UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: October 3, 2004
Commission file number: 1-10827
PAR PHARMACEUTICAL COMPANIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE RAM RIDGE ROAD, SPRING VALLEY, NEW YORK 10977
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code : (845) 425-7100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes X No
--- ---
Number of shares of Common Stock outstanding as of November 9, 2004:
33,877,079
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
October 3, December 31,
ASSETS 2004 2003
------ ---- ----
Current assets:
Cash and cash equivalents $25,328 $162,549
Available-for-sale securities 197,605 195,500
Accounts receivable, net of allowances of
$32,606 and $40,357 156,229 157,707
Inventories, net 82,499 66,713
Prepaid expenses and other current assets 5,895 10,033
Deferred income tax assets 50,641 34,473
------ ------
Total current assets 518,197 626,975
Property, plant and equipment, at cost less
accumulated depreciation and amortization 62,404 46,813
Investments 17,399 7,500
Intangible assets, net 37,770 35,564
Goodwill 76,800 24,662
Deferred charges and other assets 8,788 6,899
Non-current deferred income tax assets, net 47,514 14,399
------ ------
Total assets $768,872 $762,812
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $206 $122
Accounts payable 35,216 20,157
Payables due to distribution agreement partners 55,976 88,625
Accrued salaries and employee benefits 6,436 7,363
Accrued expenses and other current liabilities 17,137 24,654
Income taxes payable 48,057 26,252
------ ------
Total current liabilities 163,028 167,173
Long-term debt, less current portion 200,326 200,211
Other long-term liabilities 347 347
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.0001 per share; authorized: 6,000,000 shares;
no shares issued and outstanding - -
Common stock, par value $.01 per share; authorized: 90,000,000 shares;
issued: 34,715,886 and 34,318,163 shares 347 343
Additional paid-in capital 187,575 171,931
Retained earnings 249,461 224,480
Accumulated other comprehensive loss (186) (1,673)
Treasury stock at cost: 843,700 shares (32,026) -
------ --------
Total stockholders' equity 405,171 395,081
------- -------
Total liabilities and stockholders' equity $768,872 $762,812
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
2
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS
(In Thousands, Except Per Share Data)
(Unaudited)
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
OCTOBER 3, SEPTEMBER 28, OCTOBER 3, SEPTEMBER 28,
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Net product sales $574,810 $424,418 $151,566 $214,933
Other product related revenues 1,054 14,490 - 1,702
----- ------ ----- -----
Total revenues 575,864 438,908 151,566 216,635
Cost of goods sold 373,461 237,709 92,832 131,709
------- ------- ------ -------
Gross margin 202,403 201,199 58,734 84,926
Operating expenses (income):
Research and development 33,722 17,908 17,060 6,788
Acquired in-process research and development 84,000 - 84,000 -
Selling, general and administrative 49,676 44,246 16,128 14,141
Settlements, net (2,846) - - -
Gain on sale of facility (2,812) - - -
----- ------- ------- --------
Total operating expenses 161,740 62,154 117,188 20,929
------- ------ -------- ------
Operating income 40,663 139,045 (58,454) 63,997
Other expense, net (130) (145) (55) (101)
Interest (expense) income, net (667) 474 (94) 141
--- --- -- ---
Income (loss) before
provision (credit) for income taxes 39,866 139,374 (58,603) 64,037
Provision (credit) for income taxes 14,885 55,053 (23,518) 25,295
------ ------ ------ ------
Net income (loss) 24,981 84,321 (35,085) 38,742
Retained earnings, beginning of period 224,480 101,947 284,546 147,526
------- ------- ------- -------
Retained earnings, end of period $249,461 $186,268 $249,461 $186,268
======= ======= ======= =======
Net income (loss) per share of common stock:
Basic $.73 $2.53 $(1.03) $1.15
=== ==== ==== =====
Diluted $.71 $2.45 $(1.03) $1.11
=== ==== ==== ====
Weighted average number of common shares outstanding:
Basic 34,225 33,269 33,958 33,758
====== ====== ====== ======
Diluted 35,027 34,368 33,958 35,004
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements.
3
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
NINE MONTHS ENDED
-----------------
OCTOBER 3, SEPT. 28,
2004 2003
---- ----
Cash flows provided by operating activities:
Net income $24,981 $84,321
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income taxes (50,414) (3,943)
Acquired in-process research and development 84,000 -
Depreciation and amortization 9,421 6,681
Inventory reserves 1,249 220
Allowances against accounts receivable (7,751) 8,571
Stock option activity 788 3,690
Gain on sale of property (2,812) -
Other (307) 6
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 9,416 (130,154)
Increase in inventories (16,907) (7,171)
Decrease (increase) in prepaid expenses and other assets 5,366 (6,940)
Increase in accounts payable 14,164 574
(Decrease) increase in payables due to distribution agreement partners (32,649) 66,106
(Decrease) increase in accrued expenses and other liabilities (12,853) 8,027
Increase in income taxes payable 25,755 57,233
------ ------
Net cash provided by operating activities 51,447 87,221
------ ------
Cash flows from investing activities:
Capital expenditures (18,733) (16,720)
Investment in New River (7,000) -
Acquisition of Kali Laboratories, Inc., net of cash acquired (142,089) -
Acquisition of available-for-sale securities (350,294) -
Proceeds from sale of available-for-sale securities 347,920 -
Proceeds from sale of fixed assets 4,980 -
----- ----------
Net cash used in investing activities (165,216) (16,720)
------- ------
Cash flows from financing activities:
Proceeds from issuances of common stock 8,375 23,122
Repurchases of stock (32,026) -
Increase in capital lease obligations 399 -
Principal payments under long-term debt and other borrowings (200) (1,215)
--- -----
Net cash (used in) provided by financing activities (23,452) 21,907
------ ------
Net (decrease) increase in cash and cash equivalents (137,221) 92,408
Cash and cash equivalents at beginning of period 162,549 65,121
------- ------
Cash and cash equivalents at end of period $25,328 $157,529
====== =======
Supplemental disclosure of cash flow information: Cash paid during the year for:
Taxes $29,896 $1,762
====== =====
Interest 5,863 104
===== ===
Non-cash transactions:
Tax benefit from exercise of stock options 3,955 10,764
===== ======
Issuance of warrants 2,530 -
===== =
Decrease in fair value of available-for-sale securities and investments 1,487 -
===== =
Receivable due from convertible debt, net - 177,945
= =======
The accompanying notes are an integral part of these consolidated financial statements.
4
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Par Pharmaceutical Companies, Inc. (the "Company" or "PRX") operates
primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. ("Par"),
in one business segment, the manufacture and distribution of generic
pharmaceuticals, principally in the United States. In addition, the Company
develops and manufactures, in small quantities, complex synthetic active
pharmaceutical ingredients through its wholly owned subsidiary, FineTech
Laboratories Ltd. ("FineTech"), based in Haifa, Israel, and sells a limited
number of mature brand name drugs through an agreement between Par and
Bristol-Myers Squibb Company ("BMS"). The Company also wholly owns Kali
Laboratories, Inc. ("Kali"), a generic pharmaceutical research and development
company located in Somerset, New Jersey, which was acquired on June 9, 2004. On
May 26, 2004, the Company changed its name from Pharmaceutical Resources, Inc.
to Par Pharmaceutical Companies, Inc. Marketed products are principally in the
solid oral dosage form (tablet, caplet and two-piece hard-shell capsule). The
Company also distributes one product in the semi-solid form of a cream and one
product in oral suspension form.
NOTE 1 - BASIS OF PREPARATION:
The accompanying consolidated financial statements at October 3, 2004 and
for the nine-month and three-month periods ended October 3, 2004 and September
28, 2003, respectively, are unaudited; in the opinion of the Company's
management, however, such statements include all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the information presented
therein. The consolidated balance sheet data at December 31, 2003 was derived
from the Company's audited consolidated financial statements at such date.
On June 9, 2004, the Company purchased all of the capital stock of Kali.
The acquisition was accounted for as a purchase under Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations", and the
consolidated financial statements include the operating results from the date of
acquisition.
Pursuant to accounting requirements of the Securities and Exchange
Commission (the "Commission") applicable to quarterly reports on Form 10-Q, the
accompanying consolidated financial statements and these notes do not include
all disclosures required by accounting principles generally accepted in the
United States for audited financial statements. Accordingly, these statements
should be read in conjunction with the Company's most recent annual consolidated
financial statements.
Results of operations for interim periods are not necessarily indicative of
those to be achieved for full fiscal years. Certain items in the consolidated
financial statements for the prior period have been reclassified to conform to
the current period's financial statement presentation.
NOTE 2 - STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion 25"), and
complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). Under APB Opinion 25, compensation
expense is based on any difference, as of the date of a stock option grant,
between the fair value of the Company's common stock and the option's per share
exercise price.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123" ("SFAS 148"), to provide
alternative methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation. SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effects of the method used on reported
results.
5
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The following table illustrates the effects on net income and net income
per share of common stock if the Company had applied the fair value recognition
provisions of SFAS 123 to its stock-based employee compensation:
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
OCT. 3, SEPT. 28, OCT. 3, SEPT. 28,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss), as reported $24,981 $84,321 $(35,085) $38,742
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - 1,263 - -
Deduct: Stock-based employee compensation
expense determined under the fair value based
method, net of related tax effects (14,013) (7,884) (2,827) (2,573)
------ ----- ----- -----
Pro forma net income (loss) $10,968 $77,700 $(37,912) $36,169
====== ====== ====== ======
Net income (loss) per share of common stock:
As reported -Basic $.73 $2.53 $(1.03) $1.15
=== ==== ==== ====
As reported -Diluted $.71 $2.45 $(1.03) $1.11
=== ==== ==== ====
Pro forma -Basic $.32 $2.34 $(1.12) $1.07
=== ==== ==== ====
Pro forma -Diluted $.31 $2.26 $(1.12) $1.03
=== ==== ==== ====
As permitted under SFAS 123, the Company has elected to follow APB Opinion
25 and related interpretations in accounting for stock-based compensation to its
employees. Pro forma information regarding net income is required by SFAS 123,
as amended by SFAS 148. This required information is to be determined as if the
Company had accounted for its stock-based compensation to employees under the
fair value-based method of SFAS 148. The fair value of the options granted
during each of the nine- and three-month periods has been estimated at the date
of grant using the Black-Scholes stock option-pricing model, based on the
following assumptions:
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
OCT. 3, SEPT. 28, OCT. 3, SEPT. 28,
2004 2003 2004 2003
---- ---- ---- ----
Risk-free interest rate 3.9% 4.0% 3.3% 4.0%
Expected term 4.9 years 4.8 years 5.0 years 5.0 years
Expected volatility 60.5% 61.3% 60.7% 61.0%
It has been assumed also that no dividends will be paid during the entire
term of the options. The weighted average fair values of options granted in the
nine-month periods ended October 3, 2004 and September 28, 2003 were $30.75 and
$18.08, respectively. The weighted average fair values of options granted in the
three-month periods ended October 3, 2004 and September 28, 2003 were $19.08 and
$29.55, respectively.
NOTE 3 - AVAILABLE-FOR-SALE SECURITIES:
At October 3, 2004 and December 31, 2003, all of the Company's investments
in marketable securities were classified as available-for-sale and, as a result,
were reported at fair value. The following is a summary of the Company's
available-for-sale securities at October 3, 2004:
UNREALIZED
---------- FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Debt securities issued by various state and local
municipalities and agencies $111,565 $- $(28) $111,537
Securities issued by United States
government and agencies 86,351 - (283) 86,068
------ - ---- ------
Total $197,916 - $(311) $197,605
======= = === =======
6
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The following is a summary of the Company's available-for-sale securities
at December 31, 2003:
UNREALIZED
---------- FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Debt securities issued by various state and local
municipalities and agencies $185,450 $- $- $185,450
Securities issued by United States
government and agencies 10,080 - (30) 10,050
------ - -- ------
Total $195,530 - $(30) $195,500
======= = == =======
All of the securities are available for immediate sale and have been
classified as short-term investments. The following table summarizes the
contractual maturities of debt securities at October 3, 2004 and December 31,
2003:
OCTOBER 3, 2004 DECEMBER 31, 2003
--------------- -----------------
FAIR FAIR
COST VALUE COST VALUE
---- ----- ---- -----
Less than one year $91,351 $91,068 $10,080 $10,050
Due in 1-2 years 1,056 1,055 - -
Due in 2-5 years 15,184 15,157 - -
Due after 5 years 90,325 90,325 185,450 185,450
------ ------ ------- -------
Total $197,916 $197,605 $195,530 $195,500
======= ======= ======= =======
In addition to the short-term investments described above, the Company also
has investments in New River Pharmaceuticals Inc. ("New River") and Advancis
Pharmaceutical Corporation ("Advancis"). The Company assesses whether temporary
or other-than-temporary gains or losses on its marketable securities have
occurred due to increases or declines in fair value or other market conditions.
Because the Company has determined that all of its marketable securities are
available-for-sale, unrealized gains and losses are reported as a component of
accumulated other comprehensive income (loss) in stockholders' equity.
The Company purchased 875 shares of common stock of New River on August 5,
2004 in its initial public offering for $8 per share. Par's investment of $7,000
represents an ownership position of 4.9% of the outstanding common stock of New
River. New River, based in Radford, Virginia, is a specialty pharmaceutical
company focused on developing novel pharmaceuticals that are safer and improved
versions of widely-prescribed drugs, including amphetamines and opioids. As of
October 3, 2004, the fair value of the Company's investment in New River was
$9,039, based on the market value of the common stock of New River at that date.
