UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 005-52501
WARNER CHILCOTT PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
Ireland N/A
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Lincoln House, Lincoln Place, Dublin 2, Ireland
(Address of principal executive offices)
353 1 662-4962
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
American Depositary Shares, representing Ordinary Shares, par value $.05 each;
Ordinary Shares, par value $.05 each; 12,366,871 Ordinary Shares outstanding at
September 30, 1999.
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Table of Contents
PAGE NO.
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Part I - Financial Information
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 2
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 4
Notes to the Unaudited Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II- Other Information
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Part I - Financial Information
Item 1. Financial Statements
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998
(in thousands of U.S. dollars)
(UNAUDITED)
September 30, December 31,
1999 1998
------------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 52,529 $ 43,133
Accounts receivable 10,920 18,050
Inventories 4,258 13,099
Prepaid expense and other assets 1,033 7,403
------------- -----------
Total current assets 68,740 81,685
------------- -----------
Fixed Assets:
Equipment, furniture and fixtures 1,195 1,076
Intangible assets 65,097 74,256
------------- -----------
Total assets $ 135,032 $ 157,017
============= ===========
LIABILITIES
Current Liabilities:
Accounts payable $ 2,708 $ 8,833
Accrued liabilities 6,404 6,254
Due to Elan Corporation, plc and subsidiaries 100 7,697
------------- -----------
Total current liabilities 9,212 22,784
------------- -----------
Other Liabilities:
Working capital facility 16,019 20,393
Long-term debt 9,665 8,897
------------- -----------
Total liabilities 34,896 52,074
------------- -----------
SHAREHOLDERS' EQUITY
Ordinary Shares, par value $.05 per share; 50,000,000
shares authorized, 12,366,871 shares issued and
outstanding at September 30, 1999, and 12,366,808 shares
issued and outstanding at December 31, 1998 618 618
Deferred Shares, par value IR(pounds)1 per share; 30,000
shares authorized, 30,000 shares issued and outstanding
at September 30, 1999 and December 31, 1998 45 45
Additional paid-in capital 209,013 208,939
Accumulated deficit (108,922) (103,578)
Deferred compensation (618) (1,081)
------------- -----------
Total shareholders' equity 100,136 104,943
------------- -----------
Total liabilities and shareholders' equity $ 135,032 $ 157,017
============= ===========
See accompanying notes to unaudited consolidated financial statements.
2
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 1998
(in thousands of U.S. dollars, except per share data)
(UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
Branded product sales $ 9,136 $ 3,109 $ 25,393 $ 10,854
Generic product sales 2,386 6,228 12,223 24,788
Marketing alliance and other revenue 4,151 7,764 18,681 7,764
------------- -------------- ------------- --------------
Total revenues 15,673 17,101 56,297 43,406
------------- -------------- ------------- --------------
OPERATING EXPENSES
Cost of goods sold 6,340 7,987 22,078 26,187
Selling, general and administrative 11,161 10,245 34,866 28,364
Depreciation and amortization 1,417 1,405 4,249 4,213
Research and development 839 796 2,468 2,354
------------- -------------- ------------- --------------
Total operating expenses 19,757 20,433 63,661 61,118
------------- -------------- ------------- --------------
OPERATING LOSS (4,084) (3,332) (7,364) (17,712)
------------- -------------- ------------- --------------
OTHER INCOME (EXPENSE)
Interest income 557 631 1,604 2,036
Interest expense (751) (776) (2,327) (2,138)
Gain on sale of assets 2,743 - 2,743 -
------------- --------------- -------------- ---------------
Total other income (expense) 2,549 (145) 2,020 (102)
------------- --------------- -------------- ---------------
LOSS BEFORE TAXES (1,535) (3,477) (5,344) (17,814)
------------- --------------- -------------- ---------------
Income taxes - - - -
------------- -------------- ------------- --------------
NET LOSS $ (1,535) $ (3,477) $ (5,344) $ (17,814)
============= ============== ============= ==============
Net loss per ordinary share
Basic and Diluted $ (0.12) $ (0.28) $ (0.43) $ (1.44)
============= ============== ============= ==============
Weighted average ordinary shares outstanding 12,366,871 12,366,808 12,366,829 12,366 808
============= ============== ============= ==============
See accompanying notes to unaudited consolidated financial statements.
