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: April 3, 2005
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.)
300 TICE BOULEVARD, WOODCLIFF LAKE, NEW JERSEY 07677
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code - (201) 802-4000)
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 May 2, 2005:
34,191,793
TABLE OF CONTENTS
PAR PHARMACEUTICAL COMPANIES, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED APRIL 3, 2005
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated balance sheets as of April 3, 2005 and
December 31, 2004...............................................3
Consolidated statements of operations for the three months
ended April 3, 2005 and April 4, 2004...........................4
Consolidated statements of cash flows for the three months
ended April 3, 2005 and April 4, 2004...........................5
Notes to consolidated financial statements...................6-16
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................17-25
Item 3 Quantitative and Qualitative Disclosures about Market Risk......26
Item 4 Controls and Procedures.........................................26
PART II OTHER INFORMATION
Item 1 Legal Proceedings............................................27-29
Item 5 Other Information...............................................29
Item 6 Exhibits.......................................................29
SIGNATURES................................................................30
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
APRIL 3, DECEMBER 31,
ASSETS 2005 2004
------ ---- ----
Current assets:
Cash and cash equivalents $42,064 $36,534
Available for sale securities 122,445 151,854
Accounts receivable, net of
allowances of $35,729 and $42,316 152,063 149,107
Inventories, net 100,822 86,835
Prepaid expenses and other current assets 13,502 17,072
Deferred income tax assets 46,932 52,580
------ ------
Total current assets 477,828 493,982
Property, plant and equipment, at cost less
accumulated depreciation and amortization 69,571 66,642
Investments 33,139 25,271
Intangible assets, net 50,189 51,491
Goodwill 77,946 77,919
Deferred charges and other assets 11,042 11,234
Non-current deferred income tax assets, net 38,412 42,465
------ ------
Total assets $758,127 $769,004
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term and current portion of long-term debt $2,443 $4,348
Accounts payable 38,547 45,832
Payables due to distribution agreement partners 39,205 40,149
Accrued salaries and employee benefits 7,059 8,745
Accrued expenses and other current liabilities 16,063 16,554
Income taxes payable 31,990 39,116
------ ------
Total current liabilities 135,307 154,744
Long-term debt, less current portion 200,224 200,275
Other long-term liabilities 395 395
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
35,012,024 and 34,759,265 shares 350 348
Additional paid-in capital 203,649 193,686
Deferred compensation - restricted stock (9,536) (1,455)
Retained earnings 255,703 253,726
Accumulated other comprehensive income (loss) 4,061 (689)
Treasury stock, at cost, 843,700 shares (32,026) (32,026)
------ ------
Total stockholders' equity 422,201 413,590
------- -------
Total liabilities and stockholders' equity $758,127 $769,004
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
3
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
THREE MONTHS ENDED
------------------
APRIL 3, APRIL 4,
2005 2004
---- ----
Revenues:
Net product sales $91,088 $211,039
Other product related revenues 6,413 728
----- ---
Total revenues 97,501 211,767
Cost of goods sold 58,349 141,215
------ -------
Gross margin 39,152 70,552
Operating expenses (income):
Research and development 15,989 6,478
Selling, general and administrative 21,352 17,067
Gain on sale of facility - (2,812)
------ -----
Total operating expenses 37,341 20,733
------ ------
Operating income 1,811 49,819
Other income (expense), net 1,323 (22)
Interest expense, net (146) (279)
--- ---
Income before provision for income taxes 2,988 49,518
Provision for income taxes 1,011 19,312
----- ------
Net income $1,977 $30,206
===== ======
Net income per share of common stock:
Basic $0.06 $0.88
==== ====
Diluted $0.06 $0.85
==== ====
Weighted average number of
common shares outstanding:
Basic 34,137 34,498
====== ======
Diluted 34,646 35,555
====== ======
The accompanying notes are an integral part of these consolidated
financial statements.
4
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
------------------
APRIL 3, APRIL 4,
2005 2004
---- ----
Cash flows from operating activities:
Net income $1,977 $30,206
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Deferred income taxes 6,797 2,704
Depreciation and amortization 3,519 2,911
Inventory reserves (353) 284
Allowances against accounts receivable (6,588) (8,440)
Gain on sale of property (2) (2,812)
Gain on investments (1,318) -
Stock compensation expense 893 392
Other - (692)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 3,632 (2,801)
Increase in inventories (13,633) (12,005)
Decrease in prepaid expenses and other assets 3,762 1,307
(Decrease) increase in accounts payable (7,286) 15,021
(Decrease) increase in payables due to
distribution agreement partners (944) 6,570
Decrease in accrued expenses and other
liabilities (2,176) (11,509)
(Decrease) increase in income taxes payable (7,167) 12,327
----- ------
Net cash (used in) provided by operating
activities (18,887) 33,463
------ ------
Cash flows from investing activities:
Capital expenditures (5,146) (5,156)
Issuance of note receivable - (10,000)
Proceeds from sale of investment 1,846 -
Proceeds from sales of available for sale
securities 43,665 -
Purchases of available for sale securities (15,000) (95,168)
Proceeds from sale of fixed assets 2 4,980
Other (27) -
-- -------
Net cash provided by (used in) investing
activities 25,340 (105,344)
------ -------
Cash flows from financing activities:
Proceeds from issuances of common stock 1,033 4,445
Issuance of debt - 399
Principal payments under long-term debt
and other borrowings (1,956) (96)
----- --
Net cash (used in) provided by financing
activities (923) 4,748
--- -----
Net increase (decrease) in cash and cash equivalents 5,530 (67,133)
Cash and cash equivalents at beginning of period 36,534 162,549
------ -------
Cash and cash equivalents at end of period $42,064 $95,416
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Taxes $1,379 $4,929
===== =====
Interest $2,915 $2,922
===== =====
Non-cash transactions:
Tax benefit from exercise of stock options $214 $2,301
=== =====
Increase in fair value of available for sale
securities and investments $9,005 $1,688
===== =====
The accompanying notes are an integral part of these consolidated
financial statements.
5
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(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. The Company wholly owns Kali
Laboratories, Inc. ("Kali"), a generic pharmaceutical research and development
company located in Somerset, New Jersey, which it acquired on June 10, 2004.
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 oral suspension product.
NOTE 1 - BASIS OF PREPARATION:
The accompanying consolidated financial statements at April 3, 2005 and
for the three-month periods ended April 3, 2005 and April 4, 2004 are unaudited;
in the opinion of the Company's management, however, such statements include all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the information presented therein. The consolidated balance sheet at
December 31, 2004 was derived from the Company's audited consolidated financial
statements at such date.
On June 10, 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
accompanying consolidated financial statements include the operating results of
Kali 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 that may be achieved for full fiscal years. Certain items in the
consolidated financial statements for the prior corresponding period have been
reclassified to conform to the current period's financial statement
presentation.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123R (Revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R
requires all share-based payments made to employees, including grants of
employee stock options and shares issued under employee stock purchase plans, to
be recognized in the income statement based on their grant-date fair values. In
April 2005, the Commission amended the date for compliance with SFAS 123R. The
Company is required to adopt the new accounting provision beginning in its first
quarter of fiscal year 2006. The Company is currently evaluating the provisions
of SFAS 123R.
