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: July 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 August 8, 2005:
34,199,198
TABLE OF CONTENTS
PAR PHARMACEUTICAL COMPANIES, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 3, 2005
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of July 3, 2005 and December 31,
2004..............................................................3
Consolidated statements of operations for the three months and
six months ended July 3, 2005 and July 4, 2004....................4
Consolidated statements of cash flows for the six months ended
July 3, 2005 and July 4, 2004.....................................5
Notes to consolidated financial statements.....................6-18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................19-28
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.............................................................29
Item 4. Controls and Procedures..........................................30
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................30-32
Item 4. Submission of Matters to a Vote of Security Holders...........32-33
Item 6. Exhibits.........................................................33
SIGNATURES...............................................................34
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
JULY 3, DECEMBER 31,
ASSETS 2005 2004
------ ---- --------
Current assets:
Cash and cash equivalents $32,093 $36,534
Available for sale securities 97,523 151,854
Accounts receivable, net of allowances of
$27,906 and $42,316 189,143 149,107
Inventories, net 101,793 86,835
Prepaid expenses and other current assets 14,725 17,072
Deferred income tax assets 36,731 52,580
------ ------
Total current assets 472,008 493,982
Property, plant and equipment, at cost less
accumulated depreciation and amortization 75,424 66,642
Investments 44,008 25,271
Intangible assets, net 48,783 51,491
Goodwill 77,821 77,919
Deferred charges and other assets 8,142 11,234
Non-current deferred income tax assets, net 37,580 42,465
------ ------
Total assets $763,766 $769,004
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term and current portion of long-term debt $997 $4,348
Accounts payable 46,160 45,832
Payables due to distribution agreement partners 36,432 40,149
Accrued salaries and employee benefits 10,494 8,745
Accrued expenses and other current liabilities 17,667 16,554
Income taxes payable 22,820 39,116
------ ------
Total current liabilities 134,570 154,744
Long-term debt, less current portion 200,172 200,275
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 35,041,453 and 34,759,265 shares 350 348
Additional paid-in capital 204,993 193,686
Deferred compensation - restricted stock (8,654) (1,455)
Retained earnings 255,082 253,726
Accumulated other comprehensive income (loss) 9,036 (689)
Treasury stock, at cost, 848,588 and 843,700 shares (32,178) (32,026)
------ ------
Total stockholders' equity 428,629 413,590
------- -------
Total liabilities and stockholders' equity $763,766 $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 Amounts)
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JULY 3, JULY 4, JULY 3, JULY 4,
2005 2004 2005 2004
---- ---- ---- --------
Revenues:
Net product sales $207,815 $423,243 $116,727 $212,204
Other product related revenues 6,726 1,055 313 327
----- ----- --- ---
Total revenues 214,541 424,298 117,040 212,531
Cost of goods sold 126,552 280,629 68,203 139,414
------- ------- ------ -------
Gross margin 87,989 143,669 48,837 73,117
Operating expenses (income):
Research and development 33,387 16,662 17,398 10,184
Selling, general and administrative 46,506 33,548 25,154 16,481
Settlements, net - (2,846) - (2,846)
Gain on sale of facility - (2,812) - -
------ ------ ------ ------
Total operating expenses 79,893 44,552 42,552 23,819
Operating income 8,096 99,117 6,285 49,298
Other income (expense), net 2,851 (75) 1,528 (53)
Investment impairment (8,280) - (8,280) -
Interest expense, net (514) (573) (368) (294)
--- --- ---- ---
Income (loss) before provision for income taxes 2,153 98,469 (835) 48,951
Provision (benefit) for income taxes 797 38,403 (214) 19,091
--- ------ --- ------
Net income (loss) $1,356 $60,066 $(621) $29,860
===== ====== ===== ======
Net income (loss) per share of common stock:
Basic $0.04 $1.75 $(0.02) $0.87
==== ==== ==== ====
Diluted $0.04 $1.70 $(0.02) $0.85
==== ==== ==== ====
Weighted average number of
common shares outstanding:
Basic 34,081 34,359 34,186 34,267
====== ====== ====== ======
Diluted 34,487 35,247 34,186 34,930
====== ====== ====== ======
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)
SIX MONTHS ENDED
----------------
JULY 3, JULY 4,
2005 2004
---- ----
Cash flows from operating activities:
Net income $1,356 $60,066
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Deferred income taxes 14,691 (3,528)
Investment impairment 8,280 -
Depreciation and amortization 7,120 5,681
Inventory reserves 2,873 196
Allowances against accounts receivable (14,410) 1,601
Gain on sale of fixed assets - (2,812)
Gain on sale of investments (2,841) -
Stock compensation expense 1,785 397
Other (58) 77
Changes in assets and liabilities:
Increase in accounts receivable (25,626) (22,472)
Increase in inventories (17,831) (7,196)
Decrease (increase) in prepaid expenses and other assets 5,439 (1,514)
(Decrease) increase in accounts payable (248) 6,755
(Decrease) increase in payables due to distribution agreement partners (3,141) 6,256
Increase (decrease) in accrued expenses and other liabilities 2,862 (7,833)
(Decrease) increase in income taxes payable (15,898) 15,437
------ ------
Net cash (used in) provided by operating activities (35,647) 51,111
------ ------
Cash flows from investing activities:
Capital expenditures (13,138) (11,243)
Acquisition of subsidiary, net of cash acquired - (138,366)
Proceeds from sale of investments 4,310 -
Proceeds from sales of available for sale securities 90,189 248,650
Purchases of available for sale securities (36,577) (252,871)
Purchase of investment (12,000) -
Proceeds from sale of fixed assets 2 4,980
Other 98 -
-- -------
Net cash provided by (used in) investing activities 32,884 (148,850)
------ -------
Cash flows from financing activities:
Proceeds from issuances of common stock 1,928 6,122
Purchases of treasury stock (152) (20,077)
Issuance of long term debt - 399
Principal payments under long-term debt and other borrowings (3,454) (166)
----- ---
Net cash used in financing activities (1,678) (13,722)
----- ------
Net decrease in cash and cash equivalents (4,441) (111,461)
Cash and cash equivalents at beginning of period 36,534 162,549
------ -------
Cash and cash equivalents at end of period $32,093 $51,088
====== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Taxes $1,998 $26,492
===== ======
Interest $2,955 $2,962
===== =====
Non-cash transactions:
Tax benefit from exercise of stock options $398 $2,767
=== =====
Issuance of warrants $- $2,530
= =====
Increase (decrease) in fair value of available for sale securities $7,257 $(815)
and investments ===== ====
The accompanying notes are an integral part of these consolidated financial statements.