3
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)
(UNAUDITED)
Nine Months Ended September 30,
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,344) $ (17,814)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization 4,249 4,213
Accretion of loan discount - 862
Stock compensation expense 463 463
Gain on sale of assets (2,743) -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, prepaid expense
and other assets 13,050 (5,220)
Decrease (increase) in inventories 6,162 (721)
(Decrease) increase in accounts payable and accrued liabilities (5,975) 3,185
Decrease in due to Elan Corporation, plc and subsidiaries (7,597) -
---------- ----------
Net cash provided by (used in) operating activities 2,265 (15,032)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 11,000 -
Purchase of fixed assets (337) (104)
---------- ----------
Net cash provided by (used in) investing activities 10,663 (104)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Working capital facility (repayment) proceeds, net (4,374) 5,661
Senior subordinated notes -- additional notes issued for
interest payment due April 30, 1999 768 -
Loan proceeds from Elan Corporation, plc - 58
Miscellaneous financing costs - (23)
Additional paid-in capital related to stock options 74 -
---------- ----------
Net cash (used in) provided by financing activities (3,532) 5,696
---------- ----------
Net increase (decrease) in cash and cash equivalents 9,396 (9,440)
Cash and cash equivalents, beginning of period 43,133 52,786
---------- ----------
Cash and cash equivalents, end of period $ 52,529 $ 43,346
========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
WARNER CHILCOTT PUBLIC LIMITED COMPANY
Notes to the Unaudited Consolidated Financial Statements
September 30, 1999
NOTE 1: BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. 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 (the "Company"
or "Warner Chilcott") 1998 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 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. For the Company, comprehensive loss is
comprised solely of net loss.
In the opinion of management, the financial statements reflect all adjustments
necessary for a fair statement of the operations for the interim periods
presented.
NOTE 2: 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, 1999 December 31, 1998
(in thousands of U.S. dollars)
----------------- ------------------
Raw materials $ 5 $ 1,897
Finishing supplies 1 3
Work in process - 932
Finished goods 4,872 11,597
---------- ----------
4,878 14,429
Less: Reserves for obsolescence 620 1,330
---------- ----------
Inventories $ 4,258 $ 13,099
========== ==========
NOTE 3: CO-PROMOTION AGREEMENTS
In July 1998, the Company entered into an agreement under which Warner Chilcott
promotes certain branded pharmaceutical products on behalf of Schering-Plough.
This agreement was amended as of January 1, 1999 to change the mix of products
to be promoted by Warner Chilcott and the means of calculating royalties earned
by Warner Chilcott based upon the performance of the promoted products.
5
In February 1999, the Company entered into an agreement under which Warner
Chilcott promotes certain branded pharmaceutical products on behalf of Bristol-
Myers Squibb.
Revenue earned by Warner Chilcott from these arrangements is included in the
Statement of Operations under the caption "Marketing alliance and other
revenue".
NOTE 4: ELAN AGREEMENTS
In March 1999, the Company reached a binding agreement with Elan Corporation,
plc under which Elan agreed to acquire Warner Chilcott'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 $3.0 million to Warner Chilcott and such amount was reported as
revenue in the first quarter of 1999 under the caption "Marketing alliance and
other revenue". In June 1999, the Company executed the definitive agreement
licensing the extended-release nifedipine product to Elan and received an
additional $4.0 million that was recorded as revenue in the second quarter of
1999. Under the agreement, additional license fees would be due to Warner
Chilcott upon the completion of certain milestones including FDA approval of the
pending ANDA for the product. Warner Chilcott would also be entitled to receive
royalties based upon revenues derived from the product. During the quarter ended
September 30, 1999, the Company did not recognize any additional fees or
royalties from this agreement.
In March 1999, the Company also reached a binding agreement with Elan under
which Elan re-acquired the marketing rights to an isosorbide-5-mononitrate
product ("IS5MN-PM") that Elan had been developing for Warner Chilcott. Under
terms of the agreement, as of March 31, 1999, Elan was obligated to make a
payment to Warner Chilcott in an amount equal to Warner Chilcott's remaining
contractual obligation relating to the development of IS5MN-PM. Such amount had
been carried by Warner Chilcott as an asset in "Prepaid expense and other
assets" and as a liability in "Due to Elan Corporation, plc and subsidiaries".
In concluding this transaction and reducing both the related asset and
liability, Warner Chilcott did not recognize an income statement effect.