NOTE 3 - 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 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. In addition, this Standard amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both
6
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
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:
THREE MONTHS ENDED
------------------
APRIL 3, APRIL 4,
2005 2004
---- ----
Net income, as reported $1,977 $30,206
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects 383 -
Deduct: Stock-based employee compensation expense
determined under the fair value-based method,
net of related tax effects (20,734) (7,634)
------ -----
Pro forma net (loss) income $(18,374) $22,572
====== ======
Net income (loss) per share of common stock:
As reported -Basic $0.06 $0.88
==== ====
As reported -Diluted $0.06 $0.85
==== ====
Pro forma -Basic $(0.54) $0.65
==== ====
Pro forma -Diluted $(0.54) $0.63
==== ====
In February 2005, the Company accelerated the vesting of 820 outstanding,
non-vested stock options, which represented all stock option grants with per
share exercise prices exceeding $60. The fair value of these options, using the
Black-Scholes stock option pricing model and the Company's stock option
assumptions at the date of their grant, was approximately $27,869. This action
increased pro forma compensation expense in the first quarter of 2005 by
approximately $16,552, net of related tax effects. The Company considered a
number of factors in making this decision, including the issuance and
anticipated implementation of the revision to SFAS 123 requiring the expensing
of stock options, which is expected to be effective for the Company in 2006.
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 three-month periods has been estimated at the dates of grant
using the Black-Scholes stock option pricing model, based on the following
assumptions:
THREE MONTHS ENDED
------------------
APRIL 3, APRIL 4,
2005 2004
---- ----
Risk-free interest rate 3.5% 4.0%
Expected term 4.9 years 5.0 years
Expected volatility 59.0% 59.0%
It is assumed that no dividends will be paid for the entire term of the
options. The weighted average per share fair values of options granted in the
first quarter of fiscal years 2005 and 2004 were $21.98 and $32.85,
respectively.
7
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 4 - AVAILABLE FOR SALE SECURITIES:
At April 3, 2005 and December 31, 2004, 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, classified as current, at April 3, 2005:
UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Debt securities issued by various
state and local municipalities
and agencies $49,244 $- $(447) $48,797
Securities issued by United States
government and agencies 74,592 - (944) 73,648
------ - --- ------
Total $123,836 $- $(1,391) $122,445
======= = ===== =======
The following is a summary of the Company's available for sale securities,
classified as current, at December 31, 2004:
UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Debt securities issued by various
state and local municipalities
and agencies $82,894 $- $(216) $82,678
Securities issued by United States
government and agencies 69,642 - (466) 69,176
------ --- --- ------
Total $152,536 $- $(682) $151,854
======= = === =======
The Company had $442 and $36 of unrealized losses related to available for
sale securities that had been in a loss position for greater than a year as of
April 3, 2005 and December 31, 2004, respectively. All of the securities are
available for immediate sale and have been classified as current. In the first
quarter of 2005, the Company sold $43,665 of these securities. The following
table summarizes the contractual maturities of debt securities at April 3, 2005
and December 31, 2004:
APRIL 3, 2005 DECEMBER 31, 2004
------------- -----------------
FAIR FAIR
COST VALUE COST VALUE
---- ----- ---- -----
Less than one year $98,857 $97,638 $93,907 $93,250
Due between 1-2 years - - - -
Due between 2-5 years 3,592 3,556 3,592 3,594
Due after 5 years 21,387 21,251 55,037 55,010
------ ------ ------ ------
Total $123,836 $122,445 $152,536 $151,854
======= ======= ======= =======
NOTE 5 - INVESTMENTS:
The Company holds investments in New River Pharmaceuticals Inc. ("New
River"), Advancis Pharmaceutical Corporation ("Advancis") and Abrika
Pharmaceuticals, LLLP ("Abrika"). The Company assesses whether temporary or
other-than-temporary gains or losses on its investments have occurred due to
increases or declines in fair value or other market conditions. Because the
Company has determined that all of its investments are available for sale,
unrealized gains and losses are reported as a component of accumulated other
comprehensive income (loss) in stockholders' equity.
In December 2004, the Company acquired a 5% partnership interest in
Abrika, a privately-held specialty generic pharmaceutical company located in
Sunrise, Florida for $8,361, including costs. The Company also holds a
convertible promissory note in the principal amount of $3,000, with interest
accruing at 8.0% annually, for money loaned to Abrika. Because Abrika is
8
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
privately-held, the Company monitors the investment on a periodic basis to
evaluate whether any changes in fair value become other-than-temporary.
In August, 2004, the Company purchased 875 shares of common stock of New
River for $7,000 in its initial public offering of $8 per share. In the first
quarter of 2005, the Company sold 62 shares of New River common stock for $1,846
and recorded a gain on the sale of $1,353. The Company's current investment
represents an ownership position of approximately 4.5% of the outstanding common
stock of New River. As of April 3, 2005 and December 31, 2004, the fair value of
the Company's investment in New River was $21,268 and $13,090, respectively,
based on the market value of the common stock of New River on those dates,
respectively. To date, the Company has recorded unrealized gains on this
investment of $14,761, with a corresponding credit of $9,095 to accumulated
other comprehensive gains and $5,666 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
Company's current investment represented an ownership position of 4.4% of the
outstanding common stock of Advancis at April 3, 2005. As of April 3, 2005 and
December 31, 2004, the fair value of the Company's investment in Advancis was
$3,510 and $3,820, respectively, based on the market value of the common stock
of Advancis at those dates, respectively. To date, the Company has recorded net
unrealized losses on this investment of $6,490, with corresponding charges of
$3,962 to accumulated other comprehensive losses and $2,528 to deferred income
taxes.
NOTE 6 - ACCOUNTS RECEIVABLE:
APRIL 3, DECEMBER 31,
2005 2004
---- ----
Gross trade accounts receivable $272,529 $294,030
Allowances for rebates and chargebacks 91,150 102,607
------ -------
Trade accounts receivable, net of customer
rebates and chargebacks 181,379 191,423
Other accounts receivable 6,413 -
----- -------
187,792 191,423
Allowances:
Doubtful accounts 1,847 1,847
Returns 21,787 23,392
Price adjustments and allowances 12,095 17,077
------ ------
35,729 42,316
------ ------
Accounts receivable,
net of allowances $152,063 $149,107
======= =======
At the time the Company recognizes revenues for product sales, it
simultaneously records estimates for sales allowances, the most significant of
which are described below and include rebates, chargebacks, returns, price
adjustments and other sales allowances, as reductions to gross revenues, with
corresponding adjustments to the accounts receivable allowances.
Customer rebates are price reductions that generally are provided to
customers as an incentive for them to continue to carry the Company's products
or to substitute the Company's products for competing products to be sold
through the customers' distribution channels. This incentive is generally based
on a customer's volume of purchases made during an applicable monthly, quarterly
or annual period.
Chargebacks are given to the wholesale customer for product that it
resells to specific healthcare providers on the basis of prices negotiated
between the Company and the providers. Chargeback credits are issued to
wholesalers for the difference between the Company's invoice price and the
contract price through which the wholesaler resells the product.
The Company accepts returns of product according to the following: (i) the
returns must be approved by authorized personnel in writing or by telephone with
the lot number and expiration date accompanying any request, (ii) the Company
9
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
generally will accept returns of products from any customer and will give the
customer a credit for such return if such product is returned within six months
prior to, and until 12 months following, such product's expiration date and
(iii) any product that has more than six months until its expiration date may be
returned to the Company; however, no credit will be issued to the customer
unless the product can be resold.
