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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF NOVEMBER, 2000.
GALEN HOLDINGS PLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SEAGOE INDUSTRIAL ESTATE
CRAIGAVON
BT63 5UA
UNITED KINGDOM
(ADDRESS OF PRINCIPAL EXECUTIVE'S OFFICES)
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.)
Form 20-F [X] Form 40-F [ ]
(Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes [ ] No [X]
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82- .)
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EXPLANATORY NOTE
I. PURPOSE OF FILING
The purpose of this report on Form 6-K of Galen Holdings PLC is to make
public the financial position and results of operations as of and for the three
and nine months ended September 30, 2000 of Galen's wholly owned subsidiary,
Warner Chilcott Public Limited Company ("WCplc"). This information is included
in the quarterly report of Warner Chilcott attached to this report as Annex A.
The consolidated financial statements contained in the quarterly report have
been prepared in accordance with United States generally accepted accounting
principles. This report is being furnished to comply with Section 4.02 of the
indenture governing the 12 5/8% Senior Notes due 2008 of Warner Chilcott, Inc.
("WCI"), a wholly owned subsidiary of WCplc.
II. 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.
Galen Holdings PLC
November 14, 2000 /s/ PAUL S. HERENDEEN
----------------------------------------------
Paul S. Herendeen
Executive Vice President and Director
Of Business Development
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
TABLE OF CONTENTS
PAGE NO.
--------
Part I -- Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999......................................... 2
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999.................. 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999......................... 4
Notes to the Unaudited Consolidated Financial Statements.... 5-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14-22
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 22
Part II-- Other Information
Item 1. Legal Proceedings........................................... 22
Item 2. Submission of Matters to a Vote of Security Holders.........
Item 3 Reports on Form 8-K......................................... 22
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 62,169 $ 50,954
Accounts receivable, net............................... 16,297 11,526
Inventories............................................ 5,585 4,025
Prepaid expense and other assets....................... 1,696 864
--------- ---------
Total current assets................................. 85,747 67,369
--------- ---------
Fixed Assets:
Equipment, furniture and fixtures, net................. 934 1,177
Intangible assets, net.................................... 229,511 63,865
Other assets.............................................. 7,242 51
--------- ---------
Total assets......................................... $ 323,434 $ 132,462
========= =========
LIABILITIES
Current Liabilities:
Accounts payable....................................... $ 4,765 $ 3,204
Accrued liabilities.................................... 19,682 7,145
Senior notes........................................... 196,512 --
Accrued interest....................................... 3,281 293
Due to Elan Corporation, plc and subsidiaries.......... -- 262
--------- ---------
Total current liabilities............................ 224,240 10,904
--------- ---------
Other Liabilities:
Working capital facility............................... -- 12,098
Long-term debt......................................... -- 10,476
--------- ---------
Total liabilities.................................... 224,240 33,478
--------- ---------
SHAREHOLDERS' EQUITY
Ordinary Shares, par value $.05 per share; 50,000,000
shares authorized, 12,680,812 shares issued and
outstanding at September 30, 2000, and 12,377,034
issued and outstanding at December 31, 1999............ 634 619
Deferred Shares, par value IRL1 per share; 30,000 shares
authorized, 30,000 shares issued and outstanding at
September 30, 2000 and December 31, 1999............... 45 45
Additional paid-in capital................................ 219,167 209,062
Accumulated deficit....................................... (120,652) (110,279)
Deferred compensation..................................... -- (463)
--------- ---------
Total shareholders' equity............................. 99,194 98,984
--------- ---------
Total liabilities and shareholders' equity........... $ 323,434 $ 132,462
========= =========
See accompanying notes to unaudited consolidated financial statements.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
REVENUES
Branded product sales................... $ 18,670 $ 9,136 $ 54,242 $ 25,393
Generic product sales................... 1,755 2,386 7,485 12,223
Marketing alliance and other revenue.... 10,474 4,151 26,835 18,681
---------- ---------- ---------- ----------
Total revenues....................... 30,899 15,673 88,562 56,297
---------- ---------- ---------- ----------
OPERATING EXPENSES
Cost of goods sold...................... 5,458 6,340 17,070 22,078
Selling, general and administrative..... 12,730 11,161 38,931 34,866
Depreciation and amortization........... 3,630 1,417 9,568 4,249
Research and development................ 565 839 1,784 2,468
Merger-related costs.................... 15,047 -- 15,976 --
---------- ---------- ---------- ----------
Total operating expenses............. 37,430 19,757 83,329 63,661
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS)................... (6,531) (4,084) 5,233 (7,364)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income......................... 925 557 2,224 1,604
Interest expense........................ (6,761) (751) (17,099) (2,327)
Gain on sale of assets.................. -- 2,743 -- 2,743
---------- ---------- ---------- ----------
Total other income (expense)......... (5,836) 2,549 (14,875) 2,020
---------- ---------- ---------- ----------
LOSS BEFORE TAXES AND EXTRAORDINARY
ITEM.................................... (12,367) (1,535) (9,642) (5,344)
---------- ---------- ---------- ----------
Income taxes.............................. -- -- -- --
---------- ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM............ (12,367) (1,535) (9,642) (5,344)
---------- ---------- ---------- ----------
Extraordinary item........................ -- -- (731) --
---------- ---------- ---------- ----------
NET LOSS.................................. $ (12,367) $ (1,535) $ (10,373) $ (5,344)
========== ========== ========== ==========
LOSS PER SHARE
Basic and Diluted Loss before
extraordinary item................... $ (0.99) $ (0.12) $ (0.77) $ (0.43)
Extraordinary item...................... $ -- $ -- $ (0.06) $ --
Net loss................................ $ (0.99) $ (0.12) $ (0.83) $ (0.43)
========== ========== ========== ==========
WEIGHTED AVERAGE ORDINARY SHARES
OUTSTANDING
Basic and Diluted....................... 12,526,935 12,366,871 12,437,232 12,366,829
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
--------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (10,373) $(5,344)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization.......................... 9,568 4,249
Amortization of discount on senior notes............... 175 --
Write-off of deferred financing and miscellaneous
costs................................................. 307 --
Stock compensation expense............................. 5,798 463
Notes issued in lieu of cash interest payment.......... -- 768
Gain on sale of assets................................. -- (2,743)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, prepaid
expense and other assets............................ (5,860) 13,050
(Increase) decrease in inventories................... (1,560) 6,162
Increase (decrease) in accounts payable, accrued
liabilities and accrued interest.................... 17,086 (5,975)
Decrease in due to Elan Corporation, plc and
subsidiaries........................................ (262) (7,597)
--------- -------
Net cash provided by operating activities......... 14,879 3,033
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets............................. (175,054) --
Proceeds from sale of assets.............................. -- 11,000
Purchase of fixed assets.................................. (109) (337)
--------- -------
Net cash (used in) provided by investing activities.... (175,163) 10,663
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Working capital facility repayment, net................... (12,098) (4,374)
Proceeds from issuance of senior notes due 2008........... 196,337 --
Redemption of senior subordinated discount notes due
2001................................................... (10,476) --
Increase in other assets.................................. (7,048) --
Net proceeds from issuance of share capital -- option and
warrant exercises...................................... 4,784 74
--------- -------
Net cash provided by (used in)financing activities..... 171,499 (4,300)
--------- -------
Net increase in cash and cash equivalents................... 11,215 9,396
Cash and cash equivalents, beginning of period............ 50,954 43,133
--------- -------
Cash and cash equivalents, end of period.................. $ 62,169 $52,529
========= =======
See accompanying notes to unaudited consolidated financial statements.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared in accordance with generally accepted accounting principles. Certain
information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The statements should be read in conjunction
with the accounting policies and notes to the consolidated financial statements
included in Warner Chilcott Public Limited Company's 1999 Annual Report on Form
10-K.
