UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
COMMISSION FILE NUMBER 1-10827
PHARMACEUTICAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 425-7100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. Yes T No___
32,077,163
Number of shares of Common Stock outstanding as of May 8, 2002.
This is page 1 of 87 pages. The exhibit index is on page 24.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
MARCH 31, DECEMBER 31,
ASSETS 2002 2001
------ ---- ----
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $77,546 $67,742
Accounts receivable, net of allowances of
$30,607 and $47,168 17,834 38,009
Inventories 44,304 31,458
Prepaid expenses and other current assets 5,555 4,156
Deferred income tax assets 34,578 34,485
------ ------
Total current assets 179,817 175,850
Property, plant and equipment, at cost less
accumulated depreciation and amortization 25,785 24,345
Deferred charges and other assets 1,375 1,427
Intangible assets 29,184 15,304
------ ------
Total assets $236,161 $216,926
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $224 $239
Accounts payable 22,860 18,007
Payables due to distribution agreement partners 21,932 32,295
Accrued salaries and employee benefits 3,717 2,859
Accrued expenses and other current liabilities 5,700 4,817
Income taxes payable 16,776 14,766
------ ------
Total current liabilities 71,209 72,983
Long-term debt, less current portion 1,016 1,060
Accrued pension liability 331 331
Deferred income tax liabilities, net 4,077 4,129
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01 per share; authorized
90,000,000 shares; issued and outstanding
32,058,332 and 32,035,189 shares 321 320
Additional paid-in capital 115,954 115,610
Retained earnings 43,253 22,493
------ ------
Total shareholders' equity 159,528 138,423
------- -------
Total liabilities and shareholders' equity $236,161 $216,926
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (ACCUMULATED DEFICIT)
(In Thousands, Except Per Share Amounts)
(Unaudited)
THREE MONTHS ENDED
------------------
(*AS RESTATED)
MARCH 31, MARCH 31,
2002 2001
---- ----
Net sales $80,508 $25,704
Cost of goods sold 41,233 17,276
------ ------
Gross margin 39,275 8,428
Operating expenses:
Research and development 2,874 1,538
Selling, general and administrative 7,516 4,195
----- -----
Total operating expenses 10,390 5,733
------ -----
Operating income 28,885 2,695
Settlements 9,051 -
Other (expense) income (4,157) 319
Interest income (expense) 254 (220)
--- ----
Income before provision for income taxes 34,033 2,794
Provision for income taxes 13,273 1,298
------ -----
NET INCOME 20,760 1,496
Retained earnings (accumulated deficit), beginning
of period 22,493 (31,429)
------ ------
Retained earnings (accumulated deficit), end
of period $43,253 $(29,933)
====== =======
NET INCOME PER SHARE OF COMMON STOCK:
BASIC $.65 $.05
=== ===
DILUTED $.63 $.05
=== ===
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
BASIC 32,048 29,661
====== ======
DILUTED 32,868 31,235
====== ======
*Restated as described in the Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial
statements.
3
PHARMACEUTICAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
------------------
(*AS RESTATED)
MARCH 31, MARCH 31,
2002 2001
---- ----
Cash flows from operating activities:
Net income $20,760 $1,496
Adjustments to reconcile net income
to net cash provided by (used) in operating
activities:
Deferred income taxes (145) 1,024
Depreciation and amortization 930 831
Write-off of inventories 1,765 285
Allowances against accounts receivable (16,561) 566
Settlements (9,651) -
Tax benefit from exercise of stock options 170 188
Other 5 64
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 36,736 (2,558)
(Increase) decrease in inventories (14,611) 41
Increase in prepaid expenses and other assets (5,896) (946)
Increase (decrease) in accounts payable 4,853 (2,164)
Decrease in payables due to distribution agreement
partners (10,363) (303)
Increase (decrease) in accrued expenses and other
liabilities 1,741 (189)
Increase in income taxes payable 2,010 86
----- --
Net cash provided by (used in) operating
activities 11,743 (1,579)
Cash flows from investing activities:
Capital expenditures (2,055) (456)
Proceeds from sale of fixed assets - 17
----- --
Net cash used in investing activities (2,055) (439)
Cash flows from financing activities:
Proceeds from issuances of Common Stock 175 5
Net proceeds from revolving credit line - 2,128
Principal payments under long-term debt and other
borrowings (59) (85)
--- ---
Net cash provided by financing activities 116 2,048
Net increase in cash and cash equivalents 9,804 30
Cash and cash equivalents at beginning of period 67,742 222
------ ---
Cash and cash equivalents at end of period $77,546 $252
====== ===
* RESTATED AS DESCRIBED IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The accompanying notes are an integral part of these consolidated financial
statements.
4
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
Pharmaceutical Resources, Inc. (the "Company" or "PRI") operates, primarily
through its wholly owned subsidiary, Par Pharmaceutical, Inc. ("Par"), in one
business segment, the manufacture and distribution of generic pharmaceuticals in
the United States. Marketed products are principally in solid oral dosage form
(tablet, caplet and two-piece hard-shell capsule). The Company also distributes
one product in the semi-solid form of a cream and one oral suspension.
*restatement of results
Certain items in the consolidated financial statements for the three-month
period ended March 31, 2001 have been restated to change the manner in which the
Company accounted for its transactions with Merck KGaA in fiscal year 1998. In
June 1998, the Company sold to Merck KGaA 10,400,000 shares of its Common Stock,
and entered into a distribution agreement, dated March 1998, with Genpharm, Inc.
("Genpharm"), a Canadian subsidiary of Merck KGaA. Previously, the Company
accounted for the sale of the Common Stock and the distribution agreement as
separate transactions. In restating its consolidated financial statements, the
Company has accounted for the two agreements as a single transaction under
Emerging Issues Task Force Issue ("EITF") No. 96-18 "Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling Goods or Services". Under EITF 96-18, the fair value of
the Common Stock sold, to the extent it exceeded the cash consideration received
for such Common Stock, must be attributed to the distribution agreement. The
Company determined the fair value of the Common Stock sold to Merck KGaA to be
$27,300,000, which exceeded the cash consideration of $20,800,000 by $6,500,000.
That $6,500,000 has therefore been assigned to the distribution agreement, with
a corresponding increase in shareholders' equity. Additionally, the Company
recorded a deferred tax liability, and a corresponding increase in the financial
reporting basis of the distribution agreement, of $4,333,000 to account for the
difference between the basis in the distribution agreement for financial
reporting and income tax purposes as required by Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS
109"). The aggregate of $10,833,000 assigned to the distribution agreement is
included in intangible assets, and beginning in the third calendar quarter of
1998 is being amortized on a straight-line basis over fifteen years as a
non-cash charge included in selling, general and administrative expenses. The
impact of the restatement for the three months ended March 31, 2001 is as
follows:
Three Months Ended
CONSOLIDATED STATEMENTS OF March 31, 2001
- -------------------------- ----------------------------
OPERATIONS AND ACCUMULATED DEFICIT As Reported Restated
- ---------------------------------- ----------- ------------
Selling, general and administrative $4,014 $4,195
Net income $1,677 $1,496
Accumulated deficit ($27,946) ($29,933)
Net income per share of common stock:
Basic $0.06 $0.05
Diluted $0.05 $0.05
BASIS OF PREPARATION:
The accompanying consolidated financial statements at March 31, 2002 and
for the three-month periods ended March 31, 2002 and March 31, 2001 are
unaudited; however, in the opinion of the Company's management, such statements
include all adjustments (consisting of normal recurring accruals) necessary to
present a fair statement of the information presented therein. The consolidated
balance sheet at December 31, 2001 was derived from the Company's audited
consolidated financial statements at such date.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
financial statements and these notes do not include all disclosures required by
accounting principles generally accepted in the United States for audited
financial statements. Accordingly, these statements should be read in
conjunction with the Company's most recent annual financial statements.
5
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
Results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years. Certain items on the consolidated
financial statements for the prior year have been reclassified to conform to the
current year financial statement presentation.
ACCOUNTS RECEIVABLE:
MARCH 31, DECEMBER 31,
2002 2001
---- ----
(IN THOUSANDS)
Accounts receivable $48,441 $85,177
------- -------
Allowances:
Doubtful accounts 689 998
Returns and allowances 8,409 4,847
Price adjustments 21,509 41,323
------ ------
30,607 47,168
====== ======
Accounts receivable,
net of allowances $17,834 $38,009
The accounts receivable amounts at March 31, 2002 and December 31, 2001 are
net of provisions for customer rebates of $8,121,000 and $14,081,000, and
chargebacks of $54,786,000 and $41,830,000, respectively. Customer rebates are
price reductions generally given to customers as an incentive to increase sales
volume. This incentive is based on a customer's volume of purchases during an
applicable monthly, quarterly or annual period. Chargebacks are price
adjustments given to the wholesale customer for product it resells to specific
healthcare providers on the basis of prices negotiated between the Company and
the provider. Where the provider has negotiated with the Company for a price
below the normal resale price, the Company adjusts its price to the wholesaler
supplying that provider accordingly. The adjustment is based on the wholesaler's
actual resales to that provider.