Price adjustments include term discounts, sales promotions and shelf-stock
adjustments. Term discounts are given to customers that pay within a specific
period of time. The Company may conduct sales or trade show promotions where
additional discounts may be given on a new product or certain existing products
as an added incentive to stock the Company's products or for the customer to
substitute the Company's products for competing products. The Company may also,
from time to time, provide price and/or volume incentives on new products that
have multiple competitors and/or on existing products that confront new
competition in order to secure or maintain a certain market share. The Company
does not provide incentives designed to increase shipments to its customers that
it believes would result in out-of-the ordinary course of business inventory for
them. Shelf-stock adjustments are typically provided to a customer when the
Company lowers its invoice pricing and provides the customer with 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.
Due to competitive factors, the Company may also provide price protection.
The Company will generally offer price protection for sales of new generic drugs
for which its market exclusivity period has expired or with respect to 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 or at the time of a price decrease. Such
price protection plans, which are common in the Company's industry, are given
through lower contract pricing to the wholesalers, which could result in an
increased chargeback per unit on existing inventory levels, or through
shelf-stock adjustments. At April 3, 2005 and December 31, 2004, the Company did
not have any material price protection reserves, but had issued significant
price protection credits and had generally lowered contract pricing on its key
products in the first quarter 2005 and throughout fiscal year 2004 due to
competition.
The following summarizes the activity for the three-months ended April 3,
2005 in the accounts affected by the accruals described above:
THREE MONTHS
ENDED APRIL 3, 2005
-------------------
RESERVES FOR REBATES AND CHARGEBACKS:
- -------------------------------------
Balance, beginning of the period $(102,607)
Provision recorded (149,345)
Credits processed 160,802
-------
Balance, end of the period $(91,150)
======
RESERVES FOR DOUBTFUL ACCOUNTS, RETURNS,
PRICE ADJUSTMENTS AND OTHER SALES ALLOWANCES:
- ---------------------------------------------
Balance, beginning of the period $(42,316)
Provision recorded (35,459)
Credits processed 42,046
------
Balance, end of the period $(35,729)
======
The Company's other accounts receivable in the first quarter 2005 included
a $6,000 receivable from a business partner to conclude a manufacturing and
supply agreement. The $6,000 was subsequently paid in April 2005.
10
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 7 - INVENTORIES, NET:
APRIL 3, DECEMBER 31,
2005 2004
---- ----
Raw materials and supplies, net $30,573 $30,773
Work-in-process, net 11,496 11,041
Finished goods, net 58,753 45,021
------ ------
$100,822 $86,835
======= ======
NOTE 8 - ACQUISITIONS:
On June 10, 2004, the Company acquired all of the capital stock of Kali
for $142,888 in cash and warrants to purchase 150 shares of the Company's common
stock valued at $2,530. The acquisition did not require the approval of the
Company's stockholders. The Company acquired the physical facilities, acquired
in-process research and development and intellectual property of Kali and
retained all of its employees. The acquisition of Kali has significantly
expanded the Company's research and development capabilities. The Company's
acquisition of Kali is consistent with its long-term strategy to supplement
internal growth with acquisitions, joint ventures and product licensing
agreements.
NOTE 9 - INTANGIBLE ASSETS, NET:
APRIL 3, DECEMBER 31,
2005 2004
---- ----
FSC Laboratories, Inc. agreement, net of
accumulated amortization of $189 and $0 $14,811 $15,000
Trademark licensed from Bristol-Myers Squibb 5,000 5,000
Bristol-Myers Squibb asset purchase agreement,
net of accumulated amortization of $5,154
and $4,736 6,546 6,964
Product license fees, net of accumulated
amortization of $3,539 and $3,480 7,466 7,525
Genpharm, Inc. distribution agreement, net of
accumulated amortization of $4,875
and $4,694 5,958 6,139
Intellectual property, net of accumulated
amortization of $2,331 and $2,071 6,974 7,234
Other intangibles assets, net of accumulated
amortization of $386 and $191 3,434 3,629
----- -----
$50,189 $51,491
====== ======
The Company recorded amortization expense related to intangible assets of
$1,302 and $1,512, respectively, for the three-month periods ended April 3, 2005
and April 4, 2004. Amortization expense related to the intangible assets
currently being amortized is expected to total approximately $7,959 in 2005,
$8,131 in 2006, $6,701 in 2007, $5,960 in 2008, $4,197 in 2009 and $6,544
thereafter. Intangible assets not being amortized at April 3, 2005 and December
31, 2004 were product license fees of $6,999 and a trademark licensed from
Bristol-Myers Squibb Company ("BMS") of $5,000.
The product license fees of $6,999 consist of payments made by Par
pursuant to agreements with Breath Ltd. of the Arrow Group ("Breath") and
FineTech Laboratories, Ltd. related to latanoprost ophthalmic solution 0.005%,
the generic equivalent of Pharmacia Corporation's ("Pharmacia") Xalatan(R), a
glaucoma medication. The Company and Pharmacia are currently in litigation over
alleged patent infringement in regards to latanoprost (see "Note 13 -
Commitments, Contingencies and Other Matters - Legal Proceedings").
NOTE 10 - 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 April 3, 2005 and December 31, 2004 consisted of temporary
differences, primarily related to accounts receivable reserves, and non-current
deferred income tax assets in both periods included the tax benefit related to
purchased call options and acquired in-process research and development.
11
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 11 - CHANGES IN STOCKHOLDERS' EQUITY:
Changes in the Company's Common stock, Additional paid-in capital,
Deferred compensation - restricted stock and Accumulated other comprehensive
income (loss) accounts during the three-month period ended April 3, 2005 were as
follows:
DEFERRED ACCUMULATED
ADDITIONAL COMPENSATION OTHER
COMMON STOCK PAID-IN RESTRICTED COMPREHENSIVE
SHARES AMOUNT CAPITAL STOCK INCOME (LOSS)
------ ------ ------- ----- -------------
Balance, January 1, 2005 34,759 $348 $193,686 $(1,455) $(689)
Comprehensive income:
Unrealized gains on marketable
securities, net of tax - - - - 4,750
Exercise of stock options 44 - 941 - -
Tax benefit from exercise of
stock options - - 214 --
Issuance of restricted stock 206 2 8,698 (8,700) -
Employee stock purchase program 3 - 92 - -
Compensatory arrangements - - 273 619 -
Other - - (255) - -
------ ----- --- ----- -----
Balance, April 3, 2005 35,012 $350 $203,649 $(9,536) $4,061
====== === ======= ===== =====
THREE MONTHS ENDED
------------------
APRIL 3, APRIL 4,
COMPREHENSIVE INCOME: 2005 2004
---- ----
Net income $1,977 $30,206
Other comprehensive income:
Unrealized gains on marketable
securities, net of tax 4,750 1,070
----- -----
Comprehensive income $6,727 $31,276
===== ======
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
may be 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. In fiscal year 2004, the Company had repurchased 844 shares
of its common stock for approximately $32,026 pursuant to the program. The
Company did not repurchase any shares of its common stock in the first quarter
of 2005. The Company can still repurchase approximately $17,974 of its common
stock under the above plan.
In the first quarter of 2005 and the second quarter of 2004, the Company
granted 206 and 45 restricted shares of common stock, respectively, to certain
key employees. The restrictions expire over a four-year period from date of
grant. Compensation expense is recognized over the related vesting period as
restrictions lapse.
