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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 000-30123
FIRST HORIZON PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 58-2004779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
660 HEMBREE PARKWAY 30076
SUITE 106 (Zip Code)
ROSWELL, GEORGIA
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code: (770) 442-9707
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Common shares of the registrant outstanding at March 12, 2001 were
13,005,475. The aggregate market value, as of March 12, 2001, of such common
shares held by non-affiliates of the registrant was approximately $133,816,282
based upon the last sales price reported that date on the Nasdaq Stock Market of
$23.25 per share. (Aggregate market value estimated solely for the purposes of
this report. For purposes of this calculation, all executive officers, directors
and 10% stockholders are classified as affiliate status.)
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of Registrant's Proxy Statement relating to the 2001
Annual Meeting of Stockholders are incorporated into Part III of this Form 10-K.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
First Horizon Pharmaceutical Corporation was incorporated in Delaware in
July 1992 as the surviving corporation of a merger between Century
Pharmaceutical Corporation and Horizon Pharmaceutical Corporation. Our principal
office is located at 660 Hembree Parkway, Suite 106, Roswell, Georgia 30076 and
our telephone number is (770) 442-9707. Our corporate Internet address is
www.firsthorizonpharm.com. We do not intend the information contained on our
website to be a part of this Annual Report.
We are a specialty pharmaceutical company that markets and sells brand name
prescription drugs. We focus on the treatment of chronic conditions, including
cardiovascular diseases and respiratory, gastroenterological and gynecological
disorders. Our strategy is to acquire pharmaceutical products that other
companies do not actively market that we believe have high sales growth
potential, are promotion-sensitive and complement our existing products. In
addition, we intend to develop new patentable formulations, use new delivery
methods and seek regulatory approval for new indications of existing drugs. We
may also acquire companies with complementary products. For the year ended
December 31, 2000, our net revenues were $36.6 million.
Large multinational companies dominate the U.S. prescription pharmaceutical
market. These companies often divest products which, as a result of
consolidation or lack of strategic fit, do not meet the threshold level of sales
required for continued marketing and promotion, as these companies continue to
focus on drugs with annual sales in excess of $1 billion. In 1999 and 2000, we
acquired and licensed products from American Home Products Corporation, Aventis
and Pfizer Inc.
Since 1992, we have introduced 13 products. We promote our products through
our nationwide sales and marketing force of approximately 150 professionals,
targeting high-prescribing primary care and specialty physicians such as
cardiologists, gastroenterologists, gynecologists and pediatricians. Third
parties manufacture all of our products.
Our key products include Nitrolingual Pumpspray, Robinul and Robinul Forte,
Tanafed and Ponstel. We have marketed Tanafed, a liquid cold and allergy product
primarily for children, since 1993. In January 1999, we acquired the
gastrointestinal products Robinul and Robinul Forte, indicated for use in the
treatment of peptic ulcer, from American Home Products Corporation. In July and
October 1999, we acquired marketing rights from Pohl-Boskamp and Aventis,
respectively, to Nitrolingual, a product used for the acute relief or prevention
of chest pain resulting from heart disease. In February 2000, we launched an
improved version of Nitrolingual called Nitrolingual Pumpspray. In April 2000,
we acquired from Pfizer U.S. rights to market, distribute and sell Ponstel, a
product used for the relief of mild to moderate pain and pain associated with
menstruation.
FIRST HORIZON STRATEGY
We believe that our ability to market, acquire and develop brand name
products and our ability to increase our sales and improve our marketing
infrastructure uniquely positions us to continue to grow. We focus on products
that treat chronic conditions primarily because patients and physicians remain
loyal to such products. This results in repeat use over an extended period of
time, generates recurring consistent revenue streams and lowers marketing costs
necessary to maintain existing sales.
The key elements of our strategy include:
- Increase sales of products through targeted promotion. We seek to
increase sales by promoting our products to high-prescribing primary care
and specialty physicians through our nationwide sales and marketing force
that includes approximately 150 professionals. For example, according to
IMS Health's National Prescription Audit Plus data, prescriptions of our
Robinul products and Tanafed
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have grown 51% and 44%, respectively, from 1999 to 2000. We also use
targeted direct mail and telemarketing to promote our products.
- Identify and license or acquire brand name prescription products. We
seek to acquire the rights to brand name pharmaceutical products that we
believe will benefit from increased marketing efforts to high-prescribing
primary care and specialty physicians, leverage our existing sales
infrastructure, complement our existing products and have the potential
for market exclusivity. Since 1999, we have acquired or licensed five
products.
- Develop proprietary products and line extensions. We seek to reduce the
costs and risks of development by focusing on drugs that the FDA has
already approved in the United States. We plan to develop products,
including line extensions of our current drugs, using patent-protected
delivery systems or formulations that offer market differentiation and
the potential for market exclusivity.
- Acquire companies that sell products that complement our current products
and sales strategy. We regularly review opportunities to acquire
companies that sell products that complement the current products that we
sell and the physicians to whom we promote our products.
PRODUCTS
We currently market and sell the following products:
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YEAR OF
PRODUCT INTRODUCTION PRODUCT INDICATION
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Cognex.................................. 2000 Treatment of mild to moderate dementia
associated with Alzheimer's disease
Ponstel................................. 2000 Relief of mild to moderate pain for
patients 14 years of age and older for
therapies lasting less than a week and
for painful menstruation
Nitrolingual Pumpspray.................. 2000 Acute relief or prevention of an attack
of angina pectoris due to heart disease
Robinul and Robinul Forte............... 1999 Adjunctive therapy for the treatment of
peptic ulcer
Zebutal Capsules........................ 1999 Tension headache
Protuss DM Tablets...................... 1997 Cough and congestion
Mescolor Tablets........................ 1994 Allergy and runny nose
Protuss-D Liquid........................ 1994 Cough and congestion
Zoto-HC Ear Drops....................... 1994 Swimmer's ear infections
Tanafed Suspension...................... 1993 Allergy and cold
Defen-LA Tablets........................ 1992 Cough and cold
Protuss Liquid.......................... 1992 Cough and congestion
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The FDA approved Cognex, Ponstel, Nitrolingual Pumpspray, Robinul and
Robinul Forte based on new drug application submissions. The FDA also approved
an abbreviated new drug application for Zebutal. We believe our other products
are classified by the FDA as drugs that may be marketed without submitting
safety and efficacy data.
Cognex
In June 2000, we acquired from Pfizer world-wide rights to market,
distribute and sell Cognex, as well as rights to a new unapproved controlled
release version of Cognex called Cognex CR. Cognex is used for the treatment of
mild to moderate dementia associated with Alzheimer's disease. Alzheimer's
disease is a
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progressive, degenerative disease that attacks the brain and results in impaired
memory, thinking and behavior. Although no cure for Alzheimer's disease is
currently available, good planning and medical and social management can ease
the burdens on the patient and family. According to the Alzheimer's Association,
approximately four million Americans have Alzheimer's disease. Cognex is one of
only four FDA-approved drug treatments for mild to moderate dementia associated
with Alzheimer's disease.
Ponstel
In April 2000, we acquired exclusive U.S. rights from Pfizer to market,
distribute and sell Ponstel. Ponstel is used for the relief of mild to moderate
pain for patients 14 years of age and older if therapy will be for less than one
week and for primary dysmenorrhea, which is pain associated with menstruation.
According to the American Pain Foundation, one in three American adults lose
more than twenty hours of sleep each month due to pain. Pain costs an estimated
$100 billion each year and lost workdays due to pain add up to over 50 million
days a year. One class of frequently prescribed pain relievers is nonsteroidal
anti-inflammatory drugs, or NSAIDs. Ponstel is a well known NSAID and we believe
that its advantages are its non-addictive qualities, low stomach-related side
effects and efficacy.
Nitrolingual
In February 2000, we began marketing Nitrolingual Pumpspray for which we
acquired exclusive distribution rights in the United States from Pohl-Boskamp.
Nitrolingual Pumpspray is an oral spray of nitroglycerin used for the acute
relief or prevention of chest pain associated with angina pectoris that results
from heart disease. Pohl-Boskamp holds a patent that was issued in 1993 on the
formulation of Nitrolingual that we license. According to the American Heart
Association, about 6.2 million Americans suffer from angina pectoris.
Aventis previously had the rights to market the chlorofluorocarbon (CFC)
version of this product named Nitrolingual Spray. We believe that Nitrolingual
Pumpspray has marketing advantages over Nitrolingual Spray. Unlike the previous
version, Nitrolingual Pumpspray is packaged in a translucent, plastic-coated
glass bottle, that allows patients to easily see the amount of product left in
the bottle. In addition, Nitrolingual Pumpspray does not contain CFC, making it
environmentally friendly.
The primary competitor to Nitrolingual Pumpspray is nitroglycerin tablets.
Unlike tablets, which begin to lose their potency immediately upon opening the
bottle, Nitrolingual Pumpspray maintains its potency for two years. Further,
studies have shown that Nitrolingual Pumpspray provides for more rapid
absorption than the tablets. Each metered dose of Nitrolingual Pumpspray
provides for consistent delivery of nitroglycerin. Also, unlike the tablets,
Nitrolingual Pumpspray requires no special storage or handling to maintain its
potency.
Robinul and Robinul Forte
In January 1999, we acquired exclusive rights from American Home Products
in the United States to Robinul and Robinul Forte, which is a higher-strength
dosage of Robinul. Both Robinul and Robinul Forte belong to a class of drugs
known as anticholinergics, which reduce the motion of the gastrointestinal
tract. The FDA has approved both products for use as a therapy in conjunction
with other therapeutics in the treatment of peptic ulcer. Compared to other
anticholinergics, the Robinul product line has an overall better side effect
profile and is longer acting, thereby requiring fewer doses. We are currently
developing a line extension and will seek regulatory approval to use the active
ingredient in Robinul to treat symptoms associated with the excessive production
of saliva. Since acquiring the products, we have substantially increased the
sales of Robinul and Robinul Forte. Industry sources estimate that the U.S.
market for anticholinergics was $130 million in 1999.
Tanafed
Tanafed is a liquid cold and allergy product marketed for children. We
believe that pediatricians prescribe Tanafed because it is effective and
children prefer its taste. The National Center for Health Statistics estimated
that nearly 22 million days were lost from school in 1996 due to colds.
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Cough, Cold and Allergy Products
Our other products for the treatment of cough, cold and allergy are
Defen-LA tablets, Mescolor tablets and the Protuss product line, which includes
Protuss liquid, Protuss DM tablets and Protuss-D Liquid.
Other Products
We sell Zoto-HC ear drops for the treatment of swimmer's ear infections and
Zebutal capsules for the treatment of tension headaches. A study has shown that
approximately nine out of ten people have at least one headache in any given
year. Headaches account for approximately 18 million outpatient visits annually
to hospitals and healthcare clinics.
PRODUCT DEVELOPMENT
We seek to maximize the value of drugs by developing new patentable
formulations, using new delivery methods and seeking regulatory approval for new
indications. Through the use of these distinct formulations and patent-protected
delivery systems, we plan to create a marketing advantage over generic drugs and
reduce substitution by the pharmacist. Some of these development projects
include line extensions which allow us to extend the life cycles of our
products. We expect the strength of extensive literature-based clinical data on
the active ingredients in our products under development, current acceptance and
usage of the active ingredients in these products by healthcare professionals
and the safety profile of the active ingredients in approved products will
reduce development costs and risks associated with FDA approval.
We generally seek to contract third parties to formulate, develop and
manufacture materials needed for clinical trials and to perform scale-up work.
We select third-party contractors that we believe have the capability to
commercially manufacture the products. By selecting qualified third parties
capable of both developing formulations and providing full-scale manufacturing
services, we believe we will be able to shorten development and scale-up times
necessary for production. The key advantage to this approach is that the
third-party contractor will have the equipment, operational parameters and
validated testing procedures already in place for the commercial manufacture of
our products. Our management team has experience in selecting and managing
activities of third-party contract companies.
Migraine Product (FHPC 01)
We are developing a proprietary formulation of a product named FHPC 01 for
the treatment of migraine headaches, which contains an active ingredient that is
currently approved by the FDA for other indications. We have entered into a
development agreement with Penwest Pharmaceuticals Co. to develop the product
using Penwest's patented TIMERx controlled-release technology. Penwest has also
granted us the right to reference their drug master file as necessary for us to
submit a new drug application for this product. A drug master file is a
submission to the FDA, often in support of a new drug application, that
companies may use to provide confidential, detailed information to the FDA about
facilities, processes or articles used in the manufacturing, processing,
packaging and storing of one or more human drugs without disclosure to third
parties. We have developed a once a day formulation for this product and we
filed an investigational new drug application for this product on February 17,
2000 which has been accepted by the FDA. We have engaged Parexel International
to conduct clinical trials for this product. We recently completed a Phase I
clinical trial for this product, and are in discussions with the FDA to clarify
their expectations on further clinical trials before commencing those trials.
The National Institute of Health estimates that 28 million Americans suffer from
migraine headaches. Of these, approximately half suffer from migraines that are
moderately to severely disabling.
Excessive Salivation Product (FHPC 02)
We are developing a product named FHPC 02 for the treatment of the symptoms
associated with the excessive production of saliva primarily in children. This
product will be a line extension of our Robinul products. We have entered into
an agreement with Mikart to develop a new dosage form and to manufacture the
product. On December 29, 2000, we filed an investigational new drug application
for this product which
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has been accepted by the FDA. We plan to initiate clinical trials and file a
supplementary new drug application to market the product. Excessive salivation,
also known as sialorrhea, is a socially embarrassing condition that occurs in
patients, including those who suffer from cerebral palsy and other
neurodevelopmental diseases.
SALES AND MARKETING
To maximize the effectiveness of our selling efforts, our sales force
focuses on high-prescribing primary care and select specialty physicians. Our
sales force seeks to develop close relationships with these physicians and
respond to their needs. During 2000, we expanded our sales and marketing force
from 133 to approximately 150 professionals nationwide.
We sell our products to pharmaceutical wholesalers (who in turn distribute
to pharmacies), chain drug stores, other retail merchandisers and, on a limited
basis, directly to pharmacies. For the year ended December 31, 2000, sales to
our top five pharmaceutical wholesalers accounted for over 73% of all of our
sales. The following four wholesalers each accounted for 10% or more of all of
our sales: McKesson HBOC, Inc. (29%), Cardinal Health, Inc. (14%) and Bergen
Brunswig Corporation (12%) and Bindley Western Industries, Inc. (10%).
We have traditionally targeted our sales efforts in areas with low
managed-care penetration in which it is easier to establish a presence. In
addition, we have a group of sales professionals that focuses exclusively on
building relationships with managed-care organizations that can be leveraged
across markets. We continue to strengthen this group to gain access to
formularies and develop long-term working relationships that may lead to
adoption of our products.
For the years ended December 31, 2000, 1999 and 1998, Nitrolingual
Pumpspray accounted for 24%, less than 1% and 0%, respectively, of our total
sales. For the years ended 2000, 1999 and 1998, Robinul and Robinul Forte
accounted for 20%, 26% and 0%, respectively, of our total sales. In 2000, 1999
and 1998, Tanafed accounted for 22%, 24% and 31%, respectively, of our total
sales.
Although our business is generally non-seasonal, sales of certain products,
such as cough and cold products, increase slightly between October and March due
to the cold and flu season. We expect the impact of seasonality to decrease as
we acquire or obtain licenses for products that treat chronic conditions.
However, we anticipate that the seasonality may continue to affect sales for the
foreseeable future.
THIRD-PARTY AGREEMENTS
Cognex
In June 2000, we acquired from Pfizer world-wide rights to market,
distribute and sell Cognex as well as rights to a new unapproved version of
Cognex, called Cognex CR. We paid $3.5 million in cash for Cognex. In addition,
we acquired rights to a new unapproved version of Cognex, called Cognex CR. We
must pay Pfizer up to $1.5 million in additional purchase price if we obtain FDA
approval to market Cognex CR in the United States.
Under this agreement, we must submit reports to the FTC regarding the
status of FDA approvals of Cognex and our efforts to market the product. In the
event that we voluntarily stop selling Cognex for 60 days or more, other than
for reasons outside our control, the FTC may order that Cognex revert back to
Pfizer and be divested by the FTC to another purchaser. In addition, subject to
an extension, the FTC may order us to return Cognex if we fail to pursue the
sale and manufacture or third-party manufacture of Cognex within one year from
receiving FTC approval which occurred in June 2000.
Under the purchase agreement for the Cognex transaction, we are required to
pay royalties upon achieving certain net sales levels of Cognex. We do not
expect to pay significant royalties in the near future.