5
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
Par Pharmaceutical Companies, Inc. (the "Company") 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 July 3, 2005 and for
the six-month and three-month periods ended July 3, 2005 and July 4, 2004 are
unaudited; in the opinion of the Company's management, however, such statements
include all adjustments 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 its 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 May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"), effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. SFAS 154 requires voluntary changes in accounting
principle be retrospectively applied to financial statements from previous
periods unless such application is impracticable. Under the newly issued
standard changes in depreciation, amortization, or depletion for long-lived,
non-financial assets should be accounted for as a change in accounting estimate
that is affected by a change in accounting principle. The Company believes that
the adoption of this standard will not have a material impact on the Company's
results of operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets", an amendment of Accounting Principles Board ("APB") Opinion No. 29. The
Company does not expect that the adoption of this statement, effective for
fiscal periods beginning after June 15, 2005, will have any impact on the
Company's results of operations, financial position or cash flows.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS
151"), to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material. SFAS 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company is currently assessing the impact that SFAS 151 will have on its results
of operations, financial position or cash flows.
6
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
In December 2004, the 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 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.
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:
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JULY 3, JULY 4, JULY 3, JULY 4,
2005 2004 2005 2004
---- ---- ---- ----
Net income (loss), as reported $1,356 $60,066 $(621) $29,860
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects 833 - 450 -
Deduct: Stock-based employee compensation expense determined
under the fair value-based method, net of related tax effects (23,976) (11,185) (3,242) (3,551)
------ ------ ----- -----
Pro forma net (loss) income $(21,787) $48,881 $(3,413) $26,309
====== ====== ===== =======
Net income (loss) per share of common stock:
As reported - Basic $0.04 $1.75 $(0.02) $0.87
==== ==== ==== ====
As reported - Diluted $0.04 $1.70 $(0.02) $0.85
==== ==== ==== ====
Pro forma - Basic $(0.64) $1.42 $(0.10) $0.77
==== ==== ==== ====
Pro forma - Diluted $(0.64) $1.39 $(0.10) $0.75
==== ==== ==== ====
In February 2005, the Company accelerated the vesting of 820 outstanding,
non-vested stock options, which represented all outstanding 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 grants 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 SFAS 123R requiring the expensing of stock
options, which is expected to be effective for the Company in the first quarter
of 2006.
7
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
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 six-month and three-month periods has been estimated at the
dates of grant using the Black-Scholes stock option pricing model, based on the
following assumptions:
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JULY 3, 2005 JULY 4, 2004 JULY 3, 2005 JULY 4, 2004
------------ ------------ ------------ ------------
Risk-free interest rate 3.7% 4.0% 4.0% 4.0%
Expected term 4.9 years 4.9 years 5.0 years 4.9 years
Expected volatility 58.6% 62.1% 57.7% 61.9%
It is assumed that no dividends will be paid during the entire term of the
options. The weighted average per share fair values of options granted in the
six-month periods ending July 3, 2005 and July 4, 2004 were $20.24 and $33.27,
respectively. The weighted average per share fair values of the options granted
in the three-month periods ended July 3, 2005 and July 4, 2004 were $17.12 and
$24.46, respectively.
NOTE 4 - AVAILABLE FOR SALE SECURITIES:
At July 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 July 3, 2005:
UNREALIZED FAIR
---------- ----
COST GAIN LOSS VALUE
---- --------- -----
Debt securities issued by various state
and local municipalities and agencies $68,309 $- $(502) $67,807
Securities issued by United States
government and agencies 30,368 - (652) 29,716
------ - --- ------
Total $98,677 $- $(1,154) $97,523
====== = ===== ======
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 $376 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
July 3, 2005 and December 31, 2004, respectively. All of the securities are
available for immediate sale and have been classified as current. The Company
8
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
sold $90,189 and $46,524 of these securities for the six-month and three-month
periods ended July 3, 2005. The following table summarizes the contractual
maturities of the Company's debt securities at July 3, 2005 and December 31,
2004:
JULY 3, 2005 DECEMBER 31, 2004
------------ -----------------
FAIR FAIR
COST VALUE COST VALUE
---- ----- ---- -----
Less than one year $79,640 $78,945 $93,907 $93,250
Due between 1-2 years - - - -
Due between 2-5 years 8,812 8,740 3,592 3,594
Due after 5 years 10,225 9,838 55,037 55,010
------ ----- ------ ------
Total $98,677 $97,523 $152,536 $151,854
====== ====== ======= =======
NOTE 5 - INVESTMENTS:
The Company has investments in New River Pharmaceuticals Inc. ("New
River"), Advancis Pharmaceutical Corporation ("Advancis"), Abrika
Pharmaceuticals, LLLP ("Abrika") and Optimer Pharmaceuticals, Inc. ("Optimer").
The Company has determined that all of these investments are available for sale;
therefore, unrealized gains and losses are reported as a component of
accumulated other comprehensive income (loss) in stockholders' equity.
Additionally, the Company assesses whether declines in fair value are considered
other-than-temporary and records impairment expense on any of those investments
that the Company determines are other-than-temporary.
In April 2005, the Company acquired 3,333 shares of Series C preferred
stock of Optimer, a privately held biotechnology company located in San Diego,
California, for $12,000. The 3,333 shares represent approximately 13% ownership
in Optimer. Because Optimer is privately-held, the Company monitors the
investment on a periodic basis to evaluate whether any changes in fair value
become other-than-temporary.
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 it loaned to Abrika. Because Abrika is privately-held,
the Company monitors this 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 at $8 per share. In the first
six months of 2005, the Company sold 144 shares of New River common stock for
$4,310 and recorded a gain on the sale of $3,156 which is recorded in other
income (expense), net. The Company's current investment represents an ownership
position of approximately 4.1% of the outstanding common stock of New River. As
of July 3, 2005 and December 31, 2004, the fair value of the Company's
investment in New River was $21,927 and $13,090, respectively, based on the
market value of the common stock of New River on those dates. To date, the
Company has recorded unrealized gains on this investment of $16,080, with a
corresponding credit of $9,919 to accumulated other comprehensive gains and
$6,161 to deferred income taxes.
In October 2003, 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. The
Company's current investment represents approximately 3.4% of the outstanding
common stock of Advancis. In the second quarter of 2005, the Company recorded an
investment impairment of $8,280 related to its investment in Advancis. In June
and July 2005, Advancis announced that it failed to achieve the desired
microbiological and clinical endpoints in their Amoxicillin PULSYS phase III
clinical trials for the treatment of pharyngitis/tonsillitis. Due to the results
of the clinical trials, and the continued significant decline in the stock price
of Advancis, the Company has determined that the decline in fair market value of
its investment is other-than-temporary and as such has written the investment
down to its fair market value as of July 3, 2005, which was $1,720 based on the
market value of the common stock of Advancis at that date. At December 31, 2004
the fair value of the Company's investment in Advancis was $3,820.
