an adverse effect on its omeprazole revenues in future periods.
GROSS MARGIN
The Company's gross margin of $143,669 (34% of total revenues) for the
first six-month period of 2004 increased $27,396 from $116,273 (52% of total
revenues) for the same period a year ago. 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 profit splits to GSK and Pentech on sales of paroxetine. In
addition, Par pays profit splits on glyburide and metformin HCl tablets and
metformin HCl extended-release tablets pursuant to agreements with BMS and
Genpharm Inc. of Toronto, Canada. As a result of these agreements, the Company's
gross margin as a percentage of its total revenues declined as net sales of
these products 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 period
of 2003. In addition, Par's gross margin was also impacted by the decline in
royalty revenue from omeprazole.
The gross margin of $73,117 (34% of total revenues) in the second quarter
of 2004 increased $12,147 from $60,970 (53% of total revenues) for the second
quarter of 2003. The gross margin dollar increase was achieved primarily as a
result of contributions from sales of new products, particularly paroxetine,
partially offsetting increased competition on certain of the Company's key
products. The gross margin in the second quarter of 2004 included income of
$6,200 related to a change in accounting estimate used in the calculation of the
profit share due to Pentech on paroxetine.
As discussed above, the Company experienced lower sales and gross margins
for fluoxetine and megestrol acetate oral suspension in each of the periods
reported above. The Company's gross margin contribution from paroxetine has also
declined due to additional manufacturers introducing and marketing comparable
generic products. Despite existing market conditions and the possibility of
additional competition on these products, the Company anticipates all three
products will remain significant contributors to its overall performance in
fiscal year 2004.
Inventory write-offs of $5,036 and $3,056, respectively, in the six and
three-month periods ended July 4, 2004, increased from $1,317 and $905 in the
corresponding periods of 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 increase write-offs in each of the current
periods 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 research and development expenses of $16,662 for the
six-month period ended July 4, 2004 increased $5,542, or 50%, from the
comparable period of the prior fiscal year. The increase was primarily
attributable to a payment to Advancis to fund the development of a potential new
product and higher biostudy costs. The Company expects its research and
development spending to increase substantially over the last two quarters of
2004 with the addition of Kali and other planned expenditures. As previously
discussed, the Company acquired Kali in June 2004. The Company expects to
utilize Kali to develop products principally for its own new product pipeline.
Although there can be no such assurance, the Company believes that its research
and development expenses could approach $50,000 for fiscal year 2004. In
addition to the $50,000, Par believes that a substantial portion of the
unallocated purchase price for Kali will be valued as in-process research and
development and will be written off in 2004 in accordance with purchase
accounting for acquisitions.
Research and development expenses for the second quarter of 2004 were
$10,184, increasing $5,533 from $4,651 for the corresponding quarter of 2003.
The increase was primarily due to higher costs for outside development projects
and biostudies.
20
In addition to ANDAs filed by Kali for potential products that are subject
to licensing agreements with other companies entered into before the Kali
acquisition, 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 the remainder of 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 three 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 20 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
Total selling, general and administrative expenses were $30,736 for the
first six-months of 2004, which included a gain of $2,812 on the sale of the
Company's facility in Congers, New York. In the prior year, total costs of
$30,105 included a charge of $3,635 related to a retirement package for the
Company's former chairman, president and chief executive officer. Excluding
these items, current year costs of $33,548 (8% of total revenues) increased
$7,078, or 27%, from $26,470 (12% of total revenues) in the corresponding period
of last year. The increase in 2004 was primarily attributable to higher
personnel costs of $2,166, including those for information systems assessments,
marketing costs of $2,509, legal fees of $1,824, and, to a lesser extent,
product liability insurance of $732 and facility costs of $617. 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 $1,251 in the current six-month period was comparable
to $1,349 in the corresponding period 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 12-Commitments, Contingencies and Other Matters-Legal
Proceedings"). Although there can be no such assurance, selling, general and
administrative costs in fiscal year 2004 are expected to increase by 15% to 20%
from fiscal year 2003 primarily due to increased legal fees, personnel costs and
marketing activities.