The purchase agreement for Cognex provides for a supply agreement under
which an affiliate of Pfizer will manufacture and supply to us either Cognex or
the active ingredient in Cognex for two years after the Cognex transaction
closed in June 2000, subject to a one year renewal. We paid an agreed upon price
for the
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supply of Cognex and the active ingredient. The supply agreement contains
designated quantities of Cognex and its active ingredient that Pfizer's
affiliate will supply to us and that we must purchase. We plan to secure a
replacement manufacturer for Cognex and are currently in negotiations with a
potential manufacturer.
Pfizer has provided us with a new drug application package for our use in
seeking approval from the FDA and international regulatory authorities to market
and sell Cognex CR. However, we must obtain from ALZA Corporation rights to a
portion of the new drug application which has not been provided to us by Pfizer.
ALZA controls the manufacture and intellectual property rights for the drug
delivery systems of Cognex CR. We may have to undertake additional clinical
studies to obtain approval of the product. We must pay Pfizer up to $1.5 million
in additional purchase price if we obtain FDA approval to market Cognex CR. If
approved, Cognex CR will also treat mild to moderate dementia associated with
Alzheimer's disease, but we believe that the new version will offer convenience
to patients by reducing the dosing from four times per day to one time per day.
In December, 2000, we entered into an agreement with OTL Pharma of France
granting them exclusive rights to sell and distribute Cognex, in Germany,
France, Spain, Belgium and Luxembourg through 2004, subject to four one year
renewals. This agreement provides OTL Pharma with a right of first refusal to
sell Cognex CR in these countries upon appropriate regulatory approval in such
countries, which approvals OTL Pharma is required to obtain. OTL Pharma will
also be responsible for all regulatory matters related to the sale and
distribution of Cognex in these countries. We must pay OTL Pharma a commission
based on amounts collected by OTL Pharma and remitted to us from the sale of
Cognex.
In January 2001, we entered into a distribution agreement with Genesis
Pharma of Athens granting Genesis Pharma exclusive rights to distribute Cognex
in Greece, Turkey, Cyprus, Bulgaria, Romania, Croatia, Slovenia, Serbia, Bosnia
and Albania through December 31, 2005, subject to four one year renewals. Under
the agreement, Genesis Pharma will purchase Cognex from us from time to time at
a price based on a government mandated maximum price set for Greece.
OTL Pharma's and Genesis Pharma's services under these agreements will
include maintenance of Cognex registrations, contact with regulatory authorities
including reporting requirements, responding to customer complaints, sales
administration, shipping management, billing, processing of returns, storage,
responding to any regulatory inquiries or investigations, responding to any
customer complaints and communicating with physicians in relation to the
product.
Ponstel
In April 2000, we acquired exclusive rights from Pfizer to market,
distribute and sell Ponstel in the United States. The total purchase price was
$13 million. We paid $9.5 million in cash, which we borrowed under a bridge
loan, and issued a promissory note to Pfizer for $3.5 million for the rights to
this product. We repaid both the bridge loan and promissory note in June 2000
with the proceeds of our initial public offering.
In April 2000, we also entered into a supply agreement through the first
quarter of 2001 with Pfizer under which Pfizer supplies us with designated
quantities of Ponstel. We are in the process of amending this agreement to
extend it through approximately the second quarter of 2001. We pay Pfizer an
agreed upon price for the supply of Ponstel.
In December 2000, we signed an agreement with West-ward Pharmaceuticals to
manufacture Ponstel after West-ward obtains FDA approval to manufacture the
product. We anticipate that this will occur by the fourth quarter of 2001. The
term of this agreement is five years subject to automatic annual renewals. We
must purchase all of our requirements for Ponstel from West-ward and are subject
to minimum purchase requirements. We must pay West-ward a price for Ponstel
based on a multiple of West-ward's direct cost of goods sold in the manufacture
and supply of the product. In addition, we must pay West-ward milestone
payments, as long as no generics have been introduced, upon certain anniversary
dates of FDA approval of the manufacture of Ponstel by West-ward. West-ward is
currently in the process of manufacturing the required pilot batches in order to
obtain such approval.
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Nitrolingual Pumpspray
In July 1999, we acquired from Pohl-Boskamp exclusive U.S. rights to
distribute, market and sell Nitrolingual Pumpspray beginning on February 1, 2000
for five years plus an additional five-year renewal period subject to
establishing mutually acceptable minimum sales requirements. Under the
agreement, Pohl-Boskamp supplies us with our requirements of product at prices
that decrease as volume purchased in each year increases. We must purchase
designated minimum quantities in each year of the agreement or pay a fee to keep
the agreement in effect. We must also pay a royalty on net sales of the product.
Also, Pohl-Boskamp can terminate our distribution agreement for Nitrolingual if
we do not sell specified minimum quantities of the product each year, if a
company with a product competitive with Nitrolingual acquires direct or indirect
influence or control over us, or if a very significant change in our
stockholders occurs so that Kapoor-Pharma Investments and our employees,
management, directors, and any of their respective affiliates, do not in the
aggregate directly or indirectly beneficially own at least 20% of our shares.
Aventis had exclusive rights through January 2000, to a version of the
product containing CFC named Nitrolingual Spray. To promote earlier adoption of
Nitrolingual Pumpspray, we obtained exclusive marketing rights from Aventis to
market Nitrolingual Spray in the United States as of November 22, 1999. We
promoted Nitrolingual Spray for a short period of time to reduce inventories of
the product in the distribution channels. Since the launch of Nitrolingual
Pumpspray, we have not marketed Nitrolingual Spray.
Robinul/Robinul Forte
In January 1999, we acquired exclusive rights in the United States to
Robinul and Robinul Forte tablets from American Home Products Corporation. We
must pay royalties on net sales under our license agreement with American Home
Products. We negotiated for American Home Products Corporation or its designee
to continue to manufacture and supply the product to us until July 29, 2001. We
have an agreement with Mikart, dated April 23, 1999, for Mikart to become
qualified under applicable regulations to manufacture and supply our
requirements for Robinul. Under this agreement, Mikart will manufacture the
products for five years from the time Mikart becomes a qualified manufacturer
plus renewal terms of one year until either party elects not to renew. The
agreement with Mikart requires that we purchase certain designated minimum
quantities.
Tanafed
In January 1996, we obtained exclusive distribution rights from Unisource
Inc. to Tanafed in North America through December 31, 2003 plus an additional
seven years at our option. The agreement requires us to purchase all of our
requirements for Tanafed from Unisource, including at least certain minimum
quantities of Tanafed in each year of the agreement. We entered into a patent
license agreement with Jame Fine Chemicals, Inc., a supplier of a raw material
for Tanafed, effective January 1, 2000. This agreement grants us a
semi-exclusive license to use, sell and distribute finished products containing
an active ingredient used in Tanafed. The licensed patent covers the
manufacturing process of an active ingredient used in Tanafed. The license
continues through the life of the licensed patent, which expires in 2014. We
paid an up-front license fee and agreed to pay certain royalties based on net
sales of Tanafed at rates which we believe are within industry customary ranges.
Another party also has a license for one of the active ingredients in Tanafed.
Migraine Product (FHPC 01)
In October 1998, we entered into an agreement with Inpharmakon Corporation
in which we acquired rights to the proprietary information for the migraine
product FHPC 01 for which we recently completed Phase I clinical studies and
plan to submit a new drug application. The agreement expires on October 31,
2008, but we may renew it indefinitely after expiration. In May 2000, we entered
into an amendment to this agreement in which Inpharmakon Corporation released us
from all previous claims that Inpharmakon Corporation may have had under the
agreement, and deleted the required time within which we must commence clinical
trials and file for regulatory approval of the product. Under the amended
agreement, we must develop a workable once-a-day formulation for the drug,
conduct clinical trials and file for and exert reasonable efforts to obtain
regulatory approval for the drug. If we do not obtain regulatory approval of the
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drug within three years after filing for such approval and thereafter commence
and continue to aggressively market and sell the product, Inpharmakon may
terminate the agreement. In the event that Inpharmakon terminates the agreement
for failure to achieve these milestones, Inpharmakon may purchase rights to
develop the drug at our costs to date. We must also pay up to an aggregate of
$950,000 in non-refundable fees to Inpharmakon at various developmental
milestones through and including regulatory approval of the product, and, in the
event of commercial sales of the product, we must pay royalties at rates which
we believe are within industry customary ranges. Under this agreement we also
paid Inpharmakon $200,000 upon completion of our initial public offering in June
2000. If we elect to sell the business opportunity to a third party, we must
share the proceeds of the sale with Inpharmakon.
In March 1999, we acquired rights from Penwest Pharmaceuticals Co. to use
Penwest's TIMERx controlled-release technology to develop FHPC 01. Under the
Penwest agreement, we have the right to manufacture, use and sell the developed
product in North America and Mexico for a period extending 15 years from the
date a new drug application is issued for the product, as well as a license
under certain Penwest patents. We must pay Penwest up to an aggregate of
approximately $2,600,000 of non-refundable fees upon achieving specified
development milestones through the first anniversary of the first commercial
sale of the product following regulatory approval and royalties upon any sales
of the migraine product at rates which we believe are within industry customary
ranges. Penwest may terminate the agreement in the event we fail to timely
achieve designated performance milestones within prescribed time periods
including the completion of clinical trials by April 2002, applying for FDA
approval of the product within six months after completing clinical trials and
commercially launching the product within two months after obtaining FDA
approval. Penwest may also terminate the agreement if we fail to either sell
specified minimum quantities of the product each year after approval of the
product or pay the applicable royalty to Penwest as if we had sold such minimum
quantity.
Excessive Salivation Product (FHPC 02)
In January 2001, we entered into a manufacturing and supply agreement with
Mikart granting Mikart exclusive rights to manufacture and package our product
under development for the treatment of excessive salivation upon approval of the
product by the FDA and upon approval by the FDA of the manufacture of the
product by Mikart. The term of this agreement expires five years after FDA
approval of the new drug application or supplemental new drug application for
the product, subject to automatic one-year renewals.
Other Products
Generally, our other products are manufactured pursuant to manufacturing
and supply agreements for remaining terms ranging from two to nine years.
Generally, these agreements require that we purchase all of our requirements for
these products from the manufacturers which are a party to these agreements,
including specified minimum purchase quantities of the product for each year.
Except for our Defen-LA, Protuss-D and Zoto-HC products, these agreements
generally state that the product supplier will provide products only to us.
MANUFACTURERS AND SINGLE SOURCE SUPPLIERS
We use third-party manufacturers for the production of our products for
development and commercial purposes. Given the general under-utilization of
resources, the availability of excess capacity for manufacturing in the
marketplace and the lower cost of outsourcing, we intend to continue to
outsource our manufacturing for the near term.
We currently use the services of seven third-party manufacturers for our
products and have entered into an agreement with one which is scheduled to begin
the manufacture of Ponstel for us during the fourth quarter of 2001 after
obtaining FDA approval to do so. These manufacturers manufacture our products
pursuant to our product specifications. We have manufacturing and supply
agreements with six of these manufacturers. The terms of these agreements
generally range from two years to ten years except for the supply agreement with
Pfizer for Ponstel, which expired December 31, 2000, and was extended through
the first quarter of 2001 and which we are in the process of amending to extend
through the second quarter of 2001. Under some of
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these agreements, the manufacturers or other third parties own rights to the
products that we have under our marketing licenses. We have not entered into
agreements for alternative manufacturing sources for any of our products. The
suppliers of Nitrolingual Pumpspray and the raw material for Tanafed hold
patents relating to their respective products. The patents may provide us with a
competitive advantage because the patents create a barrier to entry to other
companies that might otherwise seek to develop similar products.
TRADEMARKS
Because of the large number of products on the market which compete with
our products, we believe that our brand names are an important factor in
establishing product recognition. We have applied for a U.S. registered
trademark for First Horizon Pharmaceutical. Our products are sold under a
variety of trademarks registered in the United States, including Ponstel,
Zoto-HC, Protuss, Mescolor, Defen, Zebutal and Tanafed. We own the U.S. rights
to the Cognex trademark and its international counterparts. Further, we have
been licensed rights to use the Nitrolingual, Robinul and Ponstel trademarks in
the United States from Pohl-Boskamp, American Home Products and Pfizer,
respectively. We have rights to the TIMERx trademark pursuant to our rights to
market the product we have under development with Penwest. Our trademark
registrations could be challenged by others which could result in the loss of
use of one or more of our trademarks. Maintenance of our trademarks requires
that we enforce our rights by preventing infringement by third parties, and we
may not have the resources to stop others from infringing our trademarks.
PATENTS
We consider the protection afforded by patents important to our business.
We intend to seek patent protection in the United States and selected foreign
countries where deemed appropriate for products we develop. We cannot assure you
that any patents will result from our patent applications, that any patents that
may issue will protect our intellectual property or that any issued patents will
not be challenged by third parties. In addition, if we do not avoid infringement
of the intellectual property rights of others, we may have to seek a license to
sell our products, defend an infringement action or challenge the validity of
the intellectual property in court, all of which could be expensive and time
consuming.
Nitrolingual Pumpspray
By virtue of our distribution agreement with Pohl-Boskamp for Nitrolingual
Pumpspray, we are afforded marketing exclusivity arising from Pohl-Boskamp's
1993 U.S. patent relating to the product. This patent expires in 2010.
Tanafed
We entered into a licensing agreement with the raw material supplier for
our Tanafed product effective January 1, 2000. This agreement grants us a
license to market and distribute Tanafed for which the manufacturer has a patent
covering the manufacturing process of one of its active ingredients. This patent
expires in 2014.
Cognex
We own certain patent rights relating to the use of an active ingredient in
Cognex to treat conditions associated with Alzheimer's disease. These patents
expire from 2001 to 2007.
Migraine Product (FHPC 01)
Pursuant to our development agreement with Penwest for a once-a-day
migraine product, we are the licensee of certain Penwest patents for the purpose
of manufacturing and marketing the product under development. These patents
expire from 2008 through 2016.
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Active Ingredient in Robinul/Robinul Forte
In 1999, we filed a patent application directed to the use of
glycopyrrolate for the treatment of certain new indications. Glycopyrrolate is
the active ingredient in Robinul and Robinul Forte.
Cardiac Conditions
In April 2000, we filed a patent application directed to the use of
combinations of active agents for treatment of a variety of cardiac conditions.
Such combinations may also include unique formulations for delivery.
COMPETITION
The market for drugs is highly competitive with many established
manufacturers, suppliers and distributors actively engaged in all phases of the
business. We believe that competition in the sale of our products is based
primarily on price, service, availability and product efficacy. Our brand name
pharmaceutical products may be subject to competition from alternate therapies
during the period of patent protection and thereafter from generic equivalents.
Some of our products have generic equivalents in the marketplace.
We also compete with other pharmaceutical companies for new products and
product line acquisitions. These competitors include Dura Pharmaceuticals, Inc.,
Forest Laboratories, Inc., Watson Pharmaceuticals, Inc., King Pharmaceuticals,
Inc., Shire Pharmaceuticals Group plc and other companies that acquire branded
product lines from other pharmaceutical companies.
GOVERNMENT REGULATION
According to the Federal Food, Drug and Cosmetic Act ("FDC Act"), all new
drugs are subject to premarket approval by the FDA. Applicable FDA law will
treat our development of new products and new uses for approved products or the
development of any of our line extensions as "new drugs," which requires the
submission of a new drug application ("NDA") or a supplemental NDA ("sNDA"), and
approval by the FDA.
The steps required for approval of an NDA or sNDA may include:
- extensive pre-clinical toxicology and pharmacology studies;
- submission to the FDA of an investigational new drug application ("IND"),
which must become effective before human clinical trials can be
commenced;
- a series of preliminary clinical studies to demonstrate safety (Phase I)
and optimal dosing and pharmacologic effects (Phase II);
- adequate and well-controlled human clinical trials (Phase III) to
establish the safety and effectiveness of the product;
- submission of an NDA or an sNDA to the FDA (typically six to 12 month
internal FDA review cycle);
- presentation of NDA data to an FDA Advisory Panel for its recommendation;
and
- FDA approval of the NDA or sNDA prior to any commercial sale or shipment
of the product.
Pre-clinical studies generally include laboratory evaluation of product
chemistry and formulation, as well as toxicological and pharmacological animal
studies, to assess quality and safety and provide a basis for design of the
human clinical trials. An applicant submits the results of the pre-clinical
studies with chemistry, manufacturing and control information and pharmacology
and toxicology data in support of the proposed clinical study design to the FDA
as a part of an IND and for review by the FDA prior to the commencement of human
clinical trials. Unless the FDA says otherwise, the IND will become effective 30
days following its receipt by the FDA; however, the FDA may place an IND on
"clinical hold" until the sponsor generates and
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supplies the FDA with additional data, which prohibits the sponsor of the IND
from commencing with clinical studies.