12
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 12 - EARNINGS PER SHARE:
The following is a reconciliation of the amounts used to calculate basic
and diluted earnings per share:
THREE MONTHS ENDED
------------------
APRIL 3, APRIL 4,
2005 2004
---- ----
Net income $1,977 $30,206
Basic:
Weighted average number of common
shares outstanding 34,137 34,498
Net income per share of common stock $0.06 $0.88
==== ====
Assuming dilution:
Weighted average number of common
shares outstanding 34,137 34,498
Effect of dilutive options 509 1,057
--- -----
Weighted average number of common
shares outstanding 34,646 35,555
Net income per share of common stock $0.06 $0.85
==== ====
Outstanding options and warrants of 2,196 and 1,244 as of April 3, 2005
and April 4, 2004, respectively, were not included in the computation of diluted
earnings per share because their exercise prices were greater than the average
market price of the Common Stock during the respective periods and their
inclusion would, therefore, 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 April 3, 2005 and April 4, 2004. The warrants are exercisable
for an aggregate of 2,253 shares at an exercise price of $105.20 per share.
NOTE 13 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
PENSION PLAN:
The Company maintains a defined benefit plan (the "Pension Plan") that
covers eligible employees, as defined in the Pension Plan. The Pension Plan has
been frozen since October 1, 1989. Since the benefits under the Pension Plan are
based on the participants' length of service and compensation (subject to the
Employee Retirement Income Security Act of 1974 and Internal Revenue Service
limitations), service costs subsequent to October 1, 1989 are excluded from
benefit accruals under the Pension Plan. The funding policy for the Pension Plan
is to contribute amounts actuarially determined as necessary to provide
sufficient assets to meet the benefit requirements of the Pension Plan retirees.
For fiscal year 2005, the Company's contribution is estimated to be $22.
Net pension expense for the three-months ended April 3, 2005 and April 4,
2004 included the components set forth in the table below:
APRIL 3, APRIL 4,
2005 2004
---- ----
Interest cost $31 $31
Expected return on Pension Plan assets (33) (34)
Amortization of initial unrecognized
transition obligation 13 13
-- --
Net pension expense $11 $10
== ==
13
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
LEGAL PROCEEDINGS:
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 was launched in the fourth
quarter of 2004. The Company intends to defend vigorously this action and has
asserted counterclaims against Morton Grove.
On May 3, 2004, Pentech Pharmaceutical, Inc. ("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 (Paxil(R)). The
Company and Pentech are in dispute over the amount of gross profit share. This
case is currently in discovery. The Company intends to defend vigorously this
action.
On March 9, 2004, the Congress of California Seniors brought an action
against GlaxoSmithKline, plc ("GSK") and the Company concerning the sale of
paroxetine in the State of California. This action alleges that the sale of
paroxetine by GSK and the Company in California constitutes, among other things,
unfair business practices. The Company intends to defend vigorously this action.
On September 10, 2003, Par and a number of other generic and brand
pharmaceutical companies were sued by a New York State county (the suit has
since been joined by additional New York counties) 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 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. In addition to Massachusetts, the Commonwealth of Kentucky, the
State of Illinois and the State of Alabama have filed similar suits in their
respective jurisdictions. Par intends to defend vigorously these actions.
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 (Megace Oral Suspension(R)). 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 U.S. Patent Office. Par
intends to defend vigorously this action.
14
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In February 2003, Abbott, Fournier Industrie et Sante and Laboratoires
Fournier S.A. ("Abbott") filed a complaint in the United States District Court
for the District of New Jersey against Par, alleging that Par's generic version
of TriCor(R) (fenofibrate) infringes one or more claims of four of their patents
based on Par having filed an Abbreviated New Drug Application ("ANDA") for the
accused product with the Food and Drug Administration (the "FDA"). Par filed an
answer and a counterclaim, alleging non-infringement and invalidity. Par has
filed a request with the FDA to convert its Paragraph IV certification to a
Paragraph III certification and the case is subject to an administrative
dismissal.
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 as of yet been scheduled.
The Company received FDA approval and began shipping tramadol in April 2005 and
is still awaiting an answer from the court regarding the referenced motion for
summary judgment (see "Note 14 - Subsequent Events"). Ortho-McNeil has stated
that it will pursue its claims against Kali and will seek damages for lost
profits. The Company intends to defend vigorously against this action.
As a result of Par's filing of the ANDA for latanoprost (Xalatan(R)),
Pharmacia Corporation and the Trustees of Columbia University (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.
Par entered into a licensing agreement with developer Paddock
Laboratories, Inc. ("Paddock") to market testosterone 1% gel, a generic version
of Unimed Pharmaceuticals, Inc.'s ("Unimed") product Androgel(R). Pursuant to
this agreement, Par is responsible for management of any litigation and payment
of all legal fees associated with this product. 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. The Company intends to defend vigorously against this
action.
15
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2005
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company cannot predict with certainty at this time the outcome or the
effects on the Company of the above listed actions. Accordingly, no assurances
can be given that such actions will not have a material adverse effect on the
Company's financial condition, results of operations, prospects or business.
The Company and/or Par are, from time to time, parties to certain other
litigations, including product liability and patent actions. The Company
believes that these actions are part of the ordinary course of its business and
that their ultimate resolution will not have a material adverse effect on its
financial condition, results of operations or liquidity. The Company intends to
vigorously defend or, in cases where the Company is plaintiff, to prosecute
these actions.
OTHER MATTERS:
In June 2003, the Company received notice from the U.S. Congress that the
Committee on Energy and Commerce (the "Committee") had begun an industry-wide
(brand and generic) investigation into pharmaceutical reimbursements and rebates
under Medicaid, to which the Company has responded. In order to conduct the
investigation, the Committee has requested certain pricing and other
information, which the Company delivered in August 2003, relating to certain
drugs produced by these pharmaceutical manufacturers. It is premature for the
Company to speculate what action, if any, the federal government may take and
what impact such action could have on the Company's business, prospects or
financial condition.
NOTE 14 - SUBSEQUENT EVENTS:
In April 2005, the Company received final approval from the FDA and began
shipping tramadol hydrochloride and acetaminophen tablets, the generic version
of Ortho-McNeil's Ultracet(R). The product is indicated for the short-term (five
days or less) management of acute pain. The Company has been awarded 180 days of
marketing exclusivity, commencing at its launch, for being the first to file an
ANDA containing a paragraph IV certification of the product. Following the
Company's launch, a competitor entered the market with a generic version of
Ultracet(R) authorized by Ortho-McNeil. The Company is currently involved in
litigation with Ortho-McNeil who has alleged that the Company's product
infringes upon their patent (see "Note 13 - Commitments, Contingencies and Other
Matters - Legal Proceedings").