NOTE 5: SALE OF VECTRIN(R)
During September 1999, the Company completed the sale of its Vectrin(R) branded
minocycline HCl product line including certain inventory, samples and the
related abbreviated new drug application (ANDA), and received $11.0 million in
cash. The Company reported a pre-tax gain of $2.7 million from the sale that is
included in the Statement of Operations under the caption "Other income - Gain
on sale of assets". The Company also earned royalties and milestone revenue
under the sale agreement during the third quarter 1999 and such amounts are
included in the Statement of Operations under the caption "Marketing alliance
and other revenue".
NOTE 6: NET LOSS PER ORDINARY SHARE
Basic net loss per ordinary share has been computed by dividing net loss
available to ordinary shareholders by the weighted average number of ordinary
shares outstanding during the period. Net loss and weighted average shares
outstanding used 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, 1999 and 1998. Stock options and warrants have not been included in the
calculation since the inclusion of such shares would be antidilutive.
6
NOTE 7: 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.
NOTE 8: 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. Warner Chilcott'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. The Company did not accrue any liability
for Federal income taxes in the three or nine months ended September 30, 1999
and 1998.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections. These forward-looking statements are subject to significant
risks and uncertainties, including those identified in the section of this Form
10-Q entitled "Factors That May Affect Future Operating Results" and in Warner
Chilcott Public Limited Company's (the "Company" or "Warner Chilcott") 1998
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. The forward-looking statements within this Form 10-Q
are identified by words such as "believes", "anticipates", "expects", "intends",
"may", "will" and other similar expressions. However, these words are not the
exclusive means of identifying such statements. In addition, any statements that
refer to expectations, projections or other characterizations of future events
or circumstances are forward-looking statements. The Company undertakes no
obligation to release publicly the results of any revisions to these forward-
looking statements that may be made to reflect events or circumstances occurring
subsequent to the filing of this Form 10-Q with the Securities and Exchange
Commission. Readers are urged to review and consider carefully the various
disclosures made by the Company in this report and in the Company's other
reports filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect the Company's
business.
Set forth below is the discussion of the financial condition and results of
operations of the Company for the three and nine months ended September 30, 1999
and 1998. This discussion should be read in conjunction with the consolidated
unaudited financial statements and the related notes, appearing in Item 1.
Overview
- --------
The Company is primarily engaged in the development, marketing, sale and
distribution of prescription pharmaceutical products in the United States. The
Company's current focus is on branded products targeted for three specialty
segments: women's health care, urology and cardiology. All of the Company's
branded products are promoted by the Company's sales force.
The Company currently markets 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 chewable prescription prenatal vitamin; Pyridium(R) Plus, a
urinary tract analgesic and antispasmodic agent used for irritative bladder
conditions; Doryx(R), a broad spectrum antibiotic; LoCholest(R), a lipid
regulator for the reduction of LDL cholesterol levels; Estrace(R) vaginal cream,
a hormone replacement product; Ovcon(R) 35, an oral contraceptive; K-Dur(R), a
sustained-release potassium supplement; NitroDur(R), a nitroglycerin patch for
the treatment of angina; and Lotrisone(R), a corticosteroid/antifungal cream.
NataFort(R), NataChew(TM), Pyridium(R) Plus, Doryx(R) and LoCholest(R) are
products owned by the Company. Estrace(R) vaginal cream and Ovcon(R) 35 are
products owned by Bristol-Myers Squibb and promoted by the Company under a
promotion agreement. K-Dur(R), NitroDur(R) and Lotrisone(R) are products owned
by Schering-Plough and promoted by the Company under a promotion agreement.
The Company plans to add additional products to its portfolio of branded
products through internal development, co-promotion agreements, in-licensing,
acquisition and development collaborations with other companies.
8
Revenue from the sale of branded products accounted for 45.1% and 25.0% of total
revenue for the nine months ended September 30, 1999 and 1998, respectively.
Marketing alliance revenue was first generated in the third quarter of 1998 and
accounted for 33.2% of total revenue for the nine months ended September 30,
1999 as compared to 17.9% for the 1998 period. Revenue associated with the sale
of non-differentiated generic products during the nine months ended September
30, 1999 accounted for 21.7% of total revenue, down from 57.1% in the 1998
period.
The foundation for the Company's future success is its sales and marketing
organization. The Company began to build its sales force in early 1997. During
1998, the Company's sales force grew from 175 professionals at year-end 1997 to
270 at the end of 1998. Through the third quarter of 1999 the Company's sales
force remained approximately the same in size as at year-end 1998. The Company's
target for its sales force is approximately 295 comprised of 255 representatives
in the Company's primary care sales force, 20 in the dermatology sales force and
20 in sales force management.