Clinical trials involve the administration of the investigational new drug
to humans under the clinical study protocols that had been submitted to the FDA
in the IND. The conduct of the clinical trials is subject to extensive
regulation including compliance with good clinical practices, obtaining informed
patient consent, sponsor monitoring and auditing of the clinical, laboratory and
product manufacturing sites and review and approval of each study by an
institutional review board. Clinical trials are typically conducted in three
sequential Phases, although Phases may overlap. In Phase I, the investigational
new drug usually is administered to 20-50 healthy human subjects and is tested
for safety. Phase II usually involves studies in a limited patient population
(50-200 patients) to:
- determine the initial effectiveness of the investigational new drug for
specific indications;
- determine dosage tolerance and optimal dosage; and
- identify possible adverse effects and safety risks.
When an investigational new drug is found to be effective and to have an
acceptable safety profile in Phase II evaluation, Phase III trials are
undertaken to further evaluate clinical effectiveness and to further test for
safety within an expanded patient population of usually 200 or more patients.
The FDA reviews both the clinical plans and the results of the trials and may
require the study to be discontinued at any time if there are significant safety
issues or lack of efficacy. In some cases, the FDA can request Phase IV clinical
studies to be conducted as a condition of approval of the NDA, to be performed
after the NDA approval with a timeframe. These studies can be designed to obtain
additional safety and efficacy data, detect new uses for or abuses of a drug, or
determine effectiveness for labeled indications under conditions of widespread
usage. These studies can involve significant additional expenses, and failure to
perform these Phase IV studies within the FDA stated timeframe can result in the
FDA withdrawing the NDA approval.
Once the FDA has approved an NDA, the holder of the NDA may request changes
in the conditions of approval contained in its NDA through a supplement to the
original NDA, termed an sNDA. The format, content and procedures applicable to
NDA supplements are generally the same as those for NDAs. However, the only
information required in a supplement is that needed to support the requested
change. If the NDA or sNDA is based on new clinical investigations which are
essential to the approval of the application, other than bioavailability
studies, it may qualify for a three-year period of administrative exclusivity,
distinct from any applicable patent protection that may exist. The FDA may also
require user fees in excess of $280,000 for prescription drug NDAs or sNDAs.
Supplements proposing to include a new indication for use in pediatric
populations are not subject to user fees.
Another form of an NDA is the so-called "505(b)(2)" NDA, which applicants
submit pursuant to Section 505(b)(2) of the FDC Act. This type of NDA permits
the cross-referencing of safety and effectiveness studies that the applicant has
not conducted or been granted a right of reference by the sponsor of the animal
or human studies, submitted in a prior NDA or in the literature which utilized
the same drug. In addition, the FDA recommends a 505(b)(2) NDA for a
modification, such as a new dosage form or drug delivery form, of a previously
approved drug which requires more than merely bioequivalence data. This
505(b)(2) NDA is similar to a full NDA, except that, under conditions prescribed
by the FDA, it may be supported in whole or in part by one or more animal and
human study investigations in the originator NDA or those published in
scientific literature in lieu of the applicant's clinical trials. We intend to
submit this type of NDA application to market potential product line extensions
or new uses of already-approved products.
In addition, if we submit a 505(b)(2) NDA or abbreviated NDA ("ANDA"), the
FDA will require us to certify as to any patent which covers the drug for which
we seek approval. If there is a patent in existence, a certain type of
certification commonly referred to as a "paragraph 4 certification" is made and
proper notice to the patent holder of our intent to market the drugs is given,
and the patent holder makes an infringement claim within a specified time
period, then the FDA will not approve our marketing application for 30 months or
until the patent litigation is resolved, whichever occurs sooner. In addition,
distinct from patent considerations, approval of a generic type of ANDA could be
delayed because of the existence of five or three
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years of administrative non-patent exclusivity afforded by the FDA for the
innovator drug; however, in certain proscribed cases, this non-patent
exclusivity may not prevent the submission and approval of competitor
applications.
The least burdensome application for new drug approval is the ANDA, which
may apply to a new drug that is shown to be bioequivalent to a drug previously
approved by the FDA for safety and effectiveness and listed as the drug to which
bioequivalence must be shown. An applicant may submit an ANDA for products that
are the same as an approved originator drug regarding active ingredient(s),
route of administration, dosage form, strength and conditions of use recommended
on the labeling. The ANDA requires only bioequivalence data and other technical
and manufacturing information, but typically no safety and effectiveness
studies.
Even after obtaining regulatory approval, such approval may require
post-marketing (Phase IV) testing and surveillance to monitor the safety of the
product. In addition, the product approval may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. At present, companies cannot export pharmaceutical products that
cannot be lawfully sold in the United States unless certain statutorily
prescribed conditions are met.
FDA regulations require that we report adverse events suffered by patients,
submit new marketing and promotional materials, submit changes we plan to make
to the product manufacturing or labeling and comply with recordkeeping
requirements and requirements relating to the distribution of drug samples to
physicians. In the event that we do not comply with the FDA requirements, the
manufacture, sales and distribution of our products may be suspended, and we may
be prevented from obtaining FDA approval of new products. We received a FD-483
at the conclusion of a recent FDA inspection that listed observations relating
to record keeping and reporting. We submitted a response, and the FDA has
replied that the corrective actions appear to address the issues, but will
verify the corrections at the next scheduled inspection.
Our third-party manufacturers must adhere to FDA regulations relating to
current good manufacturing practice ("cGMP") regulations, which include
requirements relating to organization of personnel, buildings and facilities,
equipment, control of components and drug product containers and closures,
production and process controls, packaging and labeling controls, holding and
distribution, laboratory controls, records and reports, and returned and
salvaged products. Ongoing compliance with cGMP procedures, labeling and other
regulatory requirements are monitored through periodic inspections and market
surveillance by state and federal agencies, including the FDA. It is also our
obligation to periodically monitor the FDA compliance of our third-party
manufacturers. Failure by our third-party manufacturers to comply with these
rules could result in sanctions being imposed, including fines, injunctions,
civil penalties, suspension or withdrawal of FDA approvals, seizures or recalls
of products, operating restrictions and criminal prosecutions. In addition, we
rely upon our third-party manufacturers to provide many of the documents that we
use to comply with our FDA reporting requirements for Ponstel, Robinul, Robinul
Forte and Nitrolingual.
In addition, we are subject to fees under the Prescription Drug User Fee
Act for new drug applications for new drug products and sNDAs for new uses,
except that we may qualify for a waiver of the fee for our first new drug
application. We will be responsible for paying these fees for NDAs, sNDAs and
subsequent submissions, unless we receive approval from the FDA for a waiver,
reduction or refund. We are also subject to regulation under other federal and
state laws, including the Occupational Safety and Health Act and other
environmental laws and regulations, national restrictions on technology transfer
and import, export and customs regulations. In addition, some of our products
that contain controlled substances, such as Protuss and Protuss-D, are subject
to Drug Enforcement Administration regulations relating to storage,
distribution, importation and sampling procedures. We have registered with the
Drug Enforcement Administration under the Controlled Substances Act which
establishes, among other things, registration, security and recordkeeping
requirements. We must also comply with federal and state anti-kickback and other
healthcare fraud and abuse laws.
In addition, whether or not we obtain FDA approval, we must obtain approval
of a pharmaceutical product by comparable governmental regulatory authorities in
foreign countries prior to the commencement of
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clinical trials and subsequent marketing of such product in such countries. The
approval procedure varies from country to country, and the time required may be
longer or shorter than that required for FDA approval.
ORPHAN DRUG DESIGNATION
We may request orphan drug status for some of our products under
development. Orphan drug designation may be granted to those products developed
to treat diseases or conditions that affect fewer than 200,000 persons in the
United States or that affect more than 200,000 persons in the United States and
for which there is no reasonable expectation that the cost of developing and
making a drug in the United States for such disease or condition will be
recovered from sales in the United States of such drug. Under the law, the
developer of an orphan drug may be entitled to seven years of market exclusivity
following the approval of the product by the FDA, exemption from user fee
payments to the FDA and a tax credit for the amount of money spent on human
clinical trials. However, we must be the first to receive FDA marketing approval
to receive market exclusivity under the orphan drug statute should there be a
competitor with a similar molecular entity pursuing the same intended clinical
use. Although we may get market exclusivity under the Orphan Drug Act, the FDA
will allow the sale of a molecularly equivalent drug which is clinically
superior to or a molecular entity different from another approved orphan drug,
although for the same indication, during the seven-year exclusive marketing
period. We cannot be sure that any of our products under development would
ultimately receive orphan drug designation, or that the benefits currently
provided by this designation, if we were to receive it, will not subsequently be
amended or eliminated. Orphan drug designation does not convey any advantage in,
or shorten the duration of, the regulatory review and approval process.
REIMBURSEMENT
Our ability to market our products successfully will depend in part on the
extent to which reimbursement for the costs of the products will be available
from government health administration authorities, private health insurers and
managed care organizations in the United States and in any foreign markets where
we may sell our products. Third-party payors can affect the pricing or relative
attractiveness of our products by regulating the reimbursement they provide on
our products and competing products. Insurance carriers may not reimburse
healthcare providers for use of our products used for new indications. Domestic
and foreign government and third-party payors are increasingly attempting to
contain healthcare costs by limiting both coverage and the level of
reimbursement for new pharmaceutical products.
DESI REGULATORY STATUS
The regulatory status of our Protuss, Protuss-D, Protuss-DM, Zoto-HC,
Tanafed, Mescolor and Defen-LA products, allows third parties to more easily
introduce competitive products, and may make it more difficult for us to sell
these products in the future. Currently, an FDA program allows us, in our
opinion, to manufacture and market these products and permits others to
manufacture and market the same and similar products without submitting safety
or efficacy data. These markets are already highly competitive and, except for a
license to one of the raw materials in Tanafed, we do not hold rights in patents
protecting us against such competitive pressures. This results in increased
competition because other companies can enter the market without having to
submit safety and efficacy data to sell competing products. On several
occasions, the FDA has considered changing the classification of these types of
drugs from prescription to over-the-counter use. If they do change the
classification, we might have to reformulate them, submit safety and efficacy
data on our products which could be costly, or we might have to discontinue
selling these products if the FDA does not approve our marketing application. We
could lose third-party reimbursement for the products and face increased
competition. We are unable to predict the timing of any of these actions, but
they could occur soon.
In addition, the FDA considers these types of products to be "new drugs",
but has indicated its intent to exercise enforcement discretion and not pursue
regulatory action unless certain conditions occur. If these conditions were to
materialize, or the FDA disagreed with our conclusions about the regulatory
status of these products, we might be required to submit a new drug application
and/or cease marketing until the FDA grants approval to do so. The FDA could
also, at any time, promulgate new regulations or policies to require the
submission of a new drug application for each of these products.
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BACKLOG
As of December 31, 2000, we had no material backlog.
INSURANCE
We maintain a product liability insurance policy. We do not maintain
business interruption insurance.
EMPLOYEES
We had 178 full-time employees as of December 31, 2000, including 154 sales
and marketing employees in the field, and 24 in management, finance and
administration. We also maintain active independent contractor relationships
with various individuals with whom we have consulting agreements. We believe our
employee relations are good. None of our employees is subject to a collective
bargaining agreement.
ITEM 2. PROPERTIES
We lease a 24,300 square-foot facility in Roswell, Georgia. Our facility
includes space for offices and a warehouse. This lease expires on August 31,
2003. We also lease executive office space on a short-term basis in Raleigh,
North Carolina, and Phoenix, Arizona, for our regional managers. We believe that
our facilities are adequate for our current requirements; however, we anticipate
that as we grow, we will require additional facilities.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in routine litigation. Currently,
we are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"FHRX." There were approximately 108 stockholders of record on March 13, 2001.
Our Common Stock began trading on May 31, 2000 and the price range of
common stock is described below:
2000
-----------------
HIGH LOW
------- -------
Second quarter (May 31 through June 30)..................... $12.375 $ 7.875
Third quarter (ended September 30).......................... $19.00 $ 9.125
Fourth quarter (ended December 31).......................... $33.50 $12.875
DIVIDEND POLICY
We have never paid and have no plans to pay any dividends on our common
stock in the foreseeable future. Instead, we intend to retain any earnings for
use in our business operations.
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RECENT SALES OF UNREGISTERED SECURITIES
During 2000, we sold or issued the following unregistered securities:
At various times during 2000, we issued to certain employees and
consultants options to purchase in the aggregate up to 300,750 shares of
common stock at exercise prices ranging from $8.00 to $10.6875 per share.
Exemption from the registration provisions of the Securities Act for the
transaction described above was claimed under section 3(b) of the Securities Act
on the basis that such securities were sold pursuant to a written compensatory
benefit plans or pursuant to a written contract relating to compensation and not
for capital raising purposes under Rule 701 of the Securities Act.
INITIAL PUBLIC OFFERING AND USE OF PROCEEDS
Our registration statement on form S-1 (File No. 333-30764) relating to our
initial public offering was declared effective on May 31, 2000. The offering of
3,800,000 shares of common stock, $.001 par value, commenced on May 31, 2000 and
closed on June 5, 2000. All 3,800,000 of the shares registered were sold at
$8.00 per share for an aggregate price of $30,400,000 before deducting
underwriting discounts commissions and underwriting expenses. The managing
underwriters of the initial public offering were Chase Securities, Inc., Banc of
America Securities LLC, and Thomas Weisel Partners LLC (the "Underwriters"). We
deducted $2,128,000 in underwriting discounts and commissions and $1,393,450 in
offering expenses incurred through December 31, 2000. We received net proceeds
of $26,878,550. On June 30, 2000, the Underwriters exercised their
over-allotment option, pursuant to which we sold an additional 570,000 shares of
common stock at $8.00 per share for an aggregate price of $4,560,000 before
deducting underwriting discounts and commissions of $319,200. We received net
proceeds of $4,240,800 from the exercise of the over-allotment option. Our total
net proceeds from the initial public offering including the exercise of the
over-allotment option was $31,119,350.
Through December 31, 2000, we used the proceeds from the initial public
offering to repay $9,500,000 due under the bridge loan with LaSalle Bank which
we borrowed to purchase Ponstel, $1,640,000 due under the term loan facility
with LaSalle Bank and $2,000,000 under the revolving loan facility with LaSalle
Bank.
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We also repaid $3,500,000 due under the promissory note issued to Warner-Lambert
for the purchase of Ponstel and $3,500,000 to Warner-Lambert Company for the
purchase of Cognex. We also paid a $200,000 fee to Inpharmakon Corporation under
the terms of the Amendment to the Collaboration Agreement with Inpharmakon
Corporation dated May 3, 2000.
We currently expect that the remaining proceeds will be used primarily for
general corporate purposes, including equity investments in other companies and
the development of new products and new product acquisitions which may include
the payment of licensing fees and milestone payments. We might also use a
portion of the remaining proceeds to acquire complementary businesses.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with our financial statements and the related
notes and other financial information included elsewhere in this Annual Report,
as well as "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected financial data as of December 31, 1997,
1998, 1999 and 2000, were derived from our financial statements which have been
audited by Arthur Andersen LLP, independent public accountants. The selected
financial data as of December 31, 1996 were derived from unaudited financial
statements which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of our financial condition and results of operations. These results
may not be indicative of future results.
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ---------- ---------- ----------- -----------
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA
Net revenues............................ $2,516,616 $5,557,700 $9,252,058 $18,624,514 $36,649,547
Operating costs and expenses:
Cost of revenues...................... 489,905 1,136,691 1,903,054 3,140,416 5,435,908
Selling, general and administrative
expenses, excluding the non-cash
expense presented below............. 2,393,018 4,545,254 6,789,358 12,400,439 23,446,979
Non-cash selling, general and
administrative expense.............. -- 133,500 -- 143,986 769,363
Depreciation and amortization......... 28,878 30,273 35,225 424,274 1,091,138
Research and development expense...... -- -- 255,000 860,350 1,784,144
---------- ---------- ---------- ----------- -----------
Total operating costs and
expenses..................... 2,911,801 5,845,718 8,982,637 16,969,465 32,527,532
---------- ---------- ---------- ----------- -----------
Operating (loss) income................. (395,185) (288,018) 269,421 1,655,049 4,122,015
---------- ---------- ---------- ----------- -----------
Other (expense) income:
Interest expense...................... (67,461) (5,496) (14,017) (356,598) (324,226)
Interest income....................... 3,314 2,909 4,383 11,950 348,183
Other................................. -- 3,629 (2,749) 8,059 20,944
---------- ---------- ---------- ----------- -----------
Total other (expense) income............ (64,147) 1,042 (12,383) (336,589) 44,901
---------- ---------- ---------- ----------- -----------
(Loss) income before benefit (provision)
for income taxes...................... (459,332) (286,976) 257,038 1,318,460 4,166,916
Benefit (provision) for income taxes.... 114,984 106,530 (121,484) (547,996) (1,659,746)
---------- ---------- ---------- ----------- -----------
Net (loss) income....................... $ (344,348) $ (180,446) $ 135,554 $ 770,464 $ 2,507,170
========== ========== ========== =========== ===========
Net (loss) income per common share:
Basic................................. $ (0.06) $ (0.02) $ 0.02 $ 0.10 $ 0.23
========== ========== ========== =========== ===========
Diluted............................... $ (0.06) $ (0.02) $ 0.02 $ 0.09 $ 0.20
========== ========== ========== =========== ===========
Weighted average common shares
outstanding:
Basic................................. 5,830,000 7,576,580 7,978,234 8,028,673 11,074,616
========== ========== ========== =========== ===========
Diluted............................... 5,830,000 7,576,580 8,584,329 8,975,493 12,737,564
========== ========== ========== =========== ===========
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-----------------------------------------------------------------
AS OF DECEMBER 31,
-----------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ---------- ---------- ----------- -----------
(UNAUDITED)
BALANCE SHEET DATA
Cash and cash equivalents.......... $ 30,986 $ 244,766 $ 425,023 $ 219,688 $14,228,067
Working capital.................... (645,249) 687,426 640,090 (733,884) 15,107,924
Total assets....................... 834,238 1,758,872 2,933,101 11,077,744 50,083,542
Borrowings under revolving loan
agreement........................ -- -- 602,928 800,000 --
Long-term debt, including current
portion.......................... -- -- -- 2,898,886 221,482
Total stockholders' (deficit)
equity........................... (477,011) 814,326 956,130 3,615,564 38,572,902
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Annual Report.