To date, the Company has recorded unrealized gains on this investment of $2,039,
with a corresponding credit of $1,244 to accumulated other comprehensive gains
and $795 to deferred income taxes.
The Company paid $10,000 to purchase 1,000 shares of the common stock of
Advancis, a pharmaceutical company based in Germantown, Maryland, at $10 per
share in its initial public offering of 6,000 shares on October 16, 2003. The
transaction closed on October 22, 2003. The Company's investment represented an
ownership position of 4.4% of the outstanding common stock of Advancis. As of
October 3, 2004, the fair value of the Company's investment in Advancis was
$8,360, based on the market value of the common stock of Advancis at that date.
To date, the Company has recorded net unrealized losses on this investment of
$1,640, with corresponding charges of $1,000 to accumulated other comprehensive
losses and $640 to deferred income taxes.
7
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 4 - ACCOUNTS RECEIVABLE:
OCTOBER 3, DECEMBER 31,
2004 2003
---- ----
Trade accounts receivable, net of customer
rebates and chargebacks $187,787 $196,888
Other accounts receivable 1,048 1,176
----- -----
188,835 198,064
------- -------
Allowances:
Doubtful accounts 1,847 1,756
Returns 16,255 13,256
Price adjustments and allowances 14,504 25,345
------ ------
32,606 40,357
------ ------
Accounts receivable,
net of allowances $156,229 $157,707
======= =======
The trade accounts receivable amounts presented above at October 3, 2004
and December 31, 2003 are net of provisions for customer rebates of $15,034 and
$23,793, and of chargebacks of $85,197 and $75,598, respectively. Customer
rebates are price reductions generally given to customers as an incentive to
increase sales volume. Rebates are generally based on a customer's volume of
purchases made during an applicable monthly, quarterly or annual period. The
lower rebate reserve at October 3, 2004 compared to December 31, 2003 was
primarily attributable to lower pricing on paroxetine, the generic version of
GlaxoSmithKline's ("GSK's") Paxil(R). Chargebacks are price adjustments provided
to wholesale customers for product that they resell to specific healthcare
providers on the basis of prices negotiated between the Company and the
providers. The increase in the chargeback reserve from December 31, 2003 is
primarily attributable to new products, particularly ribavirin, the generic
version of Schering-Plough Corporation's ("Schering's") Rebetol(R), that the
Company began selling in April 2004 and glyburide and metformin hydrochloride,
the generic version of BMS's Glucovance(R), introduced by the Company in May
2004. The chargeback reserve also increased due to lower contract pricing from
competition on paroxetine, which was partially offset by lower paroxetine sales
volumes.
The accounts receivable allowances include provisions for doubtful
accounts, returns and price adjustments and allowances. Price adjustments
include cash discounts, sales promotions and shelf-stock adjustments. Cash or
terms discounts are given to customers that pay within a specified period of
time. The Company may conduct sales or trade-show promotions through which
additional discounts may be given on a new product or certain existing products
as an added incentive for the customer to purchase the Company's products. The
lower reserve for price adjustments and allowances at October 3, 2004 is due to
the absence of reserves for certain stocking credits and shelf-stock adjustments
that were required at year-end. Shelf-stock adjustments can be given to a
customer either for price protection or when the Company lowers its invoice
pricing at the wholesale level, without a reduction in contract price, and
provides a credit for the difference between the old and new invoice prices for
the inventory that the customer has on hand at the time of the price reduction.
The Company generally will offer price protection for sales of new generic
drugs for which its market exclusivity period has expired. In addition, the
Company may offer price protection with respect to existing products for which
it anticipates significant price erosion through increases in competition. Such
price protection accounts for the fact that the prices of such drugs typically
will decline, sometimes substantially, when additional generic manufacturers
introduce and market a comparable generic product following the expiration of an
exclusivity period. Such price protection plans, which are common in the
Company's industry, are given through lower contract pricing at the wholesalers,
which results in an increased chargeback per unit on existing inventory levels,
or shelf-stock adjustments. The shelf-stock adjustments are given to customers
with respect to the customer's remaining inventory at the expiration of the
exclusivity period for the difference between the Company's new price and the
price at which the Company originally sold the product to the customer.
The Company's exclusivity period for megestrol acetate oral suspension, the
generic version of BMS's Megace(R) Oral Suspension, expired in mid-January 2002.
Through October 3, 2004, two generic competitors had been granted United States
Food and Drug Administration ("FDA") approval to market generic versions of
8
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
megestrol acetate oral suspension and launched products that compete with the
Company's product. In July 2004, Par entered into a legal settlement with one of
the competitors, Teva Pharmaceuticals USA, Inc. ("Teva USA"), pursuant to which
Par granted a license to Teva USA for a limited number of units and Par receives
a royalty on Teva USA's net sales of megestrol acetate oral suspension in the
United States (see "Note 11 -Commitments, Contingencies and Other Matters-Legal
Proceedings"). On November 3, 2004, an additional competitor was granted
approval from the FDA to launch a generic version of megestrol acetate oral
suspension, which generic product would also compete with the Company's product.
Sales and gross margins on megestrol acetate oral suspension continued to
decline in fiscal year 2004 due to the effects of competition; however, the
product is expected to continue to be a significant contributor to the Company's
overall results in future periods. Net sales of megestrol acetate oral
suspension were approximately $17,800 for the third quarter of 2004, decreasing
$4,600 from approximately $22,400 for the third quarter of 2003. Megestrol
acetate oral suspension net sales were approximately $54,800 for the nine-month
period ended October 3, 2004 compared to $65,000 for the corresponding
nine-month period of 2003.
As a result of generic competition beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing exclusivity period,
the sales price for fluoxetine 10 mg and 20 mg tablets and 40 mg capsules
substantially declined from the price that the Company had charged during the
exclusivity period. Despite pricing declines, fluoxetine 40 mg capsules were a
significant sales and gross margin contributor in fiscal years 2002 and 2003. In
the first quarter of 2004, however, additional competitive factors led to
further pricing pressure on fluoxetine 40 mg capsules, resulting in lower net
sales and gross margins. Currently, there are two competitors in the market with
products that compete with the Company's fluoxetine 40 mg product and a third
competitor received FDA approval for its product in October 2004. Net sales of
fluoxetine 10 mg and 20 mg tablets and 40 mg capsules were approximately $14,400
and $37,600, respectively, for the three- and nine-month periods ended October
3, 2004 compared to approximately $26,100 and $70,600, respectively, for the
corresponding periods of 2003.
As discussed above, net sales of megestrol acetate oral suspension and of
fluoxetine 40 mg capsules have decreased as a result of increased generic
competition and its corresponding effect on pricing and market share. When
competition enters the market and the Company anticipates significant price
erosion, there are circumstances under which the Company may decide to not
afford price protection to certain customers and consequently, as a matter of
business strategy, to lose volume to competitors rather than reduce its pricing.
When there is general market pressure for lower pricing due to many competitors
entering the market at the same time, the Company decides which customers will
be afforded price protection and a price protection reserve is established,
based on estimated or actual existing customer inventories. The competition on
these two products has been somewhat limited and competitors have been entering
the market over an extended period of time, thereby reducing the need for broad
price protection and material price protection reserves. The Company has lowered
the pricing on these products over time and granted and processed some price
protection credits within the applicable reporting periods. However, the Company
did not establish a price protection reserve as of October 3, 2004 because there
were no additional price protection credits issued with respect to sales through
that date. The Company will continue to evaluate the effects of competition and
will record a price protection reserve when, if and to the extent that it deems
necessary.
In fiscal year 2003, Par obtained the marketing rights to paroxetine, the
generic version of GlaxoSmithKline's ("GSK") Paxil(R), in connection with a
litigation settlement (the "GSK Settlement") between the Company, GSK and
certain of its affiliates, and Pentech Pharmaceuticals, Inc. ("Pentech"). As a
result of the GSK Settlement, Par and GSK entered into an agreement (the "GSK
Supply Agreement") pursuant to which Par began marketing paroxetine, supplied
and licensed from GSK, in the Commonwealth of Puerto Rico in May 2003 and the
United States in September 2003, at which time there was one other competitive
generic product in the market. The marketing exclusivity period in respect of
paroxetine ended on March 8, 2004 and two additional competitors launched
competing paroxetine products in the second quarter of 2004. The additional
competition continues to adversely affect the Company's net sales and gross
margins derived from paroxetine. Net sales of paroxetine were approximately
$26,800 and $208,700, respectively, for the three- and nine-month periods ended
October 3, 2004 compared to approximately $95,400 and $96,300, respectively, for
the corresponding periods of 2003. As a result of the competition, the Company
had price protection reserves of approximately $5,900 for paroxetine at July 4,
2004, which it fully utilized by October 3, 2004, and issued additional price
protection credits within the current quarter. The Company believes that market
9
conditions did not warrant any further price protection reserves at October 3,
2004. The Company will continue to evaluate the effects of competition and will
record a price protection reserve when, if and to the extent that it deems
necessary.
NOTE 5 -INVENTORIES, NET:
OCTOBER 3, DECEMBER 31,
2004 2003
---- ----
Raw materials and supplies, net $30,614 $21,551
Work-in-process, net 11,830 7,166
Finished goods, net 40,055 37,996
------ ------
$82,499 $66,713
====== ======
NOTE 6 - ACQUISITION OF KALI:
On June 9, 2004, the Company acquired all of the capital stock of Kali for
$143,345 in cash and $2,530 in warrants to purchase 150,000 shares of the
Company's common stock. The Kali stockholders may be entitled to up to an
additional $10,000 if certain product-related performance criteria are met over
the next four years. The acquisition did not require the approval of the
Company's stockholders. The Company acquired the physical facilities, in-process
research and development and intellectual property of Kali and retained all of
its 55 employees. The acquisition of Kali expands the Company's research and
development capabilities and provides additional sustained-release technology
and oral disintegrating tablet technology.
The pro forma adjustments in the tables below are based upon available
information and assumptions that the Company believes are reasonable. The
unaudited condensed consolidated pro forma financial statements do not purport
to represent what the consolidated results of operations of the Company would
actually have been if the acquisition had occurred on the date referred to
below, nor do they purport to project the results of operations of the Company
for any future period.
The unaudited condensed consolidated pro forma statements of operations
data were prepared by combining the Company's statement of operations for the
12-months ended December 31, 2003 and for the nine and three month periods ended
October 3, 2004 and September 28, 2003 with Kali's statements of operations for
the same periods, giving effect to the acquisition as if it had occurred on
January 1, 2003. The unaudited condensed consolidated pro forma statements of
operations do not give effect to any restructuring costs or any potential cost
savings or other operating efficiencies that could result from the acquisition.
The unaudited condensed consolidated pro forma financial statements should
be read in conjunction with the historical financial statements of the Company
included in its Annual Report on Form 10-K for the year ended December 31, 2003.
Condensed Consolidated Pro Forma Statement of Operations Data
TWELVE MONTHS NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
ENDED DEC. 31, OCT. 3, SEPT. 28, OCT. 3, SEPT. 28,
2003 2004 2003 2004 2003
---- ---- ---- ---- ----
Total revenue $662,695 $576,648 $442,487 $151,566 $218,630
Net income (loss) $121,125 $21,905 $85,133 $(35,085) $39,616
Net income (loss) per basic share of common stock $3.62 $.64 $2.56 $(1.03) $1.17
==== === ==== ==== ====
Net income (loss) per diluted share of common stock $3.50 $.63 $2.48 $(1.03) $1.13
==== === ==== ==== ====
10
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The purchase price was allocated to the assets and liabilities of Kali
based on management's determination of fair value. The following table sets
forth the allocation of the purchase price:
Current assets $2,513
Property, plant and equipment 3,224
Receivable from VGS Holdings, Inc. 2,688
Intellectual property 6,545
In-process research and development 84,000
Goodwill 52,138
------
Total assets acquired 151,108
Current liabilities 5,233
-----
Total liabilities assumed 5,233
-----
Net assets acquired $145,875
=======
In accordance with SFAS No. 142, "Accounting for Goodwill and Other
Intangible Assets" ("SFAS 142"), the goodwill will not be amortized, but will be
tested at least annually for impairment using a fair value approach.
The allocated purchase price for Kali includes $2,725 classified as
core/developed technology, which was capitalized and included in intangible
assets on the consolidated balance sheet and $84,000 classified as acquired
in-process technology, which was written off in the three-month period ended
October 3, 2004. The Company classified the technology assets as either
core/developed or in-process based on the stage of development that the product
was in at the time of acquisition. All core/developed and in-process technology
was valued using the income approach, which focuses on the income-producing
capability of the subject assets. The underlying premise of the income approach
is that the value of an asset can be measured by the present worth of the net
economic benefit (cash receipts less cash outlays) to be received over the life
of the subject asset.
The acquired in-process research and development includes the valuation of
29 products where there was a material investment in their research and
development activities and they have completed a certain amount of development
work. The development work on 16 of these products was considered complete and
ANDAs for 14 of the products were filed with the FDA. The core/developed
products include six products that have completed the final approval stage,
including the approval process with the FDA and the Company's assessments of
patent issues and batch size compatibility.