The accounts receivable allowances include price adjustments that consist
of cash discounts, sales promotions and price protection or shelf-stock
adjustments. The Company may offer price protection, or shelf-stock adjustments,
with respect to sales of new generic drugs for which it has a market exclusivity
period. To account for the fact that the price of such drugs typically will
decline when additional generic manufacturers introduce and market a comparable
generic product at the end of the exclusivity period, such plans, which are
common in the industry, generally provide that the Company credit its customers
with respect to the quantity remaining on the customer's shelf at the end of the
exclusivity period for the difference between the Company's new price at the end
of the exclusivity period and the price at which the Company sold the customers
the product. In the Company's experience, the amount by which the price of a
drug may decline at the end of an exclusivity period will depend in part on the
number of additional generic manufacturers that introduce and market a
comparable product. The Company estimates the amount by which prices will
decline by monitoring the number and status of U.S. Food and Drug Administration
("FDA") applications and tentative approvals and its historical experience with
other drugs for which the Company had market exclusivity. The Company estimates
the amount of shelf stock that will remain at the end of an exclusivity period
based on both its knowledge of the inventory practices for wholesalers and
retail distributors and conversations it has with its major customers. Using
these factors, the Company estimates the total price protection credit it will
have to issue at the end of an exclusivity period. The Company records charges
(reductions of sales) to accrue this amount for specific product sales that will
be subject to price protection based on the Company's estimate of customer
inventory levels and market prices at the end of the exclusivity period.
The Company's exclusivity period for megestrol acetate oral suspension
ended in mid-January 2002. The Company has recently learned that a generic
competitor was granted FDA approval to market another generic version of
megestrol acetate oral suspension and began shipping the product to a limited
number of customers in the second quarter of 2002. In addition, a second
potential generic competitor entered into a settlement agreement with Bristol
Myers Squibb ("BMS") pursuant to which the public record states that the present
formulation of the generic company's product infringes a BMS patent related to
megestrol acetate. However, at this time the Company has no information as to
whether the settlement agreement provides for the generic competitor to enter
the market at some point in the future. The Company has patents that cover its
unique formulation for megestrol acetate oral suspension and will avail itself
of all legal remedies and will take all of the necessary steps to protect its
intellectual property rights. Although competitors may be taking the necessary
6
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
steps to enter the market, the Company believes they are less likely to
successfully enter this market because of patents owned by BMS or the Company.
Megestrol acetate oral suspension is still anticipated to be a significant
profit contributor during fiscal year 2002, despite the potential of
competition. Based on these factors and the Company not experiencing any
significant competition to date, the Company did not record a price protection
reserve for megestrol acetate oral suspension as of March 31, 2002, but will
continue evaluating the effect of potential competition and will record a price
protection reserve when it deems necessary.
The Company's exclusivity period for fluoxetine ended in late-January 2002.
With respect to fluoxetine, the Company established a price protection reserve
during the exclusivity period of approximately $34,400,000, based on its
estimate that between eight and ten additional generic manufacturers would
introduce and market comparable products for the 10 mg and 20 mg tablets and
between one and three additional manufacturers would introduce and market a
comparable product for the 40 mg capsules. As a result of the introduction of
these competing generic products during the first quarter of 2002, the sales
price for fluoxetine has substantially declined from the price the Company
received during the exclusivity period and the Company issued price protection
credits of approximately $23,500,000 through March 31, 2002. The Company expects
that the remaining price protection reserve at March 31, 2002 of approximately
$10,900,000 will be sufficient and fully utilized. Accordingly, the Company's
sales and gross margins generated by fluoxetine in fiscal year 2002 have been
and will continue to be adversely affected in future periods. Although there can
be no assurance, the Company expects to continue to introduce new products
throughout fiscal year 2002 and increase sales of certain existing products to
offset the loss of sales and gross margin on its fluoxetine products.
CHANGES IN SHAREHOLDERS' EQUITY:
Changes in the Company's Common Stock and Additional Paid-in Capital
accounts during the three months ended March 31, 2002 were as follows:
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL
------ ------ -------
Balance, December 31, 2001 32,035,189 $320,000 $115,610,000
Exercise of stock options 22,008 1,000 117,000
Compensatory arrangements 1,135 - 227,000
----- ----- -------
Balance, March 31, 2002 32,058,332 $321,000 $115,954,000
========== ======== ============
RESEARCH AND DEVELOPMENT AGREEMENT:
The Company, Israel Pharmaceutical Resources L.P. ("IPR"), and Generics
(UK) Ltd. ("Generics"), a subsidiary of Merck KGaA, entered into an agreement
(the "Development Agreement"), dated as of August 11, 1998, pursuant to which
Generics agreed to fund one-half the costs of the operating budget of IPR, the
Company's research and development operation in Israel, in exchange for the
exclusive distribution rights outside of the United States to products developed
by IPR after the date of the Development Agreement. In addition, Generics agreed
to pay IPR a perpetual royalty for all sales of the products by Generics or its
affiliates outside the United States. To date, no such products have been
brought to market by Generics and no royalty has been paid. The Development
Agreement has an initial term of five years and automatically renews for
additional periods of one year subject to earlier termination upon six months'
notice in certain circumstances. Pursuant to the Development Agreement, Generics
funded approximately $788,000 for fiscal year 2001 and $170,000 for the first
three months of fiscal year 2002, fulfilling their funding requirements through
March 31, 2002. Under the Development Agreement, Generics is not required to
fund more than $1,000,000 in any one calendar year.
INTANGIBLE ASSETS:
On March 5, 2002 the Company acquired the United States rights to five
products from BMS. The products include the antihypertensives Capoten(R) and
Capozide(R), the cholesterol-lowering medications Questran(R) and Questran
Light(R), and Sumycin(R), an antibiotic. Based on the Company's market research,
these products are expected to generate annual net sales of approximately
$10,000,000. The product acquisition agreement is retroactive to January 1,
2002. To obtain the rights to the five products, the Company paid approximately
$1,024,000 in March 2002 and agreed to make an additional payment of
7
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
approximately $1,025,000 in the first quarter of 2003. The Company also agreed
to terminate its outstanding litigation against BMS involving megestrol acetate
oral suspension and buspirone. The Company determined, through a third party
appraisal, the fair value of the agreement to be $11,700,000, which exceeded the
cash consideration of $2,049,000 and associated costs of $600,000 by $9,051,000.
The $9,051,000 value was assigned to the litigation settlement and included in
the settlement income in the first quarter of 2002. The value assigned to the
agreement was included in intangible assets and will be amortized on a
straight-line basis over seven years as a non-cash charge that will be included
in cost of goods sold.
In November 2001, the Company entered into a joint development and
marketing agreement with Breath Ltd. of the Arrow Group to pursue the worldwide
distribution of latanoprost ophthalmic solution 0.005%, the generic equivalent
of Pharmacia Corporation's ("Pharmacia") Xalatan(R), a glaucoma medication. As a
result of this agreement, Par filed an Abbreviated New Drug Application ("ANDA")
for latanoprost, including a Paragraph IV certification that the existing
patents for the product will not be infringed by Par's generic product. Par has
reason to believe that its ANDA is the first to be filed for this drug with a
Paragraph IV certification. In December 2001, Pharmacia, among others, initiated
a patent infringement action against Par and Par intends to vigorously defend
its position in its pending litigation with Pharmacia. Pursuant to this
agreement Par made payments to Breath Ltd. of $2,500,000 in fiscal year 2001 and
$2,500,000 in the first quarter of fiscal year 2002, which are included in
intangible assets on the consolidated balance sheets (see "-Legal Proceedings").
In April 1999, the Company entered into an agreement with FineTech Ltd.
("FineTech") for the right to use a process for a pharmaceutical bulk active.
Pursuant to this agreement, the Company paid FineTech approximately $2,000,000,
included in intangible assets on the consolidated balance sheets, in fiscal
years 2000 and 2001 for a completed process together with its technology
transfer package and patent. The Company will pay royalties to FineTech on gross
margins from sales of all products developed pursuant to this agreement.
In January 1999, the Company entered into a profit sharing agreement (the
"Genpharm Profit Sharing Agreement") with Genpharm pursuant to which the Company
will receive a portion of the profits generated from the sale of products sold
under a separate agreement between Genpharm and an unaffiliated United States
based pharmaceutical company in exchange for a non-refundable fee of $2,500,000
paid by the Company. The fee, included in intangible assets on the consolidated
balance sheets, will be amortized over a projected revenue stream from the
products when launched by the third party. To date there are two ANDAs for
potential products covered under the Genpharm Profit Sharing Agreement awaiting
FDA approval. The agreement between Genpharm and the unaffiliated third party
covers 15 products that are not included in the Company's other distribution
agreements with Genpharm as described below.
On June 30, 1998, the Company completed a strategic alliance with Merck
KGaA, a pharmaceutical and chemical company located in Darmstadt, Germany.