16
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, TRENDS AND FUTURE EVENTS, PARTICULARLY RELATING TO
SALES OF CURRENT PRODUCTS AND THE INTRODUCTION OF NEW MANUFACTURED AND
DISTRIBUTED PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE
COMPANY, WHICH COULD CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM
THOSE EXPRESSED HEREIN. THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE
TYPICALLY BY USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS,"
"ANTICIPATES," "CONTINUING," "ONGOING," "EXPECTS," "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
(PARTICULARLY 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 AS OF THE DATE HEREOF ONLY, 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
The Company's revenues and gross margin dollars for the three-month period
ended April 3, 2005 decreased 54.0% and 44.5%, respectively, from the
corresponding period of 2004. Increased competition has adversely affected
pricing and volumes of the Company's key products leading to lower sales and
gross margins. Also, the Company's increased spending on research and
development, higher sales and marketing costs and increased legal fees
contributed to decreased earnings when comparing the first fiscal quarter of
2005 to the first fiscal quarter of 2004. 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. As part of this effort, the Company received final approval
from the FDA and began shipping tramadol HCl and acetaminophen tablets
(Ultracet(R)) in April 2005 (see "Notes to Consolidated Financial Statements -
Note 14 - Subsequent Events"). 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 and brand
marketing strategy throughout fiscal year 2005 and beyond. Also, the Company
will continue 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.
Part of the Company's business plan is its strategy to enter the branded
drug market in an effort to market products with longer life cycles and higher
profitability. 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 ("FFDC Act"), seeking marketing clearance for megestrol acetate
oral suspension NanoCrystal(R) Dispersion ("NCD"). During the first quarter of
2005, the Company was notified that the FDA had extended the original ten-month
Prescription Drug User Fee Act ("PDUFA") goal date for the completion of its
review of its NDA for Megace(R) ES. The new PDUFA goal date has been extended
three months to July 29, 2005, following the FDA's request for, and the
Company's submission of, existing supplemental data on Megace(R) ES. 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 by the FDA for marketing, Megace(R) ES 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
17
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 late 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. Advancis has stated that it expects to
publicly report summary results of its initial Phase III clinical trial of
amoxicillin PULSYS(TM) around mid-June 2005. The parties executed an amendment
to this agreement in December of 2004. The amendment adds a new formulation of
amoxicillin to treat otitis media in pediatrics to the original agreement.
Net sales and gross margins derived from generic pharmaceutical products
often follow a pattern based on regulatory and competitive factors that are
believed by the Company's management to be unique to the generic pharmaceutical
industry. As the patent(s) for a brand name product and the related exclusivity
period expire, the first generic manufacturer to receive regulatory approval
from the FDA for a generic equivalent of the product is often able to capture a
substantial share of the market. At that time, however, the branded company may
license an authorized generic product to a competing generic company. As
additional 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. In recent years, a large portion of the Company's revenue
growth had been derived from sales of generic drugs during the 180-day marketing
exclusivity period or from the sale of generic products where there was limited
competition. These drugs included paroxetine tablets (Paxil(R)), megestrol
acetate oral suspension (Megace Oral Suspension(R)), and fluoxetine (Prozac(R)).
The marketing exclusivity period in respect of paroxetine ended on March
8, 2004 and the Company currently has three competitors for this product. The
additional competition has had an adverse effect on the Company's revenues and
gross margins derived from paroxetine. Due to significant pricing and, to a
lesser extent, volume declines, paroxetine sales in the first quarter of 2005
have decreased to $11,600 from $104,500, in the first quarter of 2004.
The Company currently has three generic competitors on megestrol acetate
oral suspension. In July 2004, Par entered into a 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 is receiving
a royalty on Teva USA's net sales of megestrol acetate oral suspension in the
United States. Sales and gross margins for megestrol acetate oral suspension
have declined due principally to the effects of competition on pricing and
volume. Megestrol acetate oral suspension net sales were approximately $8,600
for the first quarter of 2005 compared to approximately $18,700 for the first
quarter of 2004.
There are four competitors currently in the market with products that
compete with the Company's fluoxetine 40 mg product and a large number of
competitors on the 10 mg and 20 mg products. Net sales of fluoxetine 40 mg
capsules and 10 mg and 20 mg tablets were approximately $6,100 for the first
quarter of 2005 compared to approximately $14,900 for the first quarter of 2004.
Generic drug pricing at the wholesale level can create significant
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 its accounts receivable
allowances.
The Company generally will offer price protection for sales of generic
drugs for which the market exclusivity period has expired because the prices of
such drugs will typically decline, sometimes substantially, when additional
generic manufacturers introduce and market comparable generic products. In
addition, the Company may offer price protection with respect to products for
which it anticipates significant price erosion through increased competition.
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 could result in an increased chargeback per unit on existing
inventory levels. In the first quarter of 2005, the Company provided for and
issued price protection credits of approximately $11,100 primarily due to
18
competition with respect to paroxetine, megestrol acetate oral suspension and
glyburide & metformin HCl (Glucovance(R)).
The Company has the historical experience and access to information,
including rebate agreements with each customer, resales by its customers to
end-users having contracts with the Company, the total demand for each drug that
the Company manufactures or distributes, the Company's market share, recent or
pending new drug introductions and inventory practices of the Company's
customers, that it believes are 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 customers' inventories at a particular point in time and market
data, 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 any of the underlying assumptions
used by the Company to estimate such sales returns, rebates, chargebacks, price
adjustments or other sales allowances for the three-months ended April 3, 2005
and April 4, 2004.
The following table summarizes activity for the three-months ended April
3, 2005 and April 4, 2004 in the accounts affected by the accruals described
above:
FOR THE THREE MONTHS ENDED
--------------------------
APR. 3, APR. 4,
RESERVES FOR REBATES AND CHARGEBACKS: 2005 2004
------------------------------------- ---- ----
Balance, beginning of the period $(102,607) $(99,391)
Provision recorded (149,345) (130,110)
Credits processed 160,802 134,685
------- -------
Balance, end of the period $(91,150) $(94,816)
====== ======
RESERVES FOR DOUBTFUL ACCOUNTS,
RETURNS, PRICE ADJUSTMENTS AND APR. 3, APR. 4,
OTHER SALES ALLOWANCES: 2005 2004
------------------------------ ---- ----
Balance, beginning of the period $(42,316) $(40,357)
Provision recorded (35,459) (33,219)
Credits processed 42,046 41,659
------ ------
Balance, end of the period $(35,729) $(31,917)
====== ======
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 which the Company purchased in June 2004, and these
strategic alliances, the Company's pipeline of potential products includes 51
regulatory filings including two NDAs and 49 ANDAs (six of which have been
tentatively approved), pending with, and awaiting approval from, the FDA. The
Company pays a percentage of the gross profits or of sales to its strategic
partners on sales of products covered by its distribution agreements. Generally,
products that the Company develops internally, and 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 through
distribution and development agreements with third parties.
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 could 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 certify
either that the patent listed by the FDA as covering the branded 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 branded
drug is invalid or will not be infringed by the manufacture, sale or use of the
new drug for which the ANDA is filed. In 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. Because
19
substantially all of the Company's current business involves the marketing and
development of generic versions of brand 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, financial condition,
prospects and results of operations.