Historical results and percentage relationships set forth in the statement of
operations, including trends that might appear, are not necessarily indicative
of future operations.
OVERVIEW
We are a specialty pharmaceutical company that markets and sells brand name
prescription drugs. We focus on the treatment of chronic conditions, including
cardiovascular diseases and respiratory, gastroenterological and gynecological
disorders. Our strategy is to acquire pharmaceutical products that other
companies do not actively market that we believe have high sales growth
potential, are promotion-sensitive and complement our existing products. In
addition, we intend to develop new patentable formulations, use new delivery
methods and seek regulatory approval for new indications of existing drugs. We
may also acquire companies with complementary products. For the year ended
December 31, 2000, our net revenues were $36.6 million.
Since 1992, we have introduced 13 products. We promote our products through
our nationwide sales and marketing force of approximately 150 professionals,
targeting high-prescribing primary care and specialty physicians such as
cardiologists, gastroenterologists, gynecologists and pediatricians. Third
parties manufacture all of our products.
Our key products include Nitrolingual Pumpspray, Robinul and Robinul Forte,
Tanafed and Ponstel. We have marketed Tanafed, a liquid cold and allergy product
primarily for children, since 1993. In January 1999, we acquired the
gastrointestinal products Robinul and Robinul Forte, indicated for use in the
treatment of peptic ulcer, from American Home Products Corporation. In July and
October 1999, we acquired marketing rights from Pohl-Boskamp and Aventis,
respectively, to Nitrolingual, a product used for the acute relief or prevention
of chest pain resulting from heart disease. In February 2000, we launched an
improved version of Nitrolingual called Nitrolingual Pumpspray. In April 2000,
we acquired from Pfizer U.S. rights to market, distribute and sell Ponstel, a
product used for the relief of mild to moderate pain and pain associated with
menstruation.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
Net Revenues. Net revenues increased $18,025,000, or 97%, over the year
ended December 31, 1999, to $36,650,000 for the year ended December 31, 2000.
Sales of continuing products increased $6,250,000 or 34% to $24,420,000, for the
year ended December 31, 2000. Sales of a discontinued product were $324,000 for
the year ended December 31, 1999. The increase in sales of continuing products
was primarily due to higher unit sales of Robinul, Robinul Forte and Tanafed.
Sales of our newly acquired or licensed products, Nitrolingual Pumpspray,
Ponstel and Cognex, were $12,230,000 for the year ended December 31, 2000. We
began to sell
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Nitrolingual Pumpspray on February 1, 2000 (under a license agreement entered
into in 1999), Ponstel on April 14, 2000 and Cognex on June 22, 2000.
Cost of Revenues. Cost of revenues increased $2,296,000 or 73%, to
$5,436,000 for the year ended December 31, 2000 compared to $3,140,000 for the
year ended December 31, 1999.
Gross Margin. Gross margin for the year ended December 31, 2000 was 85%
compared to 83% for the year ended December 31, 1999. This increase resulted
primarily from increased sales of Robinul and Robinul Forte, which have higher
margins than our other products, as well as sales of the newly acquired Cognex
and Ponstel products, which also have higher margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $11,047,000, or 89%, to $23,447,000 for the
year ended December 31, 2000. Selling expenses increased due to expansion of our
sales force, higher commission expense due to increased sales, increased
marketing and promotional expenses due to promotional campaigns for new
products, increased sampling of our products, increased training expenses for
new and existing sales representatives and other market research activities.
Royalty expense increased due to increased sales of Robinul, Robinul Forte and
Zebutal and royalties on sales of Nitrolingual Pumpspray and Tanafed. There was
no comparable royalty expense on Tanafed sales in 1999.
General and administrative expenses increased due to additions to our
management team and support personnel in our corporate office, higher insurance
costs due to increased insurance coverage and higher professional fees related
to our SEC reporting requirements. In addition, in March 2000, we engaged a
consulting firm to make recommendations on the alignment and optimization of our
sales force and future expansion possibilities. As a result, we have realigned
our sales force in order to increase its sales territory coverage area and to
optimize the efficiency of our sales representatives.
Non-Cash Selling, General and Administrative Expense. Non-cash selling,
general and administrative expense was $769,000 for the year ended December 31,
2000 compared to $144,000 for the year ended December 31, 1999. This increase
resulted from the full year amortization of expense related to our issuing stock
options at exercise prices that were lower than the market value of our stock at
the time the options were issued, as determined by an independent valuation, as
well as amounts recorded in 2000 related to an agreement entered into with a
retiring executive.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $667,000 or 157% to $1,091,000 for the year ended December 31,
2000. This increase resulted from higher amortization expense related to the
acquisition of Robinul and Robinul Forte in January 1999, Ponstel on April 14,
2000 and Cognex on June 22, 2000, and increased depreciation expense for
furniture, computer equipment and leasehold improvements at our corporate
headquarters. Amortization expense could further increase if we conclude any
more product acquisitions.
Research and Development Expense. Research and development expense
increased $924,000, or 107% to $1,784,000 for the year ended December 31, 2000.
This increase resulted from continued development of FHPC 01, our migraine
product under development, and the Robinul line extension. In addition, on May
3, 2000, we amended the payment terms under our Collaboration Agreement with
Inpharmakon Corporation relating to the development of FHPC 01. Under the
amended terms, we paid a $200,000 fee to Inpharmakon upon completion of our
initial public offering. We anticipate incurring $3,000,000 of research and
development expense through 2002 for FHPC 01 relating to conducting clinical
trials, filing a new drug application and making milestone payments under our
development agreements.
Interest Expense. Interest expense decreased $33,000, or 9%, to $324,000
for the year ended December 31, 2000. We currently do not have any long-term
debt outstanding and therefore expect interest expense to continue to decrease.
However, we could incur significant interest expense in the future if we
continue to acquire products and finance the purchase of these products with
debt.
Interest Income. Interest income was $348,000 for the year ended December
31, 2000 compared to $12,000 for the year ended December 31, 1999. The increase
was the result of interest earned on the remaining proceeds from our initial
public offering.
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Provision for Income Taxes. Income taxes were provided for in the amount
of $1,660,000 at a rate of 39.8% in 2000 compared to $548,000 at a rate of 41.6%
in 1999. The decreased rate is primarily due to state income tax structuring
initiatives.
YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Net Revenues. Net revenues for the year ended December 31, 1999 were
$18,625,000, compared to $9,252,000 for the year ended December 31, 1998, a 101%
increase. Of this increase, $6,206,000 resulted from product acquisitions and
licensing agreements made in 1999, or from products that earned revenues for the
first time in 1999. Sales of existing products were $12,419,000, a $3,167,000 or
34% increase over 1998. This increase primarily resulted from the expansion of
our sales force, increased marketing efforts and the continued increase in
demand for our products as a result of current and prior efforts of our sales
force. Rebates and other sales allowances were $2,156,000 in 1999 primarily
related to Medicaid rebates on Robinul and Robinul Forte.
Net revenues for 1999 do not include sales of Nitrolingual Pumpspray,
Ponstel or Cognex. We began selling Nitrolingual Pumpspray in February 2000 and
acquired Ponstel and Cognex in April and June 2000, respectively.
Cost of Revenues. Cost of revenues for the year ended December 31, 1999
were $3,140,000, compared to $1,903,000 for the year ended December 31, 1998, a
65% increase. Cost of revenues for 1999 do not include the costs of revenues for
Nitrolingual, Ponstel or Cognex.
Gross Margin. Gross margin for the year ended December 31, 1999 was 83%,
compared to 79% in 1998. The increase in gross margin primarily resulted from
the higher gross margin earned on Robinul and Robinul Forte which we began
selling in February 1999. Gross margin for 1999 and 1998 does not include the
effect of net revenues and cost of revenues for Nitrolingual Pumpspray, Ponstel
or Cognex.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1999 were $12,400,000,
compared to $6,789,000 for the year ended December 31, 1998, an 83% increase.
Selling-related expenses increased over the previous year due to increased
expenses related to sales force expansion, higher commission and royalty
payments and larger sample, marketing and promotional costs. General and
administrative expenses increased over the previous year due to increased
compensation and related expenses, and increased costs as a result of relocation
of our corporate offices from a 7,603-square-foot facility to a
24,300-square-foot facility in September 1998.
Non-Cash Selling, General and Administrative Expense. Non-cash
compensation expenses were $144,000 for the year ended December 31, 1999,
compared to no expense for the year ended December 31, 1998. This expense
resulted from our issuing stock options in 1999 at exercise prices that were
less than the market value of our stock at the time of issuance, as determined
by an independent valuation.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses were $424,000 for the year ended December 31, 1999, compared to $35,000
for the year ended December 31, 1998. This increase primarily resulted from
amortization expense related to the purchase in 1999 of Robinul and Robinul
Forte.
Research and Development Expenses. Research and development expenses were
$860,000 for the year ended December 31, 1999, compared to $255,000 for the year
ended December 31, 1998. This increase resulted from our continuing development
of a new product for the treatment of migraine headache and our continuing
development of a line extension of Robinul for the treatment of symptoms
associated with excessive salivation.
Interest Expense. Interest expense for the year ended December 31, 1999
was $357,000, compared to $14,000 for the year ended December 31, 1998. The
$343,000 increase resulted primarily from borrowings for the acquisition of
Robinul and Robinul Forte.
Interest Income. Interest income for the year ended December 31, 1999 was
$12,000, compared to $4,000 for the year ended December 31, 1998. This $8,000
increase resulted from increased average cash balances resulting from improved
financial performance.
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Income Tax Expense. Income tax expense for the year ended December 31,
1999 was $548,000, compared to $121,000 for the year ended December 31, 1998.
The $427,000 increase resulted from increased pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements arise from debt service, working capital
requirements and funding of acquisitions. We have met these cash requirements
through cash from operations, proceeds from our line of credit, borrowings for
product acquisitions and the issuance of common stock.
Our cash and cash equivalents were $425,000, $220,000 and $14,228,000 at
December 31, 1998, 1999 and 2000, respectively. Net cash used in operating
activities in 1998 was $181,000. This use of net cash was primarily the result
of increases in accounts receivable and inventories partially offset by
increases in accounts payable and accrued expenses plus net income. Net cash
provided by operating activities for the years ended December 31, 1999 and 2000
was $1,018,000 and $3,275,000, respectively. The sources of cash primarily
resulted from net income plus non-cash expenses and increased accounts payable
and accrued expenses, partially offset by increases in accounts receivable and
inventories. Our purchases of inventory impacts our liquidity. Management
estimates that supply agreements with our manufacturers require that we purchase
a minimum of approximately $6,000,000 of inventory during 2001. We expect to use
significant cash for operating activities in the future in connection with the
development of FHPC 01. We expect to incur approximately $3,000,000 of research
and development expense through 2002.
Net cash used in investing activities for the years ended December 31,
1998, 1999 and 2000 was $208,000, $4,186,000 and $17,056,000, respectively. The
investment in 1998 was primarily for the purchase of property and equipment. In
1999 we purchased the rights to market Robinul and Robinul Forte for $4,000,000
in cash with an additional $1,800,000 financed by the seller which we paid off
in January 2001. In addition, we spent $186,000 in 1999 for the purchase of
property and equipment. In April 2000, we purchased the rights to market Ponstel
for $9,500,000 in cash and issued a $3,500,000 seller note, which we paid off in
June 2000. In June 2000, we purchased the rights to market Cognex for $3,500,000
in cash. In addition, we spent $547,000 in 2000 for the purchase of property and
equipment.
Net cash provided by financing activities for the years ended December 31,
1998, 1999 and 2000, was $569,000, $2,962,000 and $27,789,000, respectively. In
1998 we borrowed $563,000 under our revolving line of credit. During 1999, we
borrowed $4,000,000 and incurred indebtedness of $1,800,000 for the purchase of
intangible assets. In 1999, we also made payments of $1,235,000 on long-term
debt and had a net increase of $197,000 on our revolving line of credit. The
primary source of cash in 2000 was from our initial public offering and the
exercise of stock options that provided net proceeds of $31,266,000 offset by
payment on the revolving loan agreement of $800,000 and payment of long-term
debt of $2,677,000.
In May 1998, we entered into a credit facility with LaSalle Bank National
Association, which was subsequently amended to include a revolving credit
facility, a term loan and a bridge loan. The revolving loan is subject to
borrowing base limitations. The revolving credit facility provides for
borrowings up to $2,500,000 and bears interest at the bank's prime rate and
matures in May 2001. At December 31, 2000, we had no outstanding balance under
the revolving credit facility.
In January 1999, we borrowed $2,400,000 under a term loan with LaSalle
Bank. The term loan bore an interest rate at our choice of either the bank's
prime rate or LIBOR plus 2%. The term loan was payable in monthly installments
of $40,000 plus accrued interest and was due to mature on May 2, 2001. On June
5, 2000, the outstanding balance of $1,640,000 payable under the term loan was
paid with proceeds from our initial public offering.
On April 14, 2000, the credit facility was further amended to include
bridge financing of up to $13,000,000 to finance product acquisitions. On April
14, 2000, we borrowed $9,500,000 under this bridge loan for the purchase of
Ponstel. Borrowings under the bridge loan bore interest at our choice of the
bank's prime rate or LIBOR plus 1.5%. On June 5, 2000 the outstanding balance of
$9,500,000 payable under the bridge loan was paid with proceeds from our initial
public offering.
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Our credit facility with LaSalle Bank is secured by our accounts
receivable, inventories, equipment and intangible assets including our
intellectual properties. Under the terms of the credit facility, we must
maintain a minimum net worth plus subordinated debt of $3,300,000 plus 75% of
net income, a ratio of liabilities to net worth plus subordinated debt of 2.25
to 1.00, a minimum specified EBITDA, and a fixed charge coverage ratio ranging
from .75 to 1.00 to 1.25 to 1.00. The credit facility also limits our ability to
incur additional indebtedness, and prohibits substantial asset sales and cash
dividends. As of December 31, 2000, we were in compliance with these covenants.
On April 14, 2000, we issued a promissory note to Pfizer evidencing
$3,500,000 of the purchase price of Ponstel. This promissory note was interest
free. We paid this promissory note in full with proceeds from the initial public
offering.
Management believes that our cash and cash equivalents and cash generated
from operations will be adequate to fund our current working capital
requirements for at least the next 12 months. However, in the event that we make
significant acquisitions in the future, we may be required to raise additional
funds through additional borrowings or the issuance of debt or equity
securities.
IMPACT OF INFLATION
We have experienced only moderate price increases under our agreements with
third-party manufacturers as a result of raw material and labor price increases.
We have passed these price increases along to our customers.
SEASONALITY
Although our business is generally non-seasonal, sales of certain products,
such as cough and cold products, increase slightly between October and March due
to the cold and flu season. We expect the impact of seasonality to decrease as
we acquire or obtain licenses for products that treat chronic conditions.
However, we anticipate that the seasonality may continue to affect sales for the
foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We have adopted SFAS No. 133 effective
January 1, 2001. SFAS No. 133 established methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. Adoption of SFAS No. 133 will not have a
material impact on our financial condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 is applicable to
public companies and provides guidance on applying accounting principles
generally accepted in the United States to revenue recognition issues in
financial statements. We believe our revenue recognition criteria are consistent
with the guidance provided by SAB 101.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Our operating results and cash flows are subject to fluctuations from
changes in foreign currency exchange rates and interest rates. Our purchases of
Nitrolingual Pumpspray under our agreement with Pohl-Boskamp are made in German
Deutsche marks. We expect to make purchases several times per year under this
agreement. In addition, sales of Cognex are recognized in the foreign currencies
of the respective European countries in which it is sold. While the effect of
foreign currency translations has not been material to our results of operations
to date, currency translations on export sales or import purchases could be
adversely affected in the future by the relationship of the U.S. dollar with
foreign currencies.