Pursuant to a Stock Purchase Agreement, dated March 25, 1998, the Company issued
10,400,000 shares of the Company's Common Stock to Merck KGaA, through its
subsidiary EMD, Inc. ("EMD" formerly known as Lipha Americas, Inc.) in exchange
for cash of $20,800,000 and the exclusive United States distribution rights to a
portfolio of products covered by a distribution agreement, dated March 25, 1998,
with Genpharm (the "Genpharm Distribution Agreement"). The Company determined
the fair value of the Common Stock sold to Merck KGaA was $27,300,000, which
exceeded the cash consideration of $20,800,000 by $6,500,000. The $6,500,000
value was assigned to the Genpharm Distribution Agreement, with a corresponding
increase in shareholders' equity. Additionally, the Company recorded a deferred
tax liability, and a corresponding increase in the financial reporting basis of
the distribution agreement, of $4,333,000 to account for the difference between
the basis in the distribution agreement for financial reporting and income tax
purposes as required by SFAS 109. The aggregate of $10,833,000 assigned to the
distribution agreement is included in intangible assets, and beginning in the
third calendar quarter of 1998, is being amortized on a straight-line basis over
fifteen years as a non-cash charge included in selling, general and
administrative expenses.
Under the Genpharm Distribution Agreement, the Company obtained the
exclusive distribution rights within the United States and certain other United
States territories to approximately 40 generic pharmaceutical products. To date,
16 of such products have obtained FDA approval and 15 are currently being
marketed by Par. The remaining products are either being developed, have been
identified for development, or have been submitted to the FDA for approval.
8
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
Currently, there are eight ANDAs for potential products (two of which have been
tentatively approved) that are covered by the Genpharm Distribution Agreement
pending with, and awaiting approval from, the FDA. Genpharm is required to use
commercially reasonable efforts to develop the products and is responsible for
the completion of product development and obtaining all applicable regulatory
approvals. The Company pays Genpharm a percentage of the gross profits on all
sales of products covered by the Genpharm Distribution Agreement.
On July 31, 2001, Alphapharm Pty Ltd. ("Alphapharm"), an Australian
subsidiary of Merck KGaA, was granted final approval by the FDA for flecainide
acetate tablets, the generic version of Minnesota Mining and Manufacturing
Companys' ("3Ms'") Tambocor(R), which will be distributed by the Company under
the Genpharm Distribution Agreement. Since Alphapharm was the first-to-file an
ANDA and obtained Paragraph IV certification, the Company anticipates receiving
up to 180 days of marketing exclusivity for the product. The Company anticipates
commencing the marketing of the product in the second quarter of fiscal year
2002.
On September 5, 2001, Merck KGaA and certain of its affiliates sold their
entire holdings of 13,634,012 shares of Common Stock, representing approximately
43% of the Company's total number of outstanding shares of Common Stock at the
close of the transaction in September 2001, to unaffiliated institutional
investors in a private placement. The selling of these shares did not change the
terms of any existing distribution or development agreements between the Company
and Merck KGaA or its affiliates.
LEASE AGREEMENT:
In March 1999, Par entered into an agreement to lease (the "Lease
Agreement") its manufacturing facility and related machinery and equipment
located in Congers, New York (the "Congers Facility") to Halsey Drug Co., Inc.
("Halsey"), a manufacturer of generic pharmaceutical products. The Lease
Agreement has an initial term of three years, subject to an additional two-year
renewal period and contains a purchase option permitting Halsey to purchase the
Congers Facility and substantially all the equipment thereof at any time during
the lease terms for a specified amount. The Lease Agreement provides for annual
fixed rent during the initial term of $500,000 per year and $600,000 per year
during the renewal period.
DISTRIBUTION AND SUPPLY AGREEMENTS:
DR. REDDY'S LABORATORIES LTD.
In April 2001, the Company and Dr. Reddy's Laboratories Ltd. ("Reddy"), a
producer of bulk active ingredients for the pharmaceutical industry and a
developer and manufacturer of finished dosage forms located in India, entered
into a broad-based co-marketing and development agreement (the "Reddy
Development and Supply Agreement") covering up to 14 generic pharmaceutical
products, five of which have been filed with, and awaiting approval from, the
FDA, to be marketed exclusively by Par in the United States and certain other
United States territories. Reddy is required to use commercially reasonable
efforts to develop the products covered by the Reddy Development and Supply
Agreement, and is responsible for the completion of product development and for
obtaining all applicable regulatory approvals. The Company will pay Reddy a
percentage of the gross profits on sales of the products sold by Par in
accordance with the Reddy Development and Supply Agreement. On August 2, 2001,
the Company received 180-day marketing exclusivity for fluoxetine 40 mg
capsules, the generic version of Eli Lilly and Company's Prozac(R), pursuant to
the Reddy Development and Supply Agreement and began immediately shipping the
product.
The products covered by the Reddy Development and Supply Agreement are in
addition to five products currently being marketed by the Company under prior
agreements with Reddy. Pursuant to these agreements, the Company pays Reddy a
certain percentage of the gross profits on sales of any products covered under
such agreements.
GENPHARM, INC.:
The Company and Genpharm entered into a distribution agreement (the
"Genpharm Additional Product Agreement"), dated November 27, 2000, pursuant to
which Genpharm granted the Company exclusive distribution rights within the
United States and certain other United States territories with respect to five
generic pharmaceutical products not included in the Company's other distribution
agreements with Genpharm (see "-Intangible Assets" and "-Subsequent Events").
The products are either being developed, have been identified for development,
9
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
or have been submitted to the FDA for approval. Currently, there is one ANDA
(tentatively approved) for a potential product covered by the Genpharm
Additional Product Agreement pending with, and awaiting approval from, the FDA.
Genpharm and the Company are sharing the costs of developing the products and
for obtaining all applicable regulatory approvals. The Company will pay Genpharm
a percentage of the gross profits on all sales of products included in the
Genpharm Additional Product Agreement. On August 2, 2001, the Company received
180-day marketing exclusivity for fluoxetine (Prozac(R)) 10 mg and 20 mg
tablets, covered under the Genpharm Additional Product Agreement and immediately
began shipping the product.
BASF CORPORATION:
In April 1997, Par entered into a Manufacturing and Supply Agreement (the
"BASF Supply Agreement") with BASF Corporation ("BASF"), a manufacturer of
pharmaceutical products. Under the BASF Supply Agreement, Par agreed to purchase
minimum quantities of certain products manufactured by BASF, and to phase out
Par's manufacturing of those products. As part of the agreement, BASF
discontinued its direct sale of those products. The agreement had an initial
term of three years and would have renewed automatically for successive two-year
periods until December 31, 2005, if Par had met certain purchase thresholds.
Since Par did not meet the minimum purchase requirement of one product in the
third and final year of the agreement, BASF had the right to terminate the
agreement with a notice period of one year. BASF has not given Par such notice
and to ensure continuance of product supply, BASF and the Company have agreed to
continue to operate under terms similar to those of the BASF Supply Agreement.
PAYABLES DUE TO DISTRIBUTION AGREEMENT PARTNERS:
As of March 31, 2002 and December 31, 2001, the Company had payables due to
distribution agreement partners of $21,932,000 and $32,295,000, respectively.
SHORT-TERM DEBT:
In December 1996, Par entered into a Loan and Security Agreement (the "Loan
Agreement") with General Electric Capital Corporation ("GECC"). The Loan
Agreement, as amended, provides Par with a revolving line of credit expiring
March 2005. Pursuant to the Loan Agreement, Par is permitted to borrow up to the
lesser of (i) the borrowing base established under the Loan Agreement or (ii)
$30,000,000. The borrowing base is limited to 85% of eligible accounts
receivable plus 50% of eligible inventory of Par, each as determined from time
to time by GECC. The interest rate charged on the line of credit is based upon a
per annum rate of 2.25% above the 30-day commercial paper rate for high-grade
unsecured notes adjusted monthly. The line of credit with GECC is secured by the
assets of Par, PRI and certain subsidiaries, other than real property, and is
guaranteed by PRI and certain of its subsidiaries. In connection with such
facility, Par, PRI and their subsidiaries have established a cash management
system pursuant to which all cash and cash equivalents received by any of such
entities are deposited into a lockbox account over which GECC has sole operating
control if there are amounts outstanding under the line of credit. The deposits
would then be applied on a daily basis to reduce the amounts outstanding under
the line of credit. The revolving credit facility is subject to covenants based
on various financial benchmarks. As of March 31, 2002, the borrowing base was
approximately $26,700,000. To date, no debt is outstanding under the Loan
Agreement.
INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of
SFAS 109, which requires the Company to recognize deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. At March 31, 2002 and December 31, 2001, the Company
had deferred income tax assets of $34,578,000 and $34,485,000, respectively,
consisting of temporary differences, primarily related to accounts receivable
reserves, and net deferred income tax liabilities of $4,077,000 and $4,129,000,
respectively, primarily related to the Genpharm Distribution Agreement.