RESULTS OF OPERATIONS
GENERAL
The Company's net income of $1,977 for the three-month period ended April
3, 2005 decreased $28,229, from $30,206 for the three-month period ended April
4, 2004. Total revenues of $97,501 in the first quarter of 2005 decreased 54.0%,
from $211,767 in the first quarter of 2004, due primarily to lower net sales of
paroxetine, megestrol acetate oral suspension and fluoxetine as competition
adversely affected both pricing and volume for these products. Gross margin
dollars of $39,152 in the first quarter of 2005 decreased from $70,552 in the
first quarter of 2004 due primarily to the lower net sales. Research and
development spending in the first quarter of 2005 of $15,989 increased $9,511,
or 146.8%, from $6,478 in the same period of the prior year. The acquisition of
Kali in June 2004, along with additional outside development costs, led to the
increase in the Company's research and development spending. In fiscal year
2005, the Company expects to continue to spend at a higher rate on research and
development than it did in 2004. Selling, general and administrative costs in
the first three-months of 2005 were $21,352 compared to $17,067 in first
three-months of 2004. The Company increased its spending on sales and marketing
in the first quarter of 2005 as it prepared for the potential launch of a new
branded product later in fiscal year 2005. General and administrative costs were
also higher due primarily to increased personnel costs and legal fees. First
quarter of 2004 net income included a $2,812 gain on the sale of the Company's
facility in Congers, New York (the "Congers Facility").
Sales and gross margins of the Company's products are dependent
principally upon the (i) introduction of other generic drug manufacturers'
products in direct competition with the Company's significant products, (ii)
ability of generic competitors to quickly enter the market after patent or
exclusivity period expirations, or during exclusivity periods with authorized
generic products, diminishing the amount and duration of significant profits to
the Company from any one product, (iii) pricing practices of competitors and
removal of any competing products from the market, (iv) continuation of existing
distribution agreements, (v) introduction of new distributed products, (vi)
consolidation among distribution outlets through mergers, acquisitions and the
formation of buying groups, (vii) willingness of generic drug customers,
including wholesale and retail customers, to switch among generic pharmaceutical
manufacturers, (viii) approval of ANDAs and introduction of new manufactured
products, (ix) granting of potential marketing exclusivity periods, (x) extent
of market penetration for the existing product line and (xi) level, quality and
amount of customer service.
REVENUES
Total revenues for the three-month period ended April 3, 2005 were
$97,501, decreasing $114,266, or 54.0%, from total revenues of $211,767 for the
three-month period ended April 4, 2004, due primarily to lower sales of certain
existing products sold under various distribution agreements, including
paroxetine which decreased approximately $92,900, metformin ER (Glucophage
XR(R)) which decreased $9,500 and Fluoxetine which decreased $8,800. Also
contributing to the lower sales was the Company's top selling manufactured
product, megestrol acetate oral suspension, which decreased $10,100. Increased
competition continues to adversely affect both volume and pricing on the above
mentioned products. Partially offsetting these decreases were higher sales of
minocycline which increased $5,300 and the introduction of new products
including quinapril (Accupril(R)) which was introduced in the fourth quarter
2004 and had sales of $4,700 and glyburide/metformin which was introduced in the
second quarter 2004 and had net sales of $2,900. Total revenue in the first
quarter of 2005 also included a $6,000 payment from a business partner to
conclude a manufacturing and supply agreement which was recorded in other
product related revenues.
Net sales of distributed products, which consist of products manufactured
under contract and licensed products, were approximately $53,300, or 54.7% of
the Company's total revenues in the first quarter of 2005, and $168,400, or
79.5% of the Company's total revenues in the first quarter of 2004. 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.
20
The Company's gross revenues before deductions for chargebacks, rebates
(including rebates paid under Federal and State government Medicaid drug
reimbursement programs), price adjustments, sales returns and other sales
allowances were $288,206 in the first three-months of 2005 compared to $385,164
in first three-months of 2004. Deductions from gross revenues were $190,705 in
the first three-months of 2005 and $173,397 in the first three-months of 2004.
These deductions are discussed in "Notes to Consolidated Financial Statements -
Note 6 - Accounts Receivable." The gross-to-net revenue percentage spread
increased to 66.2% in the first quarter of 2005 compared to 45.0% in the first
quarter of 2004, primarily due to the effects of price declines for paroxetine,
glyburide/metformin (which was launched in the second quarter of 2004),
megestrol acetate oral suspension and metformin ER, which led to the issuance of
price protection credits and increased chargeback dollars due to lower contract
pricing for wholesalers during the first quarter of 2005.
The Company's other product related revenues of $6,413 in the first
quarter of 2005 increased from $728 in the first quarter of 2004. Included in
the first quarter of 2005 was a $6,000 payment from a business partner to
conclude a manufacturing and supply agreement. The Company also records other
product related revenues pursuant to an agreement with Genpharm, Inc., where the
Company receives a portion of the profits, as defined in the agreement,
generated from Kremers Urban Development Co.'s, a subsidiary of Schwarz Pharma
AG of Germany, sales of omeprazole, the generic version of Astra Zeneca's
Prilosec(R).
As discussed above, net sales of the Company's key products have decreased
primarily 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 determine to not afford price protection to certain
customers and consequently, as a matter of business strategy, to lose volume to
competitors rather than to 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 may be established depending on estimated or
actual existing customer inventories. Competitors on the Company's key products
have been entering the market over an extended period of time, thereby reducing
the need for broad price protection and material price protection reserves at
the end of any one reporting period; however, the Company has lowered the
pricing on these products over time and significant price protection credits
have been granted and processed within the reporting periods, including the
first quarter of 2005. The Company did not have material reserves for additional
price protection as of April 3, 2005 because it did not believe that there would
be any additional significant price protection credits to be issued with respect
to sales of these products through that date. The Company will continue to
evaluate the effects of competition and the need for price protection reserves
in future periods.
GROSS MARGIN
The Company's gross margin of $39,152 (40.2% of total revenues) in the
first three-months of 2005 decreased $31,400 from $70,552 (33.3% of total
revenues) in the corresponding period of 2004. The lower margin is due primarily
to the lower net sales discussed above, partially offset by the increase of the
other product related revenue. The gross margin percentage increase is due
primarily to the increase of the other product related revenue and the lower
sales of paroxetine and metformin ER which after profit splits with partners,
have significantly lower gross margins than other products.
Inventory write-offs of $385 in the first quarter of 2005 decreased from
$1,980 in the first quarter of 2004. These 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 that did not
meet the Company's quality control standards. The decreased write-offs in the
first quarter of 2005 were due primarily to the write-off of inventory in 2004
for a product whose launch was delayed, and was not repeated in 2005. 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 $15,989 for the
three-months ended April 3, 2005 increased $9,511, or 146.8%, from the same
period of last year. The increase was primarily attributable to higher outside
development projects of $5,035, including a payment of $4,750 to Advancis in
order to fund the development of a novel formulation of the antibiotic
amoxicillin, additional expenses related to the acquisition of Kali of $2,817
21
and increased domestic development operations of $1,556 primarily due to
additional personnel costs. As previously discussed, the Company acquired Kali
in June 2004. The Company expects to utilize Kali to develop additional products
for its product pipeline. Although there can be no such assurance, annual
research and development expenses for fiscal year 2005, including payments to be
made to unaffiliated companies, are expected to increase by approximately 20%
from fiscal year 2004.
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 $14,000, which was charged to research and
development expense in fiscal year 2004. Par paid an additional $4,750 in the
first quarter of 2005, which was charged to research and development expense in
that quarter. Par has agreed to fund future development costs of $14,250 through
the remainder of 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.