Kali leases, with a purchase option, a 45,000-square foot manufacturing
facility located in Somerset, New Jersey. The building is subject to a triple
net lease between VGS Holdings and Kali that terminates on June 9, 2006. On June
9, 2004, the lease was assigned to Par. Because the rent under the lease was
below market value, the Company determined the value of the net rental benefit
to be $3,820, which was recorded as an intangible asset in the third quarter
2004. That value was determined as the net present fair value of the difference
between the current market rental rate for a similar facility and the contract
rent.
NOTE 7 - INTANGIBLE ASSETS, NET:
OCTOBER 3, DECEMBER 31,
2004 2003
---- ----
Intellectual property, net of accumulated amortization of $1,911 and $1,202 $11,213 $5,378
Product license fees, net of accumulated amortization of $3,136 and $1,135 7,669 9,170
BMS Asset Purchase Agreement, net of accumulated amortization
of $4,318 and $3,064 7,382 8,636
Genpharm Distribution Agreement, net of accumulated amortization
of $4,514 and $3,972 6,319 6,861
Trademark licensed from BMS 5,000 5,000
Genpharm Profit Sharing Agreement, net of accumulated amortization
of $2,313 and $1,981 187 519
--- ---
$37,770 $35,564
====== ======
11
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company recorded amortization expense related to intangible assets of
$4,838 and $4,338, respectively, for the nine-month periods, and $1,634 and
$1,881, respectively, for the three-month periods, ended October 3, 2004 and
September 28, 2003. Amortization expense related to the intangible assets
currently being amortized is expected to total approximately $5,984 in 2004,
$4,450 in 2005, $3,792 in 2006, $3,792 in 2007, $3,792 in 2008 and a total of
$9,024 thereafter.
Intangible assets not being amortized at October 3, 2004 and December 31,
2003 were product license fees of $6,999 and a trademark licensed from BMS of
$5,000. The Company does not amortize the intangible assets relating to products
that have not yet come to market because, until those products reach the market
and begin to produce cash flows, the related intangible asset has not, in the
Company's view, begun its useful life. Under SFAS 142, an asset's useful life is
the period over which an asset is expected to contribute directly or indirectly
to future cash flows of a company. The Company anticipates that the potential
products related to these intangible assets will be brought to market in the
near term, thereupon generating cash flows for the Company. The intangible
assets will then be amortized over their estimated remaining useful lives and
accounted for in the same manner as other intangible assets currently subject to
amortization.
The product license fees of $6,999 consist of payments made by Par pursuant
to agreements with Breath Ltd. of the Arrow Group ("Breath") and FineTech
related to latanoprost ophthalmic solution 0.005%, the generic equivalent of
Pharmacia Corporation's Xalatan(R), a glaucoma medication. Breath filed an
Abbreviated New Drug Application ("ANDA") (currently pending with the FDA) for
latanoprost, which was developed by Breath pursuant to a joint manufacturing and
marketing agreement with the Company, seeking approval to engage in the
commercial manufacture, sale and use of one latanoprost drug product in the
United States. Par subsequently acquired ownership of the ANDA, which includes a
Paragraph IV certification that the patents in connection with Xalatan(R)
identified in "Approved Drug Products with Therapeutic Equivalence Evaluations"
are invalid, unenforceable and/or will not be infringed by Par's generic version
of Xalatan(R). Par believes that its ANDA is the first to be filed for this drug
with a Paragraph IV certification. As a result of the filing of the ANDA,
Pharmacia Corporation, Pharmacia AB, Pharmacia Enterprises, S.A., Pharmacia and
Upjohn Company (collectively, "Pharmacia") and the Trustees of Columbia
University in the City of New York ("Columbia"), filed a lawsuit against Par on
December 21, 2001 in the United States District Court for the District of New
Jersey, alleging patent infringement. In July 2004, the District Court for the
District of New Jersey issued an opinion and order dismissing Pharmacia's
Corporation's claim of infringement on one patent; however, the Court also ruled
that two other patents included in the litigation are valid, enforceable and
infringed by Par. Par is appealing certain portions of the Court's decision (see
"Note 11 -Commitments, Contingencies and Other Matters-Legal Proceedings").
NOTE 8 - INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes", which requires the Company to
recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Current deferred
income tax assets at October 3, 2004 and December 31, 2003 consisted primarily
of temporary differences related to accounts receivable reserves, and
non-current deferred income tax assets in both periods included the deferred tax
benefits related to purchased call options. Non-current deferred income tax
assets at October 3, 2004, also included the deferred tax benefits related
acquired in-process research and development.
12
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 9 - CHANGES IN STOCKHOLDERS' EQUITY:
Changes in the Company's common stock and additional paid-in capital
accounts during the nine-month period ended October 3, 2004 were as follows:
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK
------------ PAID-IN COMPREHENSIVE --------------
SHARES AMOUNT CAPITAL (LOSS)/GAIN SHARES AMOUNT
------ ------ ------- ----------- ------ ------
Balance, January 1, 2004 34,318 $343 $171,931 $(1,673) - -
Comprehensive loss:
Unrealized gains on marketable
securities, net of tax - - - 1,487 - -
Exercise of stock options 346 4 8,100 - - -
Issuance of warrants - - 2,530 - - -
Tax benefit from exercise of stock options - - 3,955 - - -
Employee stock purchase program 7 - 271 - - -
Compensatory arrangements 45 - 788 - - -
Common stock acquired for treasury - - - - 844 (32,026)
---------- ----- ------ -------- --- ------
Balance, October 3, 2004 34,716 $347 $187,575 $(186) 844 $(32,026)
====== === ======= === === ======
COMPREHENSIVE INCOME (LOSS):
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
OCTOBER 3, SEPT. 28, OCTOBER 3, SEPT. 28,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $24,981 $84,321 $(35,085) $38,742
Other comprehensive gain:
Unrealized gain on
marketable securities, net of tax 1,487 - 2,302 -
----- ----- ----- -----
Comprehensive income (loss) $26,468 $84,321 $(32,783) $38,742
====== ====== ====== ======
In April 2004, the Company's board of directors (the "board") authorized
the repurchase of up to $50,000 of the Company's common stock. The repurchases
are made, subject to compliance with applicable securities laws, from time to
time in the open market or in privately negotiated transactions. Common stock
acquired through the repurchase program is and will be available for general
corporate purposes. At October 3, 2004, the Company had repurchased 844 shares
of its common stock for approximately $32,026 pursuant to the program. The
following table sets forth (a) the number of shares repurchased, (b) the average
price paid per share, (c) the total number of shares repurchased as part of the
publicly announced plan and (d) the approximate dollar value that may yet be
repurchased under the plan.
TOTAL TOTAL NUMBER OF APPROXIMATE DOLLAR
NUMBER OF AVERAGE SHARES REPURCHASED VALUE THAT MAY
SHARES PRICE PAID AS PART OF A PUBLICLY YET BE REPURCHASED
REPURCHASED(a) PER SHARE(b) ANNOUNCED PLAN(c) UNDER THE PLAN(d)
-------------- ------------ ----------------- -----------------
May 2, 2004 through May 29, 2004 406 $40.08 406 $33,712
May 30, 2004 through July 4, 2004 94 $40.49 94 $29,922
July 5, 2004 through July 31, 2004 184 $32.94 184 $23,870
August 29, 2004 through October 3, 2004 160 $36.85 160 $17,974
--- ---
For the nine-month
period ended October 3, 2004 844 844
=== ===
13
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 10 - EARNINGS PER SHARE:
The following is a reconciliation of the amounts used to calculate basic
and diluted earnings per share:
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
OCT. 3, SEPT. 28, OCT. 3, SEPT. 28,
2004 2003 2004 2003
---- ---- ---- ----
Net income $24,981 $84,321 $(35,085) $38,742
Basic:
Weighted average number of common
shares outstanding 34,225 33,269 33,958 33,758
Net income per share of common stock $.73 $2.53 $(1.03) $1.15
== ==== ==== ====
Assuming dilution:
Weighted average number of common
shares outstanding 34,225 33,269 33,958 33,758
Effect of dilutive options 802 1,099 - 1,246
--- ----- ---- -----
Weighted average number of common
shares outstanding 35,027 34,368 33,958 35,004
Net income per share of common stock $.71 $2.45 $(1.03) $1.11
== ==== ==== ====
Outstanding options and warrants of 1,343 and 120 at the end of the
nine-month periods ended October 3, 2004 and September 28, 2003, respectively,
and 1,428 at the end of the three-month period ended October 3, 2004 were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the common stock during the
respective periods. The effect of dilutive options and warrants was excluded
from the computation of diluted earnings per share for the three-month period
ended October 3, 2004 because the effect would have been anti-dilutive. In
addition, outstanding warrants sold concurrently with the sale of senior
subordinated convertible notes in September 2003 were not included in the
computation of diluted earnings per share as of October 3, 2004. The warrants
are exercisable for an aggregate of 2,253 shares of common stock at an exercise
price of $105.20 per share.
NOTE 11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
LEGAL PROCEEDINGS:
On May 3, 2004, Pentech filed an action against the Company in the United
States District Court for the Northern District of Illinois. This action alleges
that the Company breached its contract with Pentech relating to the supply and
marketing of paroxetine. Although the Company and Pentech are in dispute over
the amount of gross profit share, if any, due to Pentech, the Company believes
that it is in compliance with its agreement with Pentech and intends to defend
vigorously this action.
On March 9, 2004, the Congress of California Seniors brought an action
against GSK and the Company concerning the sale of paroxetine in the State of
California. The Company intends to defend vigorously the claims set forth in the
complaint.
On September 10, 2003, Par and a number of other generic and brand
pharmaceutical companies were sued by a New York county, which has alleged
violations of laws (including the Racketeer Influenced and Corrupt Organizations
Act, common law fraud and obtaining funds by false statements) related to
participation in the Medicaid program. The complaint seeks declaratory relief;
actual, statutory and treble damages, with interest; punitive damages; an
accounting and disgorgement of any illegal profits; a constructive trust and
restitution; and attorneys' and experts' fees and costs. This case was
transferred to the United States District Court for the District of
Massachusetts for coordinated and consolidated pre-trial proceedings. In
addition, on September 25, 2003, the Office of the Attorney General of the
Commonwealth of Massachusetts filed a complaint in the District of Massachusetts
against Par and 12 other leading generic pharmaceutical companies, alleging
principally that Par and such other companies violated, through their marketing
and sales practices, state and federal laws, including allegations of common law
14
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
fraud and violations of Massachusetts false statements statutes, by inflating
generic pharmaceutical product prices paid for by the Massachusetts Medicaid
program. Par has waived service of process with respect to the complaint. The
complaint seeks injunctive relief, treble damages, disgorgement of excessive
profits, civil penalties, reimbursement of investigative and litigation costs
(including experts' fees) and attorneys' fees. On January 29, 2004, Par and the
other defendants involved in the litigation brought by the Office of the
Attorney General of the Commonwealth of Massachusetts filed a motion to dismiss,
which has not yet been ruled on. On August 4, 2004, Par and a number of other
generic and brand pharmaceutical companies were also sued by the City of New
York, which has alleged violations of laws (including common law fraud and
obtaining funds by false statements) related to participation in its Medicaid
program. The Complaint seeks declaratory relief; actual, statutory and treble
damages, with interest; punitive damages; an accounting and disgorgement of any
illegal profits; a constructive trust and restitution; and attorneys' and
experts' fees and costs. This case was transferred to the U.S. District Court
for the District of Massachusetts for coordinated and consolidated pre-trial
proceedings. Par intends to defend vigorously the claims asserted in such
complaints. The Company cannot predict with certainty at this time the outcome
or the effects on the Company of such litigations. Accordingly, no assurance can
be given that such litigations or any other similar litigation by other states
or jurisdictions, if instituted, will not have a material adverse effect on the
Company's financial condition, results of operations, prospects or business.
In August 2003, Teva USA filed a lawsuit against the Company and Par in the
United States District Court for the District of Delaware after its having
received approval from the FDA to launch a generic version of BMS's Megace(R),
which generic product competes with the Company's megestrol acetate oral
suspension product. In the lawsuit, Teva USA sought a declaration that its
product has not infringed and will not infringe any of Par's four patents
relating to megestrol acetate oral suspension. On August 22, 2003, Par filed a
counterclaim against Teva USA, alleging willful infringement of one of Par's
four patents in the lawsuit, U.S. Patent No. 6,593,318. In July 2004, Par and
Teva USA entered into a settlement of the lawsuit. As part of the judgment and
order of permanent injunction entered by the parties, Teva USA acknowledged that
the claims of the U.S. Patent No. 6,593,318 are valid and enforceable in all
respects and that Teva USA's product infringes that patent. As part of the
settlement, Par has granted a license to Teva USA for a limited number of units,
and, in return, Par is receiving a royalty on Teva USA's sales of megestrol
acetate oral suspension in the United States.
On July 15, 2003, the Company and Par filed a lawsuit against Roxane
Laboratories, Inc. ("Roxane") in the United States District Court for the
District of New Jersey. The Company and Par alleged that Roxane had infringed
Par's U.S. Patents numbered 6,593,318 and 6,593,320 relating to megestrol
acetate oral suspension. Roxane has denied these allegations and has
counterclaimed for declaratory judgments of non-infringement and invalidity of
both patents. In addition, Roxane has recently filed an amended complaint
asserting that Par's patents in the litigation are unenforceable due to
inequitable conduct before the Patent Office. Par intends to defend vigorously
against these allegations.