10
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
EARNINGS PER SHARE:
The Company presents earnings per share data in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS 128"), which establishes the standards for the
computation and presentation of basic and diluted earnings per share data. Under
SFAS 128, the dilutive effect of stock options is excluded from the calculation
of basic earnings per share but included in diluted earnings per share except in
periods of net loss where inclusion would be anti-dilutive. The following is a
reconciliation of the amounts used to calculate basic and diluted earnings per
share:
THREE MONTHS ENDED
------------------
(*AS RESTATED)
MARCH 31, MARCH 31,
2002 2001
---- ----
(In Thousands, Except Per Share Amounts)
NET INCOME $20,760 $1,496
BASIC:
Weighted average number of common
shares outstanding 32,048 29,661
NET INCOME PER SHARE OF COMMON STOCK $.65 $.05
=== ===
ASSUMING DILUTION:
Weighted average number of common
shares outstanding 32,048 29,661
Effect of dilutive options 820 1,574
--- -----
Weighted average number of common and common
equivalent shares outstanding 32,868 31,235
NET INCOME PER SHARE OF COMMON STOCK $.63 $.05
=== ===
The Company had outstanding options of 2,034,125 as of March 31, 2002 that
were not included in the computation of diluted earnings per share because the
exercise prices were greater than the average market price of the Common Stock
in the period. As of March 31, 2001, incremental shares from assumed conversions
of all of the Company's outstanding options and warrants were included in the
computation of diluted earnings per share.
NEW ACCOUNTING STANDARDS:
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 changes the accounting for
business combinations, requiring that all business combinations be accounted for
using the purchase method and is effective for all business combinations
initiated after June 30, 2001. SFAS 142 specifies the financial accounting and
reporting for acquired goodwill and other intangible assets. Goodwill and
intangible assets that have indefinite useful lives will not be amortized but
rather will be tested at least annually for impairment. SFAS 142 is effective
for fiscal years beginning after December 15, 2001.
SFAS 142 requires that the useful lives of intangible assets acquired on or
before June 30, 2001 be reassessed and the remaining amortization periods
adjusted accordingly. Previously recognized intangible assets deemed to have
indefinite lives should be tested for impairment. Goodwill recognized on or
before June 30, 2001 shall be tested for impairment as of the beginning of the
fiscal year in which SFAS 142 is initially applied in its entirety.
In August of 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets," ("SFAS 144") which is effective
for fiscal years beginning after December 15, 2001. SFAS 144 addresses the
financial accounting and reporting for the impairment or disposal of long lived
assets and supersedes SFAS 121 and the accounting and reporting provisions of
the APB Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual,
11
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
and Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business.
The adoption of these new accounting standards did not have a material
impact on the Company's consolidated financial position, results of operations
and cash flows.
COMMITMENTS, CONTINGENCIES AND:
RETIREMENT PLANS:
The Company has a defined contribution social security integrated
retirement plan (the "Retirement Plan") which provides retirement benefits to
eligible employees as defined in the Retirement Plan. The Company suspended
employer contributions to the Retirement Plan effective December 30, 1996.
Consequently, participants in the Retirement Plan will no longer be entitled to
any employer contributions under such plan for 1996 or subsequent years. The
Company also maintains a retirement savings plan (the "Retirement Savings Plan")
whereby eligible employees are permitted to contribute from 1% to 25% of their
compensation to the Retirement Savings Plan. The Company contributes an amount
equal to 50% of the first 6% of compensation contributed by the employee.
Participants of the Retirement Savings Plan become vested with respect to 20% of
the Company's contributions for each full year of employment with the Company
and thus become fully vested after five full years. In fiscal year 1998, the
Company merged the Retirement Plan into the Retirement Savings Plan.
LEGAL PROCEEDINGS:
Par has filed an ANDA (currently pending with the FDA) for latanoprost
(Xalatan(R)), which was developed by Breath Ltd. of the Arrow Group pursuant to
a joint manufacturing and marketing agreement with the Company, seeking approval
to engage in the commercial manufacture, sale and use of the latanoprost product
in the United States. Par's ANDA includes a Paragraph IV certification that the
existing patents in connection with Xalatan(R) are invalid, unenforceable or
will not be infringed by Par's generic product. Par has reason to believe that
its ANDA is the first to be filed for this drug with a Paragraph IV
certification. As a result of the filing of the ANDA, Pharmacia Corporation,
Pharmacia AB, Pharmacia Enterprises, S.A., Pharmacia and Upjohn Company and the
Trustees of Columbia University in the City of New York filed lawsuits against
the Company on December 14, 2001 in the United States District Court for the
District of Delaware and on December 21, 2001 in the United States District
Court for the District of New Jersey alleging patent infringement. Pharmacia and
Columbia are seeking an injunction. On February 8, 2002, Par answered the
complaint brought in the District of New Jersey and filed a counterclaim, which
seeks a declaration that the patents-in-suit are invalid, unenforceable and not
infringed by Par's products. Par also seeks a declaratory judgment that the
extension of judgment concerning the term of one of the patents is invalid, as
well as reimbursement for attorneys' fees. In addition, on February 25, 2002 the
lawsuit brought in the District of Delaware was dismissed pursuant to a
stipulation of the parties. Par intends to vigorously defend the lawsuits. At
this time, it is not possible for the Company to predict the outcome of this
litigation and the impact, if any, that it might have on the Company.
Par, among others, is a defendant in three lawsuits filed in United States
District Court for the Eastern District of North Carolina (filed on August 1,
2001, October 30, 2001 and November 16, 2001, respectively) by aaiPharma Inc.,
involving patent infringement allegations connected to a total of three patents
related to polymorphic forms of fluoxetine (Prozac(R)). Par intends to
vigorously litigate these cases. While the outcome of litigation is never
certain, Par believes that it will prevail in these litigations.
On July 16, 2001, the Federal Circuit Court of Appeals in Washington D.C.
affirmed the Company's summary judgment victory in its patent infringement case
with BMS over megestrol acetate oral suspension, the generic version of BMS's
Megace(R) Oral Suspension. On July 25, 2001, the FDA granted the Company final
approval for megestrol acetate oral suspension with marketing exclusivity until
mid-January 2002 and the Company immediately began shipping the product to its
customers. Although the Court had disposed of all of BMS's infringement issues,
Par's counterclaims for patent invalidity, unfair competition and tortuous
interference seeking an injunction and an award of compensatory and punitive
damages remained. In March 2002 BMS sold the rights to five products to Par in
exchange for a payment of $2,049,000 and the termination of all the Company's
outstanding litigation against BMS involving megestrol acetate oral suspension
and buspirone.
12
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
On March 30, 2001, the Company reached an agreement with 3M with respect to
a previous product agreement (the "Product Co-development, Supply and
Distribution Agreement") entered into between the parties on January 6, 1994.
Under the terms of the agreement, 3M agreed to pay the Company $750,000 in April
2001 in exchange for the mutual termination of the Product Co-development,
Supply and Distribution Agreement.
On August 1, 2001 Alpharma USPD, Inc. filed a lawsuit in the U.S. District
Court for the District of Maryland seeking a declaratory judgment that
Alpharma's megestrol acetate formulation does not infringe U.S. Patent No.
6,028,065 granted to the Company and/or that the Company's patent is invalid.
The Company is involved in certain other litigation matters, including
certain product liability and patent actions, and actions by former employees,
and believes these actions are incidental to the conduct of its business and
that the ultimate resolution thereof will not have a material adverse effect on
its financial condition, results of operations or liquidity. The Company intends
to vigorously defend these actions.
OTHER MATTERS:
In December 2001, the Company committed to making an equity investment of
up to $2,400,000 over a period of time in HighRapids, Inc. ("HighRapids"), a
Delaware corporation and software developer. HighRapids is the surviving
corporation of a merger with Authorgenics, Inc., a Florida corporation.
HighRapids will utilize the Company's cash infusion for working capital and
operating expenses. Through March 31, 2002 the Company had invested $259,000 of
its planned investment in HighRapids. The Company has the exclusive right to
market to the pharmaceutical industry certain laboratory software currently in
development. PRI's Chief Executive Officer and a director of the Company, each
holds shares of HighRapids common stock (less than 1%), which were acquired
prior to the Company acquiring a controlling interest in HighRapids.
On March 15, 2002, the Company announced the termination of negotiations
with International Specialty Products ("ISP") related to the purchase of the ISP
FineTech fine chemical business, based in Haifa, Israel and Columbus, Ohio. At
that time, the Company discontinued negotiations with ISP as a result of various
events and circumstances that occurred since the announcement of the proposed
transaction. Pursuant to the termination of the purchase, the Company paid ISP a
$3,000,000 break-up fee in March 2002, which was subject to certain credits and
offsets, and incurred approximately $1,268,000 in related acquisition costs,
both of which were included in other expense in the first quarter of 2002. As
part of the termination the Company received the rights to a raw material
developed by ISP FineTech under a prior agreement. The Company subsequently
purchased FineTech based in Haifa, Israel in a separate transaction in April
2002 (see "-Subsequent Events").
