Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-Q
--------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
--------------------------------
Commission file number 0-31475
ANDRX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 65-1013859
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4955 ORANGE DRIVE
DAVIE, FLORIDA 33314
(Address of Principal Executive Offices) (Zip Code)
(954) 584-0300
(Registrant's Telephone Number, including Area Code)
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 twelve 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:
[X] YES [ ] NO
The approximate number of shares outstanding of the issuer's common
stock as of November 11, 2002 is 71,383,000.
================================================================================
ANDRX CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
PAGE NUMBER
------------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
as of September 30, 2002 (Unaudited) and December 31, 2001 3
Unaudited Consolidated Statements of Operations -
for the three and nine months ended September 30, 2002 and 2001 4
Unaudited Consolidated Statements of Cash Flows -
for the nine months ended September 30, 2002 and 2001 5
Notes to Unaudited Consolidated Financial Statements 6-22
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23-50
Item 4. Controls and Procedures 51
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 52
Item 6. Exhibits and Reports on Form 8-K 52
SIGNATURES 53
CERTIFICATIONS 54-55
This Andrx Corporation Form 10-Q contains trademarks held by Andrx Corporation
and those of third parties.
2
ANDRX CORPORATION AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ANDRX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share amounts)
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------------- ----------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 80,979 $ 62,311
Investments available-for-sale, at market value 76,209 183,113
Accounts receivable, net 102,390 129,900
Inventories, net 158,861 161,691
Income taxes receivable 40,051 --
Deferred income tax assets, net 38,086 30,745
Prepaid and other current assets, net 16,150 15,313
--------- --------
Total current assets 512,726 583,073
Property, plant and equipment, net 195,904 139,898
Goodwill, net 34,348 32,669
Other intangible assets, net 24,351 28,305
Other assets 9,755 5,269
--------- --------
Total assets $ 777,084 $789,214
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 65,859 $ 68,861
Accrued and other liabilities 110,642 67,377
--------- --------
Total current liabilities 176,501 136,238
Other liabilities 4,787 5,082
--------- --------
Total liabilities 181,288 141,320
--------- --------
Commitments and contingencies (Notes 4, 11 and 13)
Stockholders' equity
Convertible preferred stock; $0.001 par value, 1,000,000 shares
authorized; none issued and outstanding -- --
Common stocks:
Andrx Group common stock; $0.001 par value, 100,000,000
shares authorized; 70,964,000 and 70,484,000 issued and
outstanding as of September 30, 2002 and December 31, 2001,
respectively 71 70
Cybear Group common stock; $0.001 par value, 12,500,000 shares
authorized; none issued and outstanding as of September 30, 2002;
6,743,000 issued and outstanding as of December 31, 2001 -- 7
Additional paid-in capital 483,879 471,035
Restricted stock unit grant (4,350) --
Retained earnings 115,950 176,381
Accumulated other comprehensive income, net of income taxes 246 401
--------- --------
Total stockholders' equity 595,796 647,894
--------- --------
Total liabilities and stockholders' equity $ 777,084 $789,214
========= ========
The accompanying notes to unaudited consolidated financial statements are
an integral part of these consolidated balance sheets.
3
ANDRX CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues
Distributed products $ 133,020 $ 133,819 $ 381,567 $ 349,451
Andrx products 53,391 72,736 163,697 182,966
Other 2,611 7,680 7,619 20,022
------------ ------------ ------------ ------------
Total revenues 189,022 214,235 552,883 552,439
------------ ------------ ------------ ------------
Operating expenses
Cost of goods sold 178,405 131,190 434,810 330,679
Selling, general and administrative 51,751 43,453 139,495 107,811
Research and development 12,195 11,294 33,537 40,182
Litigation settlements (Note 11) -- -- 60,000 --
Goodwill write-offs at Cybear -- 9,313 -- 11,295
------------ ------------ ------------ ------------
Total operating expenses 242,351 195,250 667,842 489,967
------------ ------------ ------------ ------------
Income (loss) from operations (53,329) 18,985 (114,959) 62,472
Other income
Interest income, net 1,178 2,597 4,291 9,174
Equity in earnings of joint ventures 1,145 203 2,733 473
Gain on sale of Histex product line 109 -- 4,623 --
------------ ------------ ------------ ------------
Income (loss) before income taxes (50,897) 21,785 (103,312) 72,119
Income tax expense (benefit) (17,813) 11,120 (43,407) 31,130
------------ ------------ ------------ ------------
Net income (loss) $ (33,084) $ 10,665 $ (59,905) $ 40,989
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE (Note 3)
ANDRX COMMON STOCK:
Net income (loss) allocated to Andrx
(includes Cybear subsequent to
the May 17, 2002 Conversion) $ (33,084) $ 25,251 $ (53,961) $ 68,621
Premium on Conversion of Cybear common stock -- -- (526) --
------------ ------------ ------------ ------------
Total net income (loss) allocated to Andrx $ (33,084) $ 25,251 $ (54,487) $ 68,621
============ ============ ============ ============
Net income (loss) per share of Andrx
common stock:
Basic $ (0.47) $ 0.36 $ (0.77) $ 0.98
============ ============ ============ ============
Diluted $ (0.47) $ 0.35 $ (0.77) $ 0.95
============ ============ ============ ============
Weighted average shares of Andrx common
stock outstanding:
Basic 70,921,000 70,155,000 70,725,000 69,876,000
============ ============ ============ ============
Diluted 70,921,000 72,941,000 70,725,000 72,614,000
============ ============ ============ ============
CYBEAR COMMON STOCK:
Net loss allocated to Cybear
(through the May 17, 2002 Conversion) $ (14,586) $ (5,944) $ (27,632)
Premium on Conversion of Cybear common stock -- 526 --
------------ ------------ ------------
Total net loss allocated to Cybear $ (14,586) $ (5,418) $ (27,632)
============ ============ ============
Basic and diluted net loss per share of
Cybear common stock $ (2.23) $ (0.80) $ (5.04)
============ ============ ============
Basic and diluted weighted average shares of
Cybear common stock outstanding 6,545,000 6,743,000 5,485,000
============ ============ ============
The accompanying notes to unaudited consolidated financial statements are
an integral part of these unaudited consolidated statements.
4
ANDRX CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2002 2001
--------- ---------
Cash flows from operating activities
Net income (loss) $ (59,905) $ 40,989
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 16,069 15,490
Goodwill write-offs at Cybear -- 11,295
Other non-cash charges at Cybear -- 1,060
Undistributed equity in earnings of joint ventures (2,733) (473)
Income tax benefit on exercises of Andrx stock options 3,536 13,227
Gain on sale of Histex product line (4,623) --
Compensation expense on amortization of restricted stock unit grant 150 --
Changes in operating assets and liabilities:
Accounts receivable, net 27,543 (42,555)
Inventories, net 3,028 (30,128)
Prepaid and other assets, net (4,264) 2,402
Accounts payable and accrued and other liabilities 42,712 38,939
Income taxes receivable and deferred income tax assets, net (47,392) 12,704
--------- ---------
Net cash provided by (used in) operating activities (25,879) 62,950
--------- ---------
Cash flows from investing activities
Maturities of investments available-for-sale, net 106,749 35,186
Purchases of property, plant and equipment (68,030) (50,617)
Proceeds from sale of Histex product line 1,550 --
Acquisition of CTEX Pharmaceuticals, Inc., net of cash acquired -- (11,135)
Loans to former CTEX Pharmaceuticals, Inc. shareholders -- (3,697)
Acquisition of Entex brand product line -- (14,795)
Acquisition of marketing rights of the Anexsia brand product line -- (2,000)
Acquisition of certain assets of Armstrong Pharmaceuticals -- (18,218)
Acquisition of and advances to Mediconsult.com, Inc. -- (3,242)
AHT Corporation note receivable and investment -- 234
--------- ---------
Net cash provided by (used in) investing activities 40,269 (68,284)
--------- ---------
Cash flows from financing activity
Proceeds from issuances of shares of Andrx common
stock under the employee stock purchase plan and
from exercises of Andrx stock options 4,278 7,074
--------- ---------
Net increase in cash and cash equivalents 18,668 1,740
Cash and cash equivalents, beginning of period 62,311 115,609
--------- ---------
Cash and cash equivalents, end of period $ 80,979 $ 117,349
========= =========
Supplemental disclosure of cash paid during the period for:
Income taxes $ 816 $ 5,200
========= =========
Interest $ 168 $ --
========= =========
Supplemental disclosures of non-cash investing and financing activities:
Conversion of Cybear common stock into
Andrx common stock $ 2,537
=========
Acquisition of CTEX Pharmaceuticals, Inc.
Market value of Andrx common stock issued $ 18,166
=========
Fair value of net liabilities assumed $ 537
=========
Acquisition of Mediconsult.com, Inc.
Market value of Cybear common stock issued $ 4,765
=========
Fair value of net liabilities assumed $ 5,295
=========
The accompanying notes to unaudited consolidated financial statements are
an integral part of these unaudited consolidated statements.
5
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
1. GENERAL
The accompanying unaudited consolidated financial statements for each
period include the consolidated balance sheets, statements of operations and
cash flows of Andrx Corporation and subsidiaries ("Andrx" or the "Company"). All
significant intercompany items and transactions have been eliminated in
consolidation. In the opinion of management, the accompanying unaudited
consolidated financial statements have been prepared by Andrx pursuant to the
rules and regulations of the U.S. Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted pursuant to the SEC rules and
regulations. However, management believes that the disclosures contained herein
are adequate to make the information presented not misleading. In the opinion of
management, the unaudited consolidated financial statements reflect all material
adjustments (which include normal recurring adjustments) necessary to present
fairly the Company's unaudited financial position, results of operations and
cash flows. The unaudited results of operations for the three and nine months
ended September 30, 2002, and cash flows for the nine months ended September 30,
2002, are not necessarily indicative of the results of operations or cash flows
that may be expected for the remainder of 2002. The unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes thereto included in Andrx's Annual Report
on Form 10-K for the year ended December 31, 2001, as amended. The December 31,
2001 Consolidated Balance Sheet was extracted from the December 31, 2001 Audited
Consolidated Balance Sheet.
ACCOUNTS RECEIVABLE
In August 2002, Andrx management learned that an employee had made
numerous improper entries that affected its customers' balances and their agings
in its accounts receivable records from 1999 to 2002 and, accordingly, the
adequacy of the Company's allowance for doubtful accounts receivable. After
extensive investigation and analysis, including discussions with certain
customers regarding past due amounts, management determined that the Company's
provision for doubtful accounts (included in selling, general and administrative
expenses) relating to the period from January 1, 1999 through December 31, 2001
was understated by an aggregate of $4,325. After consideration of all of the
facts and circumstances, the Company recognized the full amount of the $4,325
prior period misstatement in the second quarter of 2002, as the Company believes
it is not material to any period affected.
6
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
ALTOCOR(TM) REVENUE RECOGNITION
For the three months ended September 30, 2002, the Company recorded
approximately $1,400 in net sales of Altocor, Andrx's first internally developed
brand product, on approximately $10,500 (estimated net sales value) of
shipments. Given the recent market introduction of Altocor, the limited amount
of prescription and product return history, and sales terms and other incentives
granted to customers in connection with the product launch, including the right
of return of initial stocking after nine months, the Company recorded an
allowance for the net sales and cost of goods sold relating to a portion of the
Altocor shipments during the three months ended September 30, 2002. Until the
Company has sufficient historical experience to reasonably estimate product
pullthrough and returns, the Company's policy is to recognize net sales of
Altocor for product that it believes was prescribed, based on data provided by
external independent sources and, to the extent the product was shipped,
received by customers, and is expected to be pulled through the distribution
channel prior to the date the customers' right of return of the initial stocking
begins, by assuming the amount of prescriptions for the last week of the
reporting period remains constant through the date such right of return begins.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets", which was effective for the Company beginning January
1, 2002. Adoption of SFAS No. 142 in 2002 resulted in the discontinuance of the
Company recording approximately $3,200 of annual goodwill amortization in future
periods. Additionally, the results of the required impairment test also
indicated that the Company's goodwill is not impaired.
7
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
The following table shows the impact of the adoption of SFAS No. 142 as
if the provisions of the pronouncement had been retroactively applied to the
prior periods, as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2001
------------- -------------
Reported net income $ 10,665 $ 40,989
Goodwill amortization, net of tax 835 3,134
-------- ----------
Adjusted net income $ 11,500 $ 44,123
======== ==========
ANDRX COMMON STOCK:
Reported net income allocated to Andrx $ 25,251 $ 68,621
Goodwill amortization, net of tax 573 1,530
-------- ----------
Adjusted net income allocated to Andrx $ 25,824 $ 70,151
======== ==========
Basic earnings per share:
Reported net income allocated to Andrx $ 0.36 $ 0.98
Goodwill amortization, net of tax 0.01 0.02
-------- ----------
Adjusted net income allocated to Andrx $ 0.37 $ 1.00
======== ==========
Diluted earnings per share:
Reported net income allocated to Andrx $ 0.35 $ 0.95
Goodwill amortization, net of tax -- 0.02
-------- ----------
Adjusted net income allocated to Andrx $ 0.35 $ 0.97
======== ==========
CYBEAR COMMON STOCK:
Reported net loss allocated to Cybear $(14,586) $ (27,632)
Goodwill amortization 262 1,604
-------- ----------
Adjusted net loss allocated to Cybear $(14,324) $ (26,028)
======== ==========
Basic and diluted net loss per share:
Reported net loss allocated to Cybear $ (2.23) $ (5.04)
Goodwill amortization 0.04 0.29
-------- ----------
Adjusted net loss allocated to Cybear $ (2.19) $ (4.75)
======== ==========
8
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This pronouncement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company believes the adoption of SFAS No. 143 in 2003 will not have a material
impact on the consolidated financial statements of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This pronouncement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This pronouncement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a business
(as previously defined in that opinion). SFAS No. 144 was effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years. Adoption of the provisions of
SFAS No. 144 in 2002 did not have a material impact on the consolidated
financial statements of the Company.
In November 2001, the Emerging Issues Tasks Force ("EITF") issued EITF
01-09, "Accounting for Consideration Given by a Vendor to a Customer (including
a Reseller of the Vendor's Products)". This pronouncement addresses the
accounting for consideration given by a vendor to a customer (including both a
reseller of the vendor's products and an entity that purchases the vendor's
products from a reseller). This pronouncement is effective for annual or interim
periods beginning after December 15, 2001. Adoption of the provisions of EITF
01-09 in 2002 did not have a material impact on the consolidated financial
statements of the Company.