In February 2003, Abbott, Fornier Industrie et Sante and Laboratoires
Fournier S.A. filed a lawsuit in the United States District Court for the
District of New Jersey against Par, alleging that Par's generic version of
TriCor(R) (fenofibrate) infringes one or more claims of their patents. The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously this lawsuit and has filed an answer and a counterclaim, alleging
non-infringement and patent invalidity. At this time, it is not possible for the
Company to predict the outcome of this litigation with any certainty.
On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil")
filed a lawsuit against Kali, a wholly-owned subsidiary of the Company, in the
United States District Court for the District of New Jersey. Ortho-McNeil
alleged that Kali infringed U.S. Patent No. 5,336,691 (the "`691 patent") by
submitting a Paragraph IV certification to the FDA for approval of tablets
containing tramadol hydrochloride and acetaminophen. Par is Kali's exclusive
marketing partner for these tablets through an agreement entered into before the
Company's acquisition of Kali. Kali has denied Ortho-McNeil's allegation,
asserting that the `691 patent was not infringed and is invalid and/or
unenforceable, and that the lawsuit is barred by unclean hands. Kali also has
counterclaimed for declaratory judgments of non-infringement, invalidity and
unenforceability of the `691 patent. Summary judgment papers were served on
opposing counsel on May 28, 2004. The referenced summary judgment motion was
fully briefed and submitted to the Court as of August 23, 2004. The Court has
stated that it will hold oral argument, which has not been scheduled.
15
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
As a result of Par's filing of the ANDA for latanoprost, Pharmacia and
Columbia (collectively, the "Plaintiffs") filed a lawsuit against Par on
December 21, 2001 in the United States District Court for the District of New
Jersey, alleging patent infringement. The Plaintiffs sought an injunction
enjoining approval of the Company's ANDA and the marketing of its generic
product prior to the expiration of their patents. On February 8, 2002, Par
answered the complaint and filed a counterclaim, which sought a declaration that
the patents-in-suit are invalid, unenforceable and/or not infringed by Par's
products and that the extension of the term of one of the patents was invalid.
The trial concluded in March 2004 and on July 6, 2004 the Court issued an
opinion and order ordering that judgment be entered in favor of the Plaintiffs
on their claims of infringement of U.S. Patent Nos. 4,599,353 (expires July 28,
2006) and 5,296,504 (expires March 22, 2011); that the effective date of
approval of Par's ANDA shall be a date which is not earlier than the dates of
expiration of those patents; and that Par is enjoined from engaging in the
commercial manufacture, use, offer to sell, or sale within the United States, or
importation into the United States, of any drug product covered by, or the use
of which is covered by, those two patents. As to the third patent asserted by
the Plaintiffs, U.S. Patent No. 5,422,368, the Court dismissed the Plaintiffs'
infringement claims and declared that the patent is unenforceable due to
inequitable conduct. The Court further dismissed all of the parties' claims for
attorneys' fees. Both Par and the Plaintiffs have filed notices of appeal which
are pending in the United States Court of Appeals for the Federal Circuit. Par
is appealing the Court's decision only insofar as it relates to U.S. Patent No.
5,296,504. Pursuant to agreements with Breath and FineTech related to
latanoprost, the Company had recorded product license fees of $6,999, which are
included in intangible assets on its consolidated balance sheets.
Par entered into a licensing agreement with developer Paddock Laboratories
("Paddock") to market testosterone 1% gel, a generic version of Unimed
Pharmaceuticals, Inc.'s ("Unimed") product Androgel(R). The product, if
successfully brought to market, would be manufactured by Paddock and marketed by
Par. Paddock has filed an ANDA (that is pending with the FDA) for the
testosterone 1% gel product. As a result of the filing of the ANDA, Unimed and
Laboratories Besins Iscovesco ("Besins"), co-assignees of the patent-in-suit,
filed a lawsuit against Paddock in the United States District Court for the
Northern District of Georgia, alleging patent infringement on August 22, 2003.
Par has an economic interest in the outcome of this litigation by virtue of its
licensing agreement with Paddock. Unimed and Besins are seeking an injunction to
prevent Paddock from manufacturing the generic product. On November 18, 2003,
Paddock answered the complaint and filed a counterclaim, which seeks a
declaration that the patent-in-suit is invalid and/or not infringed by Paddock's
product. This case is currently in discovery. At this time, the Company is not
able to predict with certainty the outcome of this litigation.
The Company and/or Par are parties to certain other litigation matters,
including product liability and patent actions; the Company believes that these
actions are part of the ordinary conduct of its business and that their ultimate
resolution thereof will not have a material adverse effect on its financial
condition, results of operations or liquidity. The Company intends to defend
vigorously or, in cases where the Company is plaintiff, to prosecute these
actions.
OTHER MATTERS:
In June 2003, the Company received notice from the U.S. Congress that the
Committee on Energy and Commerce (the "Committee") had begun an industry-wide
(brand and generic product) investigation into pharmaceutical reimbursements and
rebates under Medicaid, to which the Company has responded. In order to conduct
the investigation, the Committee requested certain pricing and other
information, which the Company delivered in August 2003, relating to certain
drugs produced by these pharmaceutical manufacturers. Because the investigation
has only recently begun, it is premature to speculate what action, if any, the
U.S. federal government may take and what impact any such action could have on
the Company's business, prospects or financial condition.
16
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 3, 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 12 - SUBSEQUENT EVENTS:
In October 2004, the board adopted a stockholder rights plan designed to
ensure that all stockholders of the Company receive fair and equal treatment in
the event of an unsolicited attempt to acquire the Company. The adoption of the
rights plan is intended to deter partial and "two step" tender offers or other
coercive takeover tactics, and to prevent an acquirer from gaining control of
the Company without offering a fair price to all of the Company's stockholders.
The rights plan was not adopted in response to any known offers for the Company
and is similar to stockholder rights plans adopted by many other companies.
To implement the rights plan, the board declared a distribution of one
preferred stock purchase right per share of common stock, payable to all
stockholders of record as of November 8, 2004. The rights will be distributed as
a non-taxable dividend and will expire on October 27, 2014. The rights will be
evidenced by the underlying Company common stock, and no separate preferred
stock purchase rights certificates will presently be distributed. The rights to
acquire preferred stock are not immediately exercisable and will become
exercisable only if a person or group acquires or commences a tender offer for
15% or more of PRX's common stock.
If a person or group acquires or commences a tender offer for 15% or more
of PRX's common stock, each holder of a right, except the acquirer, will be
entitled, subject to PRX's right to redeem or exchange the right, to exercise,
at an exercise price of $225, the right for one one-thousandth of a share of
PRX's newly-created Series A Junior Participating Preferred Stock, or the number
of shares of PRX common stock equal to the holder's number of rights multiplied
by the exercise price and divided by 50% of the market price of PRX's common
stock on the date of the occurrence of such an event. The board may terminate
the rights plan at any time or redeem the rights, for $0.01 per right, at any
time before a person acquires 15% or more of PRX's common stock.
On November 1, 2004, Morton Grove Pharmaceuticals, Inc. ("Morton Grove")
filed a lawsuit against the Company in the United States District Court for the
Northern District of Illinois, seeking a declaratory judgment that four Par
patents relating to megestrol acetate oral suspension are invalid, unenforceable
and not infringed by a Morton Grove product that has not yet been launched, but
which Morton Grove alleges it expects to begin selling. Par is evaluating its
legal options in responding to the complaint in this action. Par has
independently learned that the FDA has approved Morton Grove's ANDA for a
megestrol acetate oral suspension product, but Par does not have reliable
information concerning when Morton Grove may launch a product. The Company
intends to defend vigorously this action and shall assert counterclaims against
Morton Grove.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CERTAIN STATEMENTS IN THIS DOCUMENT MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO
FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES
OF CURRENT PRODUCTS AND THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED
PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, TRENDS
AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH
COULD CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE
EXPRESSED HEREIN. THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE TYPICALLY BY
USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS," "ANTICIPATES,"
"CONTINUING," "ONGOING," "EXPECTS," "INTENDS", "BELIEVES," OR SIMILAR WORDS AND
PHRASES. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN
THIS DOCUMENT INCLUDE (i) INCREASED COMPETITION FROM NEW AND EXISTING
COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS (ESPECIALLY UPON
COMPLETION OF EXCLUSIVITY PERIODS), (ii) PRICING PRESSURES RESULTING FROM THE
CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION CHANNELS, (iii) THE AMOUNT
OF FUNDS AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND RESEARCH AND
DEVELOPMENT JOINT VENTURES, (iv) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR
DELAYS AND UNANTICIPATED COSTS IN OBTAINING REGULATORY APPROVALS, (v)
CONTINUATION OF DISTRIBUTION RIGHTS UNDER SIGNIFICANT AGREEMENTS, (vi) THE
CONTINUED ABILITY OF DISTRIBUTED PRODUCT SUPPLIERS TO MEET FUTURE DEMAND, (vii)
THE COSTS, DELAYS INVOLVED IN AND OUTCOME OF ANY THREATENED OR PENDING
LITIGATIONS, INCLUDING PATENT AND INFRINGEMENT CLAIMS, (viii) UNANTICIPATED
COSTS, DELAYS AND LIABILITIES IN INTEGRATING ACQUISITIONS, (ix) OBTAINING OR
LOSING 180-DAY MARKETING EXCLUSIVITY ON PRODUCTS AND (x) GENERAL INDUSTRY AND
ECONOMIC CONDITIONS. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT
ARE MADE ONLY AS OF THE DATE HEREOF, BASED ON INFORMATION AVAILABLE TO THE
COMPANY AS OF THE DATE HEREOF, AND, SUBJECT TO APPLICABLE LAW TO THE CONTRARY,
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
THE FINANCIAL DATA CONTAINED IN THIS SECTION IS IN THOUSANDS.
OVERVIEW
Revenues for the nine-month period ended October 3, 2004 increased 31% from
the corresponding period of 2003; however, the increase came primarily from
lower margin new products and was not enough to offset lower sales of the
Company's key higher margin products, increased research and development
spending and the write-off of acquired in-process research and development
related to the acquisition of Kali. These factors contributed to lower earnings
when comparing the corresponding nine-month periods of fiscal years 2004 and
2003. The Company's quarterly sales and earnings growth when comparing the
results of the last four quarters, beginning with the third quarter of 2003, to
the results of the corresponding quarters of the prior year ended with both
declining sales and earnings in the third quarter of 2004. Net sales of the
Company's key products had declined in the third quarter of 2004 due to lower
pricing and/or volumes. The Company will continue to attempt to introduce new
products during the remainder of fiscal year 2004 and beyond in order to offset
sales and gross margin declines resulting from competition involving certain of
its significant products and its planned increase in research and development
expenses. The Company is seeking to reduce its dependence on its present top
selling products, by adding additional products through its internal development
program, new and existing distribution agreements and/or acquisitions of
complementary products or businesses.
Net sales and gross margins derived from generic pharmaceutical products
often follow a pattern based on regulatory and competitive factors believed by
management to be unique to the generic pharmaceutical industry. As the patent(s)
for a brand name product and the related exclusivity period expires, the first
generic manufacturer to receive regulatory approval for a generic equivalent of
the product is often able to capture a substantial share of the market. However,
as other generic manufacturers receive regulatory approvals for competing
products, the market share, and the price, of that product, have typically
declined, often significantly, depending on several factors, including the
number of competitors, the price of the brand product and the pricing strategy
of the new competitors. Recently, a large portion of the Company's revenue
growth has been derived from sales of generic drugs during the 180-day marketing
exclusivity period and from the sale of generic products where there is limited
competition. These drugs include paroxetine tablets, megestrol acetate oral
suspension, fluoxetine 40 mg capsules, and 10 mg and 20 mg tablets.
In fiscal year 2003, Par obtained the marketing rights to paroxetine in
connection with the GSK Settlement. As a result of the GSK Settlement, Par and
GSK entered into the GSK Supply Agreement, pursuant to which Par began marketing
18
paroxetine, supplied and licensed from GSK, in the United States in September
2003 and the Commonwealth of Puerto Rico in May 2003. The GSK Settlement
provides that the Company's right to distribute paroxetine will be suspended if,
at any time, there is not another generic version fully substitutable for Paxil
available for purchase in the United States. On September 8, 2003, another
generic drug manufacturer, Pharmaceutical Healthcare, Inc. ("Apotex"), launched
a generic version of Paxil(R). Additionally, in April 2002, GSK launched a
longer-lasting, newly patented version of the drug, Paxil CR(R). The Company
expects Paxil CR(R)'s market share to continue to grow in fiscal year 2004 and
beyond, which may cause the total market for paroxetine tablets to decrease. The
marketing exclusivity period in respect of paroxetine ended on March 8, 2004 and
two additional competitors launched competing paroxetine products in the second
quarter of 2004. The additional competition had an adverse effect on the
Company's revenues and gross margins derived from paroxetine in the third
quarter of 2004, which will continue in subsequent periods. Due to both pricing
and volumes declines, Paroxetine sales in the third quarter of 2004 have
decreased to $26,800 from $104,600 and $77,300, respectively, in the first and
second quarters of 2004.
The Company's exclusivity period for megestrol acetate oral suspension
expired in mid-January 2002. Through October 3, 2004, two generic competitors
had been granted FDA approval to market generic versions of megestrol acetate
oral suspension and launched products that compete with the Company's product.