Selling, general and administrative costs of $16,481 (8% of total revenues)
for the second quarter of 2004 increased $1,901, or 13%, from $14,580 (13% of
total revenues), excluding a charge of $3,635 related to a retirement package,
for the corresponding quarter of last year. The increased expenses in the second
quarter 2004 consisted of higher costs for personnel of $1,295, marketing of
$836 and legal fees of $490. Shipping costs of $617 in the second quarter 2004
were lower than costs of $742 in the corresponding quarter of the prior year due
to a reduced amount of reliance on an external distribution service.
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.
21
SETTLEMENTS
Net settlement income of $2,846 was recorded pursuant to the settlement of
claims against Akzo Nobel NV and Organon USA Inc., relating to anticompetitive
practices that delayed the availability of mirtazapine partially offset by legal
expenses associated with the settlement of litigation with Asahi related to
paroxetine.
INTEREST EXPENSE/INCOME
Net interest expense was $573 and $294, respectively, for the six and
three-month periods ended July 4, 2004, compared to net interest income of $333
and $164 for the corresponding periods of 2003. Net interest expense in both
periods of the current year includes interest payable on the Company's
convertible notes, partially offset by interest income derived primarily from
short-term investments. Net interest income in 2003 was primarily derived from
money market and other short-term investments.
INCOME TAXES
The Company recorded provisions for income taxes of $38,403 and $19,091,
respectively, and $29,758 and $15,112, respectively, for the six and three-month
periods ended July 4, 2004 and June 29, 2003, based on the applicable federal
and state tax rates for those periods (see "Notes to Consolidated Financial
Statements-Note 9-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 $51,088 at July 4, 2004 decreased $111,461
from $162,549 at December 31, 2003, primarily due to the acquisition of Kali for
$140,430 in cash and $2,530 in warrants. The Company had $51,111 of cash
provided by operations, gross proceeds of $4,980 from the sale of fixed assets,
primarily the Congers Facility, and $6,122 from the issuance of shares of Common
Stock upon the exercise of stock options. In the six-month period ended July 4,
2004, the Company invested $11,243 in capital improvements, primarily for Phase
II of the expansion of its laboratories in Spring Valley, New York, and new
production machinery. In addition the Company repurchased 500 shares of its
common stock for approximately $20,077. 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
$507,152 increased $47,350, from $459,802 at December 31, 2003, primarily due to
the unallocated purchase price for Kali partially offset by the decrease in the
cash on hand, and increases in the Company's accounts receivables and
inventories partially offset by higher income taxes payable. The working capital
ratio, which is calculated by dividing current assets by current liabilities,
was 3.74x at July 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 April 2004, the Company's board authorized the purchase of up to $50,000
worth of the Company's common stock. The purchases are 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 approximately 500 shares of its
common stock for approximately $20,077 through July 4, 2004.
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
22
available-for-sale securities in October 2003. Available-for-sale securities of
$198,955 at July 4, 2004 are all available for immediate sale. The Company
intends to use its current liquidity to support the expansion of its business,
which included 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 July 4, 2004, the Company had payables owed to distribution agreement
partners of $94,881 related primarily to amounts due pursuant to profit sharing
agreements, particularly amounts owed to GSK and Pentech on paroxetine and BMS
on glyburide and metformin hydrochloride and metformin ER. The Company expects
to pay these amounts out of its working capital during the third quarter of
2004.