9
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
NOTE 6 - ACCOUNTS RECEIVABLE:
JULY 3, DECEMBER 31,
2005 2004
---- ----
Gross trade accounts receivable $286,141 $294,030
Allowances for rebates and chargebacks 69,440 102,607
------ -------
Trade accounts receivable, net of customer
rebates and chargebacks 216,701 191,423
Other accounts receivable 348 -
--- -------
217,049 191,423
Allowances:
Doubtful accounts 1,847 1,847
Returns 13,205 23,392
Price adjustments and allowances 12,854 17,077
------ ------
27,906 42,316
------ ------
Accounts receivable,
net of allowances $189,143 $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 its gross revenues,
with corresponding adjustments to the accounts receivable allowances.
Customer rebates are price reductions that are provided to customers
generally 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 based generally
on a customer's volume of purchases made during an applicable monthly, quarterly
or annual period.
Chargebacks are provided 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 criteria:
(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 generally will accept returns of products from any customer and will
provide 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 and allowances include term discounts, sales promotions
and shelf-stock adjustments. Term discounts are provided to customers that pay
within a specific period of time. The Company may conduct sales or trade show
promotions where additional discounts may be provided 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 typically are 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
10
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
for which it anticipates significant price erosion through increases in
competition. Such price protection reflects 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 provided
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 July 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 half of 2005 and throughout fiscal year 2004 due to
competition.
The following table summarizes activity for the three-month and six-month
periods ended July 3, 2005 in the accounts affected by the accruals described
above:
THREE MONTHS SIX MONTHS
ENDED ENDED
RESERVES FOR REBATES AND CHARGEBACKS: JULY 3, 2005 JULY 3, 2005
------------------------------------- ------------ ------------
Balance, beginning of the period $(91,150) $(102,607)
Provision recorded (154,171) (303,517)
Credits processed 175,881 336,684
------- -------
Balance, end of the period $(69,440) $(69,440)
====== ======
RESERVES FOR DOUBTFUL ACCOUNTS, RETURNS,
PRICE ADJUSTMENTS AND OTHER SALES ALLOWANCES:
---------------------------------------------
Balance, beginning of the period $(35,729) $(42,316)
Provision recorded (35,480) (70,938)
Credits processed 43,303 85,348
------ ------
Balance, end of the period $(27,906) $(27,906)
====== ======
NOTE 7 - INVENTORIES, NET:
JULY 3, DECEMBER 31,
2005 2004
---- ----
Raw materials and supplies, net $31,003 $30,773
Work-in-process, net 8,225 11,041
Finished goods, net 62,565 45,021
------ ------
$101,793 $86,835
======= ======
NOTE 8 - ACQUISITION:
On June 10, 2004, the Company acquired all of the capital stock of Kali for
$142,763 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 through acquisitions, joint ventures and product licensing
agreements.
11
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
NOTE 9 - INTANGIBLE ASSETS, NET:
JULY 3, DECEMBER 31,
2005 2004
---- ----
FSC Laboratories, Inc. agreement, net of
accumulated amortization of of $460 and $0 $14,540 15,000
Trademark licensed from Bristol-Myers Squibb 5,000 5,000
Bristol-Myers Squibb asset purchase agreement,
net of accumulated amortization of $5,571 and $4,736 6,129 6,964
Product license fees, net of accumulated amortization
of $3,713 and $3,480 7,292 7,525
Genpharm, Inc. distribution agreement, net of
accumulated amortization of $5,055 and $4,694 5,778 6,139
Intellectual property, net of accumulated amortization
of $2,579 and $2,071 6,726 7,234
Other intangibles assets, net of accumulated amortization
of $502 and $191 3,318 3,629
----- -----
$48,783 $51,491
====== ======
The Company recorded amortization expense related to intangible assets of
$2,708 and $3,204, respectively, for the six-month periods ended July 3, 2005
and July 4, 2004 and $1,406 and $1,692 for the three-months periods ended July
3, 2005 and July 4, 2004, respectively. In July 2005, The Company made an
additional payment of $5,000 to Bristol-Myers Squibb ("BMS") in regards to the
trademark license above. In the third quarter of 2005, Par will begin to
amortize the $10,000 over its estimated useful life as the Company begins
shipping Megace(R) ES for which this trademark license relates. Amortization
expense related to intangible assets is expected to total approximately $7,788
in 2005, $9,472 in 2006, $8,621 in 2007, $8,610 in 2008, $7,286 in 2009 and
$7,714 thereafter. Intangible assets not being amortized at July 3, 2005 were
product license fees of $6,999.
The product license fees of $6,999 consist of payments made by Par pursuant
to agreements with Breath Ltd. of the Arrow Group 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 were in litigation over alleged patent infringement in
regards to latanoprost. On August 10, 2005, the United States Court of Appeals
for the Federal Circuit denied Par's appeal and affirmed the lower court's
decision. (see "Note 14 - Subsequent Events").
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 July 3, 2005 and December 31, 2004 consisted of temporary
differences, primarily related to accounts receivable reserves, and non-current
deferred income tax assets at both such dates included the tax benefit related
to purchased call options and acquired in-process research and development. The
decline in deferred tax assets from December 31, 2004 to July 3, 2005 is due
primarily to lower accounts receivable reserves in the current period. The
Company's effective tax rate for the six months ended July 3, 2005 and July 4,
2004 was 37.0% and 39.0%, respectively. The Company's effective tax rate for the
three months ended July 3, 2005 and July 4, 2004 was 25.6% and 39.0%,
respectively.
12
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 six-month period ended July 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:
Net gains on investments,
net of tax - - - - 4,653
Reversal of other than temporary
unrealized loss, net of tax - - - - 5,072
Exercise of stock options 75 - 1,712 - -
Tax benefit from exercise of stock options - - 398 - -
Issuance of restricted stock 200 2 8,519 (8,521) -
Employee stock purchase program 7 - 213 - -
Compensatory arrangements - - 436 1,322 -
Other - - 29 - -
------ ----- ---- ----- -----
Balance, July 3, 2005 35,041 $350 $204,993 $(8,654) $9,036
====== === ======= ===== =====
SIX MONTHS ENDED THREE MONTHS ENDED
JULY 3, 2005 JULY 4, 2004 JULY 3, 2005 JULY 4, 2004
COMPREHENSIVE INCOME:
Net income (loss) $1,356 $60,066 $(621) $29,860
Other comprehensive income (loss):
Unrealized gains (losses) on investments,
net of tax 9,725 (815) 4,975 (1,885)
----- --- ----- -----
Comprehensive income $11,081 $59,251 $4,354 $27,975
======= ======= ====== =======
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 repurchased 844 shares of
its common stock for approximately $32,026 pursuant to the program. The Company
repurchased 5 shares of its common stock in the second quarter of 2005 for
approximately $152. The Company may still repurchase up to approximately $17,822
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 the dates of
grant. Compensation expense is recognized over the related vesting period as
restrictions lapse.