In July 2004, Par entered into a settlement with one of the competitors, Teva
USA, pursuant to which Par granted a license to Teva USA for a limited number of
units and Par is to receive a royalty on Teva USA's net sales of megestrol
acetate oral suspension in the United States. On November 3, 2004, an additional
competitor received approval from the FDA to launch a generic version of
megestrol acetate oral suspension, which generic product would also compete with
the Company's product. Sales and gross margins on megestrol acetate oral
suspension declined in fiscal year 2004 due to the effects of competition on
pricing and volume; however, the product is expected by management to continue
to be a significant contributor to the Company's overall results in future
periods. Megestrol acetate oral suspension net sales were approximately $54,800
for the nine-month period ended October 3, 2004 compared to approximately
$65,000 for the corresponding nine-month period in 2003. Net sales of megestrol
acetate oral suspension were approximately $17,800 for the third quarter of
2004, decreasing $4,600 from approximately $22,400 for the third quarter of
2003.
As a result of generic competition beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing exclusivity period,
the sales prices for fluoxetine 10 mg and 20 mg tablets and 40 mg capsules
substantially declined from the prices that the Company had charged during the
exclusivity period. Despite pricing declines, fluoxetine 40 mg capsules was a
significant sales and gross margin contributor in fiscal years 2002 and 2003. In
the first quarter of 2004, however, additional competitive factors led to
further pressure on fluoxetine 40 mg capsules, resulting in significantly lower
net sales and gross margins. Currently, there are two competitors in the market
with products that compete with the Company's fluoxetine 40 mg product and a
third competitor received FDA approval for its product in October 2004. Net
sales of fluoxetine 10 mg and 20 mg tablets and 40 mg capsules were
approximately $14,400 and $37,600, respectively, for the three- and nine-month
periods ended October 3, 2004 compared to approximately $26,100 and $70,600,
respectively, for the corresponding periods of 2003.
In April 2004, the Company's marketing partner, Three Rivers Pharmaceutical
LLC ("Three Rivers"), received final approval from the FDA for its ribavirin 200
mg capsules, the generic version of Schering's Rebetol(R), which is indicated
for the treatment of chronic hepatitis. Three Rivers was awarded 180 days of
shared marketing exclusivity, commencing at launch, for being the first to file
an ANDA containing a Paragraph IV certification. Under the terms of its
agreement with Three Rivers, Par has the exclusive marketing right to sell Three
Rivers' ribavirin product, which Par launched in early April 2004. The launch of
this ribavirin product has not been successful. Several factors contributed to
the unsuccessful launch of ribavirin, which the Company had anticipated would
replace a portion of the lost revenues from competition on other products in
fiscal year 2004. In addition to the competitor with shared exclusivity, Warrick
Pharmaceuticals, a subsidiary of Schering, also launched a generic ribavirin
product in the United States in April 2004. As a result of launching the
product, Schering is not receiving a royalty from Three Rivers on sales of Three
Rivers' and Par's generic ribavirin. Due to the additional competition, the
pricing pressure on ribavirin at launch was more substantial than the Company
had previously anticipated. Additionally, the market size for Rebetol has
declined due to the success of Copegus(R), a new product introduced by Hoffman
La-Roche Inc. in 2003, which has taken significant market share from Rebetol(R).
Additionally, the Company's marketing exclusivity period ended in October 2004
and one additional competitor has since launched a competing product. These
principal factors have reduced ribavirin sales to approximately $6,300 through
October 3, 2004.
19
Generic drug pricing at the wholesale level can create varying differences
between invoice price and the Company's net selling price. Wholesale customers
purchase product from the Company at invoice price, then resell the product to
specific healthcare providers on the basis of prices negotiated between the
Company and the providers, and the wholesaler submits a chargeback credit to the
Company for that difference. The Company records estimates for these
chargebacks, along with estimates for sales returns, rebates or other sales
allowances for all its customers at the time of sale, as reductions to invoice
price, with corresponding adjustments to the accounts receivable allowances.
The Company generally will offer price protection for sales of new generic
drugs for which the market exclusivity period has expired. In addition, the
Company may offer price protection with respect to existing products for which
it anticipates significant price erosion through increased competition. Such
price protection reflects for the fact that the prices of such drugs typically
will decline, sometimes substantially, when additional generic manufacturers
introduce and market a comparable generic product following the expiration of an
exclusivity period. Such price protection plans, which are common in the
Company's industry, generally provide for shelf-stock adjustments or lower
contract pricing to the wholesalers, which results in an increased chargeback
per unit on existing inventory levels. The shelf-stock adjustments are given to
customers with respect to their remaining inventory at the expiration of the
exclusivity period for the difference between the Company's new price and the
price at which the Company originally sold the product to the customer.
Shelf-stock adjustments can also be issued to customers when the Company lowers
its invoice pricing, but not its contract pricing; in such cases, the Company
provides a credit for the difference between the old and new invoice prices for
the inventory that the customers have on hand at the time of the price
reduction. When these situations occur, the Company records estimates for
shelf-stock adjustments and/or price protection, as reductions to invoice price,
with corresponding adjustments to the accounts receivable allowances.
The Company believes that it has the experience and access to information,
including the total demand for each drug that the Company manufactures or
distributes, the Company's market share, recent or pending new drug
introductions, inventory practices of the Company's customers, resales by its
customers to end-users having contracts with the Company, and rebate agreements
with each customer, necessary to reasonably estimate the amounts of such
reductions to invoice price. Some of the assumptions used by the Company for
certain of its estimates are based on information received from third parties,
such as customer inventories at a particular point in time, or other market
factors beyond the Company's control. The Company regularly reviews the
information related to these estimates and adjusts its reserves accordingly, if
and when actual experience differs from previous estimates. There were no
material changes to the underlying assumptions used by the Company to estimate
such sales returns, rebates, chargebacks, shelf-stock or price protection
allowances or other sales allowances for the nine- and three-month periods ended
October 3, 2004 and September 28, 2003, to the extent they would have a
significant effect on the dilution of gross to net revenues. The Company's
reserves related to the items described above at October 3, 2004 and September
28, 2003 totaled $132,837 and $151,159, respectively.
Critical to the growth of the Company is its introduction of new
manufactured and distributed products at selling prices that generate adequate
gross margins. The Company, through its internal development program and various
strategic alliances and relationships, is seeking to introduce new products that
have limited competition and longer product life cycles. In addition to expected
new product introductions as part of its various strategic alliances and
relationships, the Company plans to continue to invest in its internal research
and development efforts. Also, it is seeking additional products for sale
through new and existing distribution agreements or acquisitions of
complementary products and businesses, additional first-to-file opportunities
and unique dosage forms to differentiate its products in the marketplace.
In June 2004, the Company acquired all of the capital stock of Kali for a
purchase price of $143,345 in cash and $2,530 in warrants to purchase 150,000
shares of the Company's common stock. The allocation of the purchase price
includes $84,000 valued as acquired in-process research and development that was
written off in the three-month period ended October 3, 2004 in accordance with
purchase accounting for acquisitions. The Company believes that the Kali
acquisition will expand its research and development capabilities and increase
its product portfolio. The acquisition also diversifies the Company's
development pipeline and provides what the Company believes to be four
additional first-to-file product opportunities, enhancing its prospects for
sustained long-term growth. Kali's operation includes 25 products in
development, another 13 currently filed and awaiting FDA approval, and a
20
research and development organization of approximately 55 employees. Kali's 13
ANDAs include five potential products the Company plans to market and other
potential products from which the Company will be due royalty income, if
successfully launched by third parties. Included as part of the Company's
purchase of Kali is a lease, with a purchase option, of a 45,000-square foot
manufacturing facility in Somerset, New Jersey.
In addition to its own product development program, the Company has several
strategic alliances through which it co-develops and distributes products. These
strategic alliances afford the Company many advantages, including additional
resources for increased activity, expertise on dissimilar products or
technologies, and a sharing of both the costs and risks of new product
development. As a result of its internal program, including the integration of
Kali, and these strategic alliances, the Company's pipeline of potential
products includes 43 ANDAs (six of which have been tentatively approved),
pending with, and awaiting approval from, the FDA. The Kali ANDAs include those
for potential products that would be marketed by other companies through
licensing agreements entered into before the Company's acquisition of Kali,
pursuant to which the Company would be due royalty income. The Company pays a
percentage of the gross profits or sales to its strategic partners on sales of
products covered by its distribution agreements. Generally, products that the
Company develops internally, as to which it is not required to split any profits
with its strategic partners, contribute higher gross margins than products
covered under distribution agreements. The Company is engaged in various
efforts, subject to FDA approval and other factors, to introduce new products
through its research and development efforts and distribution and development
agreements with third parties.
The Company's business plan also includes its strategy to enter the branded
drug market. On June 29, 2004, the Company submitted its first New Drug
Application ("NDA"), pursuant to Section 505(b)(2) of the Federal Food, Drug and
Cosmetic Act, seeking marketing clearance for megestrol acetate oral suspension
NanoCrystal(R) Dispersion ("NCD"). The new NCD formulation is a line extension
of Par's currently marketed megestrol acetate oral suspension. This advanced
formulation utilizes NCD technology to improve the bioavailability of the drug
as compared to currently available formulations of the product. NCD is a
trademark of Elan Corporation, plc, Dublin Ireland. If cleared for marketing,
megestrol acetate oral suspension NCD is expected to be indicated for the
treatment of anorexia, cachexia, or any unexplained significant weight loss in
patients with a diagnosis of acquired immunodeficiency syndrome ("AIDS") and
will utilize the Megace(R) brand name, which Par has licensed from BMS.
The Company's brand market business strategy also includes a potential
505(b)(2) NDA submission planned for 2005 through Advancis. The Company has an
agreement with Advancis to develop and market a low dose pulsatile form of the
antibiotic amoxicillin, utilizing Advancis' proprietary PULSYS(TM) technology.
If successfully developed, amoxicillin PULSYS(TM) would be a once-daily version
of the antibiotic amoxicillin that is administered for fewer days with improved
therapeutic effect.
In addition to the substantial costs of product development, the Company
may incur significant legal costs in bringing certain products to market.
Litigation concerning patents and proprietary rights is often protracted and
expensive. Pharmaceutical companies with patented brand products are
increasingly suing companies that produce generic forms of their patented brand
name products for alleged patent infringement or other violations of
intellectual property rights, which may delay or prevent the entry of such
generic products into the market. Generally, a generic drug may not be marketed
until the applicable patent(s) on the brand name drug expires. When an ANDA is
filed with the FDA for approval of a generic drug, the filing person may either
certify that the patent listed by the FDA as covering the generic product is
about to expire, in which case the ANDA will not become effective until the
expiration of such patent, or that the patent listed as covering the generic
drug is invalid or will not be infringed by the manufacture, sale or use of the
new drug for which the ANDA is filed. Under either circumstance, there is a risk
that a branded pharmaceutical company may sue the filing person for alleged
patent infringement or other violations of intellectual property rights. Also,
other companies that compete with the Company by manufacturing, developing
and/or selling the same generic pharmaceutical products may similarly bring
lawsuits against the Company and/or its strategic partners claiming patent
infringement or invalidity. Because substantially all of the Company's business
involves the marketing and development of off-patent products, the threat of
litigation, the outcome of which is inherently uncertain, is always present.
Such litigation is often costly and time- consuming, and could result in a
substantial delay in, or prevent, the introduction and/or marketing of products,
which could have a material adverse effect on the Company's business condition
(financial and other), prospects and results of operations.
21
RESULTS OF OPERATIONS
GENERAL
The Company's net income of $24,981 for the nine-month period ended October
3, 2004 decreased $59,340, from $84,321, for the nine-month period ended
September 28, 2003. Although total revenues of $575,864 in this nine-month
period of 2004 increased $136,956, or 31%, from $438,908 in the first nine
months of 2003, gross margin dollars remained at close to the same level as
additional sales from lower margin new products were not enough to offset lower
sales of the Company's key higher margin products. Research and development
spending in 2004 of $33,722 increased $15,814, or 88%, from $17,908 in the prior
year and the Company expects to continue to spend at a higher rate on research
and development in the fourth quarter 2004 and fiscal year 2005. The allocation
of the Kali purchase price resulted in $84,000 valued as acquired in-process
research and development, which was written off in the three-month period ended
October 3, 2004 in accordance with purchase accounting for acquisitions.
Selling, general and administrative costs in fiscal year 2004 were $49,676
compared to $44,246 in the corresponding nine-month period of 2003. Fiscal year
2003 selling, general and administrative costs include a charge of $3,712,
recorded in the second quarter of 2003, related to a retirement package for the
Company's former chairman, president and chief executive officer. Nine-month
operating expenses in 2004 are net of settlement income of $2,846, recorded in
the second quarter of 2004, resulting primarily from the settlement of claims
against Akzo Nobel NV and Organon USA Inc. relating to anti-competitive
practices that delayed the availability of mirtazapine, a generic version of
Remeron(R) and a $2,812 gain on the sale of the Company's facility in Congers,
New York.