SUBSEQUENT EVENTS:
In April 2002, the Company entered into an agreement with Rhodes
Technologies, Inc. ("RTI"), an associated company of Purdue Pharma L.P., to
establish a joint venture partnership in the United States. The new joint
venture will be named SVC Pharma and will be owned equally by both parties. SVC
Pharma will utilize, on a case-by-case basis, advanced technologies and patented
processes to develop, manufacture, market and distribute certain unique,
proprietary pharmaceutical products. Under the terms of the agreement, when both
partners agree to pursue a specific project, each partner will contribute
resources to the new enterprise. RTI will provide scientific and technological
expertise in the development of non-infringing, complex molecules. In addition
to providing chemical synthesis capabilities, RTI will provide the manufacturing
capacity for sophisticated intermediate and active pharmaceutical ingredients.
Par will provide development expertise in dosage formulation and will be
responsible for marketing, sales and distribution. The companies will share
equally in expenses and profits. SVC Pharma has already identified several
candidates for drug development. The first of these has the potential to be
marketed by the Company at the end of fiscal year 2003 or early in fiscal year
2004.
In April 2002, the Company acquired FineTech from ISP for $32,000,000. The
acquisition was financed by cash-on-hand and is not expected to have a material
effect on earnings in fiscal year 2002. FineTech, based in Haifa, Israel,
specializes in the design and manufacture of proprietary synthetic chemical
processes used in the production of complex organic compounds for the
pharmaceutical industry. The Company has acquired the physical facilities, the
intellectual property and patents of FineTech and has retained all FineTech
employees. FineTech also manufactures complex synthetic active pharmaceutical
13
PHARMACEUTICAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)
ingredients for companies in the branded and generic pharmaceutical
industries at its manufacturing facility in Haifa, Israel. This facility
operates in compliance with FDA current good manufacturing practices (cGMP)
standards. FineTech achieved revenues of approximately $6,000,000 in 2001. The
Company expects to transfer a portion of FineTech's personnel and technological
resources to a laboratory facility in the northeastern United States. The
remaining physical assets in Haifa are valued at less than $2,000,000. FineTech
will be operated as an independent, wholly owned subsidiary of PRI and will
provide immediate chemical synthesis capabilities and strategic opportunities to
the Company and other customers.
The Company has enjoyed a long-standing relationship with FineTech for more
than seven years. Two of the Company's six potential first-to-file products,
flecainide and latanoprost, resulted from the Company's relationship with
FineTech. In addition, the Company and FineTech are currently collaborating on
three additional products. ANDAs have already been submitted for two of these
products.
In April 2002, the Company entered into an agreement to expand its
strategic product partnership with Merck KGaA. Under the terms of the new
agreement, Par has licensed the exclusive rights to 11 generic pharmaceutical
products currently under development and not included in any other distribution
agreements between the Company and Genpharm (see "-Intangible Assets" and
"-Distribution and Supply Agreements-Genpharm, Inc."). Pursuant to the
agreement, Genpharm is to develop the products, submit all corresponding ANDAs
to the FDA and subsequently manufacture the products. Par will serve as
exclusive U.S. marketer and distributor of the products, pay a share of the
costs, including development and legal expenses incurred to obtain final
regulatory approval, and pay Genpharm a percentage of the gross profits on all
sales of products covered under this agreement. Pursuant to the agreement, the
Company will pay Genpharm a non-refundable fee of $2,000,000 in the second
quarter of 2002 for two of the products, loratadine 10 mg tablets and
mirtazapine tablets, which are tentatively approved and expected to be launched
in fiscal years 2003 to 2004. In addition, the Company will be required to pay a
non-refundable fee of up to $414,000 based upon FDA acceptance of filings for
six of the nine remaining products.
According to the Company's market research loratadine 10 mg tablets, the
generic version of Schering-Plough's non-sedating antihistamine Claritin(R), had
U.S. sales of approximately $1.8 billion in fiscal year 2001 and mirtazapine,
the generic equivalent of Organon's antidepressant Remeron(R), had U.S. sales of
approximately $400 million in 2001. In fiscal year 2001, the cumulative sales of
the 11 branded products totaled approximately $7.8 billion. The majority of
these products are expected to enter the U.S. market between 2003 and 2006.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CERTAIN STATEMENTS IN THIS FORM 10-Q MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO
FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES
OF CURRENT PRODUCTS AND THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED
PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD
CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED
HEREIN. THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE TYPICALLY BY USE OF
WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS," "ANTICIPATES,"
"CONTINUING," "ONGOING," "EXPECTS," "BELIEVES," OR SIMILAR WORDS AND PHRASES.
FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN THIS FORM
10-Q INCLUDE, AMONG OTHERS, (I) INCREASED COMPETITION FROM NEW AND EXISTING
COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS (ESPECIALLY UPON
COMPLETION OF EXCLUSIVITY PERIODS), (II) PRICING PRESSURES RESULTING FROM THE
CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (III) THE AMOUNT
OF FUNDS AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND
DEVELOPMENT JOINT VENTURES, (IV) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR
DELAYS AND UNANTICIPATED COSTS IN OBTAINING REGULATORY APPROVALS, (V)
CONTINUATION OF DISTRIBUTION RIGHTS UNDER SIGNIFICANT AGREEMENTS, (VI) THE
CONTINUED ABILITY OF DISTRIBUTED PRODUCT SUPPLIERS TO MEET FUTURE DEMAND, (VII)
THE COSTS AND OUTCOME OF ANY THREATENED OR PENDING LITIGATION, INCLUDING PATENT
AND INFRINGEMENT CLAIMS AND (VIII) GENERAL INDUSTRY AND ECONOMIC CONDITIONS. ANY
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q ARE MADE ONLY AS OF THE
DATE HEREOF, BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE
HEREOF, AND, SUBJECT TO APPLICABLE LAW TO THE CONTRARY, THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
GENERAL
The Company's net income of $20,760,000 for the three-month period ended
March 31, 2002 increased $19,264,000 from $1,496,000 for the three-month period
ended March 31, 2001. An increase in revenues of $54,804,000, or 213%, from
those realized in the first quarter of 2001 led to the significant improvement,
reflecting the successful launch of new products, particularly megestrol acetate
oral suspension (Megace(R) Oral Suspension) and fluoxetine (Prozac(R)) 40 mg
capsules, over the prior nine months. Net sales were $80,508,000 in the first
quarter of 2002 compared to net sales of $25,704,000 for the same period last
year. Improved gross margins followed the sales growth, increasing to
$39,275,000, or 49% of net sales, in the first quarter of fiscal year 2002, from
$8,428,000, or 33% of net sales, in the same period of the prior year. The
improved results included an 87% increase in research and development spending
in the most recent three months to $2,874,000 from $1,538,000 for the comparable
period of 2001. First quarter 2002 selling, general and administrative costs of
$7,516,000 increased $3,321,000 from the corresponding period of the prior year,
primarily due to additional personnel costs and marketing programs, shipping
costs and legal fees associated with new product launches. Additionally, the
Company recorded net settlement income of $9,051,000 in the first quarter of
2002 related to the termination of its litigation with BMS and other expense of
$4,268,000 in connection with its termination of the acquisition of the ISP
FineTech fine chemical business.
In July 2001 and August 2001, the FDA granted approvals for three ANDA
submissions, one each by Par, Reddy and Alphapharm, for megestrol acetate oral
suspension, fluoxetine 40 mg capsules and fluoxetine 10 mg and 20 mg tablets,
respectively, which as first-to-file opportunities entitled the Company to
180-days of marketing exclusivity for the products. The Company began marketing
megestrol acetate oral suspension, which is not subject to any profit sharing
agreements, in July 2001. In August 2001, the Company began marketing fluoxetine
40 mg capsules covered under the Reddy Development and Supply Agreement and
fluoxetine 10 mg and 20 mg tablets covered under the Genpharm Additional Product
Agreement. Generic competitors of the Company received 180-days marketing
exclusivity for another generic version of fluoxetine 10 mg and 20 mg capsules,
which the Company also began selling following the end of the exclusivity period
in the first quarter of 2002. As expected, additional generic competitors, with
comparable products to all three strengths of the Company's fluoxetine, began
entering the market in the first quarter of 2002, severely eroding the pricing
the Company received during the exclusivity periods, particularly on the 10 mg
and 20 mg strengths. Although the Company has recently learned of another
generic approval for megestrol acetate oral suspension in the first quarter of
2002, to date the Company had not experienced any significant generic
competition on this product (see "Notes to Consolidated Financial
Statements-Accounts Receivable" ).
Critical to sustaining the improvement in the Company's financial condition
is the introduction of new manufactured and distributed products at selling
prices that generate significant gross margin. The Company, through its internal
15
development program and strategic alliances, is committed to developing new
products that have limited competition and longer product life cycles. In
addition to new product introductions expected as part of its various strategic
alliances, the Company plans to continue to invest in research and development
efforts while seeking additional products for sale through new and existing
distribution agreements, additional first-to-file opportunities, vertical
integration with raw material suppliers and unique dosage forms and strengths to
differentiate its products in the marketplace. The Company is engaged in
efforts, subject to FDA approval and other factors, to introduce new products as
a result of its research and development efforts and distribution and
development agreements with third parties. No assurance can be given that the
Company will obtain or develop any additional products for sale (see "-Financial
Condition-Liquidity and Capital Resources").