13
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 the
Company's basic and diluted earnings per share:
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JULY 3, 2005 JULY 4, 2004 JULY 3, 2005 JULY 4, 2004
------------ ------------ ------------ ------------
Net income (loss) $1,356 $60,066 $(621) $29,860
Basic:
Weighted average number of
common shares outstanding 34,081 34,359 34,186 34,267
Net income per share of common stock $0.04 $1.75 $(0.02) $0.87
===== ===== ====== =====
Assuming dilution:
Weighted average number of
common shares outstanding 34,081 34,359 34,186 34,267
Effect of dilutive options 406 888 - 663
--- --- - ---
Weighted average number of common
shares outstanding 34,487 35,247 34,186 34,930
Net income (loss) per share of common
stock $0.04 $1.70 $(0.02) $0.85
===== ===== ====== =====
Outstanding options and warrants of 2,108 and 1,270 at the end of the
six-month periods ended July 3, 2005 and July 4, 2004, respectively, and 2,554
and 1,420 at the end of the three-month periods ended July 3, 2005 and July 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. Also, in the three month period ended July
3, 2005, the effect of 281 dilutive instruments were not included in the
computation of diluted earnings per share because their inclusion would have
been anti-dilutive due to the Company's loss in the period. 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 for all periods presented. 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 $27.
14
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
Net pension expense for the six-month and three-month periods ended July 3,
2005 and July 4, 2004 included the components set forth in the table below:
SIX MONTHS ENDED THREE MONTHS ENDED
---------------- ------------------
JULY 3, 2005 JULY 4, 2004 JULY 3, 2005 JULY 4, 2004
----------- ------------ ------------ ------------
Interest cost $62 $62 $ 31 $31
Expected return on Pension Plan assets (66) (68) (33) (34)
Amortization of initial unrecognized transition obligation 26 26 13 13
---------- --------- ---------- ---------
Net pension expense $22 $20 $11 $10
========== ========= ========== =========
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. Par is asserting counterclaims that the Morton Grove product
infringes three patents and that such infringement was willful. The Company
intends to defend vigorously this action and pursue its 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. These cases were
transferred to the United States District Court for the District of
Massachusetts for coordinated and consolidated pre-trial proceedings. The
complaint filed by Erie County in New York was not included in the consolidated
complaint and has been removed to federal district court. 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. The Commonwealth of Massachusetts subsequently filed an amended
complaint, and the defendants, including Par, have filed a motion to dismiss the
amended complaint. 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
15
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
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, all of which have been removed to federal district court. 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)) and that the infringement is
willful. 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 vigorously pursue this action.
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. 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 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
16
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
for the Federal Circuit. Par has appealed the Court's decision only insofar as
it relates to U.S. Patent No. 5,296,504. The appeals were argued on June 10,
2005. On August 10, 2005, the United States Court of Appeals for the Federal
Circuit denied Par's appeal and affirmed the lower court's decision (see "Note
14 - Subsequent Events").
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. Discovery
has recently been completed and the parties are briefing issues relating to
claim construction. The Company intends to defend vigorously this action.
Endo Pharmaceuticals Holding Inc ("Endo") has brought an arbitration
against the Company pursuant to the rules of the CFR, an alternative dispute
resolution forum similar to the American Arbitration Association. Endo claims
that Par has breached a contractual obligation to share Paxil revenues with
Endo. Par has denied these allegations in their entirety and has also contested
the arbitration's jurisdiction. In the event that the matter proceeds in
arbitration, Par intends to defend vigorously this action.
In addition, following the arbitration brought by Endo, Par filed a lawsuit
against Endo in the United States District Court for the District of New Jersey.
This case alleges that Endo's efforts to collect monies it alleges are due under
the agreement between Par and Endo which is referred to in Endo's arbitration
against Par constitutes, among other things, patent misuse. Endo has moved to
dismiss the complaint on jurisdictional grounds, among other things. Par intends
to vigorously pursue 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.
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.
17
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 2005
(In Thousands, Except Per Share Amounts)
(Unaudited)
NOTE 14 - SUBSEQUENT EVENTS:
In the third quarter of 2005, the Company received FDA approval and began
shipping Megace(R) ES, a concentrated oral suspension for the treatment of
anorexia, cachexia, or an unexplained, significant weight loss in patients with
a diagnosis of acquired immunodeficiency syndrome ("AIDS"). The approval of
Megace(R) ES is the first branded pharmaceutical product developed by Par to be
approved for marketing by the FDA.
In August 2005, the Company terminated its partnership agreement with
Advancis. The Company had entered into the agreement with Advancis to develop
and market a novel formulation of the antibiotic amoxicillin. In June and July
2005, Advancis announced that it failed to achieve the desired microbiological
and clinical endpoints in their Amoxicillin PULSYS phase III clinical trials for
the treatment of pharyngitis/tonsillitis. By terminating the partnership
agreement, the Company has agreed to pay $4,750 due in the third quarter of 2005
but is no longer responsible for the fourth quarter payment of $4,750 which
would have been the final payment to Advancis.
On August 10, 2005 the United States Court of Appeals for the Federal
Circuit denied Par's appeal and affirmed the lower court's decision in the
Pharmacia Corporation and the Trustees of Columbia University in the City of New
York v. Par Pharmaceutical, Inc. The court affirmed that Pharmacia's patent,
U.S. Patent No. 5,422,368, is unenforceable due to inequitable conduct. The
court also affirmed that Pharmacia's patent, U.S Patent No. 5,296,504, is valid
and is infringed by Par. Par is thus prohibited from engaging in any commercial
activity the United States relating to any drug product covered by that patent.
18
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 PERIODS 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
For the three-month period ended July 3, 2005, the Company's revenues and
gross margin dollars decreased 44.9% and 33.2%, respectively, from the
corresponding period of 2004. Revenue and gross margin dollars decreased 49.4%
and 38.8%, respectively, for the six-month period ended July 3, 2005 from the
corresponding period of 2004. Increased competition has continued to adversely
affect pricing and volumes of the Company's key products leading to lower sales
and gross margin dollars. 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 both the second fiscal quarter
of 2005 to the second fiscal quarter of 2004 and the first six months of 2005 to
the first six months 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 and Megace(R) ES, the Company's first branded pharmaceutical product, in
the third quarter of 2005. The Company had expected to receive FDA approval of
several additional products in the first six months of 2005, but have not yet
received such approvals. At this time, the Company is unable to determine, if
and when any such products will be approved. 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.