The Company is an Irish public limited company with operations in Dublin,
Ireland and Rockaway, NJ, USA. The Company's consolidated financial statements
include the financial statements for Warner Chilcott Public Limited Company and
all of its subsidiaries and are prepared in U.S. dollars in conformity with
United States generally accepted accounting principles. As of September 29, 2000
the Company became a wholly-owned subsidiary of Galen Holdings PLC in a business
combination accounted for as a purchase. The accompanying financial statements
have been prepared on a historical cost basis and do not reflect the "push-
down" of Galen Holdings PLC's purchase price of the Company.
In the opinion of management, the financial statements reflect all
adjustments necessary for a fair statement of the operations for the interim
periods presented.
2. RECENT DEVELOPMENT
On September 29, 2000 Galen Holdings PLC ("Galen") acquired all of the
WCplc ordinary shares and share equivalents through a scheme of arrangement (the
"Scheme") under the laws of the Republic of Ireland. Galen issued 2.5 Galen
ordinary shares for each of the Company's outstanding ordinary shares, and all
of the Company's outstanding share options/warrants were converted at the same
ratio into options/warrants to acquire Galen shares. Concurrently, the Company
became a wholly-owned subsidiary of Galen. Galen obtained a listing of its
shares, in American Depositary Share ("ADS") form, on the Nasdaq National Market
with each Galen ADS representing ownership of four Galen ordinary shares.
WCplc's ordinary shares are no longer listed on the Nasdaq National Market and
is no longer a reporting company under the Securities Exchange Act of 1934, as
amended.
The transaction with Galen constituted a change of control under the
indenture (the "Indenture") governing Warner Chilcott Inc.'s 12 5/8% Senior
Notes due 2008 (the "Notes") (see Note 4). Accordingly, holders of the Notes
have the right to require WCI, the issuer of the Notes and a wholly-owned
subsidiary of the Company, to repurchase the Notes at a purchase price equal to
101.0% of their principal amount plus accrued and unpaid interest. On October
27, 2000 WCI provided notice of the change of control to holders of record on
September 29, 2000 of the Notes and offered (the "Change of Control Offer") to
repurchase Notes tendered by such holders. The Change of Control Offer will
expire on December 1, 2000, unless extended by WCI. Under this offer, WCI and
the Company may be required to repurchase Notes for an aggregate cash
consideration of $202,000 per Note tendered pursuant to the Change of Control
Offer. Under the terms of the Scheme, Galen is required to ensure that WCI and
WCplc, as guarantor of the Notes, have sufficient financial resources with which
to repurchase the Notes in the event that holders of the Notes require WCI to
repurchase the Notes pursuant to the Change of Control Offer. Galen has
commitments from certain financial institutions to provide debt financing to
Galen, if required, to enable Galen to provide funding to WCI to satisfy any
repurchase obligation.
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
3. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
principally on the basis of first-in, first-out or standards that approximate
average cost.
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
Raw materials.............................................. $ 17 $ 17
Finishing supplies......................................... 27 3
Work in process............................................ 922 957
Finished goods............................................. 5,339 3,936
------ ------
6,305 4,913
Less: Reserves for obsolescence............................ 720 888
------ ------
Inventories.............................................. $5,585 $4,025
====== ======
4. DEBT
Issuance of Senior Notes Due 2008
On February 15, 2000 WCI, the Company's wholly-owned U.S. operating
subsidiary, issued $200,000 of 12 5/8% senior notes due 2008 at a discount of
$3,663 to yield 13%. Interest payments on the Notes are due semi-annually in
arrears on each February 15th and August 15th beginning August 15, 2000.
Proceeds from the issuance of the Notes, net of the discount and transaction
expenses, were $188,780, and were utilized to fund the acquisition of three
branded pharmaceutical products from Bristol-Myers Squibb Company (see note 6).
The Notes are included in the Company's Balance Sheet net of the discount. The
discount and transaction fees are being amortized to interest expense over the
eight-year term of the Notes. The Notes are unconditionally guaranteed by WCplc,
WCI's parent company.
On or after February 15, 2004 the Notes are redeemable at the option of
WCI, in whole or part, prior to maturity at redemption prices that decrease
annually and range from 106.3125% to 100% of the principal amount of the Notes
plus accrued interest. The Note indenture limits the Company's ability to incur
or guarantee additional debt, as well as to pay dividends or distributions on,
or redeem or repurchase, capital stock.
The Indenture provides that upon a change of control, each Note holder has
the right to require WCI to repurchase the Notes at a purchase price equal to
101% of the principal amount plus accrued interest. The Scheme, upon its
effectiveness, constituted a change of control and on October 27, 2000 WCI
commenced the Change of Control Offer by mailing materials to Note holders (see
Note 2). The amount, if any, of the Notes that holders will present for
repurchase is not known as of the date of the release of these financial
statements. In the balance sheet at September 30, 2000, the Notes have been
classified as short-term debt as some or all may be required to be repurchased
in December 2000.
WCI entered into a registration rights agreement (the "Registration Rights
Agreement") that requires WCI to offer to exchange the outstanding Notes for new
notes registered under the Securities Act of 1933, as amended (the "Exchange
Offer"). The agreement required that WCI consummate the Exchange Offer by August
14, 2000. The registration statement for the exchange offer was filed with the
SEC but has not been declared effective mainly due to delays caused by the
completion of the Scheme. Under the terms of the Registration Rights Agreement,
beginning on July 15, 2000 the Company began to incur interest expense in excess
of the stated 12.625% rate on the Notes ("Additional Interest") of 0.50%.
Beginning on
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
October 12, 2000 the Additional Interest increased to 1.00%. If the exchange
offer is not completed by January 10, 2001, the Additional Interest will
increase again to 1.50% and to 2.00% if not completed by April 10, 2001.
Redemption of Senior Subordinated Discount Notes Due 2001
On February 14, 2000 the Company prepaid all $10,476 of the senior
subordinated discount notes outstanding at a redemption price equal to 105% of
the principal amount outstanding. The redemption premium of $524 and the
write-off of the deferred financing costs of $93 associated with theses notes
are included in the extraordinary item in the Company's Statement of Operations
for the nine months ended September 30, 2000.
Amendment to Working Capital Credit Facility
On February 18, 2000 WCI prepaid all amounts outstanding under its senior
secured working capital credit facility. On February 28, 2000 WCI amended its
credit facility to reduce the maximum amount available to $10,000 from $30,000
and to extend the expiration date to February 28, 2002. Warner Chilcott, plc
unconditionally guaranteed WCI's obligation under the amended credit facility.
Other terms of the amended credit facility, provided by PNC Business Credit, are
substantially the same as the previous credit facility. The write-off of the
deferred financing costs of $114 associated with the previous credit facility is
included in the extraordinary item in the Company's Statement of Operations for
the nine months ended September 30, 2000.
5. INCENTIVE SHARE OPTION SCHEME
In April 1997 the Company adopted an Incentive Share Option Scheme (the
"Option Scheme") for officers, directors and employees that provides for stock
options. In June 1999 the Option Scheme was amended to provide for grants to
consultants and members of the Company's medical advisory board. The option
exercise price for options issued under the Option Scheme is the fair market
value at the date of grant. Options issued under the Option Scheme generally
vest over four years and expire on the earlier of ten years from the date of
grant or after a specified period following the participant's separation from
the Company. In May 2000 the Option Scheme was amended to increase the number of
authorized shares available for awards from 1,500,000 to a total of 3,000,000
shares.
In accordance with the Option Scheme, options outstanding become fully
exercisable upon a change in control of the Company. The Scheme, upon becoming
effective, on September 29, 2000 constituted a change in control under the
Option Scheme and, as such, options outstanding on September 29, 2000 became
fully vested.