To the extent that we borrow under our credit facility with LaSalle Bank we
will experience market risk with respect to changes in the general level of the
interest rates and its effect upon our interest expense. Borrowings under our
credit facility with LaSalle Bank bear interest at variable rates. Because such
rates are
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variable, an increase in interest rates will result in additional interest
expense and a reduction in interest rates will result in reduced interest
expense. Interest expense is not expected to be material in the near-term to our
results of operations.
FORWARD-LOOKING STATEMENTS
This Annual Report includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements relate
to analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms and
phrases, such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained in
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and other sections of this Annual Report.
Such statements include, but are not limited to, the following: (i) the
timing and cost of product acquisitions and licensing agreements; (ii)
regulatory approval and cost of development of our migraine product under
development and the Robinul product extension; (iii) the size and scope of our
development efforts for additional products; (iv) cost, timing and outcomes of
regulatory reviews; (v) expansion of our sales and marketing force; (vi)
determination as to the commercial potential of our products under development;
(vii) status of competitive products; (viii) defending and enforcing
intellectual property rights; (ix) establishment, continuation or termination of
third-party manufacturing agreements; (x) commencement by West-ward of
manufacturing Ponstel by the fourth quarter of 2001; (xi) the adequacy of the
current supply of Ponstel for sales in 2001; and (xii) working capital
requirements.
Such forward-looking statements involve uncertainties and other factors,
including those described in the "Risk Factors" section of our registration
statement on Form S-1 filed on March 13, 2001 under the headings. "We currently
depend on four key products for a large portion of our sales, and substantial
declines in any of them would result in our being unprofitable," "There is no
assurance of continued commercial acceptance of our products," "Our growth will
suffer if we do not acquire rights to new products and integrate them
successfully," "We depend entirely on third parties to manufacture our
products," "We may encounter supply shortages or excess inventory for Robinul
and Robinul Forte," "We may encounter interruptions in our supply of Ponstel,"
"We have no written agreements for the manufacture of our Zoto-HC and Protuss-D
products," "Our existing supply agreements may prohibit us from entering into
potentially more favorable supply relationships with others," "We face
competition from generic products that could lower prices and unit sales,"
"Strong competition exists for our products, and competitors have introduced new
products and therapies that could make our products obsolete," "A small number
of customers account for a large portion of our sales and the loss of one of
them, or changes in their purchasing patterns, could result in our inability to
successfully sell our products," "If our products under development fail in
clinical studies or if we fail or encounter difficulties in obtaining regulatory
approval for new products or new uses of existing products, we will have
expended significant resources for no return," "We or third parties may violate
government regulations and we may incur significant expenses to comply with such
regulations," "If third-party payors do not adequately reimburse patients for
our products, doctors may not prescribe them," "Product liability claims and
product recalls could limit our ability to sell products," "We expect to require
additional funding and if we cannot obtain it, our sales, profits, acquisitions
and development projects could suffer," "Incurring debt could reduce our
growth," "If we do not secure or enforce our patents or other intellectual
property rights, we could encounter increased competition that could adversely
affect our operating results," "Our products could infringe the intellectual
property rights of third parties, which could require us to pay license fees or
defend litigation that could be expensive or prevent us from selling products,"
"The regulatory status of some of our products makes these products subject to
increased competition and other risks," and "Pohl-Boskamp can terminate our
rights to Nitrolingual." We do not undertake to update our forward-looking
statements to reflect future events or circumstances.
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We do not undertake to update our forward-looking statements to reflect
future events or circumstances.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth at the pages indicated
in Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following are our executive officers and directors:
EXECUTIVE OFFICERS AND DIRECTORS
The following are our executive officers and directors as of the date of
this prospectus:
NAME AGE POSITION
- ---- --- --------
Mahendra G. Shah, Ph.D.(1)............. 56 Chairman of the Board and Chief
Executive Officer
R. Brent Dixon(1)...................... 56 President and Director
Balaji Venkataraman.................... 34 Executive Vice President of Corporate
Development, Chief Financial Officer
and Secretary
Christopher D. Offen................... 53 Vice President and Chief Commercial
Officer
Robert D. Godfrey, Jr.................. 37 Vice President of Sales
William G. Campbell.................... 45 Controller and Treasurer
Jerry N. Ellis(2)...................... 63 Director
John N. Kapoor, Ph.D................... 57 Director
Pierre Lapalme(2)(3)................... 60 Director
Jon S. Saxe(2)(3)...................... 64 Director
- ---------------
(1) Member of Stock Option Subcommittee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Mahendra G. Shah, Ph.D. is the Chairman of the Board and Chief Executive
Officer. Dr. Shah has been a director since 1993, and his present term as
director will expire at the annual meeting of stockholders to be held in 2001.
Dr. Shah became Chief Executive Officer in October 1999. From 1991 to 2000, he
was a Vice President of EJ Financial Enterprises, Inc., which manages a fund
that invests in healthcare companies. From 1996 to the present, he has been the
President of Protomed Pharmaceuticals, Inc., which is a privately-held drug
development company. From 1987 to 1991, he was the senior director of new
business development with Fujisawa USA, Inc. Prior to that, he worked in various
scientific and management positions with Schering-Plough and Bristol
Myers-Squibb Company. He serves on the board of Structural Bioinformatics Inc.
and Introgen Therapeutics. He was previously Chairman of Inpharmakon
Corporation. Dr. Shah received a Ph.D. degree in Industrial Pharmacy from St.
John's University. EJ Financial Enterprises, Inc. is the managing general
partner of Kapoor-Pharma Investments, L.P., our largest stockholder.
R. Brent Dixon is the President and a director of the Company. He has been
a director since 1993, and his present term as director will expire at the
annual meeting of stockholders to be held in 2002. Mr. Dixon has
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been with us since our formation. He has been the President since 1993 and
served as a Vice President from 1992 to 1993. He has over thirty years of
operational, sales and strategic market development experience in the
pharmaceutical industry. Prior to joining us, he was President of Dixon and
Associates, a healthcare consulting company. Prior to that he served as National
Sales Manager for Center Laboratories, a subsidiary of Merck AG. Mr. Dixon has
also served as a Regional and District Manager for Roberts Pharmaceuticals and
Adams Laboratories. Mr. Dixon attended St. Petersburg Junior College and the
University of Mississippi.
Balaji Venkataraman has been the Vice President of Corporate Development
and Chief Financial Officer since October 1999. He was elected as Executive Vice
President and Secretary in January 2001. Between August 1998 and September 1999,
he was our Vice President of Corporate Development and Strategic Planning. He
also served as a consultant to us during his employment as the Director of
Strategic Planning at EJ Financial Enterprises, Inc. from September 1997 to
August 1998. From 1995 to 1997, he was Associate, Licensing and New Business
Start-up, at the University of Pennsylvania Center for Technology Transfer. From
1994 to 1995, he was the Marketing Manager at Curative Technologies Inc., a
wound care services company. From 1993 to 1994, he was a Technical Sales
Representative for Millipore Corporation. From 1991 to 1993, he was the Senior
Research Chemist at Scios Inc. He has also held product management and finance
positions at Schering Plough and Pfizer, Inc. Mr. Venkataraman received an M.S.
degree in Organic Chemistry from Case Western Reserve University and an M.B.A.
degree from the Wharton School of Business at the University of Pennsylvania.
Christopher D. Offen was elected Vice President and Chief Commercial
Officer in January 2001. He has over thirty years of commercial experience in
the pharmaceutical industry. Prior to joining us, from 2000 to 2001, Mr. Offen
was Senior Vice President and Managing Director at A.M. Pappas & Associates, an
international life science venture capital company. From 1991 through 1999, Mr.
Offen was Senior Vice President of Commercial Operations, Vice President of
Business Development and Vice President of Marketing of Solvay Pharmaceutical,
Inc. As Senior Vice President of Commercial Operations, Mr. Offen was
responsible for the sales, marketing and medical efforts of Solvay
Pharmaceutical in the United States. From 1971 to 1991, Mr. Offen worked at
Burroughs Wellcome Co. (now GlaxoSmithKline). Mr. Offen's collective business
experiences include building and managing large sales forces, creating an
innovative business climate for decision making, launching new products which
become market leaders and acquiring products or companies. Mr. Offen has been a
member or an advisor to many pharmaceutical associations and customer groups
including among others, The American Marketing Association, Pharmaceutical
Research and Manufacturers of America, Licensing Executive Society, The American
Academy of Family Physicians and American Psychiatry Association. Mr. Offen
attended the Advanced Executive Program at the Kellogg School of Business at
Northwestern University, received an M.B.A. degree from George Mason University
concentrating in Marketing/Management and a B.S. degree in Pre-Medicine from The
Catholic University of America.
Robert D. Godfrey, Jr. has been Vice President of Sales since 1998. He
served as the National Sales Manager between 1996 and 1998. He began his career
with us in 1992 as a Sales Representative for the Jacksonville, Florida
territory and was promoted in 1994 to District Manager of the entire Florida
sales territory. At that time, in addition to his managerial responsibilities,
he continued to promote our products to physicians and pharmacies until 1995.
Prior to his career with us, Mr. Godfrey held the position of Marketing Research
Consultant with MGT Information Systems and also worked independently as a
Research Consultant in the southeastern United States. Mr. Godfrey received an
M.B.A. degree and a B.S. degree in Marketing from Jacksonville University.
William G. Campbell has been our Controller and Treasurer since 1998. Prior
to joining us, from 1995 to 1998, Mr. Campbell was the Controller/Chief
Financial Officer of DialysisAmerica, Inc. He was the Associate
Administrator/Chief Financial Officer of Stringfellow Memorial Hospital from
1993 to 1995, and from 1989 to 1993, he was the Director of Budgets, Costs and
Reimbursement at Grady Memorial Hospital, a large public teaching hospital. His
prior professional experience also includes a number of profit and not-for-
profit consulting, big five public accounting, governmental auditing and
internal audit positions. Mr. Campbell is a Certified Public Accountant and
received a B.A. degree in Accounting from Walsh College of
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Accountancy and Business Administration and an M.B.A. degree in Accounting from
Kennesaw State College.
Jerry N. Ellis was elected a director in November 2000. His term as
director will expire at the annual meeting of stockholders to be held in 2003.
Mr. Ellis has over thirty years of auditing and accounting experience. From 1994
to 2000, Mr. Ellis was a consultant to Arthur Andersen LLP for services focusing
on international auditing, audit committee practices, business risk management
and training. From 1973 to 1994, he was a partner at Arthur Andersen in their
Dallas, Madrid and Chicago offices. From 1962 to 1973, Mr. Ellis was an auditor
at Arthur Andersen. Mr. Ellis is a Certified Public Accountant and received
B.B.A. and M.B.A. degrees from the University of Iowa.
John N. Kapoor, Ph.D. has been one of our directors since 1996, and his
present term as director will expire at the annual meeting of stockholders to be
held in 2003. Dr. Kapoor has over twenty years of experience in the healthcare
field through his ownership and management of healthcare-related businesses. In
1990, Dr. Kapoor founded Kapoor-Pharma Investments, L.P., our largest
stockholder, and its managing partner, EJ Financial Enterprises, Inc., of which
he is the president and sole stockholder. EJ Financial provides general funds
and strategic advice to healthcare businesses. Dr. Kapoor is the Chairman of
Optioncare, Inc., Akorn, Inc., Introgen Therapeutics, Inc. and Neopharm, Inc.
Dr. Kapoor is a Director of Integrated Surgical Systems, Inc., as well as a
Chairman of several private companies and a director of several other private
companies. Dr. Kapoor received a B.S. degree from Bombay University and a Ph.D.
degree in Medicinal Chemistry from the State University of New York.
Dr. Kapoor was previously the Chairman and President of Lyphomed Inc.
Fujisawa Pharmaceutical Co. Ltd. was a major stockholder of Lyphomed from the
mid-1980s until 1990, at which time Fujisawa completed a tender offer for the
remaining shares of Lyphomed, including the shares held by Dr. Kapoor. In 1992,
Fujisawa filed suit in federal district court in Illinois against Dr. Kapoor
alleging that between 1980 and 1986, Lyphomed filed a large number of allegedly
fraudulent new drug applications with the FDA, and that Dr. Kapoor's failure to
make certain disclosures to Fujisawa constituted a violation of federal
securities laws and the Racketeer Influenced and Corrupt Organizations Act.
Fujisawa also alleged state law claims. Dr. Kapoor countersued, and in 1999, the
litigation was settled on terms mutually acceptable to the parties. The terms of
the settlement are subject to a confidentiality agreement. Dr. Kapoor also
controls Inpharmakon Corporation, a party to one of our development agreements.
Dr. Kapoor is the trustee of the John N. Kapoor Trust, dated September 30, 1989
which is a partner in Kapoor-Pharma Investments, L.P.
Pierre Lapalme was elected a director in April 2000. His term as director
will expire at the annual meeting of the stockholders to be held in 2002. Mr.
Lapalme has served as the President and Chief Executive Officer of Ethypharm
Inc. (North America), a global drug delivery systems company, since 1997. He is
non-executive Chairman of the Board of DiagnoCure Inc., a biopharmaceutical
company specializing in the development and marketing of products aimed at the
diagnosis and treatment of genito-urinary cancers. He is a director of Ferring
Canada Inc., a global pharmaceutical company, and Biovet Inc., a
greater-Montreal based veterinary product company. He is a former member of the
Board of the National Pharmaceutical Council U.S.A. and of the Pharmaceutical
Manufacturers Association of Canada (PMAC). From 1979 to 1990, Mr. Lapalme was
Chief Executive Officer and President of Rhone-Poulenc Canada Inc and Rhone-
Poulenc Pharmaceuticals North America. He was appointed Senior Vice President
and General Manager Rhone-Poulenc Rorer North America in 1990 and served in that
position until 1994. Mr. Lapalme attended the University of Western Ontario and
INSEAD France.
Jon S. Saxe was elected a director in January 2000. His term as director
will expire at the annual meeting of stockholders to be held in 2001. He also
serves as a director of Protein Design Labs, Inc. Mr. Saxe served as President
of Protein Design Labs, Inc. from January 1995 to May 1999. In addition, he is a
director of Questcor Pharmaceuticals Inc., Incyte Genomics Inc., ID Biomedical
Corporation, Insite Vision, SciClone Pharmaceuticals, Inc. and is Chairman of
Point Biomedical Corporation and Iconix Pharmaceuticals. Mr. Saxe served as
President of Saxe Associates, a biotechnology consulting firm, from May 1993 to
December 1994. He served as the President, Chief Executive Officer and a
director of Synergen, Inc., a biopharmaceutical company, from October 1989 to
April 1993. Mr. Saxe served in various positions including
26
28
Vice President of Licensing and Corporate Development and Head of the Patent Law
Department for Hoffmann-LaRoche, Inc. from 1960 through 1989. Mr. Saxe received
a B.S. Ch.E. degree from Carnegie-Mellon University, a J.D. degree from George
Washington University School of Law and an L.L.M. degree from New York
University School of Law.
Information appearing under the heading "Section 16(a) Beneficial Ownership
Reporting Compliance" in our Proxy Statement for the 2001 Annual Meeting of
Stockholders is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from our Proxy Statement for
the 2001 Annual Meeting of Stockholders under the heading "Executive
Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from our Proxy Statement for
the 2001 Annual Meeting of Stockholders under the heading "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from our Proxy Statement for
the 2001 Annual Meeting of Stockholders under the heading "Certain Relationships
and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
(a) Documents filed as a part of this report:
(1) Financial Statements
F-1
Report of Independent Public Accountants....................
F-2
Balance Sheets as of December 31, 1999 and 2000.............
F-3
Statements of Operations for the years ended December 31,
1998, 1999 and 2000.........................................
F-4
Statements of Stockholders' Equity for the years ended
December 31, 1998, 1999, and 2000...........................
F-5
Statements of Cash Flows for the years ended December 31,
1998, 1999, and 2000........................................
F-6
Notes to Financial Statements...............................
(2) Financial Statement Schedule
F-1
Report of Independent Public Accountants....................
F-21
Valuation and Qualifying Accounts...........................
All other schedules have been omitted because of the absence
of conditions under which they are required or because the
required information is given in the above-listed financial
statements or notes thereto
(b) Reports on Form 8-K.
No reports on Form 8-K were filed.