The Company's business plan includes its strategy to enter the branded drug
market in an effort to market products with longer life cycles and higher
profitability. In the third quarter of 2005, the Company received FDA approval
for its first New Drug Application ("NDA"), filed pursuant to Section 505(b)(2)
of the Federal Food, Drug and Cosmetic Act ("FFDC Act"), and immediately began
marketing megestrol acetate oral suspension NanoCrystal(R) Dispersion
("Megace(R) ES"). The new NanoCrystal(R) Dispersion ("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. Megace(R) ES is
indicated for the treatment of anorexia, cachexia or any unexplained significant
19
weight loss in patients with a diagnosis of AIDS and will utilize the Megace(R)
brand name that Par has licensed from BMS.
As part of the Company's brand market business strategy, Par had entered
into an agreement with Advancis to develop and market a low dose pulsatile form
of the antibiotic amoxicillin, utilizing Advancis' proprietary PULSYS(TM)
technology. In June and July 2005, Advancis announced that it failed to achieve
the desired microbiological and clinical endpoints in their Amoxicillin PULSYS
phase III clinical trials for the treatment of pharyngitis/tonsillitis. In
August, the Company terminated its partnership agreement with Advancis. The
Company has agreed to pay $4,750 due in the third quarter of 2005 but is no
longer responsible for the fourth quarter payment of $4,750 which would have
been the final payment to Advancis.
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 that had
limited competition. These drugs included paroxetine tablets (Paxil(R)),
megestrol acetate oral suspension (Megace Oral Suspension(R)), and fluoxetine
(Prozac(R)), which all have experienced significant declines in sales and gross
margins from prior years.
In April 2005, the Company received final approval from the FDA to market
tramadol HCl and acetaminophen tablets and has been awarded 180 days of
marketing exclusivity. Tramadol sales in the second quarter of 2005 were
$30,600.
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 led to significant pricing and, to a lesser extent,
sales volume declines. Paroxetine sales in the second quarter of 2005 have
decreased to $10,000 from $77,300, in the second quarter of 2004. Paroxetine
sales in the first six months of 2005 have decreased to $21,600 from $181,900,
in the first six months of 2004. The Company is currently experiencing supply
issues with paroxetine and is evaluating what affect, if any, these issues will
have on future paroxetine sales and gross margins. In spite of these issues, the
Company believes that it currently has sufficient paroxetine inventory on hand
to fill projected orders over the upcoming quarter.
The Company currently has three generic competitors for 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 adverse effects of competition on pricing
and volume. Megestrol acetate oral suspension net sales were $7,100 for the
second quarter of 2005 compared to $18,300 for the second quarter of 2004.
Megestrol acetate oral suspension net sales were approximately $15,700 for the
first six months of 2005 compared to $37,000 for the first six months 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 $6,500 for the second
quarter of 2005 compared to approximately $8,400 for the second quarter of 2004.
Net sales of fluoxetine 40 mg capsules and 10 mg and 20 mg tablets were
approximately $12,600 for the first six months of 2005 compared to approximately
$23,200 for the first six months of 2004.
Generic drug pricing at the wholesale level can create significant
differences between the 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
20
reductions to invoice price, with corresponding adjustments to its accounts
receivable allowances.
The Company will generally 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. The Company recorded no material price protection credits in
the second quarter of 2005. In the first quarter of 2005, the Company provided
for and issued price protection credits of approximately $11,100 primarily due
to 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, 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-month and six-month periods
ended July 3, 2005 and July 4, 2004. In addition, the Company's critical
accounting estimates related to those reserves were accurate as of July 3, 2005
and no material adjustments were made to such estimates during the applicable
period.
The following table summarizes activity for the three-months ended July 3,
2005 and July 4, 2004 in the accounts affected by the accruals described above:
FOR THE THREE MONTHS ENDED
--------------------------
JULY 3, JULY 4,
RESERVES FOR REBATES AND CHARGEBACKS: 2005 2004
------------------------------------- ---- ----
Balance, beginning of the period $(91,150) $(94,816)
Provision recorded (154,171) (207,280)
Credits processed 175,881 139,294
------- -------
Balance, end of the period $(69,440) $(162,802)
====== =======
RESERVES FOR DOUBTFUL ACCOUNTS, RETURNS, JULY 3, JULY 4,
PRICE ADJUSTMENTS AND OTHER SALES ALLOWANCES: 2005 2004
--------------------------------------------- ---- ----
Balance, beginning of the period $(35,729) $(31,917)
Provision recorded (35,480) (85,213)
Credits processed 43,303 75,172
------ ------
Balance, end of the period $(27,906) $(41,958)
====== ======
The following table summarizes activity for the six-months ended July 3,
2005 and July 4, 2004 in the accounts affected by the accruals described above:
FOR THE SIX MONTHS ENDED
------------------------
JULY 3, JULY 4,
RESERVES FOR REBATES AND CHARGEBACKS: 2005 2004
------------------------------------- ---- ----
Balance, beginning of the period $(102,607) $(99,391)
Provision recorded (303,517) (337,391)
Credits processed 336,684 273,980
------- -------
Balance, end of the period $(69,440) $(162,802)
====== =======
RESERVES FOR DOUBTFUL ACCOUNTS, RETURNS, JULY 3, JULY 4,
PRICE ADJUSTMENTS AND OTHER SALES ALLOWANCES: 2005 2004
--------------------------------------------- ---- ----
Balance, beginning of the period $(42,316) $(40,357)
Provision recorded (70,938) (118,432)
Credits processed 85,348 116,831
------ -------
Balance, end of the period $(27,906) $(41,958)
====== ======
21
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. 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 its 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 case, 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
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 $1,356 for the six-month period ended July 3,
2005 decreased $58,710, from $60,066 for the six-month period ended July 4, 2004
primarily due to revenue declines and increased operating expenses. Total
revenues of $214,541 and gross margin dollars of $87,989 in the first six months
of 2005 decreased from $424,298 and $143,669, respectively, in the first six
months of 2004, due primarily to competition on the Company's key products.
Research and development spending in the first six months of 2005 of $33,387
increased $16,725 over the same period of the prior year due to expenses for the
development of proprietary pharmaceutical products and additional personnel
costs, including the addition of Kali. Selling, general and administrative costs
in the first six months of 2005 were $46,506 compared to $33,548 in first six
months of 2004 as the Company prepared for the third quarter of 2005 launch of
Megace(R) ES. Net income in the first six months of 2005 includes an investment
impairment of $8,280 related to the Company's investment in Advancis, recorded
in the second quarter of 2005. The first six months of 2004 net income included
a $2,812 gain on the sale of a Company facility recorded in the first quarter of
2004 and net settlement income of $2,846 recorded in the second quarter of 2004.