The generic drug industry in the United States continues to be highly
competitive. The factors contributing to the intense competition and affecting
both the introduction of new products and the pricing and profit margins of the
Company, include, among other things: (i) introduction of other generic drug
manufacturer's products in direct competition with the Company's significant
products, (ii) consolidation among distribution outlets through mergers,
acquisitions and the formation of buying groups, (iii) ability of generic
competitors to quickly enter the market after patent expiration or exclusivity
periods, diminishing the amount and duration of significant profits, (iv)
willingness of generic drug customers, including wholesale and retail customers,
to switch among pharmaceutical manufacturers and (v) pricing and product
deletions by competitors
NET SALES
First quarter 2002 net sales of $80,508,000 increased $54,804,000, or 213%,
from net sales of $25,704,000 for the corresponding period of fiscal year 2001.
The sales increase was primarily due to new products introduced in the prior
year, particularly fluoxetine, sold under distribution agreements with Reddy and
Genpharm, and megestrol acetate oral suspension manufactured by the Company. Net
sales of fluoxetine and megestrol acetate oral suspension for the first quarter
of 2002 were approximately $25,870,000 and $19,401,000, respectively. Net sales
of distributed products, which consist of products manufactured under contract
and licensed products, were approximately 56% and 58%, respectively, of the
Company's net sales in the three month periods ended March 31, 2002 and March
31, 2001. The Company is substantially dependent upon distributed products for
its sales, and as the Company introduces new products under its distribution
agreements, it is expected that this trend will continue. Any inability by
suppliers to meet expected demand could adversely affect future sales.
The Company's exclusivity period for megestrol acetate oral suspension
ended in mid-January 2002. The Company has recently learned that a generic
competitor was granted FDA approval to market another generic version of
megestrol acetate oral suspension and began shipping the product to a limited
number of customers in the second quarter of 2002. In addition, a second
potential generic competitor entered into a settlement agreement with BMS
pursuant to which the public record states that the present formulation of the
generic company's product infringes a BMS patent. However, at this time the
Company has no information as to whether the settlement agreement provides for
the generic competitor to enter the market at some point in the future. The
Company has patents that cover its unique formulation for megestrol acetate oral
suspension and will avail itself of all legal remedies and will take all of the
necessary steps to protect its intellectual property rights. Although
competitors may be taking the necessary steps to enter the market, the Company
believes they are less likely to successfully enter this market because of
patents owned by BMS or the Company. Megestrol acetate oral suspension is still
anticipated to be a significant profit contributor during fiscal year 2002,
despite the potential of competition. Based on these factors and the Company not
experiencing any significant competition to date, the Company did not record a
price protection reserve for megestrol acetate oral suspension as of March 31,
2002, but will continue evaluating the effect of potential competition and will
record a price protection reserve when it deems necessary.
The Company's exclusivity period for fluoxetine ended in late-January 2002.
With respect to fluoxetine, the Company established a price protection reserve
during the exclusivity period of approximately $34,400,000, based on its
estimate that between eight and ten additional generic manufacturers would
introduce and market comparable products for the 10 mg and 20 mg tablets and
between one and three additional manufacturers would introduce and market a
comparable product for the 40 mg capsules. As a result of the introduction of
these competing generic products during the first quarter of 2002, the sales
price for fluoxetine has substantially declined from the price the Company
received during the exclusivity period and the Company issued price protection
credits of approximately $23,500,000 through March 31, 2002. The Company expects
that the remaining price protection reserve at March 31, 2002 of approximately
$10,900,000 will be sufficient and fully utilized. Accordingly, the Company's
sales and gross margins generated by fluoxetine in fiscal year 2002 have been
and will continue to be adversely affected in future periods.
16
Sales of the Company's products are principally dependent upon, among other
things, (i) pricing levels and competition, (ii) market penetration for the
existing product line, (iii) the continuation of existing distribution
agreements, (iv) introduction of new distributed products, (v) approval of ANDAs
and introduction of new manufactured products, including potential exclusivity
periods, and (vi) the level of customer service. Although there can be no
assurance, the Company anticipates introducing new products throughout fiscal
year 2002 and increasing sales of certain existing products to offset the loss
of sales and gross margins from competition on any of its significant products.
The Company will continue to implement measures to reduce the overall impact of
its top products, including adding additional products through new and existing
distribution agreements, manufacturing process improvements and cost reductions.
GROSS MARGIN
The Company's gross margin of $39,275,000 (49% of net sales) for the first
quarter of 2002 increased $30,847,000 from $8,428,000 (33% of net sales) in the
corresponding period of the prior year. The gross margin improvement was
achieved primarily as a result of additional contributions from sales of higher
margin new products, particularly megestrol acetate oral suspension and
fluoxetine, and to a lesser extent, increased sales of certain existing
products.
In the three-month period ended March 31, 2002, megestrol acetate oral
suspension contributed approximately $16,088,000 to the margin improvement while
fluoxetine, which is subject to profit sharing agreements with Genpharm and
Reddy, contributed approximately $10,198,000 to the margin improvement. As
discussed above, additional generic manufacturers have introduced and began
marketing comparable fluoxetine products at the end of the Company's exclusivity
period adversely affecting the Company's sales volumes, selling prices and gross
margins for the products, particularly the 10mg and 20mg strengths. As a result,
the Company's gross margin from fluoxetine is expected to substantially decline
in future periods. The Company's gross margin for megestrol acetate oral
suspension could also decline if additional manufacturers introduce and market
comparable generic products.
Inventory write-offs in the first quarter of 2002 increased to $1,765,000
from $285,000 in the first quarter of 2001. The increase was primarily
attributable to the write-off of inventory for a product whose launch was
delayed due to unexpected patent issues and certain raw material not meeting the
Company's quality control standards. The inventory write-offs, taken in the
normal course of business, are related primarily to work in process inventory
not meeting the Company's quality control standards and the disposal of finished
products due to short shelf lives.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
For the three-month period ended March 31, 2002, the Company incurred
research and development expenses of $2,874,000 compared to $1,538,000 for the
corresponding period of the prior year. The increased costs were primarily
attributable to the following: (i) payments to Elan Transdermal Technologies,
Inc. ("Elan") related to the development of a clonidine transdermal patch and
other products, (ii) payments for formulation development work performed for PRI
by unaffiliated companies and (iii) higher costs for raw material and personnel.
The Company's domestic research and development program is integrated with IPR,
its research operation in Israel. Research and development expenses at IPR for
the most recent quarter were $323,000, net of Generics funding, compared to
expenses of $285,000 for the comparable quarter of last year. The Company, IPR
and Generics have an agreement pursuant to which Generics shares one-half of the
costs of IPR's operating budget up to a maximum payment of $1,000,000 in any one
calendar year in exchange for the exclusive distribution rights outside of the
United States to the products developed by IPR after the date of the agreement
(see "Notes to Consolidated Financial Statements-Research and Development
Agreements"). Annual research and development costs in fiscal year 2002 are
expected to exceed the total for fiscal year 2001 by approximately 35%.
The Company currently has five ANDAs for potential products (two
tentatively approved) pending with, and awaiting approval from, the FDA as a
result of its own product development program. The Company has in process or
expects to commence biostudies for at least four additional products during
fiscal year 2002. None of the potential products described above are subject to
any profit sharing arrangements.
17
Under the Genpharm Distribution Agreement, Genpharm pays the research and
development costs associated with the products covered by the Genpharm
Distribution Agreement. Currently, there are eight ANDAs for potential products
(two of which have been tentatively approved) that are covered by the Genpharm
Distribution Agreement pending with, and awaiting approval from, the FDA. To
date, the Company is marketing 15 products under the Genpharm Distribution
Agreement. Flecainide acetate tablets (Tambocor(R)), covered under the Genpharm
Distribution Agreement, received final approval from the FDA in July 2001. The
Company anticipates commencing the marketing of the product in the second
quarter of 2002 (see "Notes to Consolidated Financial Statements-Intangible
Assets").
Genpharm and the Company share the costs of developing the products covered
under the Genpharm Additional Product Agreement. Currently, there is one ANDA
for a potential product (tentatively approved) covered by the Genpharm
Additional Product Agreement pending with, and awaiting approval from, the FDA.
The Company began marketing fluoxetine 10 mg and 20 mg tablets, covered under
the Genpharm Additional Product Agreement, in August 2001 (see "Notes to
Consolidated Financial Statements-Distribution and Supply Agreements-Genpharm,
Inc.").