27
29
(c) Exhibits
(3) The following Exhibits are filed herewith or incorporated herein by
reference:
EXHIBIT
NO. DESCRIPTION
- -------- -----------
3.1* -- Restated Certificate of Incorporation of The Registrant
3.2* -- Amended And Restated Bylaws of The Registrant
4.1* -- Form of Stock Certificate
4.2* -- Amended And Restated Loan And Security Agreement Dated as of
December 22, 1998 Between The Registrant And LaSalle Bank
National Association
4.3* -- First Amendment To Amended And Restated Loan And Security
Agreement dated as of May 10, 1999 Between The Registrant
and LaSalle Bank National Association
4.4* -- Second Amendment To Amended And Restated Loan And Security
Agreement dated as Of January 2, 2000 Between The Registrant
and LaSalle Bank National Association
4.5* -- Third Amendment To Amended And Restated Loan And Security
Agreement Dated As Of April 14, 2000 Between The Registrant
and LaSalle Bank National Association
4.6* -- Reimbursement Agreement Dated April 14, 2000 Between the
Registrant And Kapoor Children's 1992 Trust
10.1* -- 1997 Non-Qualified Stock Option Plan
10.2* -- 2000 Stock Plan
10.3* -- Form of Nonqualified Stock Option Agreement
10.4* -- Form of Employment Agreement Dated as of January 1, 2000
between the Registrant and Certain of its Executive Officers
10.5* -- Convertible Term Loan Note dated January 11, 1999 Made by
the Registrant for the Benefit of Kapoor Pharma Investments,
L.P., as Amended by Amendment No. 1 to the Convertible Term
Note dated January 11, 1999 Made by the Registrant for the
Benefit Of Kapoor Pharma Investments, L.P.
10.6* -- Convertible Term Note Agreement dated January 11, 1999
between the Registrant and Kapoor Pharma Investments, L.P.,
as Amended by Amendment No. 1 to the Convertible Term Note
dated January 11, 1999 Made by the Registrant for the
Benefit of Kapoor Pharma Investments, L.P.
10.7* -- Lease Agreement Dated June 28, 1998 Between the Registrant
and Asc North Fulton Associates Joint Venture
10.8*+ -- Product Development and Supply Agreement dated March 25,
1999 between the Registrant and Penwest Pharmaceuticals Co.
10.9*+ -- Collaboration Agreement dated October 31, 1998 between the
Registrant and Inpharmakon Corporation
10.10*+ -- Exclusive Patent License Agreement dated January 1, 2000
between the Registrant and Jame Fine Chemicals, Inc.
10.11*+ -- Exclusive Distribution Agreement dated January 1, 1996
between the Registrant and Unisource, Inc.
10.12*+ -- Manufacturing and Supply Agreement dated April 23, 1999
between the Registrant and Mikart, Inc.
10.13*+ -- Product Supply Agreement Dated January 29, 1999 between the
Registrant and American Home Products Corporation
10.14*+ -- License Agreement dated January 29, 1999 Between the
Registrant and American Home Products Corporation
28
30
EXHIBIT
NO. DESCRIPTION
- -------- -----------
10.15*+ -- Distribution Agreement dated July 22, 1999 between the
Registrant and G. Pohl-Boskamp Gmbh & Co.
10.16* -- Form Of Indemnity Agreement between the Registrant and its
Directors and Executive Officers
10.17*+ -- Asset Purchase Agreement dated April 10, 2000 between the
Registrant and Warner-Lambert Company
10.18*+ -- Supply Agreement dated April 14, 2000 between the Registrant
and Warner-Lambert Company
10.19*+ -- Asset Purchase Agreement dated April 14, 2000 between the
Registrant and Warner-Lambert Company
10.20* -- Amendment No. 1 to the Product Development and Supply
Agreement, dated May 3, 2000 between the Registrant and
Penwest Pharmaceuticals Co.
10.21* -- Amendment to the Collaboration Agreement, dated May 3, 2000
between the Registrant and Inpharmakon Corporation
10.22*** -- Employment Agreement dated as of January 5, 2001 between the
Registrant and Christopher Offen
10.23*** -- Amendment to Employment Agreement dated January 22, 2001
between the Registrant and Certain of its Executive Officers
10.24*** -- Separation Agreement dated as of December 22, 2000 between
the Registrant and Gregory P. Hauck
23.1** -- Consent of Arthur Andersen LLP
- ---------------
* Incorporated by reference from the Registrant's Form S-1 (Commission File
No. 333-30764).
** Filed herewith
*** Incorporated by reference from the Registrant's Form S-1 filed on March 13,
2001
+ Confidential treatment was granted for certain portions of this exhibit
pursuant to Rule 406 of the Securities Act of 1933, as amended
29
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
FIRST HORIZON PHARMACEUTICAL
CORPORATION
By: /s/ MAHENDRA G. SHAH, PH.D.
------------------------------------
Mahendra G. Shah, Ph.D.
Chairman and Chief Executive Officer
March 13, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MAHENDRA G. SHAH, PH.D. Chairman of the Board and Chief March 13, 2001
- ----------------------------------------------------- Executive Officer (principal
Mahendra G. Shah, Ph.D. executive officer)
/s/ R. BRENT DIXON President and Director March 13, 2001
- -----------------------------------------------------
R. Brent Dixon
/s/ JOHN N. KAPOOR, PH.D. Director March 13, 2001
- -----------------------------------------------------
John N. Kapoor, Ph.D.
/s/ BALAJI VENKATARAMAN Executive Vice President of March 13, 2001
- ----------------------------------------------------- Corporate Development Chief
Balaji Venkataraman Financial Officer and Secretary
(principal financial and
accounting officer)
/s/ JON S. SAXE Director March 13, 2001
- -----------------------------------------------------
Jon S. Saxe
Director
- -----------------------------------------------------
Pierre Lapalme
/s/ JERRY N. ELLIS Director March 13, 2001
- -----------------------------------------------------
Jerry N. Ellis
30
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To First Horizon Pharmaceutical Corporation:
We have audited the accompanying balance sheets of First Horizon
Pharmaceutical Corporation (a Delaware corporation) as of December 31, 2000 and
1999 and the related statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First Horizon Pharmaceutical
Corporation as of December 31, 2000 and 1999 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
Atlanta, Georgia
February 16, 2001
F-1
33
FIRST HORIZON PHARMACEUTICAL CORPORATION
BALANCE SHEETS
DECEMBER 31,
-------------------------
1999 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 219,688 $14,228,067
Accounts receivable, net of allowance for doubtful
accounts, discounts and contractual adjustments of
$55,783 and $283,929 at December 31, 1999 and 2000,
respectively........................................... 2,900,623 6,710,237
Inventories............................................... 798,615 2,648,104
Samples and other prepaid expenses........................ 553,614 1,341,126
Deferred tax assets....................................... 550,780 1,203,309
----------- -----------
Total current assets.............................. 5,023,320 26,130,843
----------- -----------
Property and equipment, net................................. 422,096 802,674
Other assets:
Note receivable from related party........................ 30,000 --
Intangibles, net.......................................... 5,602,328 23,150,025
----------- -----------
Total other assets................................ 5,632,328 23,150,025
----------- -----------
Total assets...................................... $11,077,744 $50,083,542
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 794,088 $ 1,815,269
Accrued expenses.......................................... 2,892,727 8,986,168
Borrowings under revolving loan agreement................. 800,000 --
Current portion of long-term debt......................... 1,270,389 221,482
----------- -----------
Total current liabilities......................... 5,757,204 11,022,919
----------- -----------
Long-term liabilities:
Long-term debt, net of current maturities................. 1,628,497 --
Deferred tax liabilities.................................. 76,479 487,721
----------- -----------
Total liabilities................................. 7,462,180 11,510,640
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 1,000,000 shares authorized and none
outstanding............................................ -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 8,539,643 and 12,972,900 shares issued and
outstanding at December 31, 1999 and 2000,
respectively........................................... 8,540 12,973
Additional paid-in capital................................ 5,788,220 37,792,147
Deferred compensation..................................... (1,284,374) (842,566)
Accumulated (deficit) earnings............................ (896,822) 1,610,348
----------- -----------
Total stockholders' equity........................ 3,615,564 38,572,902
----------- -----------
Total liabilities and stockholders' equity........ $11,077,744 $50,083,542
=========== ===========
The accompanying notes are an integral part of these statements.
F-2
34
FIRST HORIZON PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ----------- -----------
Net revenues............................................. $9,252,058 $18,624,514 $36,649,547
Operating costs and expenses:
Cost of revenues....................................... 1,903,054 3,140,416 5,435,908
Selling, general and administrative expenses, excluding
the non-cash expense presented below................ 6,789,358 12,400,439 23,446,979
Non-cash selling, general and administrative expense... -- 143,986 769,363
Depreciation and amortization.......................... 35,225 424,274 1,091,138
Research and development expense....................... 255,000 860,350 1,784,144
---------- ----------- -----------
Total operating costs and expenses............. 8,982,637 16,969,465 32,527,532
---------- ----------- -----------
Operating income......................................... 269,421 1,655,049 4,122,015
Other (expense) income
Interest expense....................................... (14,017) (356,598) (324,226)
Interest income........................................ 4,383 11,950 348,183
Other.................................................. (2,749) 8,059 20,944
---------- ----------- -----------
Total other (expense) income................... (12,383) (336,589) 44,901
---------- ----------- -----------
Income before provision for income taxes................. 257,038 1,318,460 4,166,916
Provision for income taxes............................... (121,484) (547,996) (1,659,746)
---------- ----------- -----------
Net income............................................... $ 135,554 $ 770,464 $ 2,507,170
========== =========== ===========
Net income per common share:
Basic.................................................. $ 0.02 $ 0.10 $ 0.23
========== =========== ===========
Diluted................................................ $ 0.02 $ 0.09 $ 0.20
========== =========== ===========
Weighted average common shares outstanding:
Basic.................................................. 7,978,234 8,028,673 11,074,616
========== =========== ===========
Diluted................................................ 8,584,329 8,975,493 12,737,564
========== =========== ===========
The accompanying notes are an integral part of these statements.
F-3
35
FIRST HORIZON PHARMACEUTICAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
-------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) EARNINGS TOTAL
---------- ------- ----------- ------------ ------------------ -----------
Balance, December 31,
1997............... 7,971,248 $ 7,972 $ 2,609,194 $ -- $(1,802,840) $ 814,326
Stock options
exercised....... 10,000 10 6,240 -- -- 6,250
Net income......... -- -- -- -- 135,554 135,554
---------- ------- ----------- ----------- ----------- -----------
Balance, December 31,
1998............... 7,981,248 7,982 2,615,434 -- (1,667,286) 956,130
Conversion of debt
to equity....... 558,395 558 1,744,426 -- -- 1,744,984
Deferred
compensation.... -- -- 1,428,360 (1,284,374) -- 143,986
Net income......... -- -- -- -- 770,464 770,464
---------- ------- ----------- ----------- ----------- -----------
Balance, December 31,
1999............... 8,539,643 8,540 5,788,220 (1,284,374) (896,822) 3,615,564
Net proceeds from
sale of stock... 4,378,294 4,378 31,182,827 -- -- 31,187,205
Stock options
exercised....... 54,963 55 78,994 -- -- 79,049
Tax benefit from
nonqualified
stock option
exercises....... -- -- 414,551 -- -- 414,551
Deferred
compensation.... -- -- 327,555 441,808 -- 769,363
Net income......... -- -- -- -- 2,507,170 2,507,170
---------- ------- ----------- ----------- ----------- -----------
Balance, December 31,
2000............... 12,972,900 $12,973 $37,792,147 $ (842,566) $ 1,610,348 $38,572,902
========== ======= =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
36
FIRST HORIZON PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1999 2000
-------- ----------- ------------
Cash flows from operating activities:
Net income............................................. $135,554 $ 770,464 $ 2,507,170
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation and amortization....................... 35,225 424,274 1,091,138
Non-cash interest expense........................... -- 144,984 --
Deferred income tax provision (benefit)............. 102,000 (352,450) (241,287)
Non-cash compensation expense....................... -- 143,986 769,363
Loss on disposal of equipment....................... 4,404 -- 25,278
Changes in assets and liabilities, net of acquired
assets and liabilities:
Accounts receivable.................................... (486,629) (1,753,375) (3,809,614)
Inventories............................................ (261,368) (396,218) (1,942,477)
Samples and other prepaid expenses..................... (139,445) (83,232) (787,512)
Note receivable from related party..................... (30,000) -- 30,000
Accrued expenses....................................... 446,429 1,763,019 4,612,232
Accounts payable....................................... 13,288 356,850 1,021,181
-------- ----------- ------------
Net cash (used in) provided by operating activities.... (180,542) 1,018,302 3,275,472
-------- ----------- ------------
Cash flows from investing activities:
Purchase of intangible assets.......................... -- (4,000,000) (16,508,990)
Purchase of property and equipment..................... (208,464) (185,709) (546,954)
-------- ----------- ------------
Net cash used in investing activities:................. (208,464) (4,185,709) (17,055,944)
-------- ----------- ------------
Cash flows from financing activities:
Proceeds (repayments) from revolving loan agreement.... 563,013 197,072 (800,000)
Proceeds from long-term debt........................... -- 4,000,000 9,500,000
Principal payments on long-term debt................... -- (1,235,000) (12,177,403)
Proceeds from issuance of common stock................. 6,250 -- 31,266,254
-------- ----------- ------------
Net cash provided by financing activities.............. 569,263 2,962,072 27,788,851
-------- ----------- ------------
Net change in cash and cash equivalents.................. 180,257 (205,335) 14,008,379
Cash and cash equivalents, beginning of period........... 244,766 425,023 219,688
-------- ----------- ------------
Cash and cash equivalents, end of period................. $425,023 $ 219,688 $ 14,228,067
======== =========== ============
The accompanying notes are an integral part of these statements.
F-5
37
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
First Horizon Pharmaceutical Corporation (formerly Horizon Pharmaceutical
Corporation, the "Company") is an emerging pharmaceutical company that markets
and sells brand name prescription drugs to high-prescribing primary care and
select specialty physicians in the United States through their nationwide sales
and marketing field force. In addition, limited sales to European customers are
made through local distributors in the region. The Company focuses on the
treatment of chronic conditions, including cardiovascular diseases, respiratory
and gastroenterological disorders, and pain and inflammation. The Company's
strategy is to acquire and obtain licenses for pharmaceutical products that
other companies do not actively market, and to increase sales through aggressive
promotion and marketing. In addition, the Company seeks to maximize the value of
their drugs by developing new patentable formulations, using new delivery
methods and seeking regulatory approval for new indications.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Revenue Recognition
Revenues from product sales are recognized upon shipment to customers and
are shown net of sales adjustments for discounts, rebates to customers, returns
and other adjustments, which are provided in the same period that the related
sales are recorded.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 is applicable to
public companies and provides guidance on applying accounting principles
generally accepted in the United States to revenue recognition issues in
financial statements. Management believes the Company's revenue recognition
criteria are consistent with the guidance provided by SAB No. 101.
Royalties
The Company pays royalties on the sale of certain products. These costs are
included in selling, general and administrative expenses in the accompanying
statements of operations. Total royalties were $194,000, $620,000 and $2,057,000
for the years ending December 31, 1998, 1999 and 2000, respectively.
Research and Development
Research and development expenses consist primarily of costs incurred to
develop formulations, engage contract research organizations to conduct clinical
studies, test products under development and engage medical and regulatory
consultants. The Company expenses all research and development costs as
incurred. Research and development costs were $255,000, $860,350 and $1,784,144
for the years ended December 31, 1998, 1999 and 2000, respectively.
Returns and Rebate Allowances
The Company provides all customers with a right of return within six months
of the expiration date of the product, and as a result records a provision for
returns at the time of sale. The Company is contractually obligated to pay
rebates on the sale of certain prescription drugs. The reserve for returns and
rebates is estimated based upon historical experience and other relevant
information, in accordance with accounting
F-6
38
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
principles generally accepted in the United States. There is no certainty that
future returns and rebates will not exceed established reserves.
Cash and Cash Equivalents
The Company considers only those investments that are highly liquid, and
readily convertible to cash with an original maturity of three months or less to
be cash equivalents. The Company had no cash equivalents at December 31, 1999.
The Company had cash equivalents with a value of $11,992,329 at December 31,
2000.
Concentration of Credit Risk
The Company extends credit on an uncollateralized basis primarily to
wholesale drug distributors and retail pharmacy chains throughout the United
States. Historically, the Company has not experienced significant credit losses
on its accounts. The Company's five largest customers accounted for
approximately 66% and 65% of accounts receivable at December 31, 1999, and 2000,
respectively. The following table presents a summary of sales to significant
customers as a percentage of the Company's total revenues:
CUSTOMER 1998 1999 2000
- -------- ---- ---- ----
McKesson HBOC, Inc.......................................... 29% 28% 29%
Cardinal Health, Inc........................................ 28 19 14
Bergen Brunswig Corporation................................. 12 10 12
Bindley Western Industries, Inc............................. 12 9 10
The Company relies on third-party suppliers to produce its products. The
supply of two products whose sales comprised 47% of the Company's sales in 2000
are exclusively available through separate single suppliers.