Net loss for the three-month period ended July 3, 2005 was $(621) compared
to net income of $29,860 for the three-month period ended July 4, 2004. Total
revenues of $117,040 and gross margin dollars of $48,837 in the second quarter
of 2005 decreased from $212,531 and $73,117, respectively, in the second quarter
of 2004, due primarily to competition on the Company's key products. Research
and development spending in the second quarter of 2005 of $17,398 increased
$7,214 from the same period of the prior year and selling, general and
administrative costs in the second quarter of 2005 were $25,154 compared to
$16,481 in the second quarter of 2004. The net loss in the second quarter of
2005 included the investment impairment related to Advancis, while net income in
the second quarter of 2004 included the net settlement income.
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
22
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 six-month period ended July 3, 2005 were $214,541,
decreasing $209,757, or 49.4%, from total revenues of $424,298 for the six-month
period ended July 4, 2004, due primarily to lower sales of certain existing
products sold under various distribution agreements, including paroxetine which
decreased by approximately $160,300, metformin ER (Glucophage XR(R)) which
decreased by $17,200, glyburide & metformin HC1 which decreased by $13,500 and
fluoxetine which decreased by $10,600. Also contributing to the lower sales was
the Company's top selling manufactured product, megestrol acetate oral
suspension, which decreased $21,300. Increased competition continues to
adversely affect both volume and pricing on the above mentioned products.
Partially offsetting these decreases were the introduction of new products
including tramadol HCl and acetaminophen tablets which was introduced in the
second quarter of 2005 and generated sales of $30,600, quinapril (Accupril(R))
which was introduced in the fourth quarter of 2004 and generated sales of
$7,000. Total revenues in the first six months of 2005 also included a $6,000
payment from a business partner to conclude a product 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 $108,600, or 50.6% of
the Company's total revenues in the first six months of 2005, and $328,900, or
77.5% of the Company's total revenues in the first six months 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.
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 $600,910 in the first six months of 2005 compared to $903,841 in
the first six months of 2004. Deductions from gross revenues were $386,369 in
the first six-months of 2005 and $479,543 in the first six 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
64.3% in the first six months of 2005 compared to 53.1% in the first six months
of 2004, primarily due to the effects of the issuance of price protection
23
credits and increased chargeback dollars due to lower contract pricing related
to paroxetine, Glyburide & Metformin HC1 (which was launched in the second
quarter of 2004), megestrol acetate oral suspension and metformin ER.
Total revenues for the three month period ended July 3, 2005 were $117,040,
decreasing $95,491, or 44.9%, from total revenues of $212,531 for the three
month period ended July 4, 2004, due primarily to lower sales of paroxetine
which decreased by approximately $67,300, glyburide & metformin HCl which
decreased by $16,400 and megestrol acetate oral suspension, which decreased by
$11,200. Increased competition continues to adversely affect both volume and
pricing on the above mentioned products. Partially offsetting these decreases
were the introduction of new products including tramadol HCl and acetaminophen
tablets which was introduced in the quarter and had net sales of $30,600. Net
sales of distributed products, which consist of products manufactured under
contract and licensed products, were approximately $55,200, or 47.2% of the
Company's total revenues in the second quarter of 2005, and $164,400, or 77.3%
of the Company's total revenues in the second quarter of 2004.
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 $312,704 in the second quarter of 2005 compared to $518,677 in
the second quarter of 2004. Deductions from gross revenues were $195,664 in the
second quarter of 2005 and $306,146 in the second quarter of 2004. These
deductions are discussed in "Notes to Consolidated Financial Statements - Note 6
- - Accounts Receivable." The gross-to-net revenue percentage spread increased
slightly to 62.6% in the second quarter of 2005 compared to 59.0% in the second
quarter of 2004. 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, were partially offset by a
lower gross-to-net spread on sales of tramadol HCl and acetaminophen tablets.
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 sales
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 based 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
generally lowered the pricing on these products over time and significant price
protection credits have been granted and processed within the reporting periods,
including the six month period ended July 3, 2005. The Company did not have
material reserves for additional price protection as of July 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 $87,989 (41.0% of total revenues) in the
first six months of 2005 decreased $55,680 from $143,669 (33.9% of total
revenues) in the corresponding period of 2004. The lower gross margin is due
primarily to the lower net sales discussed above, partially offset by the
increase of other product related revenue. The increase in gross margin
percentage is due primarily to the introduction of tramadol HCl and
acetaminophen tablets, which due to the exclusivity period contributed a high
gross margin percentage than most of the Company's other products, the increase
of the other product related revenue and the lower sales of paroxetine,
glyburide/metformin and metformin ER which after profit splits with partners,
have significantly lower gross margin percentages than other products.
Inventory write-offs were $4,773 in the first six months of 2005 compared
to $5,036 in the first six months 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 write-offs in both
periods included the write-off of inventory of a product whose launch is
delayed. The Company maintains inventory levels that it believes are appropriate
to optimize its customer service.
The Company's gross margin of $48,837 (41.7% of total revenues) in the
second quarter of 2005 decreased $24,280 from $73,117 (34.4% of total revenues)
in the corresponding period of 2004. The lower margin is due primarily to the
lower net sales discussed above. The gross margin percentage increase is due
primarily to the introduction of tramadol HCl and acetaminophen tablets and the
lower sales of paroxetine, glyburide/metformin and metformin ER.
Inventory write-offs of $4,390 in the second quarter of 2005 increased from
$3,056 in the second quarter of 2004. The increase in inventory write-offs in
the second quarter of 2005 was primarily due to an increase in short-dated
write-offs related to one product and the write-off of a raw material for
another product.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
The Company's research and development expenses of $33,387 for the six
months ended July 3, 2005 increased $16,725, or 100.4%, from the corresponding
period of last year. The increase was primarily attributable to higher outside
development projects of $6,100, including increased payments that began in the
second quarter of 2004 to Advancis in order to fund the development of a novel
formulation of the antibiotic amoxicillin, additional expenses related to Kali
of $4,451 and increased domestic development operations of $4,138, primarily due
to additional personnel costs. As previously discussed, the Company acquired
Kali in June 2004. The Company is utilizing Kali to develop additional products
for its product pipeline.
24
The Company's research and development expenses of $17,398 for the three
months ended July 3, 2005 increased $7,214, or 70.8%, from the corresponding
period of last year. The increase was primarily attributable to increased
domestic operations of $2,455 primarily due to additional personnel costs,
increased raw material costs of $1,739, additional expenses related to Kali of
$1,634 and increased outside development projects of $1,064. 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% to 25% 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 $9,500 in the
first six months of 2005, which was charged to research and development expense
during the period. In August, the Company terminated its partnership agreement
with Advancis. The Company has agreed to pay $4,750 due in the third quarter of
2005 but is no longer responsible for the fourth quarter payment of $4,750,
which would have been the final payment to Advancis.