6. PRODUCT ACQUISITIONS
On February 15, 2000 the Company completed the acquisition of three branded
pharmaceutical products from Bristol-Myers Squibb Company ("BMS") for a purchase
price of $175,054. The products acquired were Estrace(R) cream, Ovcon(R) 35 and
Ovcon(R) 50. In connection with the acquisition, the Company entered into
transitional support and supply agreements with BMS under which BMS will supply
the Company with its requirements for Estrace(R) cream, Ovcon(R) 35 and Ovcon(R)
50 for a period of up to 10 years. The Company acquired all of the intangible
assets associated with the three products including the trademarks, regulatory
files, manufacturing know-how and other intellectual property. The acquisition
of the products is being accounted for as a purchase. Under purchase accounting,
the purchase price is allocated to the tangible and intangible assets acquired
based upon their respective fair values as of the purchase date in accordance
with Accounting Principles Board Opinion No. 16. The allocation of the purchase
price for the branded
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
pharmaceutical products from BMS resulted in an allocation of $168,000 to the
products and $7,054 to goodwill, as there were no tangible assets acquired. No
value was assigned to the supply agreements for the acquired products as the
product purchase prices under the agreements approximate the prices the Company
would expect to pay to third party contract manufacturers. The acquired
intangible assets are being amortized over 20 years, their estimated useful
life.
The following unaudited pro forma information has been prepared as if the
February 2000 acquisition of the products, the issuance of the senior notes due
2008, the early redemption of senior subordinated discount notes due 2001 and
the prepayment of amounts outstanding under the working capital credit facility
(see note 4) had occurred on January 1, 1999. The unaudited pro forma
information does not purport to represent the Company's consolidated results of
operations that would have been achieved had the transactions to which pro forma
effect is given been consummated as of the date or period indicated.
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
2000 1999
--------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
-------- --------- ------- ---------
Revenues......................................... $ 88,562 $ 88,146 $56,297 $90,849
Income (Loss) before extraordinary item.......... $ (9,642) $(14,205) $(5,344) $ 1,266
Earnings (Loss) per share -- before extraordinary
item -- Basic and Diluted...................... $ (0.77) $ (1.14) $ (0.43) $ 0.10
7. SCHERING PLOUGH AGREEMENT
During the nine months ended September 30, 2000 and 1999 the Company
derived 17% and 20%, respectively, of its total revenue from the promotion of
certain products on behalf of Schering Plough Corporation. The Company's sales
force promoted these Schering Plough products to a targeted physician population
and in return received a fixed royalty plus incentive amounts based on market
performance of the products. Revenue from this agreement is included in the
Statement of Operations under the caption "Marketing alliance and other
revenue." The agreement with Schering Plough terminated on September 30, 2000.
8. ELAN AGREEMENT
In March 1999 the Company reached a binding agreement with Elan
Corporation, plc ("Elan") under which Elan agreed to acquire the Company's
marketing rights to an extended-release nifedipine product. Under terms of the
agreement, as of March 31, 1999 Elan was obligated to make a non-refundable
payment, which was received, of $3,000 to the Company and such amount was
recorded as revenue in the first quarter of 1999. In June 1999 the Company
executed the definitive agreement licensing the extended-release nifedipine
product to Elan and received an additional $4,000 that was recorded as revenue
in the second quarter of 1999. Under the agreement, additional license fees were
earned by the Company upon the completion of certain milestones including FDA
approval of the ANDA for the product. The Company is also entitled to receive
royalties based upon U.S. sales of the product. Other than the $7,000 described
above, the Company earned no additional fees or royalties under this agreement
during the year ended December 31, 1999. In March 2000 the product received FDA
approval and was launched in the U.S. The approval triggered a series of
milestone payments and royalties that totaled $2,031 for the third quarter of
2000 and $6,331 for the nine months ended September 30, 2000. All amounts earned
from this agreement are included under the caption "Marketing alliance and other
revenue."
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
9. MERGER-RELATED COSTS
On September 29, 2000 the Scheme became effective (see note 2). Transaction
expenses recorded in the nine-month period ending September 30, 2000 totaled
$15,976. These expenses include financial, legal and accounting fees amounting
to $8,161 and costs totaling $4,615 associated with the acceleration of certain
non-cash compensation expenses triggered by the change of control.
The remaining transaction expenses, mainly severance costs, amounted to
$3,200 and relate to the reorganization of the Company's business as it was
positioned for ownership by Galen. These severance costs are associated with the
separation of certain executives who elected to exercise the change of control
terms of their employment agreements that became operable on the date the Scheme
became effective, and the "right-sizing" of the Company's sales force prior to
the effectiveness of the Scheme. All amounts are expected to be paid shortly.
10. SALE OF VECTRIN(R)
During September 1999 the Company completed the sale of its Vectrin(R)
product line including certain inventory, samples and the related FDA approval,
and received $11,000 in cash at closing. The Company reported a pre-tax gain of
$2,743 from the sale. As part of the sale and purchase agreement, the Company is
also entitled to receive royalties and milestone payments based on certain
future events. The Company earned milestone and royalty payments totaling $1,124
for the third quarter 2000 and $4,669 for the nine months ended September 30,
2000. Both the milestone and royalty revenues are included in the Statement of
Operations under the caption "Marketing alliance and other revenue."
11. LOSS PER ORDINARY SHARE
Basic loss per ordinary share has been computed by dividing net loss by the
weighted average number of ordinary shares outstanding during the period. Net
loss and weighted average shares outstanding for computing diluted loss per
share were the same as that used for computing basic loss per share for the
three and nine months ended September 30, 2000 and 1999. Stock options and
warrants have not been included in the calculation since the inclusion of such
shares would be antidilutive.
12. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." Comprehensive income is defined as the total change in
shareholders' equity during the period other than from transactions with
shareholders. For the Company, comprehensive loss is comprised solely of net
loss.
13. CONTINGENCIES
The Company is involved in various legal proceedings of a nature considered
normal to its business including patent litigation, product liability and other
matters. In the event of the adverse outcome of these proceedings, resulting
liabilities are either covered by insurance, established reserves or, in the
opinion of management, would not have a material adverse effect on the financial
condition or results of operations of the Company.
The Scheme constituted a change of control under the Indenture (see Note 4)
Accordingly, holders of the Notes have the right to require that WCI, the issuer
of the Notes and a wholly-owned subsidiary of the Company, repurchase the Notes
at a purchase price equal to 101.0% of the principal amount. On October 27, 2000
WCI provided notice of the change of control to holders of record on September
29, 2000 of the Notes and offered to repurchase Notes tendered by such holders.
The Change of Control Offer will expire on
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
December 1, 2000, unless extended by WCI. Under this offer, WCI may be required
to repurchase Notes for an aggregate cash consideration of $202,000 per Note
tendered pursuant to the Change of Control Offer. Under the terms of the Scheme,
Galen is required to ensure that WCI and WCplc, as guarantor of the Notes, have
sufficient financial resources with which to repurchase the Notes in the event
that the holders of the Notes require WCI to repurchase the Notes pursuant to
the Change of Control Offer. Galen has commitments from certain financial
institutions to provide debt financing to Galen, if required, to enable Galen to
provide funding to WCI to satisfy any repurchase obligation.
14. UNITED STATES FEDERAL INCOME TAXES
The Company operates in Ireland and the United States and is subject to
various taxes on income in both jurisdictions. The Company's wholly-owned United
States subsidiary, Warner Chilcott, Inc., is a United States corporation and, as
such, is subject to United States taxation. Ultimate utilization or availability
of net operating losses and certain deferred tax assets may be limited if a
significant change in ownership occurs, as defined by rules enacted with the
United States Tax Reform Act of 1986.