In June 2002, the FASB issued SFAS No.146 "Accounting for Costs
Associated with Exit or Disposal Activities". The provisions of this
pronouncement require that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred and nullifies the
guidance of EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in Restructuring)", which recognized a liability for an exit cost at the date of
an entity's commitment to an exit plan. The provisions of SFAS No. 146 require
that the initial measurement of a liability be at fair value. SFAS No. 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002 with early adoption encouraged. Andrx plans to adopt the provisions of
SFAS No. 146 in 2003 and does not expect that its adoption will have a material
impact on the consolidated financial statements of the Company.
9
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
2. CORPORATE STRUCTURE
On September 7, 2000, Andrx Corporation completed a reorganization
whereby it acquired the outstanding equity of its Cybear Inc. subsidiary that it
did not own, reincorporated in Delaware, and created two new classes of common
stock: (i) Andrx common stock to track the performance of the Andrx Group, which
includes Andrx Corporation and subsidiaries, other than its ownership of the
Cybear Group and (ii) Cybear common stock to track the performance of the Cybear
Group (the "Reorganization"). The Cybear Group included (i) Cybear Inc. and its
subsidiaries, (ii) certain potential future Internet businesses of Andrx
Corporation, (iii) certain operating assets of AHT, and (iv) effective April 2,
2001, Mediconsult.com, Inc and its subsidiaries. In connection with the
Reorganization, Andrx shareholders exchanged each share of Andrx common stock
(pre-Reorganization) held for one share of Andrx common stock and .0372 shares
of Cybear common stock (reflects the effect of the July 31, 2001 one-for-four
reverse stock split) and Cybear stockholders, other than Andrx, exchanged each
share of Cybear common stock (pre-Reorganization) held for one share of Cybear
common stock.
On May 17, 2002, each outstanding share of Cybear common stock was
converted into 0.00964 of a share of Andrx common stock (the "Conversion") which
resulted in the issuance of approximately 65,000 shares of Andrx common stock.
The Conversion ratio included a 25% premium on the value of Cybear common stock,
as provided by the terms of Andrx Corporation's Certificate of Incorporation.
Subsequent to the Conversion, the Company only has one class of common stock
outstanding with the class including all of the businesses of Andrx Corporation
and its subsidiaries.
Subsequent to the Reorganization and through May 17, 2002, Andrx
Corporation's consolidated financial statements included consolidated operating
results, and for each class of common stock outstanding also included (i) an
allocation of net income (loss), (ii) related basic and diluted earnings (loss)
per share and (iii) basic and diluted shares outstanding. The consolidated
financial statements from the Reorganization on September 7, 2000 through the
Conversion on May 17, 2002 do not reflect consolidated basic and diluted
earnings per share since there was no underlying equity security related to the
consolidated financial results.
For operating results relating to periods subsequent to the Conversion,
Andrx Corporation (i) will only report earnings (loss) per share for Andrx
common stock which includes all of the former Cybear Group's operating results
from the effective date of the Conversion, (ii) will no longer report separate
earnings (loss) per share for the former Cybear common stock, and (iii) will not
provide supplemental group financial statements for Andrx Group, and Cybear
Group, as was previously presented.
10
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
3. EARNINGS (LOSS) PER SHARE
As a result of the Reorganization and through the date of the
Conversion, Andrx's operating results for the period from January 1, 2002
through May 17, 2002 and for the three and nine months ended September 30, 2001
have been allocated to each class of common stock. Subsequent to the Conversion,
operating results and basic and diluted net income (loss) per share of Andrx
common stock include the operating results of Cybear.
ANDRX
The shares used in computing basic net income (loss) per share of Andrx
common stock are based on the weighted average shares of Andrx common stock
outstanding for the three and nine months ended September 30, 2002 and 2001. For
the three and nine months ended September 30, 2002, all common stock
equivalents were excluded from the diluted share computation as the Company
reported a net loss and, accordingly, such common stock equivalents were
anti-dilutive. For the three and nine months ended September 30, 2002,
the diluted share computation also excluded the effect of the unamortized
restricted stock unit granted to the Company's Chief Executive Officer which is
also anti-dilutive. The diluted basis for the 2001 periods considered the
weighted average shares of common stock outstanding for common stock including
dilutive common stock equivalents. For the 2002 periods, Cybear common stock
options were converted into Andrx common stock options and were included in the
Andrx anti-dilutive options outstanding.
The Conversion resulted in the issuance of approximately 65,000 shares
of Andrx common stock and included a 25% premium on the value of Cybear common
stock, as provided by the terms of Andrx Corporation's Certificate of
Incorporation. While the premium paid to holders of Cybear common stock for the
nine month period ended September 30, 2002 was not included in the Andrx or
Cybear operating results, the premium associated therewith increased the total
net loss allocated to holders of Andrx common stock by $526 in computing Andrx's
net loss per share and reduced the total net loss allocated to holders of Cybear
common stock by $526 in computing Cybear's net loss per share and was reflected
as a charge to retained earnings and a credit to additional paid-in capital in
the Unaudited Consolidated Balance Sheet.
11
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
A reconciliation of the denominators of basic and diluted earnings
(loss) per share of Andrx common stock is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic weighted average shares of
common stock outstanding 70,921,000 70,155,000 70,725,000 69,876,000
Effect of dilutive items:
Stock options -- 2,786,000 -- 2,738,000
---------- ---------- ---------- ----------
Diluted weighted average shares
of common stock outstanding 70,921,000 72,941,000 70,725,000 72,614,000
========== ========== ========== ==========
Anti-dilutive potential common shares
excluded from diluted weighted average
shares outstanding 4,241,000 277,000 3,611,000 1,256,000
========== ========== ========== ==========
CYBEAR
The shares used in computing net loss per share of Cybear common stock
were based on the weighted average shares of Cybear common stock outstanding for
the period from January 1, 2002 through May 17, 2002 and for the three and nine
months ended September 30, 2001, respectively. As Cybear incurred a net loss for
such periods, all potential Cybear shares were excluded from the Cybear
calculation of diluted shares since the effects were anti-dilutive. All share
and per share amounts of Cybear common stock gave effect to the July 31, 2001,
one-for-four reverse stock split.
4. PRILOSEC(R) PATENT INFRINGEMENT DECISION
Andrx's operating results for the three and nine months ended
September 30, 2002 were significantly adversely affected by the October 2002
district court decision that AstraZeneca plc's ("Astra") patents (Nos. `505 and
`230) are valid, and that Andrx's bioequivalent version of Prilosec infringes
those patents (the "Prilosec Patent Infringement Decision") (see Note 11). As a
result of the Prilosec Patent Infringement Decision, which Andrx has appealed,
the Company recorded a charge of approximately $41,000, before the related
income tax benefit of approximately $14,300 at a 35% effective tax rate, related
to work-in process, finished goods and raw material inventories for its
bioequivalent version of Prilosec.
12
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
5. INVENTORIES, NET
Inventories, net consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
Raw materials $ 36,771 $ 42,326
Work in process 22,645 16,212
Finished goods 99,445 103,153
-------- --------
$158,861 $161,691
======== ========
As of September 30, 2002 and December 31, 2001, the Company had
approximately $22,500 and $33,900, respectively, in raw materials, work in
process and finished goods inventories relating to products pending final FDA
marketing approval and satisfactory resolution of patent infringement
litigation. As of September 30, 2002, these inventories primarily consisted of
bioequivalent versions of Wellbutrin SR(R)/Zyban(R) and Tiazac(R).
6. INCOME TAXES
For the three and nine months ended September 30, 2002, the Company
recorded an income tax benefit of $17,813 and $43,407, or 35% and 42%,
respectively, of loss before income taxes. Such tax benefit for the nine months
ended September 30, 2002 included the reversal of a $7,249 valuation allowance
on deferred tax assets relating to certain net operating loss carryforwards. For
the three and nine months ended September 30, 2001, the Company provided $11,120
and $31,130, respectively, for income taxes, or 51% and 43%, respectively, of
income before income taxes. For the three and nine months ended September 30,
2001, the Company provided for income taxes in excess of the expected annual
effective federal statutory rate of 35% primarily due to the effect of state
income taxes and write-offs and amortization of goodwill and other intangible
assets at Cybear which were not deductible for tax purposes.
The following table indicates the activity in the valuation allowance
on deferred income tax assets:
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------- ---------------------
Beginning balance $(7,249) $(7,249)
Reversal 7,249 --
------- -------
Ending balance $ -- $(7,249)
======= =======
13
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
7. COMPREHENSIVE INCOME (LOSS)
The components of the Company's comprehensive income (loss) are as
follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- -------
Net income (loss) $(33,084) $ 10,665 $(59,905) $40,989
-------- -------- -------- -------
Investments available-for-sale
Unrealized gain (loss), net (172) 59 (246) 666
Income tax expense (benefit) (63) 22 (91) 247
-------- -------- -------- -------
(109) 37 (155) 419
-------- -------- -------- -------
Comprehensive income (loss) $(33,193) $ 10,702 $(60,060) $41,408
======== ======== ======== =======
8. SALE OF INTERNET ASSETS AND ALLIANCE
In August 2002, Andrx sold the Dr. Chart and @Rx applications and
licensed its patents for Internet transmission of prescriptions to MyDocOnline,
a business unit of Aventis S.A. ("Aventis"). Aventis also entered into a
two-year marketing agreement with Andrx's Physicians' Online(TM) web portal
("POL"). As part of these transactions, Andrx expects to receive approximately
$6,000 through April 2004. The $6,000 in non-refundable payments will be
recognized as other revenues in the Consolidated Statements of Operations as
service is rendered. In the 2002 third quarter, $51 was recorded as other
revenues.
9. BUSINESS SEGMENTS
Business segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's operating
segments are managed separately because of the fundamental difference in their
operations or in the uniqueness of their product(s). As a result of the
Conversion, Cybear's Internet business operations were integrated into other
operating segments of Andrx and became a part of the distributed products
segment or brand products segment for financial reporting purposes. Accordingly,
for segment reporting purposes, the Company has reclassified its former Internet
segment operations for all prior periods presented herein to conform with the
current period presentation.
14
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
The Company currently operates in the following business segments:
DISTRIBUTED PRODUCTS
The Company distributes generic pharmaceuticals manufactured by third
parties primarily through its in-house telemarketing staff primarily to
independent pharmacies, pharmacy chains which do not maintain their own central
warehousing facilities, pharmacy buying groups and physician offices.
BIOEQUIVALENT PRODUCTS
The Company researches and develops, manufactures and sells
bioequivalent versions of selected controlled-release brand name pharmaceuticals
utilizing its proprietary drug delivery technologies as well as bioequivalent
versions of specialty, niche or immediate release pharmaceutical products.
BRAND PRODUCTS
The Company applies its proprietary drug delivery technologies to the
research and development of brand name controlled-release formulations of
existing chemical entities. In addition, the Company markets and sells brand
products that it developed, acquired or licensed from third parties. The brand
products segment also includes fees generated under an agreement with Geneva
Pharmaceuticals ("Geneva"), a member of the Novartis Pharmaceutical Group, for
specified brand products, as well as payments to Geneva in connection with the
termination of such agreement in October 2001, and the reacquisition of Geneva's
marketing rights for two brand products under development by Andrx. As a result
of the Conversion, except for the Cybearclub LLC joint venture, which is
currently included in the distributed products segment, the former Internet
segment operations are now included in the brand products segment.
CORPORATE AND OTHER
Corporate and other consists of corporate headquarters, including
general and administrative expenses, which include legal costs associated with
antitrust matters, the litigation settlements charge, interest income and income
taxes.
The Company evaluates the performance of the segments after all
intercompany sales are eliminated. The allocation of income taxes is not
evaluated at the segment level.