The mix of sales of the Company's products changes as products are added,
and on a combined basis, products with sales greater than 10% of the Company's
sales comprised 90%, 64% and 66% of total sales in 1998, 1999 and 2000,
respectively.
Segment Reporting
The Company operates in a single segment, the sale and marketing of
prescription drugs.
Inventories
Inventories consist of purchased pharmaceutical products and are stated at
the lower of cost or market. Cost is determined using the first-in, first-out
method.
Samples and Other Prepaid Expenses
Samples and other prepaid expenses primarily consist of product samples
used in the sales and marketing efforts of the Company's products. Samples are
expensed upon distribution.
Property and Equipment
Property and equipment are stated at cost. Major improvements, which extend
the lives of existing property and equipment, are capitalized. Depreciation is
provided for on the straight-line basis over the estimated useful lives of the
assets. Accelerated depreciation is used for income tax purposes. Expenditures
for maintenance and repairs that do not extend the lives of the applicable
assets are charged to expense as incurred.
F-7
39
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The estimated useful lives of the classes of assets generally are as
follows:
Office equipment............................................ Five to ten years
Furniture and fixtures...................................... Five to ten years
Computer hardware and software.............................. Three to five years
Leasehold improvements...................................... Based on term of lease
The components of property and equipment as of December 31, 1999 and 2000
are as follows:
1999 2000
--------- ----------
Office equipment............................................ $ 42,315 $ 87,412
Furniture and fixtures...................................... 131,065 215,882
Computer hardware and software.............................. 294,414 455,337
Leasehold improvements...................................... 98,648 306,774
--------- ----------
566,442 1,065,405
Less accumulated depreciation............................... (144,346) (262,731)
--------- ----------
Property and equipment, net............................... $ 422,096 $ 802,674
========= ==========
Depreciation expense related to property and equipment for the years ended
December 31, 1998, 1999 and 2000 was $34,745, $68,860 and $141,098,
respectively.
In the event that facts and circumstances indicate that the carrying
amounts of property and equipment may be impaired, an evaluation of
recoverability is performed using the estimated future undiscounted cash flows
associated with the asset compared to the asset's carrying amount to determine
if a write-down is required.
Intangible Assets
The costs of obtaining patents and product licenses are capitalized and
amortized on a straight-line basis over the estimated periods benefited by the
asset (15 to 20 years). Amortization of such assets is included in depreciation
and amortization expense in the accompanying statements of operations.
Amortization expense for the years ended December 31, 1998, 1999 and 2000 was
$480, $355,414 and $950,040, respectively.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long Lived Assets and for Long Lived
Assets to be Disposed of," the Company continually reevaluates the propriety of
the carrying amount of intangibles as well as the related amortization period to
determine whether the current events and circumstances warrant adjustments to
the carrying values and/or estimates of useful lives. This evaluation is
performed using the estimated projected future undiscounted cash flows
associated with the asset compared to the asset's carrying amount to determine
if a write-down is required. To the extent such projections indicate that the
undiscounted cash flows are not expected to be adequate to recover the carrying
amounts, the assets are written down to fair value as determined by discounting
future cash flows.
Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax
assets and liabilities using currently enacted tax rates.
F-8
40
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Advertising Costs
The Company follows the policy of charging the costs of advertising to
expense as incurred. Advertising expenses were $39,233, $178,929 and $1,218,615
for the years ending December 31, 1998, 1999 and 2000, respectively.
Fair Value of Financial Instruments
The Company's borrowings under its variable rate long-term debt agreements
are recorded at cost, which approximates fair value. The carrying value of all
other financial instruments approximated fair value due to their short term
nature.
Foreign Currency Exposure
Certain of the Company's product purchases and sales are denominated in
foreign currencies. Gains or losses on foreign currency transactions are
included in income as incurred. The Company does not typically engage in
purchased hedging transactions given the insignificant level of foreign currency
denominated transactions that occur.
Earnings Per Share
As required by SFAS No. 128, "Earnings Per Share," the Company has
presented basic and diluted earnings per common share amounts in the
accompanying financial statements. Basic earnings per common share is calculated
based on the weighted average common shares outstanding during the year, while
diluted earnings per common share also gives effect to all potentially dilutive
common stock equivalents during each year such as options, warrants, and
contingently issuable shares.
Below is the calculation of basic and diluted net income per common share:
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1999 2000
---------- ---------- -----------
Net income................................................ $ 135,554 $ 770,464 $ 2,507,170
========== ========== ===========
Weighted average common shares outstanding -- basic....... 7,978,234 8,028,673 11,074,616
Dilutive effect of stock options.......................... 606,095 946,820 1,662,948
---------- ---------- -----------
Weighted average common shares outstanding -- diluted..... 8,584,329 8,975,493 12,737,564
========== ========== ===========
Basic net income per share................................ $ 0.02 $ 0.10 $ 0.23
========== ========== ===========
Diluted net income per share.............................. $ 0.02 $ 0.09 $ 0.20
========== ========== ===========
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year financial statement presentation.
Supplemental Cash Flow Disclosures
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------- -------- --------
Cash paid for taxes..................................... $ -- $777,927 $940,001
======= ======== ========
Cash paid for interest.................................. $10,855 $235,889 $385,113
======= ======== ========
F-9
41
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Pronouncements
In June 1998, the financial accounting standards board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company
adopted SFAS No. 133 (as amended by SFAS No. 138) on January 1, 2001. SFAS No.
133 established methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Adoption of SFAS No. 133 will not have a material impact on the
Company's financial condition or results of operations.
2. REVOLVING LOAN AGREEMENT
In May 1998, the Company entered into a revolving loan agreement with a
bank under which the Company can borrow up to $1,000,000, subject to borrowing
base limitations based on eligible accounts receivable and inventory balances,
as defined in the agreement. Borrowings under the revolving loan agreement bear
an interest rate of the bank's prime rate and are secured by the Company's
assets. The revolving loan agreement was amended and restated on December 22,
1998 to provide for partial financing of a product acquisition through a term
loan. Under the amended agreement, terms of the revolving loan facility provide
for up to $2,500,000, subject to borrowing base limitations based on eligible
accounts receivable and inventory, as defined in the agreement. In January 2000,
the loan agreement was amended and restated to provide for borrowings up to
$3,500,000 through June 30, 2000, reverting back to $2,500,000 from June 30,
2000 to January 31, 2001. In April 2000, the Company further amended its credit
facility to include up to $13,000,000 of bridge financing to finance
acquisitions, and to extend the term of the revolving loan facility to May 2,
2001. On April 14, 2000, the Company borrowed $9,500,000 under the bridge loan
for the acquisition of Ponstel. Borrowings under the bridge loan bore an
interest rate of the Company's choice of the bank's prime rate or LIBOR plus
1.5%. The bridge loan matured, and was repaid, upon the completion of the
Company's initial public offering on May 31, 2000. The weighted average
outstanding balance under the revolving credit facility for the year ended
December 31, 2000 was $1,879,166. At December 31, 2000, the outstanding balance
under the revolving loan was $0 with an interest rate of 9.0%, and the Company
had additional availability under the terms of the agreement of approximately
$2,500,000. The revolving loan agreement contains certain restrictive covenants
including, among other things, minimum EBITDA levels and debt to equity ratio.
Any failure to comply with these requirements could have a material adverse
effect on the Company's operations, unless waivers are obtained. As of December
31, 2000, the Company was in compliance with these covenants.
3. LONG-TERM DEBT
Long-term debt consists of the following:
1999 2000
----------- ---------
Term note payable (initial amount of $2,400,000) to bank
bearing interest at the lesser of prime or LIBOR plus 2%
(7.96% at December 31, 1999), with monthly payments of
$40,000 plus accrued interest maturing in December 2001... $ 1,840,000 $ 0
Obligation to a seller of intangible assets payable in
quarterly installments of $225,000 through February 2001,
net of an unamortized discount of $52,850 at December 31,
1999 and $1,594 at December 31, 2000, using an interest
rate of 8.75%............................................. 1,058,886 221,482
----------- ---------
2,898,886 221,482
Less current maturities..................................... (1,270,389) (221,482)
----------- ---------
Total............................................. $ 1,628,497 $ 0
=========== =========
F-10
42
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCRUED EXPENSES
Accrued expenses consists of the following:
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Employee compensation and benefits.......................... $ 949,325 $1,548,666
Customer return allowance................................... 272,423 824,953
Product rebates............................................. 851,248 1,333,906
Interest.................................................... 64,011 3,154
Accrued royalty............................................. 103,807 579,677
Assumed liabilities -- product acquisitions................. 193,531 2,026,528
Income taxes payable........................................ 122,957 736,427
Other....................................................... 335,425 1,932,857
---------- ----------
$2,892,727 $8,986,168
========== ==========
5. STOCKHOLDER'S EQUITY
In 1998, the Company approved a four-for-one common stock split, thus
increasing authorized common shares from 10 million to 40 million. All common
stock information for all periods presented herein has been restated to give
effect to this stock split.
In December 1999, the Company issued 558,395 shares of common stock to the
Company's majority stockholder upon the conversion to common stock of $1.6
million of convertible debt incurred in January 1999 and accrued interest of
$144,984 thereon. The shares were converted at a rate of $3.125 as stipulated in
the applicable agreement. The original debt agreement stipulated an interest
rate of prime plus 2% (10.25% at the conversion date).
In May 2000, the Company completed its initial public offering and issued
3,800,000 shares of common stock at a price of $8.00 per share. In June 2000,
the Company's underwriters exercised their over-allotment option and an
additional 570,000 shares of common stock were issued at a price of $8.00 per
share. These offerings generated proceeds, net of offering expenses, of
$31,119,350, which the Company used to repay debt, finance product acquisitions,
and for general corporate purposes.
In December 2000, the Company issued 8,294 shares of common stock under its
employee stock purchase plan.
Under the Company's Restated Certificate of Incorporation the board of
directors has the authority, without further action by the stockholders, to
issue up to 1,000,000 shares of preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by the
stockholders. The issuance of preferred stock could adversely affect the voting
power of holders of common stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company, which could have a depressive effect on the
market price of our common stock. The Company has no present plan to issue any
shares of preferred stock. As of December 31, 1999 and 2000, there were no
shares of preferred stock outstanding.
In December 2000, the Company entered into a separation agreement with a
retiring executive, whereby the executive will receive severance and other
benefits. In addition, the vesting of a portion of his stock options was
accelerated, generating non-cash compensation expense of $361,000.
F-11
43
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTIONS
Pursuant to the Company's 1997 Non-Qualified Stock Option Plan (the "1997
Plan"), the board of directors approved the issuance of options to purchase
shares of common stock of the Company to various employees. Under the plan,
4,000,000 shares (adjusted for the 1998 four-for-one stock split) of common
stock were reserved for issuance. Vesting periods range from immediate to four
years, and options granted generally expire seven years from the date of grant.
All options also include accelerated vesting provisions in the event of a change
in control, as defined in the plan. In 2000, the Company retired the 1997 Plan.
At December 31, 2000, 1,713,200 options remained issued and outstanding under
the 1997 Plan.
On February 14, 2000, the board of directors and stockholders approved the
2000 Stock Plan (the "2000 Plan"). This plan provides for the granting of
incentive stock options, nonqualified stock options, stock awards or stock
bonuses, and sales of stock. The 2000 stock plan provides for the grants of
these options and other awards to officers, directors, full- and part-time
employees, advisors and consultants. Only full-time employees may receive
incentive stock options. The Company has reserved 2,000,000 shares of common
stock for issuance under the 2000 Plan. The Company's compensation committee
administers the 2000 Plan and has the sole authority to determine the meaning
and application of the terms of the plan and all grant agreements, the persons
to whom option or stock grants are made, the nature and amount of option or
stock grants, the price to be paid upon exercise of each option, the period
within which options may be exercised, the restrictions on stock awards, and the
other terms and conditions of awards. In September 2000, the compensation
committee delegated its authority under the 2000 stock plan to a stock option
subcommittee to grant certain options to non-executive employees. All options
granted under the 2000 Plan include accelerated vesting provisions in the event
of a change in control, as defined in the plan. The 2000 stock plan will
terminate in February 2010. At December 31, 2000, 318,137 options were issued
and outstanding under the 2000 Plan, with vesting periods of four years from the
grant date.
The Company has granted stock options to officers, directors, and employees
as follows:
NUMBER WEIGHTED
OF SHARES AVERAGE
SUBJECT TO EXERCISE
OPTION PRICE
---------- --------
Outstanding at December 31, 1997............................ 870,000 $ 0.556
Granted................................................... 122,000 1.875
Canceled.................................................. (10,000) 1.375
Exercised................................................. (10,000) 0.625
---------
Outstanding at December 31, 1998............................ 972,000 0.712
Granted................................................... 785,500 2.494
Canceled.................................................. (5,000) 2.250
Exercised................................................. -- N/A
---------
Outstanding at December 31, 1999............................ 1,752,500 1.506
Granted................................................... 386,400 10.896
Canceled.................................................. (52,600) 7.470
Exercised................................................. (54,963) 1.438
---------
Outstanding at December 31, 2000............................ 2,031,337 $ 3.140
=========
Shares vested at December 31, 2000.......................... 989,425
=========
F-12
44
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the range of exercise prices, number of
shares, weighted average exercise price, and remaining contractual lives by
similar price and grant date at December 31, 2000.
OUTSTANDING EXERCISABLE
--------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICE 2000 CONTRACTUAL LIFE PRICE 2000 PRICE
-------------- -------------- ---------------- -------- -------------- --------
$ 0.500 - $ 0.625 827,000 3.5 years $ 0.552 727,000 $ 0.542
$ 1.875 211,000 6.8 years $ 1.875 90,500 $ 1.875
$ 2.500 - $ 2.650 647,700 8.6 years $ 2.605 161,925 $ 2.605
$ 8.000 - $10.688 263,737 6.4 years $ 8.694 10,000 $ 8.350
$18.000 - $19.937 64,450 6.7 years $ 18.015 0 N/A
$21.812 - $25.718 17,450 6.8 years $ 21.98 0 N/A
-------------- --------------
Total............ 2,031,337 989,425
============== ==============
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock options issued to employees.
Accordingly, the Company records compensation expense for any stock option
grants with exercise prices lower than fair value, recognized ratably over the
vesting period. The Company has recognized compensation expense related to stock
option grants of $0, $143,986 and $769,363 in 1998, 1999 and 2000, respectively.
The 2000 compensation expense includes $361,000 related to accelerated vesting
granted to a retiring executive. Had compensation costs for these options been
determined using the option-pricing models prescribed by SFAS No. 123,
"Accounting for Stock Based Compensation," the Company's pro forma net income
per common share would have been reported as follows:
DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- ----------
Net income:
as reported......................................... $135,554 $770,464 $2,507,170
pro-forma........................................... $111,734 $476,823 $2,260,178
Net income per common share -- basic:
as reported......................................... $ 0.02 $ 0.10 $ 0.23
pro-forma........................................... $ 0.01 $ 0.06 $ 0.20
Net income per common share -- diluted:
as reported......................................... $ 0.02 $ 0.09 $ 0.20
pro-forma........................................... $ 0.01 $ 0.05 $ 0.18
The weighted average minimum value of options granted during 1998, 1999 and
2000 is estimated at $1.51, $2.01 and $4.88, respectively, per share. The
minimum value of options is estimated on the date of the grant using the
following weighted average assumptions:
DECEMBER 31,
-----------------------------
1998 1999 2000
------- ------- -------
Risk-free interest rate................................. 5.53% 5.57% 6.45%
Expected dividend yield................................. -- -- --
Expected lives.......................................... 4 years 4 years 4 years
Expected volatility..................................... --% --% 42%
The Company adopted an employee stock purchase plan on February 14, 2000
that is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Internal Revenue Code. The Company has reserved
500,000 shares of common stock for the stock purchase plan. In order to
participate in
F-13
45
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the stock purchase plan, employees must meet eligibility requirements, including
length of employment. Participating employees will be able to direct the Company
to make payroll deductions of up to 7% of their compensation during an offering
period for the purchase of shares of the Company's common stock. Each offering
period will be six months. The stock purchase plan will provide participating
employees with the right, subject to specific limitations, to purchase the
Company's common stock at a price equal to 85% of the lesser of the fair market
value of the Company's common stock on the first or last day of the offering
period. The board of directors has the authority to amend, suspend or
discontinue the stock purchase plan as long as the change will not adversely
affect participants without their consent and as long as the Company receives
the stockholder approval required by law. The stock purchase plan will terminate
on December 31, 2010.