15. CONSOLIDATING SCHEDULE
Following are consolidating schedules reflecting Balance Sheet and
Statement of Operations information for the Company as of September 30, 2000,
and for the three and nine months ended September 30, 2000 and 1999:
WARNER WARNER
CHILCOTT CHILCOTT
WARNER (BERMUDA), WARNER LABORATORIES ELIMINATION
CHILCOTT, PLC LTD. CHILCOTT, INC. IRELAND LTD. ENTRIES CONSOLIDATED
------------- ---------- -------------- ------------ ----------- ------------
SEPTEMBER 30, 2000
BALANCE SHEET INFORMATION:
ASSETS
Cash and cash
equivalents............ $ 5 $ 9,789 $ 52,374 $ 1 $ -- $ 62,169
Accounts receivable....... -- -- 15,724 573 -- 16,297
Inventories............... -- -- 5,585 -- -- 5,585
Other assets.............. 7 -- 1,689 -- -- 1,696
-------- -------- -------- ------- --------- --------
Total current assets... 12 9,789 75,372 574 -- 85,747
-------- -------- -------- ------- --------- --------
Long-term assets.......... -- -- 234,133 3,554 -- 237,687
Investment in
subsidiaries........... 185,594 -- -- -- (185,594) --
-------- -------- -------- ------- --------- --------
Total assets........... $185,606 $ 9,789 $309,505 $ 4,128 $(185,594) $323,434
======== ======== ======== ======= ========= ========
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13
WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
WARNER WARNER
CHILCOTT CHILCOTT
WARNER (BERMUDA), WARNER LABORATORIES ELIMINATION
CHILCOTT, PLC LTD. CHILCOTT, INC. IRELAND LTD. ENTRIES CONSOLIDATED
------------- ---------- -------------- ------------ ----------- ------------
LIABILITIES AND EQUITY
Accounts payable & accrued
liabilities............ $ 10,321 $ -- $ 17,393 $ 14 $ -- $ 27,728
Senior notes.............. -- -- 196,512 -- -- 196,512
Inter-company accounts.... 16,941 (12,195) (1,953) (2,793) -- --
Working capital
facility............... -- -- -- -- -- --
Shareholders' equity...... 158,344 21,984 97,553 6,907 (185,594) 99,194
-------- -------- -------- ------- --------- --------
Total liabilities and
shareholders'
equity............... $185,606 $ 9,789 $309,505 $ 4,128 $(185,594) $323,434
======== ======== ======== ======= ========= ========
THREE MONTHS ENDED SEPTEMBER
30, 2000
STATEMENT OF OPERATIONS
INFORMATION:
REVENUES
Product sales............. $ -- $ -- $ 20,425 $ -- $ -- $ 20,425
Marketing alliance and
other revenue.......... -- -- 8,477 2,031 (34) 10,474
-------- -------- -------- ------- --------- --------
Total revenues......... -- -- 28,902 2,031 (34) 30,899
-------- -------- -------- ------- --------- --------
OPERATING EXPENSES
Cost of goods sold........ -- -- 5,458 -- -- 5,458
Selling, general &
administration......... 353 -- 12,339 38 -- 12,730
Depreciation and
amortization........... -- -- 3,540 90 -- 3,630
Research and
development............ -- -- 37 562 (34) 565
Merger-related costs...... 15,047 -- -- -- -- 15,047
-------- -------- -------- ------- --------- --------
Total operating
expenses............. 15,400 -- 21,374 690 (34) 37,430
-------- -------- -------- ------- --------- --------
Interest income (expense),
net.................... -- 138 (5,974) -- -- (5,836)
Income taxes.............. -- -- -- -- -- --
Extraordinary Item........ -- -- -- -- -- --
-------- -------- -------- ------- --------- --------
NET INCOME (LOSS)...... $(15,400) $ 138 $ 1,554 $ 1,341 $ -- $(12,367)
======== ======== ======== ======= ========= ========
NINE MONTHS ENDED SEPTEMBER
30, 2000
STATEMENT OF OPERATIONS
INFORMATION:
REVENUES
Product sales............. $ -- $ -- $ 61,727 $ -- $ -- $ 61,727
Marketing alliance and
other revenue.......... -- -- 20,623 6,331 (119) 26,835
-------- -------- -------- ------- --------- --------
Total revenues......... -- -- 82,350 6,331 (119) 88,562
-------- -------- -------- ------- --------- --------
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WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
WARNER WARNER
CHILCOTT CHILCOTT
WARNER (BERMUDA), WARNER LABORATORIES ELIMINATION
CHILCOTT, PLC LTD. CHILCOTT, INC. IRELAND LTD. ENTRIES CONSOLIDATED
------------- ---------- -------------- ------------ ----------- ------------
OPERATING EXPENSES
Cost of goods sold........ -- -- 17,070 -- -- 17,070
Selling, general &
administration......... 1,600 6 37,213 112 -- 38,931
Depreciation and
amortization........... -- -- 9,322 246 -- 9,568
Research and
development............ -- -- 83 1,820 (119) 1,784
Merger-related costs...... 15,976 -- -- -- -- 15,976
-------- -------- -------- ------- --------- --------
Total operating
expenses............. 17,576 6 63,688 2,178 (119) 83,329
-------- -------- -------- ------- --------- --------
Interest income (expense),
net.................... -- 475 (15,350) -- -- (14,875)
Income taxes.............. -- -- -- -- -- --
Extraordinary item........ -- -- (731) -- -- (731)
-------- -------- -------- ------- --------- --------
NET INCOME (LOSS)...... $(17,576) $ 469 $ 2,581 $ 4,153 $ -- $(10,373)
======== ======== ======== ======= ========= ========
THREE MONTHS ENDED SEPTEMBER
30, 1999
STATEMENT OF OPERATIONS
INFORMATION:
REVENUES
Product sales.......... $ -- $ -- $ 11,522 $ -- $ -- $ 11,522
Marketing alliance and
other revenue........ -- -- 4,207 -- (56) 4,151
-------- -------- -------- ------- --------- --------
Total revenues......... -- -- 15,729 -- (56) 15,673
-------- -------- -------- ------- --------- --------
OPERATING EXPENSES
Cost of goods sold........ -- -- 6,340 -- -- 6,340
Selling, general &
administration......... 372 -- 10,732 57 -- 11,161
Depreciation and
amortization........... 4 -- 1,335 78 -- 1,417
Research and
development............ -- -- 50 845 (56) 839
-------- -------- -------- ------- --------- --------
Total operating
expenses............. 376 -- 18,457 980 (56) 19,757
-------- -------- -------- ------- --------- --------
Interest income (expense),
net.................... -- 362 (556) -- -- (194)
Gain on sale of assets.... -- -- 2,743 -- -- 2,743
Income taxes.............. -- -- -- -- -- --
-------- -------- -------- ------- --------- --------
NET INCOME (LOSS)...... $ (376) $ 362 $ (541) $ (980) $ -- $ (1,535)
======== ======== ======== ======= ========= ========
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15
WARNER CHILCOTT PUBLIC LIMITED COMPANY
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
WARNER WARNER
CHILCOTT CHILCOTT
WARNER (BERMUDA), WARNER LABORATORIES ELIMINATION
CHILCOTT, PLC LTD. CHILCOTT, INC. IRELAND LTD. ENTRIES CONSOLIDATED
------------- ---------- -------------- ------------ ----------- ------------
NINE MONTHS ENDED SEPTEMBER
30, 1999
STATEMENT OF OPERATIONS
INFORMATION:
REVENUES
Product sales.......... $ -- $ -- $ 37,616 $ -- $ -- $ 37,616
Marketing alliance and
other revenue........ -- -- 11,732 7,102 (153) 18,681
-------- -------- -------- ------- --------- --------
Total revenues......... -- -- 49,348 7,102 (153) 56,297
-------- -------- -------- ------- --------- --------
OPERATING EXPENSES
Cost of goods sold........ -- -- 22,078 -- -- 22,078
Selling, general &
administration......... 929 6 33,600 331 -- 34,866
Depreciation and
amortization........... 4 -- 4,011 234 -- 4,249
Research and
development............ -- -- 286 2,335 (153) 2,468
-------- -------- -------- ------- --------- --------
Total operating
expenses............. 933 6 59,975 2,900 (153) 63,661
-------- -------- -------- ------- --------- --------
Interest income (expense),
net.................... -- 1,038 (1,761) -- -- (723)
Gain on sale of assets.... -- -- 2,743 -- -- 2,743
Income taxes.............. -- -- -- -- -- --
-------- -------- -------- ------- --------- --------
NET INCOME (LOSS)...... $ (933) $ 1,032 $ (9,645) $ 4,202 $ -- $ (5,344)
======== ======== ======== ======= ========= ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms and
phrases, such as "anticipate", "believe", "could", "estimate", "expect",
"intend", "may", "plan", "predict", "project", "will", and similar terms and
phrases, including references to assumptions. However, these words are not the
exclusive means of identifying such statements. These statements are subject to
significant risks and uncertainties, including those identified in the section
of this report entitled "Risk Factors" and in our 1999 Annual Report on Form
10-K filed with the Securities and Exchange Commission, which may cause actual
results to differ materially from those discussed in such forward-looking
statements. We do not undertake to update our forward-looking statements to
reflect future events or circumstances.