The dollar values of the Company's material contractual obligations and
commercial commitments as of July 4, 2004 were as follows:
AMOUNTS DUE BY PERIOD
---------------------
TOTAL MONETARY JULY-DEC. 31 2005 TO 2008 TO 2010 AND
OBLIGATION OBLIGATION 2004 2007 2009 THEREAFTER
- ---------- ---------- ---- ---- ---- ----------
Operating leases $20,537 $1,603 $8,420 $4,991 $5,523
Convertible notes* 200,000 - - - 200,000
Other 566 101 465 - -
--- --- --- ----- -------
Total obligations $221,103 $1,704 $8,885 $4,991 $205,523
======= ===== ===== ===== =======
*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, $500 was paid in June 2004, $500 is due in September 2004 and $500 is due
in January 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 June 2004, Par entered into an agreement with Advancis to develop and
market a novel formulation of the antibiotic amoxicillin. Pursuant to this
agreement, Par paid Advancis a $5,000 upfront license fee, which was charged to
research and development expenses in June 2004, and Par will fund future
development expenses. Advancis will grant Par the exclusive right to sell and
distribute the product and the co-exclusive right to market the product.
Advancis will be responsible for the development and manufacture of the product
and the two parties will share equally in marketing expenses and profits if the
product is successfully developed and brought to market.
Par and Advancis also entered into the Advancis Licensing Agreement, dated
September 4, 2003, 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
23
contained in the agreement. 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.
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 an 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 July 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 has agreed to
pay Aveva $1,000 upon FDA approval of the product and royalties on sales of the
product.
24
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.
FINANCING
At July 4, 2004, the Company's total outstanding long-term debt, including
the current portion, was $200,566. 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
The trial related to latanoprost following the Pharmacia and Columbia
lawsuit against Par on December 21, 2001 in the United States District Court for
the District of New Jersey, alleging patent infringement concluded in March 2004
and on July 6, 2004 the Court issued an Opinion and Order ordering that judgment
be entered in favor of the Plaintiffs on their claims of infringement of U.S.
Patent Nos. 4,599,353 (expires July 28, 2006) and 5,296,504 (expires March 22,
2011); that the effective date of approval of Par's ANDA shall be a date which
is not earlier than the dates of expiration of those patents; and that Par is
enjoined from engaging in the commercial manufacture, use, offer to sell, or
sale within the United States, or importation into the United States, of any
drug product covered by, or the use of which is covered by, those two patents.
As to the third patent asserted by Plaintiffs, U.S. Patent No. 5,422,368, the
Court dismissed Plaintiffs' infringements claims and declared that the patent is
unenforceable due to inequitable conduct. The Court further dismissed all
parties' claims for attorneys' fees. Both Par and Plaintiffs have filed notices
of appeal. Par is appealing the Court's decision only insofar as it relates to
U.S. Patent No. 5,296,504.
In July 2004, Par and Teva USA entered into a settlement regarding
megestrol acetate oral suspension. As part of the judgment and order of
permanent injunction entered by the parties, Teva USA acknowledged that the
claims of the `318 patent are valid and enforceable in all respects and that
Teva USA's product infringes the `318 patent. As part of that settlement, Par
has granted a license to Teva USA for a limited number of units, and in return,
Par will receive a royalty on Teva USA's sales of megestrol acetate oral
suspension.
On August 5, 2004, the Company purchased 875 shares of common stock of New
River Pharmaceuticals Inc. ("New River") in an initial public offering for $8
per share. Par's investment of $7,000 represents an ownership position of 4.9
percent of the outstanding common stock of New River. New River, based in
Radford, Virginia, is a specialty pharmaceutical company focused on developing
novel pharmaceuticals that are safer and improved versions of widely-prescribed
drugs, including amphetamines and opioids. Utilizing its proprietary
Carrierwave(TM) technology, New River is currently developing versions of
amphetamines and opioids that are designed to provide overdose protection, abuse
resistance and less potential for addiction while providing efficacy comparable
to the active pharmaceutical ingredients on which they are based.
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 July 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.
25
The following table summarizes the available-for-sale securities that
subject the Company to market risk at July 4, 2004 and December 31, 2003:
JULY 4, DEC. 31,
2004 2003
---- ----
Debt securities issued by various state and local
municipalities and agencies $128,772 $185,450
Securities issued by United States government and
agencies 70,183 10,050
------ ------
Total $198,955 $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 $198,955 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 1,000
shares of the common stock of Advancis, at $10 per share, in its initial public
offering of 6,000 shares on October 16, 2003. The transaction closed on October
22, 2003. The value of the Company's investment in Advancis as of July 4, 2004
was $7,420.