15
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
The following table represents unaudited financial information by current
business segments:
AS OF OR FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
------------------------------------------------------------------------------------------
DISTRIBUTED BIOEQUIVALENT BRAND CORPORATE
PRODUCTS PRODUCTS PRODUCTS & OTHER CONSOLIDATED
--------------- ------------------ ------------- -------------- ---------------
Revenues $ 133,020 $ 50,174 $ 5,828 $ -- $ 189,022
Income (loss) from operations 10,151 (33,578) (16,962) (12,940) (53,329)
Interest income, net -- -- -- 1,178 1,178
Equity in earnings of joint ventures -- 1,145 -- -- 1,145
Gain on sale of Histex product line -- -- 109 -- 109
Depreciation and amortization 769 3,572 1,364 12 5,717
Capital expenditures 4,612 17,639 86 740 23,077
Total assets, end of period 218,120 217,383 70,302 271,279 777,084
AS OF OR FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
------------------------------------------------------------------------------------------
DISTRIBUTED BIOEQUIVALENT BRAND CORPORATE
PRODUCTS PRODUCTS PRODUCTS & OTHER CONSOLIDATED
--------------- ------------------ ------------- -------------- ---------------
Revenues $ 133,819 $ 58,328 $ 22,088 $ -- $ 214,235
Income (loss) from operations 7,656 32,058 (13,415) (7,314) 18,985
Interest income, net -- -- -- 2,597 2,597
Equity in earnings of joint ventures -- 203 -- -- 203
Depreciation and amortization 734 1,867 3,384 19 6,004
Capital expenditures 587 14,319 206 5 15,117
Total assets, end of period 232,917 213,086 88,347 285,291 819,641
NINE MONTHS ENDED
SEPTEMBER 30, 2002
------------------------------------------------------------------------------------------
DISTRIBUTED BIOEQUIVALENT BRAND CORPORATE
PRODUCTS PRODUCTS PRODUCTS & OTHER CONSOLIDATED
--------------- ------------------- ------------- -------------- ----------------
Revenues $ 381,567 $ 150,666 $ 20,650 $ -- $ 552,883
Income (loss) from operations 23,343 (2,408) (47,475) (88,419) (114,959)
Interest income, net -- -- -- 4,291 4,291
Equity in earnings of joint ventures -- 2,733 -- -- 2,733
Gain on sale of Histex product line -- -- 4,623 -- 4,623
Depreciation and amortization 2,017 9,205 4,799 48 16,069
Capital expenditures 11,196 54,862 718 1,254 68,030
NINE MONTHS ENDED
SEPTEMBER 30, 2001
------------------------------------------------------------------------------------------
DISTRIBUTED BIOEQUIVALENT BRAND CORPORATE
PRODUCTS PRODUCTS PRODUCTS & OTHER CONSOLIDATED
--------------- ------------------- ------------- -------------- ----------------
Revenues $ 349,451 $ 160,444 $ 42,544 $ -- $ 552,439
Income (loss) from operations 25,738 89,029 (34,097) (18,198) 62,472
Interest income, net -- -- -- 9,174 9,174
Equity in earnings of joint ventures -- 473 -- -- 473
Depreciation and amortization 2,188 4,245 8,998 59 15,490
Capital expenditures 1,985 48,301 301 30 50,617
16
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
10. SUPPLEMENTAL CYBEAR GROUP STATEMENTS OF OPERATIONS AND CASH FLOWS
Following is the supplemental unaudited consolidated statements of
operations and cash flows for Cybear Group through the May 17, 2002 Conversion:
CYBEAR GROUP
Unaudited Consolidated Statements of Operations
FOR THE PERIOD THREE MONTHS
FROM JANUARY 1, 2002 ENDED NINE MONTHS ENDED
THROUGH MAY 17, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2001
--------------------- ---------------- --------------------
Revenues
Cybearclub LC Internet product sales $ 1,846 $ 977 $ 3,000
Portal services 1,093 332 1,198
Application services 329 407 1,041
Website development, hosting and
other services 18 136 398
Subscription services -- 140 416
Other -- 983 983
------- -------- --------
Total revenues 3,286 2,975 7,036
------- -------- --------
Operating expenses
Cost of goods sold 1,698 913 2,811
Network operations and operations support 1,409 1,217 4,360
Product development 1,223 1,245 4,030
Selling, general and administrative 3,351 2,141 5,412
Depreciation and amortization 1,499 1,771 6,106
Non-recurring expenses -- 10,373 12,355
------- -------- --------
Total operating expenses 9,180 17,660 35,074
------- -------- --------
Loss from operations (5,894) (14,685) (28,038)
Interest income (expense), net (50) 99 406
------- -------- --------
Net loss $(5,944) $(14,586) $(27,632)
======= ======== ========
17
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
CYBEAR GROUP
Unaudited Consolidated Statements of Cash Flows
FOR THE PERIOD NINE MONTHS
FROM JANUARY 1, 2002 ENDED
THROUGH SEPTEMBER 30,
MAY 17, 2002 2001
-------------------- -----------------
Cash flows from operating activities
Net loss $(5,944) $(27,632)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,499 6,106
Goodwill write-offs -- 11,295
Other non-cash charges -- 1,060
Changes in operating assets and liabilities:
Accounts receivable, net 134 --
Prepaid and other assets, net 81 1,312
Accounts payable and accrued and other liabilities 904 (1,806)
------- --------
Net cash used in operating activities (3,326) (9,665)
------- --------
Cash flows from investing activities
Maturities of investments available-for-sale, net -- 9,979
Purchases of equipment (139) (109)
Acquisition of and advances to Mediconsult.com, Inc. -- (3,242)
------- --------
Net cash provided by (used in) investing activities (139) 6,628
------- --------
Cash flows from financing activities
Advances from Andrx on line of credit 2,152 --
Payments from Andrx for utilization of certain tax benefits 126 190
------- --------
Net cash provided by financing activities 2,278 190
------- --------
Net decrease in cash and cash equivalents (1,187) (2,847)
Cash and cash equivalents, beginning of period 1,234 4,478
------- --------
Cash and cash equivalents, end of period $ 47 $ 1,631
======= ========
Supplemental disclosure of non-cash investing and financing activities:
Conversion of Cybear common stock into
Andrx common stock $ 2,537
=======
Acquisition of Mediconsult.com, Inc.
Market value of Cybear common stock issued $ 4,765
========
Fair value of net liabilities assumed $ 5,295
========
18
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
11. LITIGATION AND CONTINGENCIES
The following information updates the litigation and contingencies
disclosure from the disclosure contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, as amended. Such information
contained therein should be read in conjunction with the following for a
complete discussion of litigation and contingencies.
In the consolidated trial in the U.S. District Court for the Southern
District of New York involving Andrx's Abbreviated New Drug Application ("ANDA")
for a generic version of Prilosec, the court entered an order and an opinion in
October 2002 ruling that Astra's `505 and `230 patents are valid and that the
generic versions of Prilosec developed by Andrx, Genpharm, Inc. ("Genpharm") and
Cheminor Drugs, Ltd. infringe those patents. The court also determined that the
generic version of Prilosec developed by Kremers Urban Development Co. ("KUDCo")
does not infringe the two patents. The court specifically deferred ruling on the
`281 patent that was asserted solely against Andrx's product, and has not issued
any opinion on Astra's claims for willful infringement of the `505 and `230
patents or on Astra's request for attorneys fees. The Company is currently
unable to determine the outcome of these matters. Andrx has appealed the
decision to the Federal Circuit Court of Appeals (See Note 4).
Andrx and Aventis have entered into a binding settlement with the
direct purchaser class of plaintiffs in the Cardizem(R) CD antitrust class
lawsuits involving the Stipulation and Agreement they entered into in 1997
("1997 Stipulation") that are pending for consolidated pre-trial proceedings in
the U.S. District Court for the Eastern District of Michigan. The binding
settlement, which is subject to final court review and approval, calls for a
cash payment by Andrx and Aventis to this group in an undisclosed amount. In
anticipation of potentially reaching settlements with all plaintiffs in the
related litigations, in the second quarter of 2002, Andrx recorded an estimated
litigation settlements charge of $60,000. Such contingency became estimable in
the second quarter of 2002 as a result of the mediation discussions with the
plaintiffs in the litigations and the settlement referred to above. Andrx
intends to vigorously litigate any of these cases that cannot be settled on a
reasonable basis.
Andrx and Biovail Corporation ("Biovail") have entered into an
agreement settling with prejudice (i) Biovail's claims against Andrx in the U.S.
District Court for the District of Columbia for alleged antitrust violations
relating to the 1997 Stipulation, (ii) Andrx's claims against Biovail in the
U.S. District Court for the Southern District of Florida for, among other
things, a declaratory judgment that Andrx had not breached any of the rights
Biovail acquired as assignee of 1999 stipulation between Aventis and Andrx in
settlement of the Cardizem CD patent infringement suit, and (iii) the parties'
respective claims against each other in the consolidated litigation pending in
the U.S. District Court for the Southern District of Florida relating to Andrx's
generic version of Tiazac(R). Though this settlement involved no cash payments,
Andrx has agreed to pay to Biovail a royalty based on net sales of Andrx's
bioequivalent version of Tiazac.
19
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
On August 8, 2002, the U.S. District Court for the District of New
Jersey, entered an order granting Andrx's Motion for Summary Judgment with
respect to US Patent No. 4,659,716 ("716 Patent"). The Court ruled that claims 1
and 3 of the 716 Patent were invalid. Schering-Plough Corporation ("Schering")
has filed a notice of its intent to appeal the decision. The 716 Patent was the
only patent for which Schering sued Andrx with respect to Andrx's Claritin D-12
and Claritin Reditabs products. Schering and Andrx had previously entered into a
stipulation whereby the parties agreed to be bound by the Court's decision with
respect to the 716 Patent in the Claritin D-24 litigation. However, with respect
to the Claritin D-24 litigation, Schering also sued Andrx for infringing US
Patent No. 5,314,697 ("697 Patent"). With respect to the 697 Patent, fact
discovery has been completed, but no trial date has yet been scheduled. Andrx
filed a Paragraph III certification for US Patent No. 4,282,233 ("233 Patent")
with respect to all of its Claritin products. The 233 Patent does not expire
until December 19, 2002.
A lawsuit was brought by Organon, Inc. and Akzo Nobel N.V. in the U.S.
District Court for the Southern District of Florida involving Andrx's ANDA for a
generic version of Remeron(R) has been transferred by the Judicial Panel on
Multi-District Litigation to the U.S. District Court for the District of New
Jersey for consolidated pretrial proceedings. The Company believes that its
product does not infringe the patent at issue.
The lawsuit against Andrx involving the Lemelson Medical Education and
Research Foundation Limited Partnership ("Lemelson") patents, pending in the
U.S. District Court for the District of Arizona, has been stayed pending
conclusion of the Symbol Technologies, Inc., et al. v. Lemelson litigation
pending in the U.S. District Court for the District of Nevada.
The class action lawsuit purportedly related to the average wholesale
pricing of pharmaceutical products under the Arizona Consumer Fraud Act,
previously pending in the Arizona state court, has been voluntarily withdrawn
and dismissed with prejudice.
In April 2002, partly in response to a motion brought by Elan
Corporation, PLC ("Elan") requesting the U.S. District Court for the Southern
District of Florida to reconsider its ruling invalidating Elan's patent for
Naprelan, the Company filed a cross-motion requesting the Court to amend the
final judgment entered in favor of the Company on March 14, 2002 by deciding the
Company's counterclaims relating to the additional issues of patent
infringement, inequitable conduct and public use as an additional ground for
patent invalidity.
20
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
In November 2002, the U.S. District Court for the Southern District of
Florida granted in part Andrx's motion to dismiss the amended consolidated class
action complaint which alleged that Andrx and certain of its officers and
directors engaged in securities fraud and/or made material misrepresentations
regarding the regulatory status of the Company's ANDA for a bioequivalent
version of Tiazac. The Court dismissed all but one of the statements allegedly
made in violation of federal securities laws, having determined that those
statements were forward-looking statements entitled to the protection of the
safe harbor provisions of the securities laws, and therefore not actionable as a
matter of law. The court directed plaintiffs to file a second amended complaint
consistent with the court's order. In October 2002, an action based on certain
of the same facts was filed against certain current and former officers and
directors of Andrx, as well as Andrx (as a nominal defendant), in the Circuit
Court, Broward County, Florida. This complaint alleges that, during the period
May 2001 to November 2001, the individual defendants were in possession of
material non-public information relating to the regulatory status of Andrx's
ANDA for a bioequivalent version of Tiazac and used such information to sell
shares of Andrx common stock at prices higher than they could have obtained had
the information been made public, thereby reaping insider trading profits. The
plaintiff, an individual, purports to bring the suit derivatively, for the
benefit of Andrx, because "the Board is incapable of making an independent and
disinterested decision to institute and vigorously prosecute" the action. The
complaint seeks the imposition of a constructive trust in favor of Andrx for the
more than $204,000 in profits that the individual defendants received from their
allegedly illegal sales of Andrx stock during such period. Andrx is
investigating the matter and is determining how to proceed.
In September 2002, four securities fraud class actions filed against
Andrx and certain of its current and former officers and directors in the U.S.
District Court for the Southern District of Florida for alleged violations of
certain of the provisions of the securities laws, were voluntarily dismissed.
These actions were filed after Andrx's August 2002 disclosure that, for
1999-2002, an employee had made numerous improper entries in its accounts
receivables records that affected customers' balances and their agings (see Note
1).
21
ANDRX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except for share, per share amounts and percentages)
12. KUDCO AGREEMENT
In October 2002, Andrx entered into an agreement with Genpharm and
KUDCo pursuant to which Andrx and Genpharm relinquished any marketing
exclusivity rights to the 10 mg and 20 mg strengths of omeprazole (generic
Prilosec), thereby accelerating the ability of KUDCo to receive final FDA
marketing approval for its version of that product. On November 1, 2002, KUDCo
received final marketing approval for its generic version of Prilosec. Under the
agreement, KUDCo will share a percentage of its profits, as defined in the
agreement, with Andrx and Genpharm, with each company's share reducing from
15.00% to 9.00% to 6.25% over a period of time, based upon a number of factors.
The agreement follows a recent U.S. District Court decision involving four
generic applicants, including Andrx, which found KUDCo's product to be the only
non-infringing formulation (see Notes 4 and 11). In November 2002, Astra
announced that it would appeal the U.S. District Court's favorable decision for
KUDCo. To facilitate their ability to relinquish their exclusivity rights, and
avoid litigation concerning the parameters of their shared marketing exclusivity
rights, Andrx also entered into an agreement with Genpharm. Pursuant to this
agreement, Andrx and Genpharm agreed to equally share any amounts received from
third parties with respect to their shared exclusivity rights and, in the event
that either Andrx or Genpharm, but not both, prevail in their appeal of the
above-mentioned court decision and is thereby able to lawfully market their
non-infringing version of generic Prilosec, to share 35% of the net profits with
the other party derived from the first 180 days in which that product is
marketed, reduced by any amounts directly or indirectly received from KUDCo.
Each of these agreements has been voluntarily provided to the U.S. Federal Trade
Commission for review.
13. DILTIA XT(R) VOLUNTARY RECALL
On November 12, 2002, the Company advised the FDA that it intends to
issue a voluntary recall of its 120 mg Diltia XT capsules. This voluntary recall
is based on tests demonstrating that, at one intermediate time-point, the
dissolution rate may not remain within specifications through the labeled
expiration dates. The Company believes that the product being recalled poses no
health hazard to the public. The recall is limited to the 120 mg strength; the
Company also markets 180 mg and 240 mg capsules which are not affected by this
voluntary recall. To the extent product was sold prior to September 30, 2002,
based on all currently available information, the results of operations for the
three and nine months ended September 30, 2002 include a $721 recall charge
reflected as a reduction of revenues - Andrx bioequivalent product sales, with a
corresponding tax benefit of $252 at a 35% effective tax rate.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Andrx Corporation ("Andrx" or the "Company") cautions readers that
certain important factors may affect the Company's actual results and could
cause such results to differ materially from any forward-looking statements
which may be deemed to have been made in this report or which are otherwise
made by or on behalf of the Company. For this purpose, any statements contained
in this report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "to", "expect", "believe", "anticipate", "intend",
"plan", "could", "would", "estimate", or "continue" or the negative or other
variations thereof or comparable terminology are intended to identify
forward-looking statements. Investors are cautioned that all forward-looking
statements involve risks and uncertainties, including, but not limited to,
future operating results which are dependent on a relatively small number of
products, the outcome of litigation, the timing of future product launches,
government regulation, level of competition, ability to manufacture adequate
amounts of products, manufacturing inefficiencies, and under utilized
manufacturing capacities. Andrx is also subject to other risks detailed herein
or detailed from time to time in Andrx Corporation's other SEC filings.