The following discussion should be read in conjunction with the
consolidated unaudited financial statements and notes thereto, included in this
report.
OVERVIEW
We develop and market branded prescription pharmaceutical products in the
United States. We primarily focus on the large and growing women's health and
urology therapeutic categories. We also participate in the cardiology and
dermatology categories. Through our national sales force of over 220
representatives, we market branded pharmaceutical products directly to physician
specialists, including obstetrician/gynecologists, urologists, cardiologists and
high-prescribing general/family practitioners. We have an experienced management
team with significant pharmaceutical industry expertise, specifically in the
marketing of prescription pharmaceutical brands.
An important part of our strategy is to acquire established branded
pharmaceutical products and to increase their sales through enhanced promotion
targeted to high-prescribing physicians. We also internally develop branded
products as well as product line extensions for our existing products, such as
new formulations, dosages or new indications. Line extensions are particularly
valuable because they may enable us to extend the growth potential of our
brands.
We currently market a portfolio of branded products including: NataFort(R),
a prescription prenatal vitamin designed to improve patient compliance by virtue
of its smaller size relative to competing products; NataChew(TM), a prescription
strength chewable prenatal vitamin; Estrace(R), a hormone replacement vaginal
cream; Ovcon(R) 35 and Ovcon(R) 50, two oral contraceptives; Pyridium Plus(R),
an orally active urinary tract analgesic antispasmodic agent used for irritative
bladder conditions; Doryx(R), a broad spectrum antibiotic; and LoCholest(R), a
lipid regulator for the reduction of LDL cholesterol levels. NataFort(R),
NataChew(TM), Estrace(R), Ovcon(R) 35, Ovcon(R) 50, Pyridium Plus(R), Doryx(R)
and LoCholest(R) are products owned by us.
As a result of our efforts to expand our branded product sales, gross
margins improved from 45.0% for the three months ended September 30, 1999 to
73.3% for the current quarter. Branded products generally generate significantly
higher gross margins than generic products.
HISTORY
We are an Irish public limited company founded in 1992 as Nale Laboratories
Limited. In March 1996 Nale acquired certain assets and assumed certain
liabilities of Warner Chilcott Laboratories, a division of the Warner-Lambert
Company. Following this transaction, Nale changed its name to Warner Chilcott
Public Limited Company and the assets and liabilities acquired from
Warner-Lambert are now organized in the United States in our wholly owned
subsidiary Warner Chilcott, Inc.
As part of the acquisition of Warner Chilcott Laboratories, we acquired a
portfolio of seventy generic pharmaceutical products. In 1997 we launched our
branded product initiative and switched our primary focus
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to the development, acquisition and in-licensing of branded pharmaceutical
products, and began to reduce our generic pharmaceutical business. Today branded
products dominate our activities. Of the original seventy generic products we
acquired in the Warner Chilcott Laboratories transaction, we currently
distribute less than ten.
Our revenues are primarily generated in the United States and the U.S.
dollar is our functional currency. Accordingly, our exposure to currency
fluctuation is limited. Product sourcing from vendors and research and
development agreements are normally contracted in U.S. dollars. As a company
operating in multiple jurisdictions, we will be subject to taxation on our
earnings in the jurisdictions in which we operate. At present, such
jurisdictions include Ireland and the United States.
On September 29, 2000 Galen Holdings PLC ("Galen") acquired all of WCplc's
ordinary shares and share equivalents through a scheme of arrangement (the
"Scheme" or the "Galen Transaction") under the laws of the Republic of Ireland.
Upon the Scheme becoming effective, we became a wholly-owned subsidiary of Galen
Holdings PLC. Galen is an integrated pharmaceutical company based in Northern
Ireland. Galen develops and markets branded prescription pharmaceutical products
and provides technology-based services to the pharmaceutical industry in both
Europe and the U.S. Galen has in its development pipeline several proprietary
pharmaceutical products and drug delivery technologies that are well positioned
for commercialization by us in the U.S. market. The product closest to
commercialization in the U.S. is Galen's intravaginal ring ("IVR") for delivery
of estrogen to treat symptoms of menopause. Galen's ordinary shares are publicly
traded on the London and Irish Stock Exchanges and as American Depository Shares
on the Nasdaq National Market in the United States. Additional information
concerning Galen can be obtained in the proxy statement that we filed with the
SEC in connection with the Galen transaction. Galen will file its financial
statements with the SEC beginning with its annual report on Form 20-F for the
fiscal year ended September 30, 2000.
RESULTS OF OPERATIONS
Three months ended September 30, 2000 and 1999
Our third quarter total revenues of $30.9 million increased $15.2 million
or 97% as compared with the prior year period. During both the third quarter of
2000 and 1999 we derived revenue from three sources: (1) sales of our own
branded pharmaceutical products, (2) marketing alliances and license agreements,
and (3) sales of generic products. The main factor driving the increase in
revenues was higher sales of branded products, which increased 104% as compared
with the third quarter of 1999.
Our branded product sales increased $9.5 million to $18.6 million from $9.1
million in the third quarter of 1999. The three branded products acquired from
Bristol-Myers Squibb in February 2000, Estrace(R) cream, Ovcon(R) 35 and
Ovcon(R) 50, were the primary contributors to the increase. Strong sales of
Doryx(R) also contributed to the growth. Sales of our family of prescription
prenatal vitamins, NataFort(R) and NataChew(TM), together were down, reflecting
increased competition in that market. Results of the third quarter of 1999
included sales of Vectrin(R) branded minocycline totaling $1.2 million. We sold
Vectrin(R) to Medicis Pharmaceutical Corp. in September 1999. Importantly, we
took the opportunity during the month of September 2000 to restrain sales of our
branded products to ensure that our product inventory held in the distribution
pipeline was brought into balance going into the fourth calendar quarter of
2000. Sales of generic products of $1.8 million declined $0.6 million, or 26%,
from the prior year as we continued our planned exit from this low-margin
business.
Gross profit on product sales increased $9.8 million to $15.0 million, as
compared with $5.2 million in the third quarter of 1999, driven by the $8.9
million increase in total product sales and a significant improvement in the
average gross profit margin on sales. Gross margin increased from 45.0% in the
year-ago quarter to 73.3% in the third quarter of 2000 due to the high margins
earned on the three products acquired from Bristol-Myers Squibb Company and high
margin branded products accounting for a greater percentage of total product
sales.
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18
Marketing alliance and other revenue totaled $10.5 million in the quarter,
up $6.3 million, or 152%, from $4.2 million in 1999. In the third quarter of
2000, this revenue was generated from three sources: (1) royalties under our
promotion agreement with Schering Plough Corporation, (2) milestone payments and
royalties under our license agreement with Elan Corporation, plc for an extended
release nifedipine product, and (3) milestone payments and royalties under our
agreement with Medicis Pharmaceutical Corp. relating to a 75mg minocycline
product. Under the agreement with Schering Plough, we are entitled to a fixed
royalty plus incentive amounts based upon the market share performance of three
branded products: K-Dur(R), Lotrisone(R) and NitroDur(R). During the third
quarter of 2000 we earned incentive amounts on K-Dur(R) and Lotrisone(R) only.