Future revenue growth will be dependent on the Company increasing the sales of
its existing portfolio of promoted products and adding new products through
acquisition, in-licensing, marketing alliances or self-development.
History
- -------
The Company is an Irish public limited company founded in 1992 as Nale
Laboratories Limited ("Nale"). In March 1996, Nale acquired certain assets and
assumed certain liabilities (the "Acquisition") of Warner Chilcott Laboratories,
a division of the Warner-Lambert Company (the "Division"). Following the
Acquisition, Nale changed its name to Warner Chilcott Public Limited Company.
The principal purpose of the Acquisition was to provide the Company with
channels of distribution for pharmaceutical products in the United States. The
Company also gained an established reputation in the pharmaceutical industry, a
portfolio of existing products, and a functioning organization. The Company's
customer base includes all major national wholesalers and pharmacy chains. The
assets and liabilities of the Division acquired in the Acquisition are now
organized in the United States as Warner Chilcott, Inc., a wholly-owned
subsidiary of Warner Chilcott Public Limited Company.
The Company's revenues are currently generated in the United States and the U.S.
dollar is the functional currency of the Company. Accordingly, the Company's
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, the Company will be subject to
taxation on its earnings in the jurisdictions in which it operates. At present,
such jurisdictions include Ireland and the United States.
Results of Operations
- ---------------------
Three months ended September 30, 1999 and 1998
Total revenues for the three months ended September 30, 1999 declined $1.4
million to $15.7 million as compared to $17.1 million for the year ago period.
Decreases in revenue from marketing alliances and generic sales were somewhat
offset by a significant increase in sales of branded products.
Branded product sales increased $6.0 million from the prior year and generated
sales of $9.1 million in the quarter compared to $3.1 million in the prior year.
NataFort(R), Doryx(R) and
9
Vectrin(R) sales all exceeded prior year results. Pyridium(R) Plus, launched in
the first quarter of 1999, also contributed to the increase in branded product
sales over the prior year. Sales of generic products decreased as the Company
continued to reduce its activities in this low margin area to focus on its
branded product portfolio.
Marketing alliance and other revenue declined $3.6 million to $4.2 million from
$7.8 million in the prior year primarily due to a decline in revenue under the
Company's co-promotion agreement with Schering-Plough. During the 1999 quarter,
the Company promoted K-Dur(R), NitroDur(R) and Lotrisone(R). In the year ago
quarter, the Company promoted Imdur(R) and K-Dur(R). The Company was able to
earn significantly greater revenues under the Imdur(R) and K-Dur agreement as
compared with the current agreement.
Gross profit on product sales increased $3.8 million to $5.2 million in the
third quarter 1999, compared to $1.3 million in the prior year. This increase
was primarily due to a 30.5% improvement in the gross profit margin on sales
from 14.5% in the 1998 quarter to 45.0% in the third quarter 1999. The improved
gross profit margin is attributable to a more favorable product mix with higher
margin branded products accounting for a greater percentage of total product
sales. Third quarter 1999 branded product sales accounted for 79.3% of total
product sales, while branded product sales in the year ago period represented
only 33.3% of total product sales.
Selling, general and administrative expenses increased by $1.0 million to $11.2
million from $10.2 million in the prior year primarily due to additional costs
associated with the expansion of the sales force from an average strength of 184
professionals in the 1998 quarter to 268 in the third quarter 1999. Promotional
activities for the recently launched Pyridium(R) Plus also contributed to the
increase in selling costs. General and administrative costs for the third
quarter 1999 were consistent with the prior year.
Research and development costs for the quarter of $0.8 million were consistent
with the third quarter 1998 reflecting the Company's continuing focus on
development projects with near-term revenue potential and relatively low funding
requirements. These projects include the development of line extensions for both
the Company's own branded products and for the oral contraceptive Ovcon(R) 35
under a license agreement with Bristol-Myers Squibb.
Interest income declined $0.1 million to $0.5 million due to a decrease in
average funds available for investing. Total interest expense for the third
quarter 1999 was consistent with the year ago period. The interest rate and
outstanding balance of the Company's senior subordinated notes increased as
compared to third quarter 1998, however, the resulting increased interest
expense was offset by a decrease in interest costs related to the Company's
working capital credit facility as the Company had less debt outstanding under
that facility during the 1999 period.
In the third quarter 1999, the Company recognized a gain of $2.7 million on the
sale of its Vectrin(R) minocycline HCl product line including certain inventory,
samples and the related abbreviated new drug application (ANDA). Royalty and
milestone revenues earned under the sale agreement in the third quarter 1999 are
reported separately under "Marketing alliance and other revenue".