As a result of its product development program, the Company currently has
18 ANDAs pending with the FDA, three of which have received tentative approval,
for potential products that are not subject to any distribution or profit
sharing agreements. In addition, there are 31 ANDAs pending with the FDA, three
of which have received tentative approval, that have been filed by the Company
or its strategic partners for potential products covered by various distribution
agreements. No assurances can be given that the Company or any of its strategic
partners will successfully complete the development of any of these products
either under development or proposed for development, that they will obtain
regulatory approvals for any such product, that any approved product will be
produced in commercial quantities or that any approved product can be sold
profitably.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Total selling, general and administrative expenses were $21,352 (21.9% of
total revenues) in the first quarter of 2005 as compared to $17,067 (8.1% of
total revenues) in the first quarter of 2004. The increase in 2005 was primarily
attributable to higher sales and marketing costs of $1,708 in anticipation of
the Company's potential brand product launch in fiscal year 2005, higher
personnel costs of $1,529 to support the Company's growth and increased legal
fees of $1,057. Distribution costs included those related to shipping product to
the Company's customers, primarily through the use of common carriers or
external distribution services. Shipping costs were approximately $1,500 and
$1,400 in the first quarters of 2005 and 2004, respectively. The Company
anticipates that it will continue to incur a high level of legal expenses for
litigation costs relating to existing products and potential new product
introductions (see "Notes to Consolidated Financial Statements - Note 13 -
Commitments, Contingencies and Other Matters - Legal Proceedings"). Although
there can be no such assurance, selling general and administrative expenses in
fiscal year 2005 are expected to increase by up to 25% to 30% from fiscal year
2004 primarily due to planned brand drug marketing activities.
GAIN ON SALE OF FACILITY
Par owned a facility of approximately 33,000 square feet located on six
acres in Congers, New York. 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.
OTHER INCOME/EXPENSE
Other income was $1,323 for the first three-months of 2005 compared to
other expense of $22 for the first three-months of 2004. In the first quarter of
2005, the Company sold 62 shares of New River stock for $1,846 and recorded a
gain on the sale of $1,353.
INTEREST EXPENSE
Net interest expense was $146 for the first three-months of 2005 compared
to net interest expense of $279 for the corresponding period of 2004. Net
interest expense in both periods principally includes interest payable on the
Company's convertible notes, partially offset by interest income derived
primarily from money market and other short-term investments.
22
INCOME TAXES
The Company recorded provisions for income taxes of $1,011 and $19,312 for
the first three-months of 2005 and 2004, respectively. The effective tax rate in
the first quarter of 2005 of 33.8% decreased from 39.0% for the first quarter of
2004 due to tax free interest income earned in the first three-months of 2005.
The provisions were based on the applicable Federal and State tax rates for
those periods (see "Notes to Consolidated Financial Statements - Note 10 -
Income Taxes").
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $42,064 at April 3, 2005 increased $5,530
from $36,534 at December 31, 2004, primarily due to the net proceeds from the
sale of available for sale securities and investments in the first quarter of
2005 partially offset by net cash used in operating activities. In the first
quarter of 2005, the Company had $18,887 of cash used in operations, net
proceeds of $30,511 from available for sale securities and investments, $1,956
of principal payments under long-term debt and other borrowings and obtained
$1,033 from the issuance of shares of Common Stock upon the exercise of stock
options. In the three-months ended April 3, 2005, the Company also invested
$5,146 in capital improvements, primarily for the expansion of its laboratories
in Spring Valley, New York and new production machinery. The Company's cash
balances are deposited primarily with financial institutions in money market
funds and overnight investments.
There were no significant changes in credit terms, collection efforts,
credit utilization, or delinquency related to the Company's accounts receivable.
There are, however, a number of timing issues that can cause fluctuations when
measuring accounts receivable days based on the previous quarter's average days'
sales in accounts receivable. Because of these issues, 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 100 days at
April 3, 2005 from 85 days at December 31, 2004. Generally, the Company has a
customer base that pays within 60 to 90 days and the Company's management
expects days' sales in accounts receivables to fluctuate within that range.
Significant decreases in sales over the last four quarters have contributed to
the higher days' sales in accounts receivable. The Company expects this trend to
reverse with the introduction of new products in future quarters.
The Company's working capital, current assets minus current liabilities,
of $342,521 increased $3,283, from $339,238 at December 31, 2004. The working
capital ratio, which is calculated by dividing current assets by current
liabilities, was 3.53x at April 3, 2005 compared to 3.19x at December 31, 2004.
The Company believes that its strong working capital ratio indicates its ability
to meet its ongoing and foreseeable obligations.
In April 2004, 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. Shares of 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 December 31, 2004. The Company did not repurchase
any additional shares under the program in the first quarter of 2005.
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. 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 $122,445
at April 3, 2005 are all available for immediate sale. The Company intends to
use its current liquidity to support the expansion of its business, 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 April 3, 2005, the Company had payables owed to distribution
agreement partners of $39,205 related primarily to amounts due under profit
sharing agreements, particularly amounts owed to Pentech and GSK with respect to
paroxetine. The Company expects to pay these amounts, with the exception of
payables due to Pentech as a result of current litigation, out of its working
capital during the second quarter of 2005. In the second quarter of 2004,
23
Pentech filed a legal action against the Company alleging that the Company
breached its contract with Pentech. The Company and Pentech are in dispute over
the amount of gross profit share.
The dollar values of the Company's material contractual obligations and
commercial commitments as of April 3, 2005 were as follows:
AMOUNTS DUE BY PERIOD
---------------------
TOTAL MONETARY APR. 4-DEC. 31, 2006 TO 2009 TO 2011 AND
OBLIGATION OBLIGATION 2005 2008 2010 THEREAFTER
---------- ---------- ---- ---- ---- ----------
Operating leases $21,236 $2,517 $9,417 $4,983 $4,319
Convertible notes* 200,000 - - 200,000 -
Advancis development
expenses 14,250 14,250 - - -
Insurance obligations 2,274 2,274 - - -
Pension obligation 22 22 - - -
Other 393 169 224 - -
--- --- --- ------- -----
Total obligations $238,175 $19,232 $9,641 $204,983 $4,319
======= ====== ===== ======= =====
*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 and has commitments or contingent liabilities with
several non-affiliated companies for products in various stages of development.
These contingent 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 contingent commitments, these obligations are not included
in the above table. Payments made pursuant to these agreements are either
capitalized or expensed according to the Company's accounting policies. The
total amount that could become due under these contingent agreements is
approximately $45,250.
As part of the consideration for the acquisition of Kali, the former Kali
stockholders are entitled to up to $10,000 from the Company if certain
product-related performance criteria are met over the next four years. As of
December 31, 2004, the former Kali stockholders had earned $2,500 of this
contingent payout and were paid in January 2005.
The Company expects to continue to fund its operations, including its
research and development activities, capital projects and obligations under its
existing distribution and development arrangements discussed herein, out of its
working capital, including proceeds from the issuance of its 2003 convertible
notes. The Company anticipates that its capital spending in fiscal year 2005
will increase approximately 20% from fiscal year 2004. 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
financing when needed on terms acceptable or favorable to it.
FINANCING
At April 3, 2005, the Company's total outstanding short-term and long-term
debt, including the current portion, was $202,667. The amount consisted
primarily of senior subordinated convertible notes, financing for product
liability insurance and capital leases of 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. The notes bear interest at an annual rate of 2.875%, payable semi-annually
on March 30 and September 30 of each year. 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. Upon conversion, the Company has the right to
deliver, in lieu of Common Stock, cash or a combination of cash and Common
Stock. It is the Company's current intention to satisfy the Company's obligation
upon a conversion of the notes in cash in an amount equal to the principal
amount of the notes converted. The notes mature on September 30, 2010, unless
earlier converted or repurchased. The Company may not redeem the notes prior to
the maturity date.