INTRODUCTION
Andrx commercializes controlled-release oral pharmaceuticals using its
proprietary drug delivery technologies. Andrx has ten proprietary
controlled-release drug delivery technologies that are patented for certain
applications or for which it has filed for patent protection for certain
applications. Andrx uses its proprietary drug delivery technologies and
formulation skills to develop:
o bioequivalent versions of selected controlled-release brand name
pharmaceuticals; and
o brand name controlled-release formulations of existing
immediate-release or controlled-release drugs where it believes that
the application of Andrx's drug delivery technologies may improve
the efficacy or other characteristics of those products.
Andrx is also developing bioequivalent versions of specialty, niche and
immediate-release pharmaceutical products.
Andrx currently manufactures and sells bioequivalent versions of
Cardizem(R) CD, Dilacor XR(R), Ventolin(R), Glucophage(R), K-Dur(R) and
Naprelan(R). Sales of Andrx's bioequivalent version of Cardizem CD materially
contributed to Andrx's current level of net sales and operating results. Andrx
also sells and markets brand products which it has developed, acquired or
licensed from third parties, including the products acquired through the
acquisition of CTEX Pharmaceuticals, Inc. ("CTEX") (including Histex through
June 28, 2002), the Entex cough and cold line, the Anexsia pain product line
and the Company's first internally developed brand product, Altocor, which was
launched in July 2002.
23
Through its distribution operations, Andrx primarily sells
bioequivalent drugs manufactured by third parties to independent pharmacies,
pharmacy chains which do not maintain their own central warehousing facilities,
pharmacy buying groups and physicians' offices. These operations are also used
for the marketing of Andrx's products.
During the first quarter of 2002, Andrx determined that its Cybear
Group business unit could not survive as a stand-alone profit center tracked by
a separate class of common stock. Therefore, Andrx exercised the rights in its
Certificate of Incorporation to convert all of the outstanding shares of Cybear
common stock into shares of Andrx common stock effective May 17, 2002 (the
"Conversion"). Cybear common stock was issued in the September 2000
Reorganization to track the performance of Cybear Group, which represented the
Internet businesses of Andrx. Pursuant to the Conversion on May 17, 2002, each
outstanding share of Cybear common stock was converted into 0.00964 of a share
of Andrx common stock which resulted in the issuance of approximately 65,000
shares of Andrx common stock. The Conversion ratio included a 25% premium on the
value of Cybear common stock, as provided by the terms of Andrx's Certificate of
Incorporation.
Following the Conversion, Andrx only has one class of common stock
outstanding, and such class includes all of the businesses of Andrx and its
subsidiaries. The Conversion ratio was based upon the relative market values of
the Andrx common stock and Cybear common stock averaged over the period from
February 22, 2002 through March 21, 2002. The Conversion ratio included a 25%
premium on the value of the Cybear common stock, as required by the terms of
Andrx's Certificate of Incorporation, which was approved by the Andrx and Cybear
stockholders. While the premium paid to the holders of Cybear common stock for
the nine month period in 2002 was not included in the Andrx or Cybear operating
results, the premium associated therewith increased the total net loss allocated
24
to holders of Andrx common stock by $526,000 in computing Andrx's net loss per
share and reduced the total net loss allocated to holders of Cybear common stock
by $526,000 in computing Cybear Group's net loss per share and was reflected as
a charge to retained earnings and a credit to additional paid-in capital in the
Unaudited Consolidated Balance Sheet.
Through the date of the Conversion on May 17, 2002, Andrx continued to
allocate net income (loss) to each class of common stock. For periods subsequent
to the Conversion, Andrx (i) will only report earnings (loss) per share for
Andrx common stock, which includes all of the former Cybear Group's operating
results from the effective date of the Conversion, (ii) will no longer report
separate earnings (loss) per share for the former Cybear common stock, and (iii)
will not provide supplemental group financial statements for Andrx Group and
Cybear Group as presented during the two-class structure.
In August 2002, Andrx management learned that an employee had made
numerous improper entries that affected its customers' balances and their agings
in its accounts receivable records from 1999 to 2002 and, accordingly, the
adequacy of the Company's allowance for doubtful accounts receivable. After
extensive investigation and analysis, including discussions with certain
customers regarding past due amounts, management determined that the Company's
related provision for doubtful accounts (included in selling, general and
administrative expenses) from January 1, 1999 through December 31, 2001 was
understated, by an aggregate of $4.3 million. After consideration of all of the
facts and circumstances, the Company recognized the full amount of the $4.3
million prior period misstatement in the second quarter of 2002, as the Company
believes it is not material to any period affected.
In October 2002, Andrx entered into an agreement with Genpharm, Inc.
("Genpharm") and Kremers Urban Development Co. ("KUDCo"), pursuant to which
Andrx and Genpharm relinquished any marketing exclusivity rights to the 10 mg
and 20 mg strengths of omeprazole (generic Prilosec), thereby accelerating the
ability of KUDCo to receive final FDA marketing approval for its version of that
product. On November 1, 2002, KUDCo received final marketing approval for its
generic version of Prilosec. Under the agreement, KUDCo will share a percentage
of its profits, as defined in the agreement, with Andrx and Genpharm, with each
company's share reducing from 15.00% to 9.00% to 6.25% over a period of time,
based upon a number of factors. The agreement follows a recent U.S. District
Court decision, involving four generic applicants, including Andrx, which found
KUDCo's product to be the only non-infringing formulation. In November 2002,
AstraZeneca plc ("Astra") announced that it would appeal the U.S. District
Court's favorable decision for KUDCo. To facilitate their ability to relinquish
their exclusivity rights, and avoid litigation concerning the parameters of
their shared marketing exclusivity rights, Andrx also entered into an agreement
with Genpharm. Pursuant to this agreement, Andrx and Genpharm agreed to equally
share any amounts received from third parties with respect to their shared
exclusivity rights and, in the event that either Andrx or Genpharm, but not
both, prevail in their appeal of the above-mentioned court decision and is
thereby able to lawfully market their non-infringing version of Prilosec, to
share 35% of the net profits with the other party derived from the first 180
days in which that product is marketed, reduced by any amounts directly or
indirectly received from KUDCo. Each of these agreements has been voluntarily
provided to the U.S. Federal Trade Commission for review.
25
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 ("2002 QUARTER"), AS COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2001 ("2001 QUARTER")
For the 2002 Quarter, the Company incurred a net loss of $33.1 million,
or $0.47 net loss per diluted share of Andrx common stock, as compared to net
income of $10.7 million for the 2001 Quarter. For the 2001 Quarter, of the $10.7
million of net income, $25.3 million of net income, or $0.35 net income per
diluted share of Andrx common stock, was allocated to Andrx Group and $14.6
million of net loss, or $2.23 net loss per diluted share was allocated to the
former Cybear Group class of stock, which was converted into Andrx common stock
on May 17, 2002.
REVENUES
Total revenues decreased to $189.0 million for the 2002 Quarter, as
compared to $214.2 million for the 2001 Quarter.
Net sales for distributed products for the 2002 Quarter were $133.0
million, as compared to $133.8 million for the 2001 Quarter. On a sequential
basis, net sales from distributed products increased by 9.5% to $133.0 million
for the 2002 Quarter, from $121.5 million in the second quarter of 2002. The
sequential increase in sales from distributed products reflected Andrx's
participation in the distribution of generic products launched by other
pharmaceutical companies and an increase in sales to existing and new customers,
offset in part by overall price declines, as is common with generic products.
Net sales of Andrx products decreased by 26.6% to $53.4 million for the
2002 Quarter, as compared to $72.7 million for the 2001 Quarter. In the 2002
Quarter, net sales of Andrx products consisted of $48.0 million of Andrx
bioequivalent products and $5.4 million of Andrx brand products, as compared to
$56.3 million of Andrx bioequivalent products and $16.4 million of Andrx brand
products for the 2001 Quarter.
For the 2002 Quarter, net sales of Andrx bioequivalent products were
$48.0 million, as compared to $56.3 million in the 2001 Quarter. The decrease in
net sales of Andrx bioequivalent products for the 2002 Quarter as compared to
the 2001 Quarter resulted primarily from a significant decline in net sales of
Andrx's bioequivalent version of Ventolin, and a modest decline in net sales of
Andrx's bioequivalent version of Cardizem CD, which was in part offset by net
sales of Andrx's bioequivalent versions of Glucophage, K-Dur and Naprelan which
were launched in 2002. Sales of Andrx's bioequivalent version of Naprelan did
not significantly contribute to Andrx's results of operations for the 2002
Quarter. The decline in net sales of Andrx's bioequivalent version of Ventolin
began in the fourth quarter of 2001 following a marked increase in competition
which has continued, if not intensified, into the 2002 fourth quarter. Andrx's
bioequivalent version of Cardizem CD continues to generate significant levels of
net sales and gross profits and materially contributes to Andrx's overall
current level of operating results. Net sales of Andrx's bioequivalent products
for the 2002 Quarter include a $721,000 charge for the Company's November 2002
voluntary recall of the 120 mg Diltia XT capsules.
26
For the 2002 Quarter, net sales of Andrx brand products were $5.4
million, as compared to $16.4 million in the 2001 Quarter. Net sales of Andrx
brand products in the 2002 Quarter include sales generated from the Entex (cough
and cold), Embrex (prenatal vitamins) and Anexsia (pain) product lines and
beginning in July 2002, net sales of Altocor, the Company's first internally
developed brand product. The decrease in 2002 Quarter net sales, as compared to
the 2001 Quarter, is primarily the result of a lower level of net sales from the
Entex product line, due primarily to the introduction of generics in 2002, the
Company's launch of reformulated Entex products in the 2001 Quarter and the
absence of net sales from the Histex product line, which was sold during the
second quarter of 2002. In the 2002 Quarter, the Company recorded approximately
$1.4 million in net sales of Altocor on approximately $10.5 million (estimated
net sales value) of shipments. Given the recent market introduction of Altocor,
the limited amount of prescription and product return history, and sales terms
and other incentives granted to customers in connection with the product launch,
including the right of return of initial stocking after nine months, the Company
recorded an allowance for the net sales and cost of goods sold relating to a
portion of the 2002 Quarter Altocor shipments. Until the Company has sufficient
historical experience to reasonably estimate product pullthrough and returns,
the Company's policy is to recognize net sales of Altocor for product that it
believes was prescribed, based on data provided by external independent sources
and, to the extent the product was shipped, received by customers and is
expected to be pulled through the distribution channel prior to the date the
customers' right of return of the initial stocking begins, by assuming the
amount of prescriptions for the last week of the reporting period remains
constant through the date such right of return begins. As a result, of the $10.5
million shipped, the Company recognized $1.4 million in net sales and
established an allowance of $9.1 million in its Unaudited Consolidated Balance
Sheet as of September 30, 2002. The Company's policy in regards to its other
brand products is to recognize net sales to the extent such product was shipped
and received by customers and can reasonably expect to be pulled through the
distribution channel. As a result, as of September 30, 2002, the Company had a
$6.3 million allowance related to the other brand products in its Unaudited
Consolidated Balance Sheet.
The Company generated $2.6 million of other revenues in the 2002
Quarter, as compared to $7.7 million in the 2001 Quarter. Other revenues for the
2002 Quarter primarily represented revenues from contract manufacturing at
Andrx's Massachusetts facility and also included revenues generated by Andrx's
Internet operations, primarily the Physicians Online ("POL") web portal. The
decline in other revenues was a result of a decrease in contract manufacturing
services for Alpharma USPD, Inc. ("Alpharma") and other contract manufacturing
customers. In March 2002, Alpharma recalled certain Epinephrine Mist products
manufactured by Andrx's facility. Andrx is currently investigating this matter.
Other revenues for the 2001 Quarter included $3.0 million from Geneva
Pharmaceuticals, Inc. ("Geneva") of the then recurring license fees from an
agreement which was terminated in October 2001.
GROSS PROFIT/GROSS MARGIN
In the 2002 Quarter, total revenues generated total gross profit of
$10.6 million with a total gross margin of 5.6%, as compared to total gross
profit of $83.0 million with a total gross margin of 38.8% in the 2001 Quarter.
Such gross profit for the 2002 Quarter includes the $41.0 million charge fully
reserving for pre-launch inventories of Andrx's bioequivalent version of
Prilosec and an additional $7.0 million charge related to other unusable
bioequivalent and brand production inventories.
27
In the 2002 Quarter, net sales of distributed products generated $26.2
million of gross profit with a gross margin of 19.7%, as compared to $20.4
million of gross profit with a gross margin of 15.3% for the 2001 Quarter. On a
sequential basis, gross profits for the 2002 Quarter were $26.2 million, as
compared to $22.9 million in the second quarter of 2002, and gross margins
increased from 18.9% to 19.7% from the second quarter of 2002, as compared to
the 2002 Quarter. Such levels of gross margin on net sales of distributed
products are at the higher end of the historical range of 14% - 21%, but
which generally range from 16%-17%. The 2002 Quarter includes the Company's
participation in the distribution of numerous generic products that now face
competition from multiple generic manufacturers, which yield higher distribution
gross margins, along with the benefit of other marketing opportunities. The 2001
Quarter included the high dollar volume, low gross margin distribution of
generic Prozac, for which the generic manufacturers enjoyed a 180-day market
exclusivity period from August 2001 through February 2002.
In the 2002 Quarter, net sales of Andrx products incurred a negative
gross profit of $13.6 million compared to $56.2 million of gross profit with a
gross margin of 77.3% for the 2001 Quarter.