The net result of the factors outlined above was that the net loss for the
quarter decreased to $1.5 million as compared to a net loss of $3.5 million for
the third quarter 1998. The improved contribution from sales of the Company's
own branded products combined with the gain on the sale of Vectrin(R), more than
offset the lesser revenues from the Schering-Plough agreement and
10
increased selling costs. The basic and diluted loss per ordinary share for the
quarter decreased to ($0.12) from ($0.28) on a similar number of shares
outstanding.
Nine months ended September 30, 1999 and 1998
Total revenue for the nine months ended September 30, 1999 advanced $12.9
million to $56.3 million as compared to $43.4 million in the prior year.
Significant increases in sales of the Company's branded products and revenues
from marketing alliances more than offset the decline in generic product sales.
Sales of branded products increased more than twofold to $25.4 million as
compared to $10.8 million in the year ago period. Branded products that
contributed to the growth included NataFort(R), Doryx(R) and Vectrin(R).
Pyridium(R) Plus was launched in the first quarter of 1999 and also contributed
to the increase in branded product sales. Sales of generic products declined
$12.6 million from the 1998 period as the Company continued to reduce its
activities in this lower margin business to focus more heavily on its branded
product portfolio.
Marketing alliance and other revenue totaled $18.7 million for the nine months
ended September 30, 1999, an increase of $10.9 million over prior year revenue
of $7.8 million. Contributing to this increase was $7.0 million of revenue
earned in the 1999 period in consideration of Warner Chilcott licensing its
marketing rights to an extended-release nifedipine product to Elan. Increased
revenue from the Schering-Plough promotion agreement also contributed to the
overall increase. However, the Company initiated its promotion of Schering-
Plough products beginning in the third quarter of 1998 and, therefore, earned
royalties from this activity for only three of the nine months ended September
30, 1998 compared with a full nine months in the 1999 period. The amount earned
by the Company in the third quarter 1999 under the Schering-Plough arrangement
was significantly less than was earned during the third quarter of 1998. Other
revenue earned in the 1999 period and not in 1998 included royalties earned from
Elan under a distribution agreement for IS5MN, and royalty/milestone revenue
related to the Company's sale of the Vectrin(R) product line in September 1999.
Gross profit on product sales increased $6.1 million to $15.5 million for the
nine months ended September 30, 1999, compared to $9.4 million in the prior
year. These favorable results are primarily due to a 14.8% improvement in the
gross profit margin on product sales from 26.5% in the 1998 period to 41.3% in
1999. The improved gross profit margin is attributable to a more favorable
product mix as 1999 branded product sales accounted for 67.5% of total product
sales as compared to 30.4% in the year ago period.
Selling, general and administrative expenses were up $6.5 million from $28.4
million in the year ago period compared with $34.9 million in 1999 due to the
Company's increased selling activities. Field selling costs increased as the
Company's sales force grew to an average strength of 265 during the 1999 period
as compared with 175 in 1998. Promotion costs also contributed to the increase,
including costs associated with the launch of Pyridium(R) Plus in the first
quarter 1999. General and administrative expenses were slightly higher in the
current period as compared to 1998 due to a modest increase in administrative
staff substantially offset by a decline in legal fees related to patent
litigation costs associated with the extended-release nifedipine product that
were no longer incurred by the Company after the first quarter 1999.
Research and development costs of $2.5 million were consistent with the prior
year period. Interest income decreased $0.4 million to $1.6 million due to a
decline in average funds available for investment. Interest expense increased
$0.2 million to $2.3 million due to the increased cost
11
of the Company's senior subordinated debt offset somewhat by decreased costs
related to the Company's working capital credit facility as the Company required
less credit toward the end of the 1999 period.
During the third quarter of 1999, the Company recognized a gain of $2.7 million
on the sale of its Vectrin(R) product line including certain inventory, samples
and the related abbreviated new drug application (ANDA). Royalty and milestone
revenues earned under the sale agreement during the 1999 period are reported
separately under "Marketing alliance and other revenue".
The net loss for the nine months ended September 30, 1999 was $5.3 million
compared to $17.8 million for the prior year. The main factors contributing to
the reduced loss were the increase in marketing alliance and other revenue,
improved gross profit on product sales and gain recognized on the sale of the
Vectrin(R) product line, partially offset by the higher field selling and
product promotion costs. The basic and diluted loss per ordinary share for the
nine months ended September 30, 1999 decreased to ($0.43) per share from ($1.44)
per share on a similar number of ordinary shares outstanding.