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 fiscal year ended December 31, 2004. 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 fiscal year ended
December 31, 2004.
24
SUBSEQUENT EVENTS
In April 2005, the Company received final approval from the FDA and began
shipping tramadol hydrochloride and acetaminophen tablets, the generic version
of Ortho-McNeil's Ultracet(R). The product is indicated for the short-term (five
days or less) management of acute pain. The Company has been awarded 180 days of
marketing exclusivity, commencing at launch, for being the first to file an ANDA
containing a paragraph IV certification of the product. Following the Company's
launch, a competitor entered the market with a generic version of Ultracet(R)
authorized by Ortho-McNeil. The Company is currently involved in litigation with
Ortho-McNeil who has alleged that the Company's product infringes upon their
patent (see "Notes to Consolidated Financial Statements - Note 13 - Commitments,
Contingencies and Other Matters - Legal Proceedings").
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to market risk primarily from changes in the market
values of its investments in marketable debt and government agency securities.
These instruments are classified as available for sale securities for financial
reporting purposes and have minimal or no interest risk due to their short-term
natures. Professional portfolio managers managed 100% of these available for
sale securities at April 3, 2005. 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 natures.
The following table summarizes the available for sale securities that
subject the Company to market risk at April 3, 2005 and December 31, 2004:
APRIL 3, DEC. 31,
2005 2004
---- ----
Debt securities issued by various state and local
municipalities and agencies $48,797 $82,678
Securities issued by United States government and
agencies 73,648 69,176
------ ------
Total $122,445 $151,854
======= =======
AVAILABLE FOR SALE SECURITIES:
The primary objectives for the Company's investment portfolio are
liquidity and safety of principal. Investments are made to achieve a high 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 $122,445 in available for
sale securities that have a maturity greater than one year.
In addition to the short-term investments described above, the Company is
also subject to market risk in respect to its investments in Advancis, New River
and Abrika.
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 in Advancis is subject to fluctuations in the price of Advancis
common stock, which is publicly traded. The fair value of the Company's
investment in Advancis as of April 3, 2005 was $3,510.
The Company purchased 875 shares of common stock of New River on August 5,
2004 in its initial public offering for $8 per share, for a total purchase price
of $7,000. The Company sold 62 shares of the stock in the first quarter of 2005
for $1,846. This investment is subject to fluctuations in the price of New River
common stock, which also is publicly traded. As of April 3, 2005, the fair value
of the Company's investment in New River was $21,268, based on the market value
of the common stock of New River at that date.
In December 2004, the Company acquired a 5% partnership interest in
Abrika, a privately-held specialty generic pharmaceutical company located in
Sunrise, Florida, for $8,361, including costs. The investment is monitored on a
periodic basis to evaluate whether any changes in fair value become other than
temporary.
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 April 3, 2005 to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms.
There were no changes in the Company's internal control over financial
reporting identified in management's evaluation during the first quarter of
fiscal year 2005 that have materially affected or are reasonably likely to
materially affect the Company's internal controls over financial reporting.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------- -----------------
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 was launched in the fourth quarter of 2004. The Company intends to
defend vigorously this action and has asserted counterclaims against Morton
Grove.
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. The Company and Pentech are in dispute over the amount
of gross profit share. This case is currently in discovery. The Company 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. This action alleges that the sale of paroxetine by GSK and the
Company in California constitutes, among other things, unfair business
practices. The Company intends to defend vigorously this action.
On September 10, 2003, Par and a number of other generic and brand
pharmaceutical companies were sued by a New York State county (the suit has
since been joined by additional New York counties) 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 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. In addition to Massachusetts, the Commonwealth of Kentucky, the
State of Illinois and the State of Alabama have filed similar suits in their
respective jurisdictions. Par intends to defend vigorously these actions.
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 U.S. Patent Office. Par
intends to defend vigorously this action.
In February 2003, Abbott filed a complaint in the United States District
Court for the District of New Jersey against Par, alleging that Par's generic
version of TriCor(R) (fenofibrate) infringes one or more claims of four of their
patents based on Par having filed an ANDA for the accused product with the FDA.
Par filed an answer and a counterclaim, alleging non-infringement and
27
invalidity. Par has filed a request with the FDA to convert its Paragraph IV
certification to a Paragraph III certification and the case is subject to an
administrative dismissal.
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 as of yet been scheduled.
The Company received FDA approval and began shipping tramadol in April 2005 and
is still awaiting an answer from the court regarding the referenced motion for
summary judgment (see "Notes to Consolidated Financial Statements - Note 14 -
Subsequent Events"). Ortho-McNeil has stated that it will pursue its claims
against Kali and will seek damages for lost profits. The Company intends to
defend vigorously against this action.
As a result of Par's filing of the ANDA for latanoprost (Xalatan(R)), 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.
Par entered into a licensing agreement with developer Paddock to market
testosterone 1% gel, a generic version of Unimed's product Androgel(R). Pursuant
to this agreement, Par is responsible for management of any litigation and
payment of all legal fees associated with this product. 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. The Company intends to defend vigorously against this
action.
The Company cannot predict with certainty at this time the outcome or the
effects on the Company of the above listed actions. Accordingly, no assurances
can be given that such actions will not have a material adverse effect on the
Company's financial condition, results of operations, prospects or business.
The Company and/or Par are, from time to time, parties to certain other
litigations, including product liability and patent actions. The Company
believes that these actions are part of the ordinary course of its business and
that their ultimate resolution will not have a material adverse effect on its
financial condition, results of operations or liquidity. The Company intends to
vigorously defend or, in cases where the Company is plaintiff, to prosecute
these actions.
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OTHER MATTERS:
In June 2003, the Company received notice from the U.S. Congress that the
Committee had begun an industry-wide (brand and generic) investigation into
pharmaceutical reimbursements and rebates under Medicaid, to which the Company
has responded. In order to conduct the investigation, the Committee has
requested certain pricing and other information, which the Company delivered in
August 2003, relating to certain drugs produced by these pharmaceutical
manufacturers. It is premature to speculate what action, if any, the federal
government may take and what impact such action could have on the Company's
business, prospects or financial condition.
ITEM 5. OTHER INFORMATION
- ------- -----------------
The Company is presently in the process of reviewing its policies
regarding the advance approval by the Company's Audit Committee of all audit,
audit-related, tax and other services (the "Pre-approval Policy") performed by
its independent auditors, Deloitte & Touche LLP. The Company intends to post its
revised Pre-approval Policy on its Company website, www.parpharm.com upon its
adoption.
ITEM 6. EXHIBITS
- ------- --------
31.1 Certification of the Principal Executive Officer.
31.2 Certification of the Principal Financial Officer.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAR PHARMACEUTICAL COMPANIES, INC.
----------------------------------
(Registrant)
May 13, 2005 /s/ Scott Tarriff
-----------------
Scott Tarriff
PRESIDENT AND CHIEF EXECUTIVE OFFICER
May 13, 2005 /s/ Dennis J. O'Connor
----------------------
Dennis J. O'Connor
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
30
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
31.1 Certification by the President and Chief Executive Officer pursuant
to Rule 13a-14(a) of the Exchange Act.
31.2 Certification by the Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act.
32.1 Certification by the President and Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
31