In the 2002 Quarter, within Andrx products, Andrx's bioequivalent
products incurred a negative gross profit of $15.9 million, which includes,
among other things, the $41.0 million charge fully reserving for pre-launch
inventories of Andrx's bioequivalent version of Prilosec. In the 2001 Quarter,
net sales of Andrx's bioequivalent products generated $43.2 million of gross
profit with a gross margin of 76.6%. In order to maximize the Company's
commercial value of potential product launch opportunities, the Company
initiated production of commercial quantities of certain products prior to final
FDA approval and satisfactory resolution of patent infringement litigation. In
October 2002, the U.S. District Court for the Southern District of New York
determined that Astra's patents (Nos. `505 and `230) are valid, and the
bioequivalent version of Prilosec developed by Andrx infringes those patents. As
a result of this ruling, which Andrx has appealed, the Company recorded a charge
of $41.0 million in the 2002 Quarter to fully reserve the work-in process,
finished goods and raw material inventories related to its bioequivalent version
of Prilosec. As of September 30, 2002, the Company had approximately $22.5
million in raw materials, work in process and finished goods inventories of
bioequivalent products pending final FDA marketing approval and satisfactory
resolution of patent infringement litigation, primarily consisting of
bioequivalent versions of Wellbutrin SR/Zyban and Tiazac. During the 2002
Quarter, the Company also incurred certain production failures in the normal
course of its production of pre-launch inventories and the production of its
currently marketed bioequivalent products, and as a result, recorded a charge of
$5.9 million included in cost of goods sold. Andrx has experienced and, in the
near term, will continue to experience inefficiencies at certain of its Florida
manufacturing facilities. The inefficiencies are driven by the process
inefficiencies that result in batch failures, as well as manufacturing personnel
turnover, which requires extensive training time and slow manufacturing speeds.
In the 2002 Quarter, Andrx incurred $1.1 million of manufacturing inefficiencies
at certain of its Florida manufacturing facilities, which is included in cost of
goods sold of its bioequivalent products.
28
In the 2002 Quarter, within Andrx products, Andrx's brand products
generated $2.3 million of gross profit with a gross margin of 42.7%, as compared
to $13.0 million of gross profit with a gross margin of 79.5% in the 2001
Quarter. The decrease in gross profit and margin included, among other things, a
charge of $1.1 million recorded in brand cost of goods sold related to
production failures of certain Andrx brand products. The decrease in gross
margin was also due to a change in product mix and due to the product rights
amortization expenses, which are calculated on a straight-line basis and
included in cost of goods sold. Cost of goods sold in the 2002 Quarter and 2001
Quarter include royalties accrued on the net sales generated from the Entex
cough and cold line, as well as amortization of the product rights for the CTEX
and Entex products. The 2002 Quarter also includes royalties accrued on net
sales generated for the Anexsia pain product line as well as amortization of the
products rights for the Anexsia product line.
Cost of goods sold also includes operating costs for Andrx's contract
manufacturing business in its Massachusetts facility including, among other
things, $2.5 million of costs relating to underutilization of its manufacturing
facility.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES
SG&A expenses were $51.8 million, or 27.4% of total revenues for the
2002 Quarter, as compared to $43.5 million, or 20.3% of total revenues for the
2001 Quarter. SG&A expenses included expenses related to the administration,
marketing, selling and warehousing of distributed and Andrx products, the brand
sales and marketing efforts, royalties to the Company's former Co-Chairman and
Chief Scientific Officer related to sales of the Company's bioequivalent version
of Cardizem CD, as well as corporate overhead and legal costs with respect to
patent infringement matters related to the Company's ANDA filings and antitrust
matters. The increase in SG&A expenses in the 2002 Quarter, as compared to the
2001 Quarter, was primarily due to brand sales and marketing costs, legal costs
and costs related to Andrx's Ohio distribution center, increases in insurance
premiums and an increase in the allowance for doubtful accounts receivable, as
well as corporate overhead, offset by a decrease in Internet operating expenses.
Operating expenses related to Andrx's Internet operations, except cost of goods
sold and goodwill write-offs are classified as SG&A for all periods presented.
RESEARCH AND DEVELOPMENT ("R&D") EXPENSES
R&D expenses were $12.2 million, or 22.8% of Andrx products sales in
the 2002 Quarter, as compared to $11.3 million, or 15.5% of Andrx products sales
in the 2001 Quarter. R&D expenses reflected the Company's continued
commercialization efforts in its bioequivalent (ANDA) and brand name (NDA)
development programs.
CYBEAR GOODWILL WRITE-OFFS
The 2001 Quarter included a $9.3 million charge associated with the
impairment of the then remaining Cybear goodwill resulting from the September
2000 Reorganization.
29
INTEREST INCOME, NET
The Company generated interest income, net of $1.2 million in the 2002
Quarter, as compared to $2.6 million in the 2001 Quarter. The decrease in
interest income, net is the result of the lower average level of cash, cash
equivalents and investments available-for-sale maintained during the 2002
Quarter and lower interest rates, as compared to the 2001 Quarter. The Company
invests in taxable and tax-free investment-grade interest bearing securities.
EQUITY IN EARNINGS OF JOINT VENTURES
The Company generated $1.1 million of equity in earnings of its joint
ventures in the 2002 Quarter, compared to $203,000 in the 2001 Quarter. For the
2002 Quarter and 2001 Quarter, equity in earnings of joint ventures was the
result of net sales of bioequivalent versions of Oruvail(R) and Trental(R) by
ANCIRC Pharmaceuticals ("ANCIRC") (Andrx's 50/50 joint venture with Watson
Pharmaceuticals, Inc.), net sales of the bioequivalent version of Pepcid(R)
launched by CARAN (Andrx's 50/50 joint venture with Carlsbad Technology, Inc.),
and for the 2002 Quarter, net sales of the bioequivalent version of Prozac
by CARAN, offset by operating expenses of the joint ventures.
GAIN ON SALE OF HISTEX PRODUCT LINE
On June 28, 2002, the Company sold the trademarks, licenses and
permits, marketing materials, packaging supplies, product and sample inventories
(including reformulations) related to the Histex cough and cold line of
products. In connection with the sale, the buyer assumed liabilities related to
all Histex products and the Company received $1.4 million in cash at closing,
$125,000 in September 2002 and is entitled to receive, among other things,
$250,000 in cash, payable in two equal quarterly installments of $125,000 on
January 1, 2003 and April 1, 2003, as well as quarterly royalty payments on net
sales of Histex products for five years. In the 2002 Quarter $109,000 was
recognized as other income, which represents the $125,000 quarterly installment
payment collected in September 2002, net of minor adjustments. As the Company
receives the additional $250,000 in payments from the buyer and the remaining
estimated potential liabilities become extinguished, the Company will record
such amounts as gain on sale of Histex product in Other Income.
INCOME TAX EXPENSE (BENEFIT)
For the 2002 Quarter, the Company recorded an income tax benefit of
$17.8 million, or 35% of loss before income taxes. For the 2001 Quarter, the
Company provided $11.1 million for income taxes, or 51% of income before income
taxes. For the 2001 Quarter, the Company provided for income taxes in excess of
the expected annual effective federal statutory rate of 35%, primarily due to
the effect of state income taxes and write-offs and amortization of goodwill and
other intangible assets at Cybear which are not deductible for tax purposes.
30
WEIGHTED AVERAGE SHARES OUTSTANDING
The basic and diluted weighted average shares of Andrx common stock
outstanding was 70.9 million in the 2002 Quarter, as compared to 70.2 million
and 72.9 million, respectively, in the 2001 Quarter. For the 2002 Quarter, all
potential shares were excluded from the diluted share computation as the Company
reported a net loss and, accordingly, such potential common shares were
anti-dilutive. The 2002 Quarter also excluded the unamortized restricted stock
unit grant to the Company's Chief Executive Officer for the diluted share
computation, which is also anti-dilutive. The increase in the basic weighted
average number of shares of Andrx common stock outstanding in the 2002 Quarter,
as compared to the 2001 Quarter, was attributable to exercises of stock options
and issuances of shares under the Company's employee stock purchase plan which
commenced January 1, 2002.
The basic and diluted weighted average number of shares of Cybear
common stock was 6.5 million for the 2001 Quarter. All common stock equivalents
were excluded from the diluted share computation as Cybear was allocated a net
loss, and accordingly, such stock equivalents were anti-dilutive. After May 17,
2002, no Cybear common stock was outstanding as a result of its Conversion to
Andrx common stock. The basic and diluted weighted average number of shares of
Cybear common stock included herein gave effect to the July 2001 one-for-four
reverse stock split of Cybear common stock.
NINE MONTHS ENDED SEPTEMBER 30, 2002 ("2002 PERIOD") AS COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2001 ("2001 PERIOD")
For the 2002 Period, the Company incurred a net loss of $59.9 million,
as compared to net income of $41.0 million for the 2001 Period. For the 2002
Period of the $59.9 million of net loss, total net loss of $54.5 million, or
$0.77 net loss per diluted share, was allocated to Andrx common stock, and $5.4
million of total net loss, or $0.80 net loss per diluted share, was allocated to
the Cybear common stock, which stock was converted into Andrx common stock on
May 17, 2002. For the 2002 Period, the premium associated with the May 17, 2002
Conversion increased the total net loss allocated to holders of Andrx common
stock by $526,000 and reduced the total net loss allocated to holders of Cybear
common stock by $526,000 and was reflected as a charge to retained earnings and
a credit to additional paid-in capital in the Unaudited Consolidated Balance
Sheet. For the 2001 Period of the $41.0 million of net income, net income of
$68.6 million, or $0.95 total net income per diluted share, was allocated to
Andrx common stock, and $27.6 million of net loss, or $5.04 net loss per diluted
share, was allocated to Cybear common stock.
31
REVENUES
Total revenues were $552.9 million for the 2002 Period, as compared to
$552.4 million for the 2001 Period.
Net sales from distributed products increased by 9.2% to $381.6 million
for the 2002 Period, as compared to $349.5 million for the 2001 Period. The
increase in sales from distributed products reflected Andrx's participation in
the distribution of generic products launched by other pharmaceutical companies
and an increase in sales to existing and new customers, offset in part by
overall price declines, as is common with generic products.
Net sales of Andrx products were $163.7 million for the 2002 Period, as
compared to $183.0 million for the 2001 Period. In the 2002 Period, net sales of
Andrx products consisted of $145.4 million of Andrx bioequivalent products and
$18.3 million of Andrx brand products, as compared to $155.7 million of Andrx
bioequivalent products and $27.3 million of Andrx brand products for the 2001
Period.
For the 2002 Period, net sales of Andrx bioequivalent products were
$145.4 million as compared to $155.7 million in the 2001 Period. The decrease in
net sales of Andrx bioequivalent products for the 2002 Period as compared to the
2001 Period resulted primarily from a significant decline in net sales of
Andrx's bioequivalent version of Ventolin, a continuing sequential decline in
net sales of Andrx's bioequivalent version of Cardizem CD, which was in part
offset by net sales of Andrx's bioequivalent versions of Glucophage, K-Dur and
Naprelan, all of which were launched in the 2002 Period. The decline in net
sales of Andrx's bioequivalent version of Ventolin began in the fourth quarter
of 2001 following a marked increase in competition which has continued, if not
intensified, into the 2002 fourth quarter. Andrx's bioequivalent version of
Cardizem CD continues to generate significant levels of net sales and gross
profits and materially contributes to Andrx's overall current level of operating
results. Net sales of Andrx's bioequivalent products for the 2002 Period include
a $721,000 charge for the Company's November 2002 voluntary recall of the 120 mg
Diltia XT capsules.
For the 2002 Period, net sales of Andrx brand products were $18.3
million, as compared to $27.3 million in the 2001 Period. Net sales of Andrx
brand products in the 2002 Period include sales generated from the Histex and
Entex (cough and cold), Embrex (prenatal vitamins) and Anexsia (pain) product
lines and beginning July 2002, net sales of Altocor, the Company's first
internally developed brand product. The decrease in the 2002 Period net sales,
as compared to the 2001 Period, is primarily the result of a lower level of net
sales from the cough and cold product lines, primarily the Histex products, and
the absence of net sales from the Histex product line, which was sold during the
second quarter of 2002, offset by net sales from Anexsia and Altocor. The
Company began marketing Anexsia in the fourth quarter of 2001 and Altocor in the
2002 Quarter. Net sales from the cough and cold product lines in the 2002 Period
were affected by, among other things, competition from generic introductions. In
the 2002 Period, the Company recorded approximately $1.4 million in net sales of
Altocor on approximately $10.5 million (estimated net sales value) of shipments.
Given the recent market introduction of Altocor, the limited amount of
prescription and product return history, and sales terms and other incentives
granted to customers in connection with the product launch, including the right
of return of initial stocking after nine months, the Company recorded an
allowance for the net sales and cost of goods sold relating to a portion of the
2002
32
Period Altocor shipments. Until the Company has sufficient historical experience
to reasonably estimate product pull through and returns, the Company's policy is
to recognize net sales of Altocor for product that it believes was prescribed,
based on data provided by external independent sources and, to the extent the
product was shipped, received by customers, and is expected to be pulled through
the distribution channel prior to the date the customers' right of return of the
initial stocking begins, by assuming the amount of prescriptions for the last
week of the reporting period remains constant through the date such right of
return begins. As a result, of the $10.5 million shipped, the Company recognized
$1.4 million in net sales and established an allowance of $9.1 million in its
Unaudited Consolidated Balance Sheet as of September 30, 2002. With regards to
the other brand products, the Company's policy is to recognize net sales to the
extent the product was shipped and received by customers, for product that it
can reasonably expect to be pulled through the distribution channel. As a
result, as of September 30, 2002, the Company had a $6.3 million allowance
related to the other brand products in its Unaudited Consolidated Balance Sheet.
The Company generated $7.6 million of other revenues in the 2002
Period, as compared to $20.0 million in the 2001 Period. Other revenues for the
2002 Period primarily represented revenues from contract manufacturing at
Andrx's Massachusetts facility and also included revenues generated by Andrx's
Internet operations, primarily the POL web portal. The decline in other revenues
was a result of a decrease in contract manufacturing services for Alpharma and
other contract manufacturing customers. In March 2002, Alpharma recalled certain
Epinephrine Mist products manufactured in Andrx's Massachusetts facility. Andrx
is currently investigating this matter. Other revenues for the 2001 Period
included $3.0 million from Geneva of the then recurring license fees from an
agreement, which was terminated in October 2001.
GROSS PROFIT/GROSS MARGIN
In the 2002 Period, total revenues generated total gross profit of
$118.1 million with a total gross margin of 21.4%, as compared to total gross
profit of $221.8 million with a total gross margin of 40.1% in the 2001 Period.
Such gross profit for the 2002 Period is net of the $41.0 million charge fully
reserving for pre-launch inventories of Andrx's bioequivalent version of
Prilosec, an $8.2 million charge related to production failures of bioequivalent
and brand production inventories and a $3.5 million charge related to aging
issues on pre-launch, as well as, inventories of currently marketed
bioequivalent and brand products.