In March 2000 the extended release nifedipine product received FDA approval and
was launched in the United States. The approval triggered a series of milestone
payments and the payment of royalties to us based upon U.S. net sales of the
nifedipine product. During the quarter, an additional milestone was achieved
and, together with the royalty on net sales of the nifedipine product, we earned
a total of $2.0 million. Also during the quarter, certain milestones were
achieved related to the 75mg minocycline product and we continued to earn
royalties based upon Medicis' sales of that product. In the third quarter of
1999, marketing alliance and other revenue was predominately comprised of
royalties earned under our promotion agreement with Schering Plough.
Selling, general and administrative expenses of $12.7 million were 14%
higher than the $11.2 million incurred in the third quarter of 1999. Selling
costs rose $0.9 million mainly the result of increased promotional expenses in
support of our larger portfolio of branded products. Our field sales force was
approximately the same size in the third quarter of 2000 as in the year ago
quarter. Administrative expenses increased $0.6 million compared with the prior
year mainly due to the addition of several senior management functions.
We have shown the costs associated with the Scheme as a separate expense
item because of the nature of these costs. The Galen Transaction expenses
totaled $15.0 million in the quarter and include: costs of our financial, legal
and accounting advisors ($7.2 million), costs associated with the acceleration
of certain non-cash compensation expenses triggered by the change of control
($4.6 million) and costs associated with the reorganization of our business,
mainly severance costs, to reflect ownership by Galen ($3.2 million).
Depreciation and amortization of $3.6 million was $2.2 million higher than
in the third quarter of 1999 primarily due to the amortization of the intangible
assets associated with the acquired Estrace(R) and Ovcon(R) brands.
Research and development costs of $0.6 million were $0.3 million less than
in the prior year mainly due to the timing of development expenses in 1999
related to NataChew(TM) and 75mg Vectrin(R). We continue to focus on product
development projects with near-term revenue potential and relatively low funding
requirements including, for example, line extensions of our existing branded
products.
Interest income of $0.9 million was $0.4 million higher than in the prior
year period due to an increase in funds available for investment. Interest
expense of $6.8 million increased $6.0 million as compared to the prior year
period. This increase was primarily due to the interest expense related to the
issuance in February 2000 of $200 million of 12 5/8% senior subordinated notes
due 2008 offset by the reduction in interest expense from the concurrent
prepayment of substantially all of our other funded debt. Interest expense
related to our working capital credit facility was less than $0.1 million in the
quarter. Following the issuance of the senior notes in February 2000, our
borrowings under our working capital credit facility have been minimal.
For the third quarter of 2000 we posted a net loss of $12.4 million. In
arriving at the net loss for the quarter, we incurred $15.0 million of costs
directly related to the Scheme, which closed on September 29, 2000. Before the
effect of these transaction costs, we would have posted net income of $2.7
million, or $0.20 per ordinary share on a diluted basis. This is an improvement
of $4.2 million compared to a net loss of $1.5 million, or $0.12 per ordinary
share on a diluted basis, for the third quarter 1999. Increased sales of our
branded products, particularly from the acquisition of the three products from
Bristol-Myers Squibb, improved gross profit on product sales and increased
revenues from marketing alliances more than offset the increased costs
associated with the acquired Estrace(R) and Ovcon(R) brands.
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Nine months ended September 30, 2000 and 1999
Revenue for the nine months ended September 30, 2000 totaled $88.6 million;
a $32.3 million or 57% increase as compared to the prior year period. During the
nine-month periods in both 2000 and 1999 we derived revenue from three sources:
(1) sales of our branded products, (2) marketing alliances and license
agreements, and (3) sales of generic products. The driving force behind the
increase in revenues in the period was higher sales of branded products, which
increased 114% as compared to the prior year.
Our branded product sales increased $28.8 million to $54.2 million from
$25.4 million in the prior year period. The three branded women's healthcare
products acquired from Bristol-Myers Squibb in February 2000, Estrace(R) cream,
Ovcon(R) 35 and Ovcon(R) 50, were the primary contributors to the increase.
However, all of the brands actively promoted during the nine-month periods of
both years posted sales increases. Sales of Doryx(R) were especially strong as
compared with the prior year period. Results for the 1999 period included sales
of Vectrin(R) branded minocycline totaling $3.2 million. We sold Vectrin(R) to
Medicis in September 1999. Sales of generic products of $7.5 million declined
$4.7 million, or 39%, from $12.2 million as we continued our planned exit from
this low-margin business.
Gross profit on product sales increased $29.1 million to $44.7 million, as
compared with $15.5 million in the prior year period, driven by the $24.1
million increase in total product sales and a significant improvement in the
average gross profit margin on sales. Gross margin increased from 41.3% in the
year-ago period to 72.3% in the nine months ended September 30, 2000 due to the
high margins earned on the three products acquired from Bristol-Myers Squibb and
high-margin branded products accounting for a greater percentage of total
product sales.
Marketing alliance and other revenue totaled $26.8 million in the period,
up $8.2 million, or 44% from $18.6 million in the 1999 period. In the nine
months ended September 30, 2000, this revenue was generated from four sources:
(1) royalties under our promotion agreement with Schering Plough Corporation,
(2) milestone payments and royalties under our license agreement with Elan
Corporation, plc for an extended release nifedipine product, (3) milestone and
royalties under our agreement with Medicis Pharmaceutical Corp. relating to a
75mg minocycline product, and (4) royalties earned as part of the termination of
a promotion agreement with Bristol-Myers Squibb. Under the agreement with
Schering Plough, we are entitled to a fixed royalty plus incentive amounts based
upon the market share performance of three branded products: K-Dur(R),
Lotrisone(R) and NitroDur(R). During the nine month period in 2000 we earned
incentive amounts on K-Dur(R) and Lotrisone(R) only. In March 2000 the extended
release nifedipine product received FDA approval and was launched in the United
States. The approval triggered a series of milestone payments and the payment of
royalties to us based upon U.S. net sales of the nifedipine product. During
period we earned milestones and royalties totaling $6.3 million. Also during the
period, certain milestones were achieved related to the 75mg minocycline product
and we continued to earn royalties based upon Medicis' sales of that product. We
also recorded revenue during the period related to the winding up of our
promotion agreement with Bristol-Myers Squibb for Ovcon(R) and Estrace(R) cream.
In the first nine months of 1999, marketing alliance and other revenue was
predominately comprised of royalties earned under our promotion agreement with
Schering Plough and $7.0 million earned by us under our license agreement with
Elan for the extended release nifedipine product.
Selling, general and administrative expenses of $38.9 million were 12%
higher than the $34.9 million incurred in the same period in 1999. Selling costs
rose $2.0 million mainly related to increased promotional expenses in support of
our larger portfolio of branded products. Our field sales force was
approximately the same size during the year 2000 period as in the same period in
1999. Administrative expenses increased $2.0 million compared with the prior
year, with $0.9 million of the increase due to unusually high litigation costs
incurred during the year 2000 period associated with our defense of our actions
in support of one of our brands. Administrative personnel costs increased $1.3
million compared with the prior year period due to the addition of several
senior management functions. The increased litigation and personnel costs were
partly offset by decreased office expenses and less use of outside consultants.
We have shown the costs associated with the closed transaction with Galen
Holdings PLC as a separate expense item because of the nature of these items.
The Galen transaction expenses totaled $16.0 million
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20
during the period and include: costs of our financial, legal and accounting
advisors ($8.2 million), costs associated with the acceleration of certain
non-cash compensation expenses triggered by the change of control ($4.6 million)
and costs associated with the reorganization of our business, mainly severance
costs, to reflect ownership by Galen ($3.2 million).
Depreciation and amortization of $9.6 million was $5.3 million higher than
in the 1999 period primarily due to the amortization of the intangible assets
associated with the acquired Estrace(R) and Ovcon(R) brands.