As a result of its product development program, the Company currently has
20 ANDAs pending with the FDA, four of which have received tentative approval,
for potential products that are not subject to any distribution or profit
sharing agreements. In addition, there are 29 ANDAs pending with the FDA, four
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 $46,506 (21.7% of
total revenues) in the first six months of 2005 as compared to $33,548 (7.9% of
total revenues) in the first six months of 2004. The increase in 2005 was
primarily attributable to higher sales and marketing costs of $6,509 in
anticipation of the Company's Megace(R) ES launch in the third quarter of 2005,
increased legal fees of $3,859 and higher general and administrative personnel
costs of $2,658. 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 $3,000 and
$2,700 for the first six months of 2005 and 2004, respectively. The Company
anticipates that it will continue to incur a high level of legal expenses for
litigation, 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 continued brand drug marketing activities.
Total selling, general and administrative expenses were $25,154 (21.5% of
total revenues) in the second quarter of 2005 as compared to $16,481 (7.8% of
total revenues) in the second quarter of 2004. The increase in 2005 was
primarily attributable to higher sales and marketing costs of $5,030 related to
pre-launch activities for Megace(R) ES, increased legal fees of $2,818 and
higher general and administrative personal costs of $1,333. Shipping costs were
approximately $1,500 and $1,400 in the second quarters of 2005 and 2004,
respectively.
NET SETTLEMENTS
In the second quarter of 2004, net settlement income of $2,846 was recorded
pursuant to the settlement of claims against Akzo Nobel NV and Organon USA Inc.,
relating to anti-competitive practices that delayed the availability of
mirtazapine, partially offset by legal expenses associated with the settlement
of litigation with Asahi related to paroxetine.
GAIN ON SALE OF FACILITY
Par owned a facility of approximately 33,000 square feet located on six
acres in Congers, New York. In March 2004, the Company sold this facility to
Ivax Pharmaceuticals New York, LLC for $4,980 and recorded a gain on the sale of
$2,812.
25
OTHER INCOME/EXPENSE
Other income was $2,851 for the first six months of 2005 compared to other
expense of $75 for the first six months of 2004. In the first six months of
2005, the Company sold 144 shares of New River stock for $4,310 and recorded a
gain on the sale of $3,156.
Other income was $1,528 for the second quarter of 2005 compared to other
expense of $53 for the second quarter of 2004. In the second quarter of 2005,
the Company sold 82 shares of New River stock for $2,464 and recorded a gain on
the sale of $1,804.
INVESTMENT IMPAIRMENT
In the second quarter of 2005, the Company recorded an investment
impairment of $8,280 related to its investment in Advancis. On October 16, 2003,
Par purchased 1,000 shares of the common stock of Advancis for $10,000. In June
and July 2005, Advancis announced that it failed to achieve the desired
microbiological and clinical endpoints in their Amoxicillin PULSYS phase III
clinical trials for the treatment of pharyngitis/tonsillitis. Due to the results
of the clinical trial, and the continued significant decline in the stock price
of Advancis, which is publicly traded, the Company has determined that the
decline in fair market value of its investment is other than temporary and as
such has written the investment down to its fair market value, based on the
market value of the common stock at July 3, 2005.
INTEREST EXPENSE
Net interest expense was $514 and $368, respectively, for the six and three
months ended July 3, 2005 compared to net interest expense of $573 and $294,
respectively, for the corresponding periods of 2004. Net interest expense in all
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.
INCOME TAXES
The Company recorded provisions for income taxes of $797 and $38,403 for
the first six months of 2005 and 2004, respectively. The Company recorded a
benefit for income taxes of $214 for the second quarter of 2005 compared to
provision for income taxes of $19,091 for the second quarter of 2004. 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 $32,093 at July 3, 2005 decreased by $4,441
from $36,534 at December 31, 2004, primarily due to net cash used in operating
activities, capital expenditures and purchases of investments, partially offset
by the net proceeds from the sales of available for sale securities. In the
first six months of 2005, the Company had $35,647 of cash used in operations,
primarily due to the increase in accounts receivable and inventories. Cash flows
provided by investing activities were $32,884 for the first six months of 2005,
as net proceeds of $53,612 from available for sale securities were partially
offset by capital expenditures of $13,138 and the investment in Optimer of
$12,000. The capital expenditures included the expansion of the Company's
laboratories located in Spring Valley, New York and new production machinery.
The Company also used $1,678 in financing activities as it paid $3,454 of
principal payments under long-term debt and other borrowings and obtained $1,928
from the issuance of shares of common stock upon the exercise of stock options.
There were no significant changes in credit terms, collection efforts,
credit utilization or delinquencies related to the Company's accounts
receivable. There are 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 116 days at
July 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. The
days sales outstanding was adversely affected by a higher than expected accounts
26
receivable balance of $189,143 due to customer payments of $37,179 received on
July 5 and 6 of 2005.
The Company's working capital, current assets minus current liabilities, of
$337,438 decreased $1,800, from $339,238 at December 31, 2004. The working
capital ratio, which is calculated by dividing current assets by current
liabilities, was 3.51x at July 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. The Company can still
repurchase approximately $17,822 of its common stock under the plan.
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 $97,523 at
July 3, 2005 were all available for immediate sale. The Company intends to
continue 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 July 3, 2005, the Company had payables due to distribution agreement
partners of $36,432 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 the
payables due to Pentech as a result of current litigation, out of its working
capital during the third quarter of 2005. In the second quarter of 2004, 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 July 3, 2005 were as follows:
AMOUNTS DUE BY PERIOD
TOTAL MONETARY JULY 4-DEC. 31, 2006 TO 2009 TO 2011 AND
OBLIGATION OBLIGATION 2005 2008 2010 THEREAFTER
---------- ---------- ---- ---- ---- ----------
Operating leases $26,221 $1,934 $12,018 $6,564 $5,705
Convertible notes* 200,000 - - 200,000 -
Advancis development expenses 4,750 4,750 - - -
License agreement 5,000 5,000
Insurance obligations 791 791 - - -
Pension obligation 22 22 - - -
Other 378 103 275 - -
--- --- --- ------- -------
Total obligations $237,162 $12,600 $12,293 $206,564 $5,705
======= ====== ====== ======= =====
*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 $37,773.
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
27
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 total 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 July 3, 2005, the Company's total outstanding short-term and long-term
debt, including the current portion, was $201,169. 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.
SUBSEQUENT EVENTS
In July 2005, the Company received FDA approval and began shipping
Megace(R) ES, a concentrated oral suspension for the treatment of anorexia,
cachexia, or an unexplained, significant weight loss in patients with a
diagnosis of AIDS. The approval of Megace(R) ES is the first branded
pharmaceutical product developed by Par to be approved for marketing by the FDA.