In the 2002 Period, net sales of distributed products generated $72.5
million of gross profit with a gross margin of 19.0%, as compared to $62.5
million of gross profit with a gross margin of 17.9% for the 2001 Period. Such
levels of gross margin on sales of distributed products are at the higher end of
the historical range of 14% - 21%, but which generally range from 16% - 17%. The
2002 Period includes the Company's participation in the distribution of numerous
generic products that now face competition from multiple generic manufacturers,
which yield higher distribution gross margins, along with the benefit of other
marketing opportunities. The 2001 and 2002 Periods included the high dollar
volume, low gross margin distribution of generic Prozac, for which the generic
manufacturers enjoyed a 180-day market exclusivity period from August 2001
through February 2002.
In the 2002 Period, net sales of Andrx products generated $50.6 million
of gross profit with a gross margin of 30.9%, compared to $142.6 million of
gross profit with a gross margin of 77.9% for the 2001 Period.
33
In the 2002 Period, within Andrx products, Andrx's bioequivalent
products generated $41.6 million of gross profit with a gross margin of 28.6%,
as compared to $121.5 million of gross profit with a gross margin of 78.1% in
the 2001 Period. The 2002 Period includes, among other things, the $41.0 million
charge fully reserving for pre-launch inventories of Andrx's bioequivalent
version of Prilosec which the Company initiated production of prior to
satisfactory resolution of patent infringement litigation in order to maximize
the commercial value of this product launch opportunity. In October 2002, the
U.S. District Court for the Southern District of New York determined that
Astra's patents (Nos. `505 and `230) are valid, and the bioequivalent version of
Prilosec developed by Andrx infringes those patents. As a result of this ruling,
which Andrx has appealed, the Company recorded a charge of $41.0 million in the
2002 Period to fully reserve the work-in process, finished goods and raw
material inventories related to its bioequivalent version of Prilosec. To
maximize the commercial value of other product launch opportunities, as of
September 30, 2002, the Company had approximately $22.5 million in raw
materials, work in process and finished goods inventories of bioequivalent
products pending final FDA marketing approval and satisfactory resolution of
patent infringement litigation, primarily consisting of bioequivalent versions
of Wellbutrin SR/Zyban and Tiazac. During the 2002 Period the Company recorded a
$6.2 million charge related to production failures of pre-launch inventories and
the production of its currently marketed bioequivalent products, which is
included in cost of goods sold. Also included in cost of goods sold is a $2.1
million charge related to inventory for products not yet launched due to the
aging of the inventory. Andrx has experienced and, in the near term, will
continue to experience inefficiencies at certain of its Florida manufacturing
facilities. In the 2002 Period Andrx incurred $4.3 million of manufacturing
inefficiencies at certain of its Florida facilities, which is included in cost
of goods sold of its Andrx bioequivalent products.
In the 2002 Period, within Andrx products, Andrx's brand products
generated $9.1 million of gross profit with a gross margin of 49.5%, as compared
to $21.1 million of gross profit with a gross margin of 77.2% in the 2001
Period. The 2002 Period included charges of $2.0 million and $1.4 million
recorded in brand cost of goods sold, related to production failures and aging
issues, respectively, as compared to $550,000 in the 2001 Period related to
aging issues. The decrease in gross margin was also due to a change in product
mix and due to product rights amortization expenses, which are calculated on a
straight-line basis and included in cost of goods sold. Cost of goods sold in
the 2002 Period and 2001 Period also included royalties accrued on the net sales
generated from the Entex cough and cold line, as well as amortization of the
product rights for the CTEX and Entex products. The 2002 Period also included
royalties accrued on the net sales generated from the Anexsia pain product line
as well as amortization of the product rights for the Anexsia product line.
Cost of goods sold also included operating costs for Andrx's contract
manufacturing business, including a provision of $871,000 in the 2002 Period
related to inventories manufactured at Andrx's Massachusetts facility for
Alpharma with whom Andrx is currently involved in a dispute, and $6.9 million of
costs relating to under utilization of its manufacturing facility.
34
SG&A EXPENSES
SG&A expenses were $139.5 million, or 25.2% of total revenues for the
2002 Period, as compared to $107.8 million, or 19.5% of total revenues for the
2001 Period. SG&A expenses included expenses related to the administration,
marketing, selling and warehousing of distributed and Andrx products, the brand
sales and marketing efforts, royalties to the Company's former Co-Chairman and
Chief Scientific Officer related to sales of the Company's bioequivalent version
of Cardizem CD, as well as corporate overhead and legal costs with respect to
patent infringement matters related to the Company's ANDA filings and antitrust
matters. The increase in SG&A expenses in the 2002 Period, as compared to the
2001 Period, was primarily due to brand sales and marketing costs, legal costs,
increases in insurance premiums and costs related to Andrx's Ohio distribution
center and an increase in the allowance for doubtful accounts receivable as well
as corporate overhead, offset by a decrease in Internet operating expenses. In
the 2002 Period, the Company recorded a $4.3 million charge to the allowance for
doubtful accounts receivable relating to the periods prior to January 1, 2002 as
the Company believes it is not material to any period affected. Operating
expenses related to Andrx's Internet operations, except cost of goods sold and
goodwill write-off, are classified as SG&A for all periods presented.
R&D EXPENSES
R&D expenses were $33.5 million, or 20.5% of Andrx products sales in
the 2002 Period, as compared to $40.2 million, or 22.0% of Andrx products sales
in the 2001 Period. R&D expenses reflect the Company's continued
commercialization efforts in its bioequivalent (ANDA) and brand name (NDA)
development programs.
LITIGATION SETTLEMENTS
Andrx and Aventis entered into a binding settlement with the direct
purchaser class of plaintiffs in the Cardizem CD antitrust litigation that is
pending for multidistrict proceedings in the U.S. District Court for the Eastern
District of Michigan. The binding settlement calls for a cash payment by Andrx
and Aventis to this group in an undisclosed amount. In anticipation of
potentially reaching settlements with all plaintiffs in the related litigations,
Andrx's results for the 2002 Period included an estimated litigation settlements
charge of $60.0 million recorded in the second quarter of 2002. Andrx intends to
vigorously litigate any of these cases that cannot be settled on a reasonable
basis.
CYBEAR GOODWILL WRITE-OFFS
The 2001 Period includes an $11.3 million charge associated with the
impairment of the then remaining goodwill of $2.0 million related to the
acquisition by Cybear of Telegraph in 1999 and the remaining goodwill of $9.3
million resulting from the September 7, 2000 Reorganization.
35
INTEREST INCOME, NET
The Company generated interest income, net of $4.3 million in the 2002
Period, as compared to $9.2 million in the 2001 Period. The decrease in interest
income, net is the result of the lower average level of cash, cash equivalents
and investments available-for-sale maintained during the 2002 Period and lower
interest rates, compared to the 2001 Period. The Company invests in taxable and
tax-free investment-grade interest bearing securities.
EQUITY IN EARNINGS OF JOINT VENTURES
The Company generated $2.7 million of equity in earnings of its joint
ventures in the 2002 Period, compared to $473,000 in the 2001 Period. For the
2002 Period and 2001 Period, equity in earnings of its joint ventures was the
result of sales of the ANCIRC bioequivalent versions of Oruvail and Trental and
sales of the bioequivalent version of Pepcid launched by CARAN and, for the 2002
Period, sales of bioequivalent Prozac by CARAN, offset by operating expenses of
the joint ventures.
GAIN ON SALE OF HISTEX PRODUCT LINE
On June 28, 2002, the Company sold the trademarks, licenses and
permits, marketing materials, packaging supplies, product and sample inventories
(including reformulations) related to the Histex cough and cold line of
products. In connection with the sale, the buyer assumed liabilities related to
all Histex products and the Company received $1.4 million in cash at closing and
$125,000 in September 2002, and is entitled to receive, among other things,
$250,000 in cash, payable in two equal quarterly installments of $125,000 on
January 1, 2003 and April 1, 2003, as well as quarterly royalty payments on net
sales of Histex products for five years. This transaction resulted in a pre-tax
net gain of $4.6 million recorded in other income in the Company's Unaudited
Consolidated Statement of Operations for the nine months ended September 30,
2002. The gain resulted mainly from the extinguishment of net liabilities. In
accordance with Staff Accounting Bulletin Topic 5-E "Accounting for Divestiture
of a Subsidiary or Other Business Operation," as of September 30, 2002, the
buyer was considered thinly capitalized and, accordingly, the gain included in
other income includes the $1.6 million the Company received in cash and the
extinguishment of the net liabilities to the extent that the related estimated
potential liabilities had actually been fully assumed by the buyer, supported
by, among other things, $2.0 million placed in escrow by the buyer and a
guarantee by a significant customer to not return purchased Histex products. As
the Company receives the additional $250,000 in payments from the buyer and the
remaining estimated potential liabilities become extinguished, the Company will
record such amounts as gain on sale of Histex product in Other Income.
36
INCOME TAX EXPENSE (BENEFIT)
For the 2002 Period, the Company reported an income tax benefit of
$43.4 million, or 42% of loss before income taxes. Such tax benefit included the
reversal of a $7.2 million valuation allowance on deferred tax assets relating
to certain net operating loss carryforwards. For the 2001 Period, the Company
provided $31.1 million for income taxes, or 43% of income before income taxes.
For the 2001 Period, the Company provided for income taxes in excess of the
expected annual effective federal statutory rate of 35%, primarily due to the
effect of state income taxes and write-offs and amortization of goodwill and
other intangible assets at Cybear which are not deductible for tax purposes.
WEIGHTED AVERAGE SHARES OUTSTANDING
The basic and diluted weighted average shares of Andrx common stock
outstanding was 70.7 million in the 2002 Period, as compared to 69.9 million and
72.6 million, respectively, in the 2001 Period. For the 2002 Period, all
potential common shares were excluded from the diluted share computation as the
Company reported a net loss and, accordingly, such potential common shares were
anti-dilutive. The 2002 Period also excluded the unamortized restricted common
shares granted to the Company's Chief Executive Officer for the diluted share
computation, which are also anti-dilutive. The increase in the basic weighted
average number of shares of Andrx common stock outstanding in the 2002 Period,
as compared to the 2001 Period, was attributable to exercises of stock options,
issuances of shares under the Company's employee stock purchase plan which
commenced January 1, 2002, and approximately 65,000 shares of Andrx common stock
issued in connection with the Conversion of Cybear common stock to Andrx common
stock on May 17, 2002.
The basic and diluted weighted average number of shares of Cybear
common stock was 6.7 million for the period from January 1, 2002 to May 17, 2002
and 5.5 million for the 2001 Period. All common stock equivalents were excluded
from the diluted share computation as Cybear was allocated a net loss, and
accordingly, such stock equivalents were anti-dilutive. After May 17, 2002, no
Cybear common stock was outstanding as a result of its Conversion to Andrx
common stock. The basic and diluted weighted average number of shares of Cybear
common stock included herein gave effect to the July 2001 one-for-four reverse
stock split of Cybear common stock.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, the Company had $157.2 million in cash, cash
equivalents and investments available-for-sale, and $336.2 million of
consolidated working capital.
OPERATING ACTIVITIES
Net cash used in operating activities was $25.9 million in the 2002
Period, as compared to net cash provided by operating activities of $63.0
million in the 2001 Period.
37
In the 2002 Period, net cash used in operating activities of $25.9
million included a net loss of $59.9 million; increases in prepaid and other
assets, net of $4.3 million; increases in income taxes receivable and deferred
income tax assets, net of $47.4 million, offset by income tax benefits related
to exercises of stock options of $3.5 million; decreases in accounts receivable,
net of $27.5 million, inventories of $3.0 million; and increases in accounts
payable and accrued and other liabilities of $42.7 million. In addition, the
2002 Period also includes depreciation and amortization of $16.1 million, offset
by undistributed equity in earnings of joint ventures of $2.7 million and a gain
on sale of Histex product line of $4.6 million.
In the 2001 Period, net cash provided by operating activities of $63.0
million included net income of $41.0 million; income tax benefits related to
exercises of stock options of $13.2 million; decreases in prepaid and other
assets, net of $2.4 million; increases in accounts payable and accrued and other
liabilities of $38.9 million and income taxes of $12.7 million, offset by
increases in accounts receivables, net of $42.6 million and inventories of $30.1
million. In addition, the 2001 Period also includes depreciation and
amortization of $15.5 million, $11.3 million of goodwill write-off at Cybear and
$1.1 million associated with other non-cash charges at Cybear related to the
estimated loss on the sublease of Cybear's headquarters in Boca Raton, Florida,
offset by undistributed equity in earnings of joint ventures of $473,000.
INVESTING ACTIVITIES
Net cash provided by investing activities was $40.3 million in the 2002
Period, as compared to net cash used in investing activities of $68.3 million in
the 2001 Period.
In the 2002 Period, net cash provided by investing activities of $40.3
million consisted of $106.7 million in maturities of investments
available-for-sale and $1.6 million in proceeds from the sale of the Histex
product line, offset by $68.0 million of purchases of property, plant and
equipment.
In the 2001 Period, net cash used in investing activities of $68.3
million consisted primarily of $50.6 million in purchases of property, plant and
equipment, $11.1 million in the acquisition of CTEX net of cash acquired, $3.7
million in loans to former CTEX shareholders, $14.8 million in the acquisition
of the Entex brand product line, $2.0 million in the acquisition of the
marketing rights of the Anexsia brand product line, $18.2 million in the
acquisition of certain assets of Armstrong, and $3.2 million in acquisition of
and advances to Mediconsult, offset by $35.2 million in maturities of
investments available-for-sale.
FINANCING ACTIVITY
Net cash provided by financing activity was $4.3 million in the 2002
Period, as compared to $7.1 million in the 2001 Period, which consisted of
proceeds from issuances of shares of Andrx common stock from exercises of Andrx
stock options, and in the 2002 Period, also included proceeds from issuances of
shares of Andrx common stock under the employee stock purchase plan.
38
FUTURE COMMITMENTS
Andrx anticipates that its cash requirements will continue to increase
due to the completion of its R&D and manufacturing facilities, and the
acquisition of facilities and/or equipment. Andrx is evaluating, among other
things, expansions of its manufacturing facilities and has entered into a
non-binding purchase and sale agreement to purchase an approximately 500,000
square foot manufacturing facility for approximately $30 million, which is
contingent upon, among other things, completion of due diligence. The Company
will also be building up inventories of some of its currently unapproved
products. Andrx is continuing its implementation of JD Edwards, an
enterprise resource planning system, and Peoplesoft software packages and
related hardware and may also fund the balance of the accrued litigation
settlements. The Company believes that its existing capital resources will be
sufficient to enable it to maintain its operations for the foreseeable future.