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs of $7,516,000 for the first
quarter of 2002 increased $3,321,000, or 79%, from $4,195,000 in the same period
of last year, however, the costs as a percentage of net sales in the respective
periods decreased to 9% in 2002 from 16% in 2001. The higher dollar amount in
the current quarter was primarily attributable to additional marketing programs,
shipping costs and legal fees associated with new product introductions, and to
a lesser extent, increased personnel costs. The Company anticipates it will
continue to incur a high level of legal expenses related to the costs of
litigation connected with certain potential new product introductions (see
"Notes to Consolidated Financial Statements-Commitments, Contingencies and Other
Matters-Legal Proceedings").
SETTLEMENTS
On March 5, 2002 the Company acquired the United States rights to five
products from BMS. The products include the antihypertensives Capoten(R) and
Capozide(R), the cholesterol-lowering medications Questran(R) and Questran
Light(R), and Sumycin(R), an antibiotic. Based on the Company's market research,
these products are expected to generate annual net sales of approximately
$10,000,000. The product acquisition agreement is retroactive to January 1,
2002. To obtain the rights to the five products, the Company paid approximately
$1,024,000 in March 2002 and agreed to make an additional payment of
approximately $1,025,000 in the first quarter of 2003. The Company also agreed
to terminate its outstanding litigation against BMS involving megestrol acetate
oral suspension and buspirone. The Company determined, through a third party
appraisal, the fair value of the agreement to be $11,700,000, which exceeded the
cash consideration of $2,049,000 and associated costs of $600,000 by $9,051,000.
The $9,051,000 value was assigned to the litigation settlement and included in
the settlement income in the first quarter of 2002
OTHER (EXPENSE) INCOME
Other expense of $4,157,000 in the three-month period ended March 31, 2002
includes approximately $4,268,000 incurred in connection with the termination of
the acquisition of the ISP FineTech fine chemical business in March 2002. Other
income of $319,000 in the three-month period ended March 31, 2001 included a
payment from 3M to the Company releasing the parties from a prior product
agreement (see "Notes to Financial Statements-Commitments, Contingencies and
Other Matters-Legal Proceedings").
INCOME TAXES
The Company recorded provisions for income taxes of $13,273,000 and
$1,298,000, respectively, for the three-month period ended March 31, 2002 and
March 31, 2001 (see "Notes to Consolidated Financial Statements-Income Taxes").
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $77,546,000 at March 31, 2002 increased
$9,804,000 from $67,742,000 at December 31, 2001. A portion of the net cash
generated by operations was used to fund capital projects. Working capital,
which includes cash and cash equivalents increased to $108,608,000 at March 31,
2002 from $102,867,000 at December 31, 2001, primarily due to the increased net
18
cash position and higher inventories partially offset by lower accounts
receivable. The working capital ratio was 2.53x at March 31, 2002 compared to
2.41x at December 31, 2001.
The Company, from time to time, enters into agreements with third parties
with respect to the development of new products and technologies. To date, the
Company has entered into agreements and advanced funds to several non-affiliated
companies for products in various stages of development. These types of payments
are expensed as incurred and included in research and development costs. Annual
research and development expenses, including payments to non-affiliated
companies, are expected to total approximately $15,000,000 for fiscal year 2002.
On March 15, 2002, the Company announced the termination of negotiations
with ISP related to the purchase of the ISP FineTech fine chemical business,
based in Haifa, Israel and Columbus, Ohio. At that time, the Company
discontinued negotiations with ISP as a result of various events and
circumstances that occurred since the announcement of the proposed transaction.
Pursuant to the termination of the purchase, the Company paid ISP a $3,000,000
break-up fee in March 2002, which was subject to certain credits and offsets,
and incurred approximately $1,268,000 in related acquisition costs, both of
which were included in other expense in the first quarter of 2002. The Company
subsequently acquired FineTech based in Haifa, Israel in a separate transaction
with ISP in April 2002 for $32,000,000, financed by the Company's cash-on-hand
(see-"Subsequent Events").
As of March 31, 2002 the Company had payables due to distribution agreement
partners of $21,932,000, related primarily to amounts due on fluoxetine pursuant
to profit sharing agreements with strategic partners. The Company expects to pay
these amounts out of its working capital in the second quarter of 2002.
In December 2001, Par entered into an agreement with Elan to develop a
range of modified release drugs over the next five years. Under the terms of the
agreement, the companies will identify two drug candidates for development at
the beginning of each year, commencing in the first quarter of 2002. Elan will
be responsible for the development and manufacture of all products, while Par
will be responsible for marketing, sales and distribution. Par will reimburse
Elan for research and development costs and Elan will receive a royalty from the
sale of the products. Pursuant to the agreement, Par will pay Elan up to
$1,500,000 per calendar year in monthly installments beginning the date of the
commencement of the development program for each product. The Company paid Elan
$250,000 for products covered under this agreement in the first quarter of 2002.
In December 2001, the Company committed to making an equity investment of
up to $2,400,000 over a period of time in HighRapids. HighRapids will utilize
the Company's cash infusion for working capital and operating expenses. Through
March 31, 2002, the Company had invested $259,000 of its $2,400,000 planned
investment.
In November 2001, the Company entered into joint development and marketing
agreement with Breath Ltd. of the Arrow Group to pursue the worldwide
distribution of latanoprost ophthalmic solution 0.005% (Xalatan(R)). Pursuant to
this agreement, Par paid Breath Ltd. $2,500,000 in fiscal year 2001 and an
additional $2,500,000 in the first quarter of 2002.
In November 2001, the Company entered into a license agreement with Pentech
Pharmaceuticals, Inc. ("Pentech") to market paroxetine hydrochloride capsules.
Pursuant to this agreement, Par paid Pentech $200,000 in fiscal year 2001 and
will pay an additional $400,000 based on the achievement of certain milestones.
In April 2001, Par entered into a licensing agreement with Elan to market a
generic clonidine transdermal patch (Catapres TTS(R)). Elan will be responsible
for the development and manufacture of all products, while Par will be
responsible for marketing, sales and distribution. Pursuant to the agreement,
the Company paid Elan $1,167,000 in fiscal year 2001 and $500,000 in the first
quarter of 2002 of a total of $2,000,000 due in monthly installments. In
addition, Par will pay Elan $1,000,000 upon FDA approval of the product and a
royalty on all sales of the product.
In March 1999, the Company entered into an agreement to lease, with an
option to purchase, its Congers Facility to Halsey. Halsey paid the Company a
purchase option of $100,000 in March 1999 and is obligated to pay rent of
$500,000 annually during the initial three-year term of the lease. The rent is
expected to continue to cover the Company's fixed costs of the facility in
subsequent periods. Under the purchase option, Halsey may purchase the facility
and substantially all the machinery and equipment at any time during the lease
for a specified amount (see "Notes to Consolidated Financial Statements-Leasing
Agreement").
19
The Company, IPR and Generics entered into the Development Agreement, dated
August 11, 1998, pursuant to which Generics agreed to fund one-half of the costs
of IPR's operating budget in exchange for the exclusive distribution rights
outside of the United States to the products developed by IPR after the date of
the agreement. In addition, Generics agreed to pay IPR a perpetual royalty for
all sales of the products by Generics or its affiliates outside the United
States. To date, no such products have been brought to market by Generics and no
royalty has been paid to IPR. Pursuant to the Development Agreement, Generics
funded approximately $788,000 for fiscal year 2001 and $170,000 for the first
three months of fiscal year 2002, fulfilling their funding requirements through
March 31, 2002. Under the Development Agreement, Generics is not required to
fund more than $1,000,000 in any one calendar year (see "Notes to Consolidated
Financial Statements-Research and Development Agreements").
The Company expects to fund its operations, including research and
development activities and its obligations under the existing distribution and
development arrangements discussed herein, out of its working capital and, if
necessary, with available borrowings against its line of credit with GECC, if
and to the extent available (see "-Financing"). Although there can be no
assurance, the Company anticipates introducing new products during fiscal year
2002 and increasing sales of certain existing products to offset the loss of
sales and gross margins from competition on any of its significant products. The
Company will continue to implement measures to reduce the overall impact of its
top products, including adding additional products through new and existing
distribution agreements, manufacturing process improvements and cost reductions.
FINANCING
At March 31, 2002, the Company's total outstanding long-term debt,
including the current portion, amounted to $1,240,000. The amount consists
primarily of an outstanding mortgage loan with a bank and capital leases for
computer equipment.
In December 1996, Par entered into the Loan Agreement with GECC. The Loan
Agreement, as amended, provides Par with a revolving line of credit expiring
March 2005. Pursuant to the Loan Agreement, Par is permitted to borrow up to the
lesser of (i) the borrowing base established under the Loan Agreement or (ii)
$30,000,000. The borrowing base is limited to 85% of eligible accounts
receivable plus 50% of eligible inventory of Par, each as determined from time
to time by GECC. The interest rate charged on the line of credit is based upon a
per annum rate of 2.25% above the 30-day commercial paper rate for high-grade
unsecured notes adjusted monthly. The line of credit with GECC is secured by the
assets of Par, PRI and certain subsidiaries, other than real property, and is
guaranteed by PRI and certain of its subsidiaries. In connection with such
facility, Par, PRI and their subsidiaries have established a cash management
system pursuant to which all cash and cash equivalents received by any of such
entities are deposited into a lockbox account over which GECC has sole operating
control if there are amounts outstanding under the line of credit. The deposits
would then be applied on a daily basis to reduce the amounts outstanding under
the line of credit. The revolving credit facility is subject to covenants based
on various financial benchmarks. As of March 31, 2002, the borrowing base was
approximately $26,700,000. To date, no debt is outstanding under the Loan
Agreement.