The Company incurred a net loss for the three-month period ended October 3,
2004 of $(35,085) compared to net income of $38,742 for the corresponding period
of 2003 primarily due to increased competition on key products, increased
spending on research and development and the write-off of acquired in-process
research and development related to the acquisition of Kali. Third quarter 2004
revenues of $151,566 and gross margins of $58,734 (39% of total revenues)
decreased from the prior year's third quarter revenues and gross margins of
$216,635 and $84,926 (39% of total revenues). Research and development spending
of $17,060 in the third quarter of 2004 increased 151% from $6,788 in the prior
year, primarily due to a payment to Advancis to fund the development of a
potential new product, the addition of Kali and higher biostudies. Selling,
general and administrative costs were $16,128 in the third quarter of 2004,
increasing 14% from $14,141 for the corresponding quarter of last year.
Sales and gross margins of the Company's products are principally dependent
upon (i) the pricing practices of competitors and any removal of competing
products from the market, (ii) the introduction of other generic drug
manufacturers' products in direct competition with the Company's significant
products, (iii) the ability of generic competitors to quickly enter the market
after patent or exclusivity period expirations, diminishing the amount and
duration of significant profits to the Company from any one product, (iv) the
continuation of existing distribution agreements, (v) the introduction of new
distributed products, (vi) the consolidation among distribution outlets through
mergers, acquisitions and the formation of buying groups, (vii) the willingness
of generic drug customers, including wholesale and retail customers, to switch
among generic pharmaceutical manufacturers, (viii) the approval of ANDAs and
introduction of new manufactured products, (ix) the granting of potential
marketing exclusivity periods, (x) the extent of market penetration for the
existing product line and (xi) the level and amount of customer service.
REVENUES
Total revenues for the nine-month period ended October 3, 2004 were
$575,864, increasing $136,956, or 31%, from total revenues of $438,908 for the
corresponding nine-month period of 2003, primarily due to additional sales from
new products sold under various distribution agreements. Net sales of
paroxetine, which the Company launched in September 2003 in the United States
and is sold through the GSK Supply Agreement, totaled approximately $208,700 for
the nine month period of 2004, increasing $112,400 from $96,300 for the
corresponding nine-month period of 2003. Additionally, net sales of other new
distributed products, including $34,200 of glyburide and metformin hydrochloride
(Glucovance(R)) introduced in May 2004, $20,800 of mercaptopurine
(Purinethol(R)), introduced in February 2004, and $19,900 of metformin ER
(Glucophage XR(R)) introduced in December 2003, contributed to the growth of
revenues in 2004 and partially offset sales decreases of certain existing
distributed products, particularly fluoxetine 40 mg capsules and 10 mg and 20 mg
tablets which decreased $33,000 and tizanidine (Zanaflex(R)) which decreased
22
$15,700. The Company's top selling manufactured product, megestrol acetate oral
suspension, also decreased $10,200. Net sales of fluoxetine and megestrol
acetate oral suspension were approximately $37,600 and $54,800, respectively,
for the nine-month period ended October 3, 2004, decreasing $33,000 and $10,200,
respectively, compared to the first nine-months of 2003.
Net sales of distributed products, which consist of products manufactured
under contract and licensed products, were approximately $432,500, or 75% of the
Company's total revenues, and $283,100, or 65% of the Company's total revenues,
respectively, in the first nine-months of fiscal years 2004 and 2003. Presently,
the Company is substantially dependent upon distributed products for its overall
sales and, because the Company continues to introduce new products under its
distribution agreements, it expects that this dependence will continue. Any
inability by its suppliers to meet demand could adversely affect the Company's
future sales.
The Company's gross revenues before deductions for chargebacks, rebates,
price adjustments, sales returns or other sales allowances were $1,234,292 for
the nine-month period ended October 3, 2004 compared to $769,682 for the
nine-month period ended September 28, 2003. Deductions from gross revenues were
$659,482 for the nine months ended October 3, 2004 and $345,264 for the
corresponding period of the prior year. The gross-to-net revenue percentage
spread increased to 53% for the nine-month period of 2004 compared to 45% for
the corresponding period of 2003, primarily due to the ribavirin launch in April
2004 and competition on paroxetine. The Company had committed to promotional
dollars on ribavirin in an effort to obtain market share and, due to a rapid
drop in price after launch, the net selling price was much lower than expected
for a new product. The effect of price declines for both ribavirin and
paroxetine increased the chargeback issued to wholesalers during the nine-month
period ended October 3, 2004.
The Company's other product related revenues of $1,054 for the nine-months
ended October 3, 2004 decreased significantly from $14,490 for the corresponding
period of 2003. The Company records other product related revenues pursuant to
an agreement with Genpharm, where the Company receives a portion of the profits,
as defined in the agreement, generated from Kremers Urban Development Co.'s
("KUDCo"), a subsidiary of Schwarz Pharma AG of Germany, sales of omeprazole,
the generic version of Astra Zeneca's Prilosec(R). In the third quarter of 2003,
two generic competitors began selling forms of omeprazole, significantly
reducing the Company's share of profits related to omeprazole. The revenues
related to this agreement are expected to continue to decrease in future
periods.
Total revenues in the third quarter 2004 of $151,566 decreased $65,069, or
30%, from revenues in the third quarter of 2003, primarily due to lower sales of
paroxetine of $68,600. Third quarter 2004 net sales of paroxetine totaled
approximately $26,800, while net sales of megestrol acetate oral suspension
decreased $4,600 to $17,800 from $22,400 in the corresponding period of 2003,
and net sales of fluoxetine decreased $11,700 to $14,400 from $26,100 in the
third quarter of 2003. Third quarter sales reflect the impact of increased
generic competition on the Company's key products, paroxetine, fluoxetine and
megestrol acetate oral suspension and its corresponding effects on pricing and
market share.
The Company's gross revenues before deductions for chargebacks, rebates,
price adjustments, sales returns or other sales allowances were $331,505 for the
quarter ended October 3, 2004 compared to $360,971 for the quarter ended
September 28, 2003. Deductions from gross revenues were $179,939, or 54% of
gross revenues, for the third quarter of 2004 and $146,038, or 40% of gross
revenues, for the corresponding quarter of the prior year. As noted above, lower
pricing on paroxetine and ribavirin were the primary contributors to the
increased gross-to-net revenue spread in 2004 compared to 2003.
Net sales of distributed products were approximately $99,700 and $164,800,
respectively, of the Company's total revenues in the third quarter of fiscal
years 2004 and 2003, which represented approximately 66% and 76% of the
Company's total revenues in the respective periods.
As discussed above, net sales of megestrol acetate oral suspension and of
fluoxetine 40 mg capsules have decreased as a result of increased generic
competition and its effect on pricing and market share. When competition enters
the market, there are circumstances under which the Company may decide to not
afford price protection to certain customers and consequently, as a matter of
business strategy, lose volume to competitors rather than reduce its pricing.
When there is general market pressure for lower pricing due to many competitors
entering the market at the same time, the Company decides which customers will
be afforded price protection and a price protection reserve is established based
on estimated or actual existing customer inventories. The competition on these
two products has been somewhat limited and competitors have been entering the
23
market over an extended period of time, thereby reducing the need for broad
price protection and material price protection reserves. Although the Company
lowered the pricing on these products over time and some price protection
credits were granted and processed within the reporting periods, the Company did
not establish a price protection reserve as of October 3, 2004 as it did not
believe that there would be any additional significant price protection credits
to be issued with respect to sales through that date. The Company will continue
to evaluate the effects of competition and will record a price protection
reserve when, if and to the extent that it deems necessary.
As a result of the competition, the Company had price protection reserves
of approximately $5,900 for paroxetine at July 4, 2004, which it fully utilized
by October 3, 2004, and issued additional price protection credits within the
current quarter. The Company believes that market conditions did not warrant any
further price protection reserves at October 3, 2004. The Company will continue
to evaluate the effects of competition and will record a price protection
reserve when, if and to the extent that it deems necessary.
GROSS MARGIN
The Company's gross margin of $202,403 (35% of total revenues) for the
first nine-months of 2004 increased $1,204 from $201,199 (46% of total revenues)
for the corresponding period of 2003. Increased revenues had a negligible effect
on gross margin dollars as the increases were generated primarily from lower
margin new products and was not enough to offset lower sales of the Company's
key higher margin products. A significant portion of the sales increase were
generated from products sold under the distribution agreements with GSK, Pentech
and BMS, where the Company splits profits with its contract partners. As a
result of these agreements, the Company's gross margin as a percentage of its
total revenues in the first nine months of 2004 declined principally because net
sales of these products, after the allocation of profit splits, yielded a
significantly lower gross margin percentage than the Company's average gross
margin as a percentage of total revenues of its other products in the
corresponding period of 2003. In addition, Par's gross margin was also impacted
by the decline in other product related revenues.
The gross margin for the nine months ended October 3, 2004 included an
income adjustment to cost of goods sold of $6,200, which was recorded in the
second quarter of 2004 and relates to sales of paroxetine during the period from
September 2003 to June 2004, that reflects a change in accounting estimate used
in the calculation of the profit split due to Pentech. The change in accounting
estimate has effectively reduced payables due under Par's agreement with Pentech
relating to the supply and marketing of paroxetine. The change in accounting
estimate follows Pentech's filing of an action against Par during the second
quarter of 2004.
The gross margin of $58,734 (39% of total revenues) in the third quarter of
2004 decreased $26,192 from $84,926 (39% of total revenues) in the third quarter
of 2003. The gross margin dollar decrease was primarily a result of lower
contributions from sales of certain of the Company's key products as noted
above.
As discussed above, the Company generated lower sales and gross margins for
paroxetine, fluoxetine and megestrol acetate oral suspension in each of the
periods reported above. Despite existing market conditions and the possibility
of additional competition on these products, the Company anticipates all three
products will remain significant contributors to its overall performance in
fiscal year 2004.
Inventory write-offs of $7,741 and $2,705, respectively, in the nine-and
three-month periods ended October 3, 2004 increased from $2,022 and $705 in the
corresponding periods of 2003. The inventory write-offs, taken in the normal
course of business, were related primarily to the disposal of finished products
due to short shelf lives and work-in-process inventory not meeting the Company's
quality control standards. The increase write-offs in each of the current
periods included the write-off of inventory for a product whose launch was
delayed. The Company maintains inventory levels that it believes are appropriate
to optimize its customer service.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
The Company's research and development expenses of $33,722 for the
nine-month period ended October 3, 2004 increased $15,814, or 88%, from the
corresponding period of the prior fiscal year. The increase was primarily
attributable to a payment to Advancis of $9,500 to fund the development of a
novel formulation of the antibiotic amoxicillin, increased biostudy costs of
24
$3,300 and increased personnel costs of $1,900, including such costs related to
the acquisition of Kali. As previously discussed, the Company acquired Kali in
June 2004. The Company expects to utilize Kali to develop products principally
for its own new product pipeline.
The allocated purchase price for Kali includes $84,000 classified as
acquired in-process technology, which was written off in the three-month period
ended October 3, 2004 in accordance with purchase accounting for acquisitions.
The Company classified the technology assets as either core/developed or
in-process based on the stage of development the product was in at the time of
acquisition. All core/developed and in-process technology was valued using the
income approach, which focuses on the income-producing capabilities of the
subject assets. The underlying premise of the income approach is that the value
of an asset can be measured by the present worth of the net economic benefit
(cash receipts less cash outlays) to be received over the life of the subject
asset.
The in-process research and development includes the valuation of 29
products where there was a material investment in research and development
activities and the completion of a certain amount of development work in
connection with the products. The development work on 16 of these products was
considered complete and 14 of the products were filed with the FDA.
In June 2004, Par entered into an agreement with Advancis to develop and
market a novel formulation of the antibiotic amoxicillin. Pursuant to this
agreement, Par paid Advancis a $5,000 upfront license fee and $4,500 in research
and development costs, which were charged to research and development expense in
fiscal year 2004, and Par will fund future development of $23,500 through fiscal
year 2005. Advancis agreed to grant Par the exclusive right to sell and
distribute the product and the co-exclusive right to market the product.
Advancis will be responsible for the development and manufacture of the product
and the two parties have agreed to share equally in marketing expenses and
profits if the product is successfully developed and brought to market.
Research and development expenses for the third quarter of 2004 were
$17,060, increasing $10,272 from $6,788 for the corresponding quarter of 2003.
The increase in the quarter was primarily due to a payment to Advancis $4,500,
higher costs for biostudies $2,400, other outside development projects $1,300
and personnel costs $1,200.
The Company expects its research and development spending in the fourth
quarter of 2004 to approximate its third quarter 2004 expenditures. Although
there can be no such assurance, the Company believes that its annual research
and development expenses could approach $60,000 for fiscal year 2005.
In addition to the ANDAs filed by Kali for potential products that are
subject to licensing agreements with other companies entered into before the
Kali acquisition, the Company has 11 ANDAs for potential products (two
tentatively approved) pending with, and awaiting approval from, the FDA as a
result of its own product development program.
The Company and Genpharm have entered into a distribution agreement (the
"Genpharm 11 Product Agreement"), dated April 2002, pursuant to which Genpharm
is developing products and submitting the corresponding ANDAs to the FDA and,
subsequently, has agreed to manufacture the potential products covered under the
Agreement. Par is to serve as the exclusive U.S. marketer and distributor of the
products, pay a share of the costs, including development and legal expenses
incurred to obtain final regulatory approval, and pay Genpharm a percentage of
the gross profits on all sales of products covered by this Agreement. There are
three ANDAs for potential products covered by the Genpharm 11 Product Agreement
pending with, and awaiting approval from, the FDA. Under the Genpharm 11 Product
Agreement, the Company is currently marketing one product and receiving
royalties on another product marketed by an unaffiliated company.