7. INCOME TAXES
The income tax provision (benefit) for 1998, 1999 and 2000 consisted of the
following:
1998 1999 2000
-------- --------- ----------
Current.............................................. $ 19,484 $ 900,446 $2,021,453
Deferred............................................. 102,000 (352,450) (361,707)
-------- --------- ----------
$121,484 $ 547,996 $1,659,746
======== ========= ==========
A reconciliation of the statutory rate to the effective rate as recognized
in the statements of operations is as follows:
1998 1999 2000
---- ---- ----
Federal statutory rate...................................... 34.0% 34.0% 34.0%
State taxes and credits..................................... 5.0% 5.0% 3.8%
Non-deductible expenses..................................... 8.3% 2.6% 2.0%
---- ---- ----
47.3% 41.6% 39.8%
Deferred tax assets and liabilities reflect the impact of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts recognized for income tax purposes.
Significant components of the Company's net deferred tax assets as of December
31, 1999 and 2000 are as follows:
1999 2000
-------- ----------
Deferred tax assets:
Accrued liabilities and reserves.......................... $439,785 $1,203,309
Deferred compensation..................................... 110,995 411,164
Other..................................................... -- 25,334
-------- ----------
550,780 1,639,807
Deferred tax liabilities:
Intangibles............................................... 76,479 870,135
Other..................................................... -- 54,084
-------- ----------
76,479 924,219
-------- ----------
Net deferred tax assets..................................... $474,301 $ 715,588
======== ==========
8. LICENSE AGREEMENTS AND PRODUCT RIGHTS
On January 1, 1996, the Company obtained exclusive distribution rights from
Unisource, Inc. for Tanafed in North America through December 31, 2003 with an
option for an additional seven years. The agreement requires the Company to
purchase all of its requirements for Tanafed from Unisource, including at least
F-14
46
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
certain minimum quantities of Tanafed in each year of the agreement. The Company
entered into a patent and license agreement with Jame Fine Chemicals,
Incorporated, the raw materials supplier for Tanafed dated January 2000. The
agreement grants the Company a semi-exclusive license to use, sell and
distribute finished products containing an active ingredient used in Tanafed.
Pursuant to the agreement, the Company must pay a royalty on sales of Tanafed.
The license continues through the life of the licensed patent, which expires in
2014.
On October 31, 1998, the Company entered into an agreement with Inpharmakon
Corporation in which the Company acquired rights to the proprietary information
for a migraine product for which the Company plans to conduct clinical studies
and submit a new drug application. The agreement expires on October 31, 2008,
but the Company may renew it indefinitely after expiration. If the Company does
not obtain regulatory approval of the drug within a specified time after filing
for such approval and thereafter commence and continue to aggressively market
and sell the product, Inpharmakon may terminate the agreement. In the event that
Inpharmakon terminates the agreement for failure to achieve these milestones,
Inpharmakon may purchase rights to develop the drug. The Company must also pay
up to an aggregate of $950,000 in non-refundable fees to Inpharmakon at various
developmental milestones through and including regulatory approval of the
product, and, in the event of commercial sales of the product, the Company must
pay royalties at rates which management believes are within industry customary
ranges. If the Company elects to sell the business opportunity to a third party,
the Company must share the proceeds of the sale with Inpharmakon.
The other owner of Inpharmakon has previously sought to renegotiate some of
the terms of this agreement based on disputes concerning the Company's
achievement of milestones. On May 3, 2000, the Company entered into an amendment
of this collaboration agreement in which both parties released each other from
any previous claims or disputes under the agreement. The amendment deleted
provisions permitting Inpharmakon to terminate the agreement if the Company does
not initiate clinical trials within a specified time period after completing a
clinical biostudy on the Company's migraine product under development or if the
Company does not file an NDA within a specified time period after completing
clinical trials. In addition, the amendment provides for an increase in the
total aggregate amount of milestone payments that the Company must pay for
development of the migraine product from $700,000 to $950,000. The amendment
also required that the Company pay Inpharmakon $200,000, which was paid in June
2000.
On January 29, 1999, the Company acquired exclusive rights in the United
States to Robinul and Robinul Forte tablets from American Home Products
Corporation (AHP) for $4,000,000 in cash with an additional $1,800,000 financed
by the seller (See Note 3). Pursuant to the acquisition, the Company also
assumed liabilities for returns of products shipped by the seller prior to the
acquisition date. The Company has recorded the total purchase price for this
acquisition as an intangible asset in its financial statements. The Company
agreed to pay royalties on net sales as long as the Company sells the product.
The Company negotiated for AHP, or its designee, to continue to manufacture and
supply the product to the Company until July 2001. The Company has an agreement
with a supplier, dated April 23, 1999, for the supplier to become qualified
under applicable regulations to manufacture and supply the requirements for
Robinul. Under this agreement, the supplier will manufacture the products for
five years from the time the supplier becomes a qualified manufacturer plus
renewal terms of one year until either party elects to not renew. The agreement
with the supplier requires that the Company purchase certain designated minimum
quantities. The Company has capitalized the cost of obtaining the license and is
amortizing it over an estimated economic life of 20 years.
On March 25, 1999, the Company acquired the rights from Penwest
Pharmaceuticals Co. to the application of Penwest's controlled release TIMERx
technology to the active ingredient in the migraine product. Under the Penwest
agreement, the Company has the right to manufacture, use and sell the developed
product in North America and Mexico for a period extending fifteen years from
the date a new drug application is issued for the product, as well as a license
to the TIMERx(R) patents for such purpose. The
F-15
47
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company must pay Penwest an aggregate of up to approximately $2,600,000 of
non-refundable fees upon achieving specified development milestones through the
first anniversary of the first commercial sale of the product following
regulatory approval and royalties upon any sales of the migraine product. To
date, the Company has paid Penwest $426,500, which is included in research and
development expense in the accompanying statements of operations. Penwest may
terminate the agreement in the event the Company fails to timely achieve
designated performance milestones within prescribed time periods.
In July 1999, the Company entered into an agreement with Pohl-Boskamp for
the exclusive rights to distribute, market and sell Nitrolingual Pumpspray
beginning on February 1, 2000 in the United States for five years plus an
additional five year renewal period subject to establishing mutually acceptable
minimum purchase requirements. Under the agreement, Pohl-Boskamp supplies the
Company with their requirements of product at prices that decrease as volume
purchased in each year increases. The Company must purchase designated minimum
quantities in each year of the agreement and pay a royalty on net sales of the
product. Aventis had exclusive rights through January 2000 to a version of the
product containing CFC named Nitrolingual Spray. To promote earlier adoption of
Nitrolingual Pumpspray, the Company obtained exclusive rights from Aventis to
market this CFC product in the United States as of November 22, 1999.
On April 14, 2000, the Company acquired exclusive rights from
Warner-Lambert Company to distribute, market, and sell the drug Ponstel in the
United States for $9,500,000 in cash and a $3,500,000 non-interest bearing
promissory note to the seller. The Company also assumed liabilities for certain
returns of products shipped by the seller prior to the acquisition date. The
Company financed $9,500,000 of the transaction under a bridge loan agreement
with LaSalle Bank. The agreement includes the purchase of the licensing rights
and certain trademarks. The purchase price was allocated among the fair values
of the intangible assets and liabilities assumed which is being amortized over
20 years. In addition the Company agreed to purchase the entire outstanding
inventory of Ponstel for approximately $100,000. The promissory note was paid in
full upon the receipt of proceeds from the Company's initial public offering in
June 2000.
The Company negotiated with Warner-Lambert to continue to manufacture and
supply the Ponstel product to the Company through December 31, 2000,
subsequently extended through March 31, 2001. In December 2000, the Company
entered into a manufacturing agreement with West-ward Pharmaceutical
Corporation, subject to FDA approval, to manufacture and supply Ponstel for five
years. Under the terms of the agreement, the Company will pay a production fee
for its manufacture of Ponstel. The Company must also pay West-ward
Pharmaceutical $170,000 upon the completion of specified milestones. The Company
must purchase designated minimum quantities in each year of the agreement.
On June 22, 2000, the Company acquired world-wide rights from
Warner-Lambert Company to market, distribute and sell the drug Cognex and a new
unapproved version of Cognex called Cognex CR, for $3,500,000 in cash. The
Company must also pay up to $1,500,000 in additional purchase price if the
Company obtains FDA approval to market Cognex CR. In addition, royalties are
required to be paid upon achieving certain sales levels of Cognex. The Company
also assumed liabilities for returns of products shipped by the seller prior to
the acquisition date. The purchase price was allocated among the fair values of
tangible and intangible assets and liabilities assumed, the majority of which is
being amortized over 20 years.
The Company negotiated a supply agreement with a Warner-Lambert affiliate
to continue to manufacture and supply Cognex and the active ingredient in Cognex
for two years subject to a one year renewal. The Company will pay
Warner-Lambert's affiliate a production fee for its manufacture of Cognex and
the active ingredient. The supply agreement contains designated quantities of
Cognex and its active ingredient that Warner-Lambert's affiliate will supply and
that the Company must purchase.
In addition, the Company entered into a transition services agreement with
Warner-Lambert under which Warner-Lambert provided transitional administrative
services to the Company until December 31, 2000 in connection with the sale of
Cognex in European countries.
F-16
48
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On December 19, 2000, the Company entered into a distribution agreement
with OTL Pharma of France (OTL). Under the terms of the agreement, the Company
granted OTL exclusive rights to distribute and sell Cognex on behalf of the
Company in France, Spain, Germany, Belgium and Luxembourg. The agreement becomes
effective in each country upon approval by the country's regulatory authority.
OTL will be responsible for processing orders, distributing the product, billing
and collecting from customers, collecting and remitting any applicable taxes on
the sales of the product and processing returned product. The Company will
provide OTL with product to sell and will pay a commission to OTL on net
proceeds as defined in the agreement. The agreement expires on December 31,
2004, and is renewable for up to four one-year renewal terms subject to minimum
sales requirements being met.
Each of the Company's third-party manufacturing agreements, excluding that
for Cognex, requires that the Company purchase all of their product requirements
from the manufacturers that are a party to those agreements.
The Company uses third-party manufacturers for the production of its
products for development and commercial purposes. Given the general
under-utilization of resources, the availability of excess capacity for
manufacturing in the marketplace, and the lower cost of outsourcing, the Company
intends to continue to outsource manufacturing for the near-term.
The Company currently uses the services of eight third-party manufacturers
for manufacturing of the Company's products pursuant to the Company's product
specifications. The Company has manufacturing and supply agreements with seven
of these manufacturers. The remaining terms of these agreements generally range
from one to four years. Under some of these agreements, the manufacturers or
other third parties own the rights to the product that the Company has under
their marketing licenses. Except for our Defen-LA, Protuss-D, and Zoto-HC
products, these agreements generally state that the product supplier will
provide products only to the Company. The Company has not entered into
agreements for alternative manufacturing sources for any of its products. The
suppliers of Nitrolingual Pumpspray and the raw materials for Tanafed hold
patents for their respective products.
9. RETIREMENT PLAN
In 1996, the Company began a qualified defined contribution 401(k) plan,
which provides benefits to substantially all employees. The annual contribution,
if any, to the trust is at the discretion of the board of directors of the
Company. Employer contributions to the plan for the years ended December 31,
1998, 1999 and 2000 were $20,695, $36,055 and $52,201, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under a non-cancelable operating lease
that expires in August 2003. The total rent expense was $90,315, $211,533 and
$199,183 for the years ended December 31, 1998, 1999, and 2000, respectively.
The Company leases vehicles for certain employees under non-cancelable lease
agreements expiring in 2001. The total vehicle lease expense under the lease
agreement for the years ended December 31, 1998, 1999 and 2000 was $0, $434,393
and $1,322,378, respectively.
F-17
49
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The total minimum future commitment under leases for years succeeding
December 31, 2000 is as follows:
YEAR ENDING DECEMBER 31,
- ------------------------
2001........................................................ $1,315,736
2002........................................................ 577,295
2003........................................................ 138,418
2004........................................................ 8,525
----------
Total............................................. $2,039,974
==========
The Company has employment contracts with certain executives, which provide
for certain levels of severance in the event of termination without cause or for
certain change of control events, as defined.
11. RELATED-PARTY TRANSACTIONS
The Company purchases repackaging services from Diversified Healthcare
Services Inc., a related party. For the years ended December 31, 1998, 1999 and
2000, the amounts paid for repackaging were approximately $132,000, $282,000 and
$136,000, respectively.
In 1996, the Company entered into two agreements with Crabapple
Enterprises, Inc. (Crabapple), a related party and potential competitor, under
which Crabapple agreed not to market products that compete with the Company's
Protuss, Protuss-D and Zoto-HC products. The Company paid $160,000, $163,000 and
$213,000 to Crabapple in 1998, 1999 and 2000, respectively, under these
agreements. The term of the agreement for Protuss and Protuss-D is seven years
with an option to renew for an additional five years. The term of the agreement
for Zoto-HC is ten years with an option to renew for an additional five years.
Crabapple may cancel these agreements if minimum royalty amounts are not paid.
The Chairman and Chief Executive Officer of the Company did not receive a
salary for the year ended December 31, 1999.
The Company extended a non-interest bearing note receivable to an officer
of the Company during 1998. As of December 31, 1999 and 2000 the amount due to
the Company under this note was $30,000 and $0, respectively.
During 1998, the Company entered into a collaboration agreement with
Inpharmakon Corporation, an affiliate of an officer of the Company, under which
Inpharmakon will assist the Company in developing its FHPC 01 product. This
agreement was amended in May 2000 (See Note 8). The Company paid $200,000,
$1,352 and $200,718 to Inpharmakon in 1998, 1999 and 2000, respectively.
On January 11, 1999, Kapoor-Pharma Investments, an affiliate of a director
of the Company, loaned the Company $1,600,000 at an interest rate of 2% over the
prime rate. In November 1999, the Company converted principal and $144,984 of
accrued interest totaling $1,744,984 into 558,395 shares of common stock at
$3.125 per share, pursuant to the terms of the loan agreement.
In connection with the bridge loan agreement discussed in Note 2, the
Company paid a fee of $16,848 to a trust affiliated with John N. Kapoor Ph.D., a
director of the Company, in return for the pledge of certain trust assets as
collateral for the loan.
F-18
50
FIRST HORIZON PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth summary quarterly financial information for
the years ended December 31, 1999 and 2000.
1999 BY QUARTER FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- --------------- ------------- -------------- ------------- --------------
Net revenues................................ $4,199,934 $3,977,158 $5,505,964 $4,941,456
Operating income............................ 697,380 371,582 800,255 (214,170)
Net income.................................. 375,901 149,200 412,618 (167,260)
---------- ---------- ---------- ----------
Earnings per share:
Basic..................................... $ 0.05 $ 0.02 $ 0.05 $ (0.02)
Diluted................................... $ 0.04 $ 0.02 $ 0.05 $ (0.02)
========== ========== ========== ==========
2000 BY QUARTER FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- --------------- ------------- -------------- ------------- --------------
Net revenues................................ $7,119,638 $7,843,547 $9,632,716 $12,053,645
Operating income............................ 8,215 453,841 1,479,470 2,180,489
Net income.................................. (38,531) 176,883 955,133 1,413,687
---------- ---------- ---------- -----------
Earnings per share:
Basic..................................... $ (0.00) $ 0.02 $ 0.07 $ 0.11
Diluted................................... $ (0.00) $ 0.02 $ 0.07 $ 0.10
========== ========== ========== ===========
Quarterly amounts do not add to annual amounts due to the effect of
rounding on a quarterly basis.
F-19
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To First Horizon Pharmaceutical Corporation:
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of First Horizon Pharmaceutical
Corporation (a Delaware Corporation) included in this registration statement and
have issued our report thereon dated February 16, 2001. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The accompanying schedule of Valuation and Qualifying Accounts is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 16, 2001
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52
SCHEDULE II
FIRST HORIZON PHARMACEUTICAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
CLASSIFICATION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
-------------- ---------- ---------- -------- ---------- ---------
1998.. Allowance for doubtful accounts $ 13,250 $ 40,744 $ -- $ (18,599) $ 35,395
Allowance for customer returns 100,000 80,994 -- (40,994) 140,000
1999 Allowance for doubtful accounts 35,395 51,493 -- (31,105) 55,783
Allowance for customer returns 140,000 366,904 -- (234,481) 272,423
Allowance for product rebates -- 1,294,072 -- (442,824) 851,248
2000.. Allowance for doubtful accounts 55,783 375,088 -- (146,942) 283,929
Allowance for customer returns 272,423 736,707 -- (184,177) 824,953
Allowance for product rebates 851,248 2,951,189 -- (2,468,531) 1,333,906
F-21