Research and development costs of $1.8 million were $0.7 million less than
in the prior year period. During the 1999 period we were actively working on the
75mg minocycline project which was completed in the third quarter of 1999. The
FDA approved the product in September 1999. The approval triggered the start of
milestone payments and royalties from Medicis to us that are included in
marketing alliance and other revenue and are discussed above. We continue to
focus on product development projects with near-term revenue potential and
relatively low funding requirements including, for example, line extensions of
our existing branded products.
Interest income for the first nine months of 2000 of $2.2 million was $0.6
million higher than in the prior year period as we had more funds available for
investment during the period. Interest expense of $17.1 million increased $14.8
million as compared to the prior year period. This increase was primarily due to
the interest expense related to the issuance in February 2000 of $200 million of
12 5/8% senior subordinated notes due 2008, offset by the reduction in interest
expense from the concurrent prepayment of substantially all of our other funded
debt. Interest expense related to our working capital credit facility was
roughly $0.2 million in the period. Following the issuance of the senior notes
in February 2000, our borrowings under our working capital credit facility have
been minimal.
For the nine months ended September 30, 2000 we posted a net loss of $10.4
million. In arriving at the net loss for the period, we incurred $16.0 million
of costs directly related to the transaction with Galen, which closed on
September 28, 2000. Before the effect of these transaction costs, we would have
posted net income of $5.6 million, or $0.43 per ordinary share on a diluted
basis. This is an improvement of $10.9 million compared to a net loss of $5.3
million, or $0.43 per ordinary share on a diluted basis, for the same period in
1999. Increased sales of our branded products, particularly from the acquisition
of the three products from Bristol-Myers Squibb, improved gross profit on
product sales and increased revenues from marketing alliances more than offset
the increased costs associated with the acquired Estrace(R) and Ovcon(R) brands.
NET OPERATING LOSS CARRYFORWARDS
We did not record any taxes on income in the three-month or nine-month
periods ended September 30, 2000 or 1999. As of December 31, 1999, we had
available net operating loss carryforwards for United States Federal income tax
reporting purposes of approximately $62 million, which begins expiring in 2011.
At December 31, 1999 we had net operating loss carryforwards for state income
tax reporting purposes of approximately $40 million which expire at various
dates.
LIQUIDITY AND CAPITAL RESOURCES
We became profitable and generated a positive cash flow for the first time
in the first quarter of 2000. We continued to operate at a profit and to
generate cash in the second quarter despite incurring $0.9 million of expenses
related to the Galen Transaction. In the third quarter of 2000 we closed the
Galen Transaction and the associated costs resulted in our reporting a net loss
for both the third quarter and nine months ended September 30, 2000. Excluding
the expenses related to the Galen Transaction, our cash flow from operations
(which we define as net income/loss plus depreciation and amortization) in the
nine months ended September 30, 2000 was $15.2 million as compared with a cash
outflow of $1.1 million for the same period in 1999. This improvement was
attributable to our increased branded product sales resulting from the
acquisition of the Estrace(R) cream and Ovcon(R) brands and sales growth of our
existing products, and increased gross profit margins on product sales.
Offsetting some of these revenue gains were increases in our selling expenses,
mainly for promotion of our expanded portfolio of products, increased
administrative expenses as we have continued
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to build our management infrastructure, increased legal costs spent in defense
of our brands and increased interest costs associated with the financing of the
acquisition of the Estrace(R) and Ovcon(R) brands.
There were three significant events during the nine months ended September
30, 2000 that impact upon our current and future liquidity. First was our
acquisition of the Estrace(R) cream and Ovcon(R) brands from Bristol-Myers
Squibb for an initial purchase price of $180.0 million. Second, on September 29,
2000 the Scheme became effective and our company became a wholly-owned
subsidiary of Galen. Third, as announced on July 19, 2000, our co-promotion
agreement with Schering Plough terminated on September 30, 2000.
Acquisition of Estrace(R) Cream and Ovcon(R) Brands
The acquisition of the products from Bristol-Myers Squibb was funded
through the issuance by WCI, our wholly-owned U.S. operating subsidiary, of
$200.0 million face amount of 12 5/8% senior notes at discount of $3.7 million
to yield 13.0%. Interest payments on the senior notes are due semi-annually in
arrears on each February 15th and August 15th beginning August 15th 2000. WCplc,
the parent company of Warner Chilcott, Inc., unconditionally guaranteed the
senior notes on a senior basis.
Proceeds from the issuance of the senior notes, net of the discount and
$7.5 million of transaction expenses, were $188.8 million. The net proceeds,
together with some of our cash on hand, were used: (i) to acquire the Estrace(R)
and Ovcon(R) brands, (ii) to prepay all $10.5 million of the senior subordinated
discount notes due 2001, plus a prepayment penalty of $0.5 million on those
notes and (iii) to repay amounts outstanding under our working capital facility.
On February 28, 2000 WCI amended its working capital facility to reduce the
maximum amount available from $30.0 million to $10.0 million. In connection with
the amendment of the working capital facility the parent company, WCplc,
unconditionally guaranteed WCI's obligation under the working capital facility.
At September 30, 2000 no debt was outstanding under the working capital
facility. We intend to utilize the working capital facility to provide for
short-term liquidity requirements and expect average borrowings under the
facility to be modest.
In March 2000 the purchase price we paid for the Estrace(R) and Ovcon(R)
brands was reduced by $4.9 million from $180.0 million to $175.1 million. Under
the terms of the asset purchase agreement the purchase price was subject to
downward adjustment based on estimates of the amount of inventory of the
acquired brands held by wholesalers and distributors as of January 31, 2000. The
$4.9 million adjustment to the purchase price was recorded in the first quarter
of 2000 and in April 2000 we received payment of that amount from Bristol-Myers
Squibb.
The acquisition of the Estrace(R) and Ovcon(R) brands was accounted for as
a purchase and the $175.1 million purchase price was allocated as follows:
$168.0 million to intangible assets identified with the brands and $7.1 million
to goodwill. No hard assets were acquired in the transaction. Both the
intangible assets and goodwill are being amortized over 20 years, their
estimated useful lives.
Scheme of Arrangement
On September 29, 2000 Galen acquired all of WC plc's ordinary shares and
share equivalents through a scheme of arrangement under the laws of the Republic
of Ireland. Upon the Scheme becoming effective, we became a wholly-owned
subsidiary of Galen. Galen is an integrated pharmaceutical company based in
Northern Ireland. Beginning in the second quarter of 2000, we incurred
substantial expenses in connection with our pursuit, and ultimate closing, of
the Galen Transaction. In the nine months ended September 30, 2000 we incurred a
total of $16.0 million of directly related costs. It is important to note that
$4.6 million of these transaction related costs were associated with the
acceleration of certain non-cash compensation expenses triggered by the change
of control. This had significant impact on our reported net earnings, resulting
in our reporting a loss for the period. The Scheme, upon becoming effective,
constituted a change of control under the Indenture governing the Notes. Under
the change of control provision and in accordance with the notice mailed to
holders of record of the Notes as of September 29, 2000, each holder has until
December 1, 2000 to elect to require WCI to repurchase their notes at 101.0% of
the principal amount, plus accrued
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interest. Under the terms of the Scheme, Galen is required to ensure that WCI
and WCplc, as guarantor of the Notes, have sufficient financial resources with
which to repurchase the Notes in the event that the Note holders require WCI to
repurchase the Notes. Galen has commitments from certain financial institutions
to provide debt financing to Galen, if required, to enable Galen to provide
funding to WCI to satisfy any repurchase obligation. The aggregated principal
amount, if any, of the Notes that holders will present for repurchase is not
known as of the date of the release of this report. In the balance sheet at
September 30, 2000 we have classified all of the Notes as short-term debt as
some or all may be required to be repurchased in December 2000.
Termination of Schering Plough Co-Promotion Agreement
Effective September 30, 2000, we terminated our promotion agreement with
Schering Plough Corporation under which we promoted certain Schering Plough
products. During the nine months ended September 30, 2000 revenue generated from
this agreement accounted for 17% of our total revenues, and 24% of our total
revenues for the year ended December 31, 1999.