The Company and Genpharm have also entered into a distribution agreement
(the "Genpharm Distribution Agreement"), dated March 25, 1998. Under the
Genpharm Distribution Agreement, Genpharm pays the research and development
costs associated with the products covered by the Genpharm Distribution
Agreement. There are six ANDAs for potential products (two tentatively approved)
that are covered by the Genpharm Distribution Agreement pending with, and
awaiting approval from, the FDA. The Company is currently marketing 21 products
under the Genpharm Distribution Agreement.
Genpharm and the Company share the costs of developing products covered
under an agreement (the "Genpharm Additional Product Agreement"), dated November
27, 2000. There is one ANDA for a potential product covered by the Genpharm
25
Additional Product Agreement pending with, and awaiting approval from, the FDA.
The Company is currently marketing two products under the Genpharm Additional
Product Agreement.
SELLING, GENERAL AND ADMINISTRATIVE
Total selling, general and administrative expenses were $49,676 (9% of
total revenues) for the first nine-months of 2004. In the corresponding period
of the prior year, total costs of $44,246 included a charge of $3,712 related to
a retirement package for the Company's former chairman, president and chief
executive officer, recorded in the second quarter of 2003. Excluding the prior
year charge, costs in 2004 increased $9,142, or 27%, from $40,534 (10% of total
revenues) in the corresponding period of last year. The increase in 2004 was
primarily attributable to higher marketing costs of $3,200, personnel costs of
$2,700, including those for information systems assessments, and legal fees of
$1,500. Distribution costs include those related to shipping product to the
Company's customers, primarily through the use of a common carrier or an
external distribution service. Shipping costs of $1,924 in the nine-month period
ended October 3, 2004 were comparable to $1,990 in the corresponding period of
the prior year. Although overall sales volumes increased in fiscal year 2004,
shipping costs remained at approximately the same level as the corresponding
period of 2003 due to a reduced amount of reliance on an external distribution
service. The Company anticipates it will continue to incur a high level of legal
expenses related to the costs of litigation relating to potential new product
introductions (see "Notes to Consolidated Financial Statements-Note
11-Commitments, Contingencies and Other Matters-Legal Proceedings"). Although
there can be no such assurance, selling, general and administrative costs in
fiscal year 2005 are expected to grow by up to 30% to 35% from fiscal year 2004,
primarily due to planned brand marketing activities.
Selling, general and administrative costs of $16,128 (11% of total
revenues) for the third quarter of 2004 increased $1,987, or 14%, from $14,141
(7% of total revenues) from the third quarter of 2003. The increased expenses in
the third quarter of 2004 consisted of higher costs for marketing of $700 and
personnel of $600. Shipping costs of $673 in the third quarter of 2004 were
comparable to costs of $641 in the corresponding quarter of the prior year.
SETTLEMENTS
Net settlement income of $2,846 was recorded pursuant to the settlement of
claims against Akzo Nobel NV and Organon USA Inc. relating to anti-competitive
practices that delayed the availability of mirtazapine partially offset by legal
expenses associated with the settlement of litigation with Asahi related to
paroxetine.
GAIN ON SALE OF FACILITY
Par owned a facility of approximately 33,000 square feet located on six
acres in Congers, New York (the "Congers Facility"). In March 2004, the Company
sold the Congers Facility to Ivax Pharmaceuticals New York, LLC for $4,980 and
recorded a gain on the sale of $2,812.
INTEREST EXPENSE/INCOME
Net interest expense was $667 and $94, respectively, for the nine- and
three-month periods ended October 3, 2004, compared to net interest income of
$474 and $141, respectively, for the corresponding periods of 2003. Net interest
expense in both periods of the current year includes interest payable on the
Company's convertible notes, partially offset by interest income derived
primarily from short-term investments. Net interest income in 2003 was primarily
derived from money market and other short-term investments.
INCOME TAXES
The Company recorded provisions for income taxes of $14,885 and $55,053,
respectively, for the nine-month periods ended October 3, 2004 and September 28,
2003. In addition, the Company recorded a credit for income taxes and a
provision for income taxes of $(23,518) and $25,295, respectively, for the
three-month periods ended October 3, 2004 and September 28, 2003. The provisions
and credit were based on the applicable federal and state tax rates for those
periods (see "Notes to Consolidated Financial Statements-Note 8-Income Taxes").
26
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's critical accounting policies are set forth in its Annual
Report on Form 10-K for the year ended December 31, 2003. There has been no
change, update or revision to the Company's critical accounting policies
subsequent to the filing of the Company's Form 10-K for the year ended December
31, 2003.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $25,328 at October 3, 2004 decreased $137,221
from $162,549 at December 31, 2003, primarily due to the acquisition of Kali for
$143,345 in cash and $2,530 in warrants. The Company had $51,404 of cash
provided by operations, gross proceeds of $4,980 from the sale of fixed assets,
primarily the Congers Facility, and $8,418 from the issuance of shares of Common
Stock upon the exercise of stock options. In the nine-month period ended October
3, 2004, the Company invested $18,733 in capital improvements, primarily for
Phase II of the expansion of its laboratories in Spring Valley, New York,
information system improvements and new production machinery. The Company's cash
balances are deposited primarily with financial institutions in money market
funds and overnight investments.
There have been no significant changes in credit terms, collection efforts,
credit utilization, or delinquency related to the Company's accounts receivable.
There are many timing issues that could cause fluctuations when measuring
accounts receivable days based on the previous quarter's average days' sales in
accounts receivable. The Company measures its days' sales in accounts receivable
on a rolling twelve month average. Days' sales in accounts receivable based on
this calculation increased to 76 days at October 3, 2004 from 63 days at
December 31, 2003. Generally, the Company has a customer base that pays in 60 to
90 days and the Company's management expects days' sales in accounts receivables
to fluctuate within that range.
Working capital, which is current assets minus current liabilities, of
$355,169 decreased $104,633, from $459,802 at December 31, 2003, primarily due
to the purchase of Kali with cash on hand. The working capital ratio, which is
calculated by dividing current assets by current liabilities, was 3.18x at
October 3, 2004 compared to 3.75x at December 31, 2003. The Company believes
that its strong working capital ratio indicates its ability to meet ongoing and
foreseeable obligations.
In April 2004, the Company's board authorized the repurchase of up to
$50,000 worth of the Company's common stock. The repurchases are made, subject
to compliance with applicable securities laws, from time to time in the open
market or in privately negotiated transactions. Common stock acquired through
the repurchase program are available for general corporate purposes. Pursuant to
the program, the Company had repurchased approximately 844 shares of its common
stock for approximately $32,026 through October 3, 2004.
In September 2003, the Company sold an aggregate principal amount of
$200,000 of senior subordinated convertible notes pursuant to Rule 144A under
the Securities Act of 1933, as amended. Net proceeds of $177,945 from the notes,
which were net of underwriting costs of $5,250 and the net payment of $16,805
from the purchase of call options and sale of warrants, were used to purchase
available-for-sale securities in October 2003. Available-for-sale securities of
$197,605 at October 3, 2004 are all available for immediate sale. The Company
intends to use its current liquidity to support the expansion of its business,
which included the acquisition of Kali, increasing its research and development
activities, entering into product license arrangements, potentially acquiring
other complementary businesses and products, and for general corporate purposes.
As of October 3, 2004, the Company had payables owed to distribution
agreement partners of $55,976 related primarily to amounts due pursuant to
profit sharing agreements, particularly amounts owed to GSK and Pentech on
paroxetine and BMS on glyburide and metformin hydrochloride and metformin ER.
The Company expects to pay these amounts out of its working capital during the
fourth quarter of 2004.
The dollar values of the Company's material contractual obligations and
commercial commitments as of October 3, 2004 were as follows:
27
AMOUNTS DUE BY PERIOD
---------------------
TOTAL MONETARY OCT.-DEC. 31 2005 TO 2008 TO 2010 AND
OBLIGATION OBLIGATION 2004 2007 2009 THEREAFTER
---------- ---------- ---- ---- ---- ----------
Operating leases $19,977 $784 $8,423 $4,991 $5,779
Convertible notes* 200,000 - - - 200,000
Advancis development expenses 23,500 4,500 19,000 - -
Nortec 500 - 500 - -
Other 538 57 481 - -
--- -- --- ----- ---------
Total obligations $244,515 $5,341 $28,404 $4,991 $205,779
======= ===== ====== ===== =======
*The convertible notes mature on September 30, 2010, unless earlier
converted or repurchased.
In addition to its internal research and development costs, the Company,
from time to time, enters into agreements with third parties for the development
of new products and technologies. To date, the Company has entered into
agreements and advanced funds or has commitments with several non-affiliated
companies for products in various stages of development. These types of payments
or commitments are generally dependent on the third party achieving certain
milestones or the timing of third-party research and development or legal
expenses. Due to the uncertainty of the timing and/or realization of such
commitments, these obligations are not included in the above table; however, the
agreements that contain such commitments that the Company believes are material
are described below. Payments made pursuant to these agreements are either
capitalized or expensed according to the Company's accounting policies.
Par and Nortec Development Associates, Inc. (a Glatt company) ("Nortec"),
entered into an agreement, dated October 22, 2003, in which the two companies
agreed to develop additional products that are not part of the two previous
agreements between Par and Nortec. During the first two years of the agreement,
Par is obligated to make aggregate initial research and development payments to
Nortec in the amount of $3,000, of which $1,500 was paid by Par in fiscal year
2003, $1,000 was paid in fiscal year 2004 and $500 is due in January 2005. On or
before October 15, 2005, Par has the option to either (i) terminate the
arrangement with Nortec, in which case the initial research and development
payments will be credited against any development costs that Par shall owe
Nortec at that time, or (ii) acquire all of the capital stock of Nortec over the
subsequent two years, including the first fifty (50%) percent of the capital
stock of Nortec over the third and fourth years of the agreement for $4,000, and
the remaining 50% from its owners at the end of the fourth year for an
additional $11,000. The parties have agreed to certain revenue and royalty
sharing arrangements before and after Par's acquisition, if any, of Nortec.
In April 2001, Par entered into a licensing agreement with Aveva Drug
Delivery Systems (formerly Elan Transdermal Technologies, Inc.) ("Aveva"), a
U.S. subsidiary of Nitto Denko, to market a generic clonidine transdermal patch
(Catapres TTS(R)). Under such agreement, Aveva is responsible for the
development and manufacture of the product, while Par is responsible for its
marketing, sale and distribution. Pursuant to the agreement, Par has agreed to
pay Aveva $1,000 upon FDA approval of the product and royalties on sales of the
product.
The Company expects to continue to fund its operations, including its
research and development activities, capital projects and obligations under the
existing distribution and development arrangements discussed herein, out of its
working capital, including the proceeds from the issuance of its convertible
notes. However, the Company anticipates that its capital spending in fiscal year
2004 will be at approximately the same level as in fiscal year 2003.
Implementation of the Company's business plan may require additional debt and/or
equity financing and there can be no assurance that the Company will be able to
obtain any additional required financing when needed and on terms acceptable or
favorable to it.
FINANCING
At October 3, 2004, the Company's total outstanding long-term debt,
including the current portion, was $200,532. The amount consisted primarily of
senior subordinated convertible notes and capital leases for computer equipment.
In September 2003, the Company sold an aggregate principal amount of $200,000 of
senior subordinated convertible notes pursuant to Rule 144A under the Securities
Act of 1933, as amended. The notes bear interest at an annual rate of 2.875%,
28
payable semi-annually on March 30 and September 30 of each year. The first
payment of $2,875 was made on March 29, 2004 and the second payment of $2,875
was made on September 29, 2004. The notes are convertible into shares of Common
Stock at an initial conversion price of $88.76 per share, only upon the
occurrence of certain events. The notes mature on September 30, 2010, unless
earlier converted or repurchased. The Company may not redeem the notes prior to
their maturity date.
SUBSEQUENT EVENTS
In October 2004, the Company's board adopted a stockholder rights plan
designed to ensure that all PRX stockholders receive fair and equal treatment in
the event of an unsolicited attempt to acquire the Company. The adoption of the
rights plan is intended to deter partial and "two step" tender offers or other
coercive takeover tactics, and to prevent an acquirer from gaining control of
PRX without offering a fair price to all of PRX's stockholders. The rights plan
was not adopted in response to any known offers for PRX and is similar to
stockholder rights plans adopted by many other companies.
To implement the rights plan, the board declared a distribution of one
preferred stock purchase right per share of common stock, payable to all
stockholders of record as of November 8, 2004. The rights will be distributed as
a non-taxable dividend and will expire on October 27, 2014. The rights will be
evidenced by the underlying PRX common stock, and no separate preferred stock
purchase rights certificates will presently be distributed. The rights to
acquire preferred stock are not immediately exercisable and will become
exercisable only if a person or group acquires or commences a tender offer for
15% or more of PRX's common stock.
If a person or group acquires or commences a tender offer for 15% or more
of PRX's common stock, each holder of a right, except the acquirer, will be
entitled, subject to PRX's right to redeem or exchange the right, to exercise,
at an exercise price of $225, the right for one one-thousandth of a share of
PRX's newly-created Series A Junior Participating Preferred Stock, or the number
of shares of PRX common stock equal to the holder's number of rights multiplied
by the exercise price and divided by 50% of the market price of PRX's common
stock on the date of the occurrence of such an event. The board may terminate
the rights plan at any time or redeem the rights, for $0.01 per right, at any
time before a person acquires 15% or more of PRX's common stock.