The Company is currently pursuing a revolving credit facility to provide for an
added source of working capital.
OUTLOOK
The Company anticipates that it will continue to face a number of
issues which adversely affect near term operating results. As the Company awaits
FDA final marketing approval and satisfactory resolution of patent infringement
litigation of its bioequivalent versions of Wellbutrin SR/Zyban and Tiazac, it
is continuing to manufacture commercial quantities of these products and plans
to increase spending in the areas of R&D and brand SG&A.
DISTRIBUTED PRODUCTS
During the 2002 Quarter, the Company generated $133.0 million in net
sales of distributed products. The Company's pharmaceutical distribution
operation has a history of generally consistent quarterly sequential growth as a
result of, among other things, its continued penetration of the market servicing
independent pharmacies, pharmacy chains which do not maintain their own central
warehousing facilities, pharmacy buying groups and, to a lesser extent,
physician offices. The Company believes that it will be able to continue to
expand in this market, both in terms of per store volume and customer locations,
particularly due to the commencement of operations at its Ohio distribution
center in September 2002. Nevertheless, the ability of the Company to provide
consistent sequential quarterly growth in the future will be affected, in large
part, by the Company's participation in the launch of new generic products by
other generic manufacturers, reduced by the decline in sales prices which
typically follows when generic products encounter new or increased competition.
The Company's distribution operation participates in the distribution
of Andrx's bioequivalent products, however, this segment's financial results
does not include that participation. Such sales are classified as Andrx product
sales in the Company's Unaudited Consolidated Statements of Operations.
39
ANDRX BIOEQUIVALENT PRODUCTS
During the 2002 Quarter, the Company generated net sales of $48.0
million from its bioequivalent products (including sales by the Company's
distribution operations of Andrx's bioequivalent products). The Company's
bioequivalent products incurred a negative gross profit of $15.9 million which
included, among other things, the $41.0 million charge fully reserving for
pre-launch inventories of Andrx's bioequivalent version of Prilosec and a $5.9
million charge of other unusable inventories of pre-launch and currently
marketed bioequivalent products, incurred in the normal course of business.
Growth in the bioequivalent product business will be generated from the launch
of significant new products, as sales of Andrx's current bioequivalent products
are expected to remain relatively stable or decrease.
The bioequivalent pharmaceutical industry is highly competitive and
selling prices are often subject to significant and rapid declines from
competition among existing or new bioequivalent manufacturers entering the
market. Since the launch of Andrx's bioequivalent version of Cardizem CD in
1999, with 180-days of marketing exclusivity, there have only been two
additional bioequivalent manufacturers of this product. As a result, although
continuing to experience a sequential decline in net sales, Andrx's
bioequivalent version of Cardizem CD continues to generate significant net sales
and gross profits and materially contributes to Andrx's overall current results
of operations.
The Company believes that its bioequivalent controlled-release products
will face more modest competition than other bioequivalent products due to the
limited number of competitors having the scientific and legal expertise and
financial resources required to develop and bring these products to market. To a
lesser extent, the Company also believes that its specialty or niche
bioequivalent products will also face less competition than bioequivalent
products generally. The Company believes that these competitive barriers,
combined with the synergistic value derived from the Company's pharmaceutical
distribution operation, will better enable it to compete in the highly
competitive bioequivalent product marketplace.
Currently, Andrx's overall level of operating results remains dependent
on a relatively small number of products. If these products, particularly
Andrx's bioequivalent version of Cardizem CD, and to a lesser extent
bioequivalent version of Dilacor XR, were to experience a significant decrease
in net sales, Andrx's operating results would be materially adversely affected.
In November 2002, the Company issued a voluntary recall of certain lots of its
120 mg Diltia XT capsules, and throughout 2002, there has been a significant
decrease in net sales of the Company's bioequivalent version of Ventolin, which
adversely affected the Company's quarterly financial results. Sales of Ventolin
are not expected to increase.
40
Though the timing remains uncertain, the Company remains optimistic
that it will be able to gain FDA marketing approval for its bioequivalent
versions of Wellbutrin SR/Zyban during the fourth quarter of 2002. Whether Andrx
will decide to introduce its bioequivalent versions of Wellbutrin SR/Zyban at
that time will depend on a number of factors, including but not limited to, the
Company's evaluation of Glaxo SmithKline's appeal of the summary judgement
decision in Andrx's favor, which the Federal Circuit court has now scheduled for
oral argument on December 2, 2002. Based on the time generally required for the
FDA to respond to the Company's anticipated response to the latest communication
from the FDA, the Company believes it may not be able to gain FDA approval for,
or introduce its bioequivalent version of, Tiazac until early 2003. Product
launches and receipt of final FDA marketing approval are dependent on a number
of factors, certain ones of which are outside the Company's control, including,
among other things, new Orange Book patent listings and related patent
infringement litigation, the expiration of others' exclusivity rights, a
perceived or predicted favorable resolution to any pending or potential patent
litigation, and the successful scale-up and manufacture of such products. The
net sales and gross profits to be generated by these new products will also be
affected by: the degree of competition the Company's products encounter, both
through the potential launch of a generic version of the brand product either
directly or through a licensee, during the Company's 180-day period of
exclusivity or thereafter, from other generic competitors, the rate of generic
substitution for the Company's bioequivalent products; the extent managed care
organizations and others are able to convert patient usage of the Company's
bioequivalent products from other branded products in the same therapeutic
class; and the Company's ability to manufacture sufficient quantities of its
products to meet market demand. Factors affecting the Company's ability to meet
that demand include: the timing of its product launches, particularly in
instances where the Company's product will fill all or a substantial part of the
generic marketplace; the presence or absence and degree of competition, both
during and after any period of exclusivity the Company's product(s) may receive;
and additional demand that may come from the conversion of other products in the
same therapeutic class.
ANDRX BRAND PRODUCTS
The Company began to ship Altocor, its first internally developed brand
product, in early July 2002 and started the promotion of Altocor to physicians
in late July 2002. Altocor was recently approved for an additional indication of
coronary prevention. Altocor competes in the statin market, which had
approximately $12 billion in U.S. sales in 2001. The Company shipped
approximately $10.5 million (estimated net sales value) of Altocor predominantly
as initial stocking in the third quarter of 2002 of which the Company recorded
$1.4 million in net sales. In addition, the Company is continuing efforts to
obtain marketing approval for Altocor in Europe and is exploring
commercialization opportunities in certain European territories.
41
With Altocor's launch, the Company entered a highly competitive market
against brand pharmaceutical manufacturers having significantly larger and more
experienced sales forces and greater financial resources dedicated to
advertising and promotion. Altocor competes in the statin market which had
approximately $12 billion in U.S. sales in 2001. The Company currently has
approximately 300 sales representatives and plans to increase its sales force to
450 sales representatives by early 2003. Net sales for Altocor and other brand
products are subject to significant accounting estimates for, among other
things, the ability of the Company's sales force and its POL Internet web portal
to promote such products to physicians, other marketing initiatives to generate
product demand and pull product through the distribution channel, and the
Company's ability to estimate future product returns. The Company's estimate of
returns is based on, among other things, terms offered to customers and an
estimate of expected prescription levels. Other marketing initiatives include
the implementation of a coupon redemption program in the 2002 Quarter. Such
sales incentives are recorded as an allowance against net sales in the
Consolidated Statement of Operations. Given the recent market introduction of
Altocor, the limited amount of prescription and product return history, and
sales terms and other incentives granted to customers in connection with the
product launch, including the right of return of the initial stocking after nine
months, the Company recorded an allowance for the net sales and cost of goods
sold relating to a portion of the 2002 Quarter Altocor shipments. Until the
Company has sufficient historical experience to reasonably estimate product
pullthrough and returns, the Company's policy is to recognize net sales of
Altocor for product that it believes was prescribed, based on data provided by
external independent sources and, to the extent the product was shipped and
received by customers, and is expected to be pulled through the distribution
channel prior to the date the customers' right of return of the initial stocking
begins, by assuming the amount of prescriptions for the last week of the
reporting period remains constant through the date such right of return begins.
In the fourth quarter of 2002, the Company expects to record modest net sales of
Altocor. Sales, marketing, advertising and promotional costs will exceed gross
profits from net sales of Altocor until a profitable sales level is achieved.
In connection with other brand products, net sales are recognized to
the extent that the Company can reasonably expect products to be pulled through
the distribution channel. Net sales for Andrx's other brand products can be
adversely affected by the introduction of generic versions or positively
affected by the introduction by the Company of reformulated products or line
extension. Net sales from Andrx's cough and cold brand products are subject to
seasonality. Moreover, since the Company expects to dedicate the majority of its
sales force's efforts to Altocor, net sales of other Andrx brand products could
be adversely affected in future periods. Andrx sold its Histex product line in
June 2002.
OTHER REVENUES
In March 2002, Alpharma, for whom Andrx performs contract
manufacturing, notified the Company that certain Epinephrine Mist products
manufactured in Andrx's Massachusetts facility were recalled by Alpharma. Andrx
is currently investigating this matter. Other revenues also include revenues
generated by Andrx's Internet operations, primarily the POL web portal. For the
2001 Periods, other revenues include the then recurring license fees from Geneva
from an agreement which was terminated in October 2001.
42
COST OF GOODS SOLD
In anticipation of future bioequivalent product launches, the Company
continues to expand its manufacturing facilities and will continue to scale-up
and build inventories of certain products which are yet to be launched and which
are pending final FDA marketing approval and satisfactory resolution of patent
infringement litigation. Andrx has experienced and in the near term will
continue to experience inefficiencies at its Florida manufacturing facilities.
These inefficiencies are driven by process inefficiencies that result in batch
failures, as well as manufacturing personnel turnover, which requires extensive
training time and slow manufacturing speeds. The facilities currently operate 24
hours a day, 7 days per week, which contributes to the inefficiencies and need
for plant expansion. Andrx continues to focus on improving its pharmaceutical
operations in Florida in an effort to optimize efficiency.
In addition, as a result of the increased competition for the Company's
bioequivalent version of Ventolin which continued during the 2002 Quarter, the
Company experienced a decline in sales and gross margins and a decrease in
production levels for this product in the 2002 Quarter. As a result, the Company
incurred under utilized manufacturing capacities at its Massachusetts
manufacturing facility, which are similarly included in cost of goods sold. The
Company is taking measures to reduce certain levels of these under utilized
manufacturing capacities and is exploring other alternatives for that operation.
In attempting to project the demand for its products, the Company is
required to consider various factors outside of its control. These factors
include, among other things: the extent to which the Company anticipates having
to initially fill all or a substantial part of the generic marketplace
("pipeline fill"); the presence or absence, degree and timing of competition;
and additional or differing demand that may be created from the conversion of
other products in the same therapeutic class or the conversion of products to
over the counter (OTC).
Although the Company believes its manufacturing facilities are capable
of producing sufficient quantities of projected market demand for its current
products, this capability is based on a 24-hour a day, 7-days a week production
cycle, with minimal equipment failures and product rejections. Through much of
2002, besides the currently marketed products, the Company was concurrently
working toward building launch quantities for two significant potential product
candidates, bioequivalent versions of Prilosec and Wellbutrin SR/Zyban, which
resulted in inefficiencies, equipment failures and rejection lots, and at times
interrupted the Company's ability to fully meet the actual demand for certain of
its products. Moreover, because the Company manufactures products which employ a
variety of technology platforms, certain of its manufacturing capabilities may
at times be constrained, while others may be underutilized. While the Company's
near-term production plans do not include a bioequivalent version of Prilosec,
as a result of the October 2002 adverse court decision, thereby decreasing the
demand for the resources utilized by that technology platform, the Company may
continue to at times have difficulty fulfilling the production of all of the
market demand for its products and product candidates which utilize other
technology platforms.
As the Company's new products are produced, both for commercial
marketing (particularly for those products in which the Company anticipates a
pipeline fill or will otherwise enjoy marketing exclusivity), and for the
production of clinical batches for new product candidates, certain aspects of
the Company's existing facilities will be further strained.
43
To address these limitations, the Company is currently: (i) evaluating
the commercial viability of continuing to produce products that generate a
relatively small amount of profit as compared to their utilization of resources,
and may choose to forego or limit its manufacturing output of certain products,
thereby allowing the Company to optimize its output and maximize its
profitability; (ii) transferring production (or portions thereof) for certain
products to third parties; (iii) renovating or acquiring additional facilities
(anticipated to be completed in the first half of 2003); (iv) focusing its
efforts on reducing batch failures caused by equipment failures and an
inexperienced work force due to high employee turnover; (v) hiring additional
senior and mid-level manufacturing operations personnel; (vi) increasing
employee training and accountability; and (vii) continuing the implementation of
a fully integrated JD Edwards enterprise resource planning system. In the
aggregate, the Company believes these items will enhance production, quality,
efficiencies, internal controls and, among other things, increase the precision
of the costing of inventories. Until the Company's manufacturing facilities are
expanded, and batch failures are reduced, the Company may have difficulty at
times fulfilling all of the market demand for its products and product
candidates.
SG&A EXPENSES
The Company's SG&A expenses are related to the level of sales and the
sales product mix which includes distributed products, Andrx bioequivalent
products and Andrx brand products. The Company anticipates that its SG&A
expenses will continue to be significantly greater in 2002 than in 2001. That
increase is primarily the result of additional operating expenses related to
Andrx's Ohio distribution facility which commenced operations in September 2002,
the existence of a brand sales force throughout 2002, increases in insurance
premiums, increases in legal costs with respect to patent infringement and
antitrust matters, expenses related to the Altocor launch and related sales
force and promotional activity and increases in the allowance for doubtful
accounts receivable.
SG&A includes the Company's Internet operating expenses currently
primarily related to its POL web portal operation. On July 31, 2002, Andrx
entered into an agreement with Aventis' business unit, MyDocOnline, to sell
the Dr. Chart and @Rx applications and license Andrx's patents for Internet
transmission of prescriptions. Aventis also entered into a two-year marketing
agreement with Andrx's POL web portal. As part of these transactions, Andrx
expects to receive approximately $6.0 million through April 2004. The Company
will continue to evaluate its POL web portal and other Internet assets in an
effort to further streamline and consolidate such operations. The Company is
also exploring other alternatives for its Internet businesses.