Our investment in adjusted working capital (current assets other than cash
and equivalents minus current liabilities other than interest bearing debt)
decreased from $5.5 million at December 31, 1999 to $(4.2) million at September
30, 2000. Accounts receivable increased $4.8 million mainly due to the increased
level of product sales but also due to the timing of amounts earned under our
license agreements with Elan and Medicis. The increase of $1.6 million in our
inventories reflects the offsetting impact of higher inventory requirements to
support the acquired Estrace(R) cream and Ovcon(R) brands and the lesser
investment in the inventory of generic products. Current liabilities, other than
interest bearing debt, increased $16.8 million from December 31, 1999 with $3.3
million of the increase due to the interest accrual for the Notes issued in
February 2000. Also contributing to the increase in current liabilities were
significant accruals for costs related to the Galen Transaction, namely costs
for our financial, legal and accounting advisors and accruals for restructuring
WCplc as a wholly owned subsidiary of Galen. These increases were slightly
offset by a $1.2 million decrease in our incentive plan accrual. We accrue the
cost of our incentive plans throughout the year with the payout made in the
first quarter of the following year. Accordingly, the incentive accrual is near
its peak at December 31st each year, at its low point as of March 31st and
increases from that point through the remainder of the year.
We ended the quarter with $62.2 million of cash on hand as compared with
$51.0 million at December 31, 1999. Excluding costs associated with the Galen
Transaction, we were profitable and strongly cash flow positive from operations
during the nine months ended September 30, 2000 and expect to continue to be
profitable and cash flow positive. We intend to fund our future liquidity needs
through a combination of cash generated from operations, cash balances on hand
and availability under our working capital facility. We believe that these
sources will be sufficient to fund our anticipated working capital needs for the
foreseeable future. However, in the event that we make significant future
acquisitions or otherwise expand our business, we may be required to raise
additional funds through the issuance of debt or through additional investment
in Warner Chilcott by Galen.
INFLATION
Inflation had no material impact on our operations during the three months
ended September 30, 2000.
RISK FACTORS
Following is a discussion of some of the risks and historical facts that
should be considered when evaluating our current and future results. This
discussion is not intended to include all risks and historical facts that could
produce adverse results.
We have a history of operating losses. Operating losses have been posted
since the formation of the Company in 1992. As of September 30, 2000 our
accumulated deficit was $120.7 million. Our ability to obtain profitability will
depend upon, among other things, the success of our branded product portfolio,
including the Estrace(R) cream and Ovcon(R) brands acquired in February 2000,
and our ability to develop
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revenue sources to offset the impact of the termination of the Schering Plough
marketing alliance effective September 30, 2000. Since July 1998 we have
promoted branded products for Schering Plough Corporation. Revenue generated
under this agreement represented 17% of our gross revenues for the nine months
ended September 30, 2000. As we announced on July 19, 2000, our agreement with
Schering Plough terminated on September 30, 2000.
With the issuance by WCI of the $200.0 million face amount of 12 5/8%
senior notes on February 15, 2000 we have a significant amount of indebtedness.
Our substantial indebtedness could limit our ability to raise additional funding
needed to execute our growth strategy. Although we may seek additional funding
through the public or private capital markets, there can be no assurance that
any such funding will be available to us, if needed. Our ability to pay
principal and interest on our indebtedness depends on our financial and
operating performance, each of which is subject to prevailing economic
conditions and financial, business and other factors, some of which are beyond
our control.
Intense competition exists within the pharmaceutical industry. Many
companies, some with greater financial, marketing and development capabilities
than us, are engaged in developing, marketing and selling products that compete
with the products we offer. Other products now in use or under development by
others may be more effective or have fewer side effects than our current or
future products. The industry is characterized by rapid technological change,
and competitors may develop their products more rapidly than us. Competitors may
also be able to complete the regulatory process sooner and, therefore, may begin
to market their products in advance of our products. Product developments by
others may render one or more of our products obsolete or otherwise
noncompetitive.
The clinical development, manufacture, marketing and sale of pharmaceutical
products is subject to extensive federal, state and local regulation in the
United States and similar regulation outside the United States. FDA approval is
required before most drug products can be marketed. FDA filings can be time
consuming and expensive without assurance that the results will be adequate to
justify approval. There can be substantial delays in the process, including the
need to provide additional data. There can be no assurance that approvals for
filings already made by us, or to be made in the future, can be obtained in a
timely manner, if at all, or that the regulatory requirements for any such
proposed products can be met. In addition, new regulations may adversely affect
our operations or competitive position in the future.
The distribution network for pharmaceutical products has in recent years
been subject to increasing consolidation. As a result, a few large wholesale
distributors control a significant share of the market. In addition, the number
of independent drug stores and small chains has decreased as retail pharmacy
consolidation has occurred. Continued consolidation of either wholesale
distributors or retail pharmacies may adversely effect our operations.
We depend on third parties for the manufacture of our products, including
the Estrace(R) cream and Ovcon(R) brands acquired in February 2000. Currently we
do not possess the facilities or resources needed for these activities. Our
strategy for development, commercialization and manufacturing of certain of our
products entails entering into various arrangements with corporate
collaborators, licensors and others. If any of our corporate collaborators were
unable to satisfy their contractual obligations to us, there can be no assurance
that we would be able to negotiate similar arrangements with other third
parties.
Many of the principal components of our products are available only from
single source suppliers. There can be no assurance that we will establish or, if
established, maintain good relationships with such suppliers or that such
suppliers will continue to exist or be able to supply ingredients in conformity
with regulatory requirements.
We are engaged in the manufacture and marketing of products that may give
rise to the development of certain legal actions and proceedings. We carry
product liability insurance and umbrella liability insurance. There can be no
assurance that this coverage is adequate to cover potential liability claims or
that additional insurance coverage will be available in the future if we
manufacture and market new products. Our financial condition and results of
operations could be materially adversely affected by the unfavorable outcome of
legal actions and proceedings.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our exposure in market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of U.S. corporate debt,
foreign corporate debt, U.S. and state government debt, foreign
government/agency guaranteed debt, bank deposits and certificates of deposit,
and commercial paper. All such instruments are classified as securities
available for sale. We do not invest in portfolio equity securities or
commodities or use financial derivatives for trading purposes. Our debt security
portfolio represents funds held temporarily pending use in our business and
operations. We manage these funds accordingly. We seek reasonable assuredness of
the safety of principal and market liquidity by investing in rated fixed income
securities while at the same time seeking to achieve a favorable rate of return.
Our market risk exposure consists principally of exposure to changes in interest
rates. Our holdings are also exposed to the risks of changes in the credit
quality of issuers. We invest in the shorter-end of the maturity spectrum, and
at September 30, 2000 100% of such holdings matured in one year or less.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in litigation relating to claims arising out of our
operations in the normal course of business, including product liability claims.
There have been no significant developments in the proceedings described in our
1999 Annual Report on Form 10-K filed with the Securities and Exchange
Commission, and we have not become involved in any additional material
proceedings.
ITEM 2. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An Extraordinary Meeting of Shareholders was held on September 4, 2000
in Dublin, Ireland.
(b) The proposal to accept the offer of Galen Holdings PLC to purchase us
was approved with 5,341,056 votes for, 694 votes against, 1,650 abstentions and
no broker non-votes.
ITEM 3. REPORTS ON FORM 8-K
a. REPORTS ON FORM 8-K:
On September 29, 2000 we filed a Form 8-K Report dated September 29, 2000,
which announced the completion of our transaction with Galen Holdings PLC under
which we became a wholly-owned subsidiary of same.
On October 23, 2000 we filed a Form 8-K Report dated October 23, 2000,
which included copies of slides used as part of a presentation by Galen Holdings
PLC at an investor conference held on Monday, October 23, 2000.
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