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, (the "Exchange Act") were effective
as of July 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 second quarter of
fiscal 2004 that have materially affected or are reasonably likely to materially
affect the Company's internal controls over financial reporting.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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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.
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. On August 4, 2004, Par and a
number of other generic and brand pharmaceutical companies were also sued by the
City of New York, which has alleged violations of laws related to participation
in its Medicaid program. Par intends to defend vigorously the claims asserted in
such 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 sought 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 in the
lawsuit, the `318 patent. In July 2004, Par and Teva USA entered into a
settlement of the lawsuit regarding megestrol acetate oral suspension. As part
of the judgment and order of permanent injunction entered by the parties, Teva
USA acknowledged that the claims of the `318 patent are valid and enforceable in
all respects and that Teva USA's product infringes the `318 patent. As part of
the settlement, Par will grant a license to Teva USA for a limited number of
units, and in return, Par will receive a royalty on Teva USA's sales.
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.
27
On May 28, 2003, Asahi 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.
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. Par and
Asahi entered into a settlement agreement on June 18, 2004, pursuant to which
Par and Pentech paid Asahi $1,100.
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 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. Summary judgment papers were served on opposing counsel on May 28, 2004;
however under New Jersey practice the summary judgment papers will not be filed
with the court until the briefing is complete.
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. As a result of the filing of the ANDA,
Pharmacia and 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 sought to
recover their respective attorneys' fees. The trial concluded in March 2004 and
on July 6, 2004 the Court issued an Opinion and Order ordering that judgment be
entered in favor of the Plaintiffs on their claims of infringement of U.S.
Patent Nos. 4,599,353 (expires July 28, 2006) and 5,296,504 (expires March 22,
2011); that the effective date of approval of Par's ANDA shall be a date which
is not earlier than the dates of expiration of those patents; and that Par is
enjoined from engaging in the commercial manufacture, use, offer to sell, or
sale within the United States, or importation into the United States, of any
drug product covered by, or the use of which is covered by, those two patents.
As to the third patent asserted by the Plaintiffs, U.S. Patent No. 5,422,368,
the Court dismissed the Plaintiffs' infringements claims and declared that the
patent is unenforceable due to inequitable conduct. The Court further dismissed
all parties' claims for attorneys' fees. Both Par and the Plaintiffs have filed
notices of appeal. Par is appealing the Court's decision only insofar as it
relates to U.S. Patent No. 5,296,504. Pursuant to agreements with Breath and
FineTech related to latanoprost, the Company had recorded product license fees
of $6,999, which are included in intangible assets on its consolidated balance
sheets. If unsuccessful in its appeal, Par will reevaluate the recoverability of
these product license fees.
28
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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(a) Exhibits:
10.9.6 Employment Agreement, dated as of May 28, 2004, by and between Par
Pharmaceutical, Inc. and Shankar Hariharan.
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 April 13, 2004 (Items 2 and 7) and
June 14, 2004 (Items 2 and 7) reflect the acquisition of Kali; dated
June 14, 2004 (Item 5) reflect a change in the Company's name; dated
July 30, 2004 (Item 12) reflect the Company's second quarter 2004
earnings release.
29
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.
PAR PHARMACEUTICAL COMPANIES, INC.
----------------------------------
(Registrant)
August 13, 2004 /s/ Scott Tarriff
-----------------
Scott Tarriff
PRESIDENT AND CHIEF EXECUTIVE OFFICER
August 13, 2004 /s/ Dennis J. O'Connor
----------------------
Dennis J. O'Connor
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
30
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
10.9.6 Employment Agreement, dated as of May 28, 2004, by and between
Par Pharmaceutical, Inc. and Shankar Hariharan.
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.
31