In August 2005, the Company terminated its partnership agreement with
Advancis. The Company had entered into the agreement with Advancis to develop
and market a novel formulation of the antibiotic amoxicillin. In June and July
2005, Advancis announced that it failed to achieve the desired microbiological
and clinical endpoints in their Amoxicillin PULSYS phase III clinical trials for
the treatment of pharyngitis/tonsillitis. By terminating the partnership
agreement, the Company has agreed to pay $4,750 due in the third quarter of 2005
but is no longer responsible for the fourth quarter payment of $4,750 which
would have been the final payment to Advancis.
On August 10, 2005 the United States Court of Appeals for the Federal
Circuit denied Par's appeal and affirmed the lower court's decision in the
Pharmacia Corporation and the Trustees of Columbia University in the City of New
York v. Par Pharmaceutical, Inc. The court affirmed that Pharmacia's patent,
U.S. Patent No. 5,422,368, is unenforceable due to inequitable conduct. The
court also affirmed that Pharmacia's patent, U.S Patent No. 5,296,504, is valid
and is infringed by Par. Par is thus prohibited from engaging in any commercial
activity the United States relating to any drug product covered by that patent.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to market risk primarily due to 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 July 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 July 3, 2005 and December 31, 2004:
JULY 3, DEC. 31,
2005 2004
---- ----
Debt securities issued by various state
and local municipalities and agencies 67,807 $82,678
Securities issued by United States government
and agencies 29,716 69,176
------ ------
Total $97,523 $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 $97,523 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, Abrika and Optimer.
In October 2003, 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. The Company's investment in Advancis is subject to fluctuations in
the price of Advancis's common stock, which is publicly traded. In the second
quarter of 2005, the Company recorded an investment impairment of $8,280 related
to its investment in Advancis. In June and July 2005, Advancis announced that it
failed to achieve the desired microbiological and clinical endpoints in their
Amoxicillin PULSYS phase III clinical trials for the treatment of
pharyngitis/tonsillitis. Due to the results of the clinical trial, and the
significant decline in the stock price of Advancis, the Company has determined
that the decline in fair market value of its investment is other-than-temporary
and as such has written the investment down to its fair market value as of July
3, 2005, which was $1,720 based on the market value of the common stock of
Advancis at that date.
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 144 shares of the common stock in the first six
months of 2005 for $4,310. This investment is subject to fluctuations in the
price of New River's common stock, which is also publicly traded. As of July 3,
2005, the fair value of the Company's investment in New River was $21,927, 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.
In April 2005, the Company acquired a 13% equity interest in Optimer, a
privately-held biotechnology company located in San Diego, California, for
$12,000. The investment is monitored on a periodic basis to evaluate whether any
changes in fair value become other-than-temporary.
29
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 July 3, 2005 to ensure that information required to be disclosed
by the Company in reports that it files with or submits to the Commission 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 second quarter of
fiscal year 2005 that have materially affected or are reasonably likely to
materially affect the Company's internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------ ----------------
On 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. Par is asserting
counterclaims that the Morton Grove product infringes three patents and that
such infringement was willful. The Company intends to defend vigorously this
action and pursue its 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. These cases were
transferred to the United States District Court for the District of
Massachusetts for coordinated and consolidated pre-trial proceedings. The
complaint filed by Erie County in New York was not included in the consolidated
complaint and has been removed to federal district court. 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. The Commonwealth of Massachusetts subsequently filed an amended
complaint, and the defendants, including Par, have filed a motion to dismiss the
amended complaint. 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
30
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, all of which have been removed to federal district court. 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 and that the
infringement is willful. 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 vigorously
pursue 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
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. 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, 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 has appealed the Court's decision only insofar as it
relates to U.S. Patent No. 5,296,504. The appeals were argued on June 10, 2005.
On August 10, 2005, the United States Court of Appeals for the Federal Circuit
denied Par's appeal and affirmed the lower court's decision (see "Notes to
Consolidated Financial Statements - Note 14 - Subsequent Events").
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
31
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. Discovery
has recently been completed and the parties are briefing issues relating to
claim construction. The Company intends to defend vigorously this action.
Endo has brought an arbitration against the Company pursuant to the rules
of the CFR, an alternative dispute resolution forum similar to the American
Arbitration Association. Endo claims that Par has breached a contractual
obligation to share Paxil revenues with Endo. Par has denied these allegations
in their entirety and has also contested the arbitration's jurisdiction. In the
event that the matter proceeds in arbitration, Par intends to defend vigorously
this action.
In addition, following the arbitration brought by Endo, Par filed a lawsuit
against Endo in the United States District Court for the District of New Jersey.
This case alleges that Endo's efforts to collect monies it alleges are due under
the agreement between Par and Endo which is referred to in Endo's arbitration
against Par constitutes, among other things, patent misuse. Endo has moved to
dismiss the complaint on jurisdictional grounds, among other things. Par intends
to vigorously pursue 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ --------------------------------------------------
The Company held its Annual Meeting of Stockholders on May 24, 2005. The
following matters were voted upon at the Annual Meeting of Stockholders:
PROPOSAL I
The stockholders voted in favor of the proposal to elect the three company
nominees for Class III directors for a term to expire at the Annual Meeting of
Stockholders to be held in 2008.
VOTES FOR WITHHELD
--------- --------
Ronald M. Nordmann 30,588,878 2,987,112
Dr. Arie Gutman 31,060,565 2,515,425
Joseph E. Smith 30,699,795 2,876,193
32
PROPOSAL II
The holders of 15,661,167 shares of common stock voted in favor of the
proposal to adopt the Company's Amended and Restated 2004 Performance Equity
Plan, as set forth in the proxy statement distributed to the stockholders,
10,797,674 shares voted against such proposal, and 632,603 shares abstained. In
addition, there were 6,484,546 broker non-votes.
ITEM 6. EXHIBITS
- ------ --------
10.64 Series C Preferred Stock Purchase Agreement, by and between Optimer
Pharmaceuticals, Inc. and Par Pharmaceutical, Inc.
31.1 Certification of the Principal Executive Officer.
31.2 Certification of the Principal Financial Officer.
32.1 Certification of 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 of 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.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAR PHARMACEUTICAL COMPANIES, INC.
----------------------------------
Registrant)
August 12, 2005 /s/ Scott Tarriff
-----------------
Scott Tarriff
PRESIDENT AND CHIEF EXECUTIVE OFFICER
August 12, 2005 /s/ Dennis J. O'Connor
----------------------
Dennis J. O'Connor
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
34
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION
- --------------- -----------
10.64 Series C Preferred Stock Purchase Agreement by and between
Optimer Pharmaceuticals, Inc. and Par Pharmaceutical, Inc.
31.1 Certification of the President and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Exchange Act.
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act.
32.1 Certification of 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 of 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.
35