On November 1, 2004, Morton Grove filed a lawsuit against the Company in
the United States District Court for the Northern District of Illinois, seeking
a declaratory judgment that four Par patents relating to megestrol acetate oral
suspension are invalid, unenforceable and not infringed by a Morton Grove
product that has not yet been launched, but which Morton Grove alleges it
expects to begin selling. Par is evaluating its legal options in responding to
the complaint in this action. Par has independently learned that FDA has
approved Morton Grove's ANDA for a megestrol acetate oral suspension product,
but Par does not have reliable information concerning when Morton Grove may
launch a product. The Company intends to defend vigorously this action and shall
assert counterclaims against Morton Grove.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to market risk primarily from changes in the market
values of its investments in marketable debt and securities issued by government
agencies. These instruments are classified as available for sale securities for
financial reporting purposes and have minimal or no interest risk due to their
short-term nature. Professional portfolio managers managed 100% of these
available-for-sale securities at October 3, 2004. Additional investments are
made in overnight deposits and money market funds. These instruments are
classified as cash and cash equivalents for financial reporting purposes and
have minimal or no interest risk due to their short-term nature.
The following table summarizes the available-for-sale securities that
subject the Company to market risk at October 3, 2004 and December 31, 2003:
OCT. 3, DEC. 31,
2004 2003
---- ----
Debt securities issued by various
state and local municipalities
and agencies $111,537 $185,450
Securities issued by United States
government and agencies 86,068 10,050
------ ------
Total $197,605 $195,500
======= =======
29
AVAILABLE-FOR-SALE SECURITIES:
The primary objectives for the Company's investment portfolio are liquidity
and safety of principal. Investments are made to achieve the highest rate of
return while retaining safety of principal. The Company's investment policy
limits investments to certain types of instruments issued by institutions and
governmental agencies with investment-grade credit ratings. A significant change
in interest rates could affect the market value of the $197,605 in
available-for-sale securities that have a maturity greater than one year.
The Company is also subject to market risk in respect of its investments in
Advancis and New River, which are subject to fluctuations in the trading price
of Advancis and New River common stocks, which are publicly traded. The Company
paid $10,000 to purchase 1,000 shares of the common stock of Advancis, at $10
per share, in its initial public offering of 6,000 shares on October 16, 2003.
The transaction closed on October 22, 2003. The Company's investment represented
an ownership position of 4.4% of the outstanding common stock of Advancis. The
value of the Company's investment in Advancis as of October 3, 2004 was $8,360.
The Company purchased 875 shares of common stock of New River on August 5, 2004
in an initial public offering for $8 per share. PRX's investment of $7,000
represented an ownership position of 4.9% of the outstanding common stock of New
River. As of October 3, 2004, the fair value of the Company's investment in New
River was $9,039.
ITEM 4. CONTROLS AND PROCEDURES.
Based on an evaluation under the supervision and with the participation of
the Company's management, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") were effective
as of October 3, 2004 to ensure that the information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Commission's rules and forms.
There were no changes in the Company's internal control over financial
reporting identified in management's evaluation during the third quarter of
fiscal 2004 that have materially affected or are reasonably likely to materially
affect the Company's internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------ -----------------
On May 3, 2004, Pentech filed an action against the Company in the United
States District Court for the Northern District of Illinois. This action alleges
that the Company breached its contract with Pentech relating to the supply and
marketing of paroxetine. Although the Company and Pentech are in dispute over
the amount of gross profit share, if any, due to Pentech, the Company believes
that it is in compliance with its agreement with Pentech and intends to defend
vigorously this action.
On March 9, 2004, the Congress of California Seniors brought an action
against GSK and the Company concerning the sale of paroxetine in the State of
California. The Company intends to defend vigorously the claims set forth in the
complaint.
On September 10, 2003, Par and a number of other generic and brand
pharmaceutical companies were sued by a New York county, which has alleged
violations of laws (including the Racketeer Influenced and Corrupt Organizations
Act, common law fraud and obtaining funds by false statements) related to
participation in the Medicaid program. The complaint seeks declaratory relief;
actual, statutory and treble damages, with interest; punitive damages; an
accounting and disgorgement of any illegal profits; a constructive trust and
restitution; and attorneys' and experts' fees and costs. This case was
transferred to the United States District Court for the District of
Massachusetts for coordinated and consolidated pre-trial proceedings. In
addition, on September 25, 2003, the Office of the Attorney General of the
Commonwealth of Massachusetts filed a complaint in the District of Massachusetts
against Par and 12 other leading generic pharmaceutical companies, alleging
principally that Par and such other companies violated, through their marketing
and sales practices, state and federal laws, including allegations of common law
fraud and violations of Massachusetts false statements statutes, by inflating
generic pharmaceutical product prices paid for by the Massachusetts Medicaid
program. Par has waived service of process with respect to the complaint. The
complaint seeks injunctive relief, treble damages, disgorgement of excessive
profits, civil penalties, reimbursement of investigative and litigation costs
(including experts' fees) and attorneys' fees. On January 29, 2004, Par and the
30
other defendants involved in the litigation brought by the Office of the
Attorney General of the Commonwealth of Massachusetts filed a motion to dismiss,
which has not yet been ruled on. On August 4, 2004, Par and a number of other
generic and brand pharmaceutical companies were also sued by the City of New
York, which has alleged violations of laws (including common law fraud and
obtaining funds by false statements) related to participation in its Medicaid
program. The Complaint seeks declaratory relief; actual, statutory and treble
damages, with interest; punitive damages; an accounting and disgorgement of any
illegal profits; a constructive trust and restitution; and attorneys' and
experts' fees and costs. This case was transferred to the U.S. District Court
for the District of Massachusetts for coordinated and consolidated pre-trial
proceedings. Par intends to defend vigorously the claims asserted in such
complaints. The Company cannot predict with certainty at this time the outcome
or the effects on the Company of such litigations. Accordingly, no assurance can
be given that such litigations or any other similar litigation by other states
or jurisdictions, if instituted, will not have a material adverse effect on the
Company's financial condition, results of operations, prospects or business.
In August 2003, Teva USA filed a lawsuit against the Company and Par in the
United States District Court for the District of Delaware after its having
received approval from the FDA to launch a generic version of BMS's Megace(R),
which generic product competes with the Company's megestrol acetate oral
suspension product. In the lawsuit, Teva USA sought a declaration that its
product has not infringed and will not infringe any of Par's four patents
relating to megestrol acetate oral suspension. On August 22, 2003, Par filed a
counterclaim against Teva USA, alleging willful infringement of one of Par's
four patents in the lawsuit, U.S. Patent No. 6,593,318. In July 2004, Par and
Teva USA entered into a settlement of the lawsuit. As part of the judgment and
order of permanent injunction entered by the parties, Teva USA acknowledged that
the claims of the U.S. Patent No. 6,593,318 are valid and enforceable in all
respects and that Teva USA's product infringes that patent. As part of the
settlement, Par has granted a license to Teva USA for a limited number of units,
and, in return, Par is receiving a royalty on Teva USA's sales of megestrol
acetate oral suspension in the United States.
On July 15, 2003, the Company and Par filed a lawsuit against Roxane in the
United States District Court for the District of New Jersey. The Company and Par
alleged that Roxane had infringed Par's U.S. Patents numbered 6,593,318 and
6,593,320 relating to megestrol acetate oral suspension. Roxane has denied these
allegations and has counterclaimed for declaratory judgments of non-infringement
and invalidity of both patents. In addition, Roxane has recently filed an
amended complaint asserting that Par's patents in the litigation are
unenforceable due to inequitable conduct before the Patent Office. Par intends
to defend vigorously against these allegations.
In February 2003, Abbott, Fornier Industrie et Sante and Laboratoires
Fournier S.A. filed a lawsuit in the United States District Court for the
District of New Jersey against Par, alleging that Par's generic version of
TriCor(R) (fenofibrate) infringes one or more claims of their patents. The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously this lawsuit and has filed an answer and a counterclaim, alleging
non-infringement and patent invalidity. At this time, it is not possible for the
Company to predict the outcome of this litigation with any certainty.
On November 25, 2002, Ortho-McNeil filed a lawsuit against Kali, a
wholly-owned subsidiary of the Company, in the United States District Court for
the District of New Jersey. Ortho-McNeil alleged that Kali infringed the `691
patent by submitting a Paragraph IV certification to the FDA for approval of
tablets containing tramadol hydrochloride and acetaminophen. Par is Kali's
exclusive marketing partner for these tablets through an agreement entered into
before the Company's acquisition of Kali. Kali has denied Ortho-McNeil's
allegation, asserting that the `691 patent was not infringed and is invalid
and/or unenforceable, and that the lawsuit is barred by unclean hands. Kali also
has counterclaimed for declaratory judgments of non-infringement, invalidity and
unenforceability of the `691 patent. Summary judgment papers were served on
opposing counsel on May 28, 2004. The referenced summary judgment motion was
fully briefed and submitted to the Court as of August 23, 2004. The Court has
stated that it will hold oral argument, which has not been scheduled.
As a result of Par's filing of the ANDA for latanoprost, the Plaintiffs
filed a lawsuit against Par on December 21, 2001 in the United States District
Court for the District of New Jersey, alleging patent infringement. The
Plaintiffs sought an injunction enjoining approval of the Company's ANDA and the
marketing of its generic product prior to the expiration of their patents. On
31
February 8, 2002, Par answered the complaint and filed a counterclaim, which
sought a declaration that the patents-in-suit are invalid, unenforceable and/or
not infringed by Par's products and that the extension of the term of one of the
patents was invalid. The trial concluded in March 2004 and on July 6, 2004 the
Court issued an opinion and order ordering that judgment be entered in favor of
the Plaintiffs on their claims of infringement of U.S. Patent Nos. 4,599,353
(expires July 28, 2006) and 5,296,504 (expires March 22, 2011); that the
effective date of approval of Par's ANDA shall be a date which is not earlier
than the dates of expiration of those patents; and that Par is enjoined from
engaging in the commercial manufacture, use, offer to sell, or sale within the
United States, or importation into the United States, of any drug product
covered by, or the use of which is covered by, those two patents. As to the
third patent asserted by the Plaintiffs, U.S. Patent No. 5,422,368, the Court
dismissed the Plaintiffs' infringement claims and declared that the patent is
unenforceable due to inequitable conduct. The Court further dismissed all of the
parties' claims for attorneys' fees. Both Par and the Plaintiffs have filed
notices of appeal which are currently pending in the United States Court of
Appeals for the Federal Circuit. Par is appealing the Court's decision only
insofar as it relates to U.S. Patent No. 5,296,504. Pursuant to agreements with
Breath and FineTech related to latanoprost, the Company had recorded product
license fees of $6,999, which are included in intangible assets on its
consolidated balance sheets.
Par entered into a licensing agreement with developer Paddock to market
testosterone 1% gel, a generic version of Unimed's product Androgel(R). The
product, if successfully brought to market, would be manufactured by Paddock and
marketed by Par. Paddock has filed an ANDA (that is pending with the FDA) for
the testosterone 1% gel product. As a result of the filing of the ANDA, Unimed
and Besins, co-assignees of the patent-in-suit, filed a lawsuit against Paddock
in the United States District Court for the Northern District of Georgia,
alleging patent infringement on August 22, 2003. Par has an economic interest in
the outcome of this litigation by virtue of its licensing agreement with
Paddock. Unimed and Besins are seeking an injunction to prevent Paddock from
manufacturing the generic product. On November 18, 2003, Paddock answered the
complaint and filed a counterclaim, which seeks a declaration that the
patent-in-suit is invalid and/or not infringed by Paddock's product. This case
is currently in discovery. At this time, the Company is not able to predict with
certainty the outcome of this litigation.
The Company and/or Par are parties to certain other litigation matters,
including product liability and patent actions; the Company believes that these
actions are part of the ordinary conduct of its business and that their ultimate
resolution thereof will not have a material adverse effect on its financial
condition, results of operations or liquidity. The Company intends to defend
vigorously or, in cases where the Company is plaintiff, to prosecute these
actions.
ITEM 6. EXHIBITS
- ------ --------
10.57 Development and Commercialization Agreement between Advancis and Par
Pharmaceutical, Inc. dated May 28, 2004.*
31.1 Certification by the President and Chief Executive Officer pursuant to
Rule 13a-14(a) of the Exchange Act.
31.2 Certification by the Chief Financial Officer pursuant to Rule 13a-14(a)
of the Exchange Act.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
*Confidential treatment requested for certain portions of the Exhibit purusant
to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, which portions
are omitted and filed separately, with the Securities and Exchange Commission.
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAR PHARMACEUTICAL COMPANIES, INC.
----------------------------------
(Registrant)
November 12, 2004 /s/ Scott Tarriff
----------------------------------
Scott Tarriff
PRESIDENT AND CHIEF EXECUTIVE OFFICER
November 12, 2004 /s/ Dennis J. O'Connor
----------------------------------
Dennis J. O'Connor
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
33
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
10.57 Development and Commercialization Agreement between Advancis
and Par Pharmaceutical, Inc. dated May 28, 2004.*
31.1 Certification by the President and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Exchange Act.
31.2 Certification by the Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act.
32.1 Certification by the President and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*Confidential treatment requested for certain portions of the Exhibit purusant
to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, which portions
are omitted and filed separately, with the Securities and Exchange Commission.
34