The Company's brand sales effort commenced in January 2001 with the
acquisition of approximately 90 sales representatives through the CTEX
acquisition. As of September 30, 2002 the Company had approximately 300 sales
representatives. The Company intends to increase the number of sales
representatives to 450 by early 2003. The Company's sales force and planned
promotional budget for 2002 are likely to be significantly less than those of
its competitors.
44
R&D EXPENSES
Andrx currently plans to invest approximately $18 million in R&D in the
fourth quarter of 2002, for a total of $52 million for the year ending 2002.
Accordingly, planned R&D expenses will be higher during the fourth quarter of
2002 than in the previous quarters of 2002. Through September 30, 2002, Andrx
submitted four ANDAs to the FDA. While none were submitted in the 2002 Quarter,
Andrx recently submitted an ANDA for a controlled-release product, bringing its
total to 30 ANDAs pending at the FDA. The Company anticipates submitting to the
FDA an NDA for Metformin XT and five ANDAs during the balance of 2002.
INCOME TAXES
The Company believes its effective tax rate for 2002 will be
approximately 35%, excluding the effect of the $7.2 million income tax benefit
relating to the reversal of a valuation allowance on deferred tax assets.
FOURTH QUARTER 2002
Andrx's operating results for the fourth quarter of 2002 will continue
to be highly dependent on its ability to manufacture and generate net sales of
its bioequivalent versions of Cardizem CD and to a lesser extent Dilacor XR, the
market acceptance of Altocor and whether Andrx launches significant additional
bioequivalent products. Andrx plans to build its sales force to 450
representatives by early 2003 to support its brand product sales efforts and
will increase SG&A and R&D in the fourth quarter of 2002. In the absence of the
launch of significant additional bioequivalent products and income generated by
the KUDCo agreement, the Company anticipates it could incur a fourth quarter
2002 net loss of $5 million to $10 million. If the Company is able to launch its
bioequivalent version of Wellbutrin SR/Zyban in the 2002 fourth quarter, and
depending on the timing and circumstances of such launch(es), the Company
anticipates generating net income in the fourth quarter of 2002. The amount of
income to be derived from the KUDCo agreement during the fourth quarter, if any,
is unknown.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Unaudited Consolidated Financial Statements have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates including but not limited to those related to the (i) allowance for
doubtful accounts receivable, (ii) allowance for inventories, (iii) sales
allowances, (iv) useful life or impairment of goodwill and other intangible
assets, (v) deferred tax asset valuation allowances and (vi) litigation
settlements accrual. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis of making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
Unaudited Consolidated Financial Statements.
45
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The Company maintains an allowance for doubtful accounts receivable for
estimated losses resulting from the failure of its customers to make required
payments. As of September 30, 2002, the Company had $117.6 million in accounts
receivables offset by an allowance for doubtful accounts of $15.2 million.
Accounts receivable generated from the Company's distribution operations are
principally due from independent pharmacies, pharmacy chains, pharmacy buying
groups and physicians' offices. Accounts receivable generated from the Company's
bioequivalent and brand product sales are principally due from a limited number
of large warehousing pharmacy chains, wholesalers and large managed care
customers. Credit is extended based on an evaluation of the customer's financial
condition and collateral is generally not required. Management specifically
analyzes accounts receivable, historical bad debts, customer concentrations,
customer credit-worthiness, percentage of accounts receivable by aging category
and changes in customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. The Company also performs ongoing credit
evaluations of its customers. If the financial conditions of the Company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, an increase to the allowance may be required. Also, should actual
collections of accounts receivable be different than the Company's estimates
included in the determination of its allowance, the allowance will be increased
or decreased through charges or credits to the Consolidated Statements of
Operations in the period in which they become known. If conditions change in
future periods, additional allowances may be required. Such additional
allowances could be significant.
ALLOWANCE FOR INVENTORIES
As of September 30, 2002, the Company had $158.9 million in
inventories, net. Inventories, net of pharmaceutical products consist primarily
of finished goods held for distribution, and raw materials, work in process and
finished goods of Andrx bioequivalent and brand products, net of applicable
realization allowances. As of September 30, 2002, the Company had approximately
$22.5 million in raw materials, work in process and finished goods inventories
relating to bioequivalent products pending final FDA marketing approval and
satisfactory resolution of patent infringement litigation primarily consisting
of bioequivalent versions of Wellbutrin SR/Zyban and Tiazac. Inventories were
stated at the lower of cost (first-in, first-out) or market. Cost of inventories
held for distribution was based on purchase price, net of vendor discounts,
rebates and other allowances, but excluded shipping, warehousing and
distribution costs which were expensed as incurred as Selling, general and
administrative expenses in the Statements of Operations. In evaluating whether
inventory was stated at the lower of cost or market, management considered such
factors as the amount of inventory on hand and in the distribution channel,
estimated time required to sell such inventory, remaining shelf life and current
and expected market conditions, including levels of competition. As appropriate,
provisions were made to reduce inventories to their net realizable value. If
conditions change in future periods, additional allowances may be required. Such
additional allowances could be significant.
46
SALES ALLOWANCES
Sales allowances for estimated returns, chargebacks and other sales
allowances are established by the Company concurrently with the recognition of
revenue. The provisions are established based upon consideration of a variety of
factors, including but not limited to, actual return and historical experience
by product type, the number and timing of competitive products approved for
sale, both historical and projected, the market for the product, estimated
customer inventory levels by product and current and projected economic
conditions, levels of competition and price declines. Actual product returns,
chargebacks and other sales allowances incurred are dependent upon future
events. The Company continually monitors the factors that influence sales
allowances and makes adjustments to these provisions when management believes
that actual product returns, chargebacks and other sales allowances may differ
from established allowances. If conditions change in future periods, additional
allowances may be required. Such additional allowances could be significant.
In the pharmaceutical industry, the practice is generally to grant
customers the right to return or exchange purchased goods. In the generic
pharmaceutical industry, this practice has resulted in generic manufacturers
issuing inventory credits (also known as shelf-stock adjustments) to customers
based on the customers' existing inventories following decreases in the market
price of the related generic pharmaceutical products. Due to the competitive
nature of the generic pharmaceutical industry, prices to customers are subject
to frequent and significant price declines from existing and new competitors.
The determination to grant a credit to a customer following a price decrease is
generally at the discretion of the Company, and generally not pursuant to
contractual arrangements with customers. Accordingly, the Company makes
significant accounting estimates, which include estimates of price declines and
quantities shipped but still on customers' shelves before the products pull
through the distribution channel. The Company accrues an estimate for the sales
allowances in the same period the sale is recognized and continually reviews
such estimates. If conditions change in future periods, additional allowances
may be required. Such additional allowances could be significant.
In connection with brand products, the Company's significant accounting
estimates for sales allowances are dependent on the Company's ability to promote
to physicians, create demand for products, pull products through the
distribution channel and estimate returns, future levels of prescriptions for
its products and the inventory levels in the distribution channel. It is a
common practice in the pharmaceutical industry for brand manufacturers to offer
customers buy-in allowances on initial purchases prior to promotion activities
by the manufacturer. All purchases by customers are generally subject to the
right of return or exchange as a result of there being a limited number of large
customers. Accordingly, the Company is required to make significant accounting
estimates related to such sales allowances, concurrently with the recognition of
revenues, and continually reviews such estimates. The Company's policy is to
recognize net sales to the extent it can reasonably estimate returns and
products expected to be pulled through the distribution channel. The ability to
make such estimates is more difficult when there is a high level of product in
the distribution channel. If conditions change in future periods, additional
allowances may be required. Such additional allowances could be significant.
47
USEFUL LIFE AND/OR IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS
Under the purchase method of accounting for acquisitions, goodwill
represents the excess of purchase price over the fair value of the net assets
acquired. As of September 30, 2002, the Company had $34.3 million of goodwill,
net. Such goodwill was comprised of $7.7 million for Valmed Pharmaceuticals,
Inc., $367,000 for Mediconsult and $26.3 million for CTEX. With the adoption of
SFAS No. 142 in 2002, goodwill is subject to at least an annual assessment for
impairment in value by applying a fair-value based test. Any applicable
impairment loss is the amount, if any, by which the implied fair value of
goodwill is less than the carrying value. If conditions change in future
periods, additional allowances may be required. Such additional allowances could
be significant.
Other intangible assets consisted of brand product rights purchased
from other pharmaceutical companies or acquired through the allocation of
purchase price upon the acquisition of another entity, which are being amortized
over periods ranging from three to ten years. Other intangible assets also
consisted of Cybear's physicians' network and trademarks, and patents relating
to Cybear's electronic prescription process, which are being amortized over
periods ranging from five to fourteen years. As of September 30, 2002, the
Company had $24.4 million of other intangible assets, net which consisted
primarily of $8.4 million of intangibles related to POL and $12.9 million of
intangibles related to product rights for the Entex product line and $1.8
million related to product rights for the Anexsia product line. Management
established the amortization period based on an estimate of the period the
assets would generate positive cash flow. Amortization was provided using the
straight-line method over the estimated useful life. Intangible assets are
reviewed for impairment whenever events or changes in circumstances indicated
that the carrying amount of an asset may not be recoverable. If conditions
change in future periods, additional allowances may be required. Such additional
allowances could be significant.
DEFERRED INCOME TAX ASSET VALUATION ALLOWANCE
The Company recorded a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. During the
second quarter of 2002, the Company recorded a $7.2 million reversal of a
valuation allowance on deferred tax assets relating to certain net operating
loss carryforwards. As of September 30, 2002 the Company had $38.1 million of
deferred income tax assets, net. Should the Company determine it would not be
able to realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset by recording a valuation allowance would be
charged to operating results in the period such determination was made. Such
valuation allowance could be significant.
48
LITIGATION SETTLEMENTS ACCRUAL
Andrx and Aventis entered into a binding settlement with the direct
purchaser class of plaintiffs in the Cardizem CD antitrust litigation that is
pending for multidistrict proceedings in the U.S. District Court for the Eastern
District of Michigan. The binding settlement, which is subject to final court
review and approval, calls for a cash payment by Andrx and Aventis to this group
in an undisclosed amount. As a result of the mediation which occurred in the
second quarter of 2002, Andrx anticipated potentially reaching settlements with
all of the plaintiffs in the related litigations. Consequently, the Company
recorded an estimated litigation settlements charge of $60.0 million. The $60.0
million litigation settlements accrual is an estimate based upon management's
judgement including representations received from outside counsel. Such estimate
will be reviewed periodically. Andrx intends to vigorously litigate any of these
cases that cannot be settled on a reasonable basis. If conditions change in the
future periods, the Company may need to increase or decrease its litigation
settlements accrual. Such additional accrual could be significant.
RECENT ACCOUNTING PRONOUNCEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" which was effective for the company beginning January
1, 2002. Adoption of SFAS No. 142 in 2002 resulted in the discontinuance of the
Company recording approximately $3.2 million of annual goodwill amortization in
future periods. Additionally, the results of the required impairment test also
indicated that the Company's goodwill is not impaired.
ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This pronouncement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company believes the adoption of SFAS No. 143 in 2003 will not have a material
impact on the consolidated financial statements of the Company.
49
LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This pronouncement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This pronouncement supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a business
(as previously defined in that opinion). SFAS No. 144 was effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years. Adoption of the provisions of
SFAS No. 144 in 2002 did not have a material impact on the consolidated
financial statements of the Company.
CONSIDERATION BY A VENDOR TO A CUSTOMER
In November 2001, the Emerging Issues Tasks Force ("EITF") issued EITF
01-09, "Accounting for Consideration Given by a Vendor to a Customer (including
a Reseller of the Vendor's Products)". This pronouncement addresses the
accounting for consideration given by a vendor to a customer (including both a
reseller of the vendor's products and an entity that purchases the vendor's
products from a reseller). This pronouncement is effective for annual or interim
periods beginning after December 15, 2001. Adoption of the provisions of EITF
01-09 in 2002 did not have a material impact on the consolidated financial
statements of the Company.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities". The provisions of the
pronouncement require that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred and nullifies the
guidance of EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in Restructuring)", which recognized a liability for an exit cost at the date of
an entity's commitment to an exit plan. The provisions of SFAS No. 146 require
that the initial measurement of a liability be at fair value. SFAS No. 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002 with early adoption encouraged. Andrx plans to adopt the provisions of
SFAS No. 146 effective December 31, 2002 and does not expect that its adoption
will have a material impact on the consolidated financial statements of the
Company.
50
ANDRX CORPORATION AND SUBSIDIARIES
PART I
ITEM 4. CONTROLS AND PROCEDURES
(a) An evaluation was performed under the supervision and with the
participation of Andrx's management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the design and operation of Andrx's disclosure
controls and procedures within 90 days before the filing date of
this quarterly report. Based on that evaluation, Andrx's
management, including the CEO and CFO, concluded that Andrx's
disclosure controls and procedures were effective.
(b) Since the date of the evaluation, there have been no significant
changes in Andrx's internal controls or in other factors that
could significantly affect internal controls subsequent to the
evaluation.
51
ANDRX CORPORATION AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 4 and 11 to the "Notes to Unaudited Consolidated Financial
Statements of Andrx Corporation" included in Part 1 Item 1 of this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
On October 15, 2002, Andrx filed a current report on Form 8-K
announcing the decision of the United States District Court for the Southern
District of New York in the consolidated trial of Astra and four generic
pharmaceutical manufacturers, including Andrx.
On October 31, 2002, Andrx filed a current report on Form 8-K
announcing its financial results for the third quarter of 2002.
52
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2002 By: /s/ RICHARD J. LANE
--------------------------------------------
Richard J. Lane
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2002 By: /s/ ANGELO C. MALAHIAS
--------------------------------------------
Angelo C. Malahias
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
53
CERTIFICATIONS
I, Richard J. Lane, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Andrx
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ RICHARD J. LANE
-------------------------------
Richard J. Lane
Chief Executive Officer
54
CERTIFICATIONS
I, Angelo C. Malahias, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Andrx
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ ANGELO C. MALAHIAS
-------------------------------------------------
Angelo C. Malahias
Senior Vice President and Chief Financial Officer
55