SUBSEQUENT EVENTS
In April 2002, the Company entered into an agreement with RTI, an
associated company of Purdue Pharma L.P., to establish a joint venture
partnership in the United States. The new joint venture will be named SVC Pharma
and will be owned equally by both parties. SVC Pharma will utilize, on a
case-by-case basis, advanced technologies and patented processes to develop,
manufacture, market and distribute certain unique, proprietary pharmaceutical
products. Under the terms of the agreement, when both partners agree to pursue a
specific project, each partner will contribute resources to the new enterprise.
RTI will provide scientific and technological expertise in the development of
non-infringing, complex molecules. In addition to providing chemical synthesis
capabilities, RTI will provide the manufacturing capacity for sophisticated
intermediate and active pharmaceutical ingredients. Par will provide development
expertise in dosage formulation and will be responsible for marketing, sales and
distribution. The companies will share equally in expenses and profits. SVC
Pharma has already identified several candidates for drug development. The first
of these has the potential to be marketed by the Company at the end of fiscal
year 2003 or early in fiscal year 2004.
In April 2002, the Company acquired FineTech from ISP for $32,000,000. The
acquisition was financed by cash-on-hand and is not expected to have a material
effect on earnings in fiscal year 2002. FineTech, based in Haifa, Israel,
specializes in the design and manufacture of proprietary synthetic chemical
processes used in the production of complex organic compounds for the
pharmaceutical industry. The Company has acquired the physical facilities, the
20
intellectual property and patents of FineTech and has retained all FineTech
employees. FineTech also manufactures complex synthetic active pharmaceutical
ingredients for companies in the branded and generic pharmaceutical industries
at its manufacturing facility in Haifa, Israel. This facility operates in
compliance with FDA current good manufacturing practices (cGMP) standards.
FineTech achieved revenues of approximately $6,000,000 in 2001. The Company
expects to transfer a portion of FineTech's personnel and technological
resources to a laboratory facility in the northeastern United States. The
remaining physical assets in Haifa are valued at less than $2,000,000. FineTech
will be operated as an independent, wholly owned subsidiary of PRI and will
provide immediate chemical synthesis capabilities and strategic opportunities to
the Company and other customers.
The Company has enjoyed a long-standing relationship with FineTech for more
than seven years. Two of the Company's six potential first-to-file products,
flecainide and latanoprost, resulted from the Company's relationship with
FineTech. In addition, the Company and FineTech are currently collaborating on
three additional products. ANDAs have already been submitted for two of these
products.
In April 2002, the Company entered into an agreement to expand its
strategic product partnership with Merck KGaA. Under the terms of the new
agreement, Par has licensed the exclusive rights to 11 generic pharmaceutical
products currently under development and not included in any other distribution
agreements between the Company and Genpharm (see "-Intangible Assets" and
"-Distribution and Supply Agreements-Genpharm, Inc."). Pursuant to the
agreement, Genpharm is to develop the products, submit all corresponding ANDAs
to the FDA and subsequently manufacture the products. Par will serve as
exclusive U.S. marketer and distributor of the products, pay a share of the
costs, including development and legal expenses incurred to obtain final
regulatory approval, and pay Genpharm a percentage of the gross profits on all
sales of products covered under this agreement. Pursuant to the agreement, the
Company will pay Genpharm a non-refundable fee of $2,000,000 in the second
quarter of 2002 for two of the products, loratadine 10 mg tablets and
mirtazapine tablets, which are tentatively approved and expected to be launched
in fiscal years 2003 to 2004. In addition, the Company will be required to pay a
non-refundable fee of up to $414,000 based upon FDA acceptance of filings for
six of the nine remaining products.
According to the Company's market research loratadine 10 mg tablets, the
generic version of Schering-Plough's non-sedating antihistamine Claritin(R), had
U.S. sales of approximately $1.8 billion in fiscal year 2001 and mirtazapine,
the generic equivalent of Organon's antidepressant Remeron(R), had U.S. sales of
approximately $400 million in 2001. In fiscal year 2001, the cumulative sales of
the 11 branded products totaled approximately $7.8 billion. The majority of
these products are expected to enter the U.S. market between 2003 and 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------ -----------------
Par has filed an ANDA (currently pending with the FDA) for latanoprost
(Xalatan(R)), which was developed by Breath Ltd. of the Arrow Group pursuant to
a joint manufacturing and marketing agreement with the Company, seeking approval
to engage in the commercial manufacture, sale and use of the latanoprost product
in the United States. Par's ANDA includes a Paragraph IV certification that the
existing patents in connection with Xalatan(R) are invalid, unenforceable or
will not be infringed by Par's generic product. Par has reason to believe that
its ANDA is the first to be filed for this drug with a Paragraph IV
certification. As a result of the filing of the ANDA, Pharmacia Corporation,
Pharmacia AB, Pharmacia Enterprises, S.A., Pharmacia and Upjohn Company and the
Trustees of Columbia University in the City of New York filed lawsuits against
the Company on December 14, 2001 in the United States District Court for the
District of Delaware and on December 21, 2001 in the United States District
Court for the District of New Jersey alleging patent infringement. Pharmacia and
Columbia are seeking an injunction. On February 8, 2002, Par answered the
complaint brought in the District of New Jersey and filed a counterclaim, which
seeks a declaration that the patents-in-suit are invalid, unenforceable and not
infringed by Par's products. Par also seeks a declaratory judgment that the
extension of judgment concerning the term of one of the patents is invalid, as
well as reimbursement for attorneys' fees. In addition, on February 25, 2002 the
lawsuit brought in the District of Delaware was dismissed pursuant to a
stipulation of the parties. Par intends to vigorously defend the lawsuits. At
this time, it is not possible for the Company to predict the outcome of this
litigation and the impact, if any, that it might have on the Company.
Par, among others, is a defendant in three lawsuits filed in United States
District Court for the Eastern District of North Carolina (filed on August 1,
2001, October 30, 2001 and November 16, 2001, respectively) by aaiPharma Inc.,
involving patent infringement allegations connected to a total of three patents
related to polymorphic forms of fluoxetine (Prozac(R)). Par intends to
vigorously litigate these cases. While the outcome of litigation is never
certain, Par believes that it will prevail in these litigations.
On July 16, 2001, the Federal Circuit Court of Appeals in Washington D.C.
affirmed the Company's summary judgment victory in its patent infringement case
with BMS over megestrol acetate oral suspension, the generic version of BMS's
Megace(R) Oral Suspension. On July 25, 2001, the FDA granted the Company final
approval for megestrol acetate oral suspension with marketing exclusivity until
mid-January 2002 and the Company immediately began shipping the product to its
customers. Although the Court had disposed of all of BMS's infringement issues,
Par's counterclaims for patent invalidity, unfair competition and tortuous
interference seeking an injunction and an award of compensatory and punitive
damages remained. In March 2002 BMS sold the rights to five products to Par in
exchange for a payment of $2,049,000 and the termination of all the Company's
outstanding litigation against BMS involving megestrol acetate oral suspension
and buspirone.
On August 1, 2001 Alpharma USPD, Inc. filed a lawsuit in the U.S. District
Court for the District of Maryland seeking a declaratory judgment that
Alpharma's megestrol acetate formulation does not infringe U.S. Patent No.
6,028,065 granted to the Company and/or that the Company's patent is invalid.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------- ---------------------------------
(a) Exhibits:
10.1.1 1997 Directors' Stock Option Plan, as amended.
10.18.11 Eleventh Amendment to Loan and Security Agreement, dated as
of March 29, 2002, among the Company, General Electric Capital
Corporation, and the other parties named therein.
(b) Reports on Form 8-K:
On January 14, 2002, March 1, 2002 and March 22, 2002 the Company
filed a Current Report on Form 8-K.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACEUTICAL RESOURCES, INC.
------------------------------
(Registrant)
May 15, 2002 /s/ KENNETH I. SAWYER
---------------------
Kenneth I. Sawyer
CHIEF EXECUTIVE OFFICE AND CHAIRMAN OF THE
BOARD OF DIRECTORS
(Principal Executive Officer)
May 15, 2002 /s/ DENNIS J. O'CONNOR
----------------------
Dennis J. O'Connor
VICE PRESIDENT - CHIEF FINANCIAL OFFICER
AND SECRETARY
(Principal Accounting and Financial Officer)
23
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.2.1 1997 Directors' Stock Option Plan, as amended.
10.18.11 Eleventh Amendment to Loan and Security Agreement, dated as of March
29, 2002, among the Company, General Electric Capital Corporation,
and the other parties named therein.
24