Factors That May Affect Future Operating Results
Following is a discussion of some of the risks and historical facts which should
be considered when evaluating the current and future results of the Company.
This discussion is not intended to include all risks and historical facts that
could produce adverse results.
The Company has a history of operating losses. Operating losses have been posted
since the formation of the Company in 1992. As of September 30, 1999, the
Company's accumulated deficit was $108.9 million. The Company has invested in
the corporate infrastructure and sales organization needed to support the
marketing and product development activities that management believes necessary
for the success of the Company. However, there can be no assurance that these
efforts will be sufficient, thus future profitability is uncertain.
The future capital needs and additional funding activities of the Company are
uncertain. Warner Chilcott has experienced negative cash flows from operations
and has funded its activities to date from the issuance of equity and debt
securities. The Company has expended, and will continue to be required to
expend, substantial funds for promotional activities for products, to continue
research and development of product candidates, to in-license and acquire
additional products and to undertake sales and marketing efforts of its current
or future products. Although the Company may seek additional funding through the
public or private capital markets, there can be no assurance that any such
funding will be available to the Company.
Intense competition exists within the pharmaceutical industry. Many companies,
some with greater financial, marketing and development capabilities than the
Company, are engaged in developing, marketing and selling products that compete
with the products offered by Warner Chilcott. Other products now in use or under
development by others may be more effective or have fewer side effects than the
Company's current or future products. The industry is characterized by rapid
technological change, and competitors may develop their products more rapidly
than the Company. Competitors may also be able to complete the regulatory
process sooner and, therefore, may begin to market their products in advance of
the Company's products. There can be no assurance that developments by others
will not render any product or technology the Company produces to be obsolete or
otherwise noncompetitive.
12
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 the Company, 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 the Company's 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 affect the Company's operations.
The Company depends on third parties for the manufacture of its current and
future products. Currently, the Company does not possess the facilities or
resources needed for these activities. The Company's strategy for development,
commercialization and manufacturing of certain of its products entails entering
into various arrangements with corporate collaborators, licensors and others. If
any of the Company's corporate collaborators were unable to satisfy their
contractual obligations to the Company, there can be no assurance that the
Company would be able to negotiate similar arrangements with other third
parties.
Many of the principal components of the Company's products are available only
from single source suppliers. There can be no assurance that the Company 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.
The Company is engaged in the manufacture and marketing of products that may
give rise to the development of certain legal actions and proceedings. The
Company carries 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 the Company manufactures and markets new products. The Company's
financial condition and results of operations could be materially adversely
affected by the unfavorable outcome of legal actions and proceedings.
Liquidity and Capital Resources
- -------------------------------
The Company ended the third quarter 1999 with $52.5 million of cash and cash
equivalents, an increase of $9.4 million over the balance at year-end 1998. The
cash flow from the net loss after adding back depreciation and amortization was
$1.1 million for the nine months ended September 30, 1999 as compared to $13.6
million in the prior year. In summary, the increase in cash and negative cash
flow from operations were funded by: (1) a significant decrease in investment in
working capital, (2) a modest increase in long term debt, and (3) the net
proceeds from the sale of Vectrin(R), offset in part by a reduction in the
amount due under the Company's working capital facility.
Accounts receivable declined $7.1 million from the year-end 1998 balance of
$18.0 million due to a reduction in the amount due the Company from Schering-
Plough, and decreased generic sales. The Schering-Plough agreement was modified
as of January 1, 1999 and revenue earned in the fourth quarter 1998 was
significantly larger than was earned in the third quarter 1999.
13
Royalties from this agreement are due quarterly and paid in arrears. The
Company's shift to a brand intensive product mix had a direct effect on accounts
receivable as the Company's branded products are sold under more favorable
terms. Generic product inventory is more costly as a percentage of sales than
that of the Company's branded products and, due to the Company's product mix
shift, inventory dropped considerably from year-end 1998 as compared to
September 30, 1999. The Vectrin(R) sale also contributed to the decline in
inventory from year-end 1998 as all inventory of Vectrin(R) was transferred to
Medicis in connection with the sale transaction.
The reduction in prepaid expenses and other current assets from year-end 1998 to
September 30, 1999 was primarily the result of the Company licensing its rights
to IS5MN-PM to Elan early in 1999. Included in prepaid expenses at December 31,
1998 was $4.5 million that represented the Company's development commitment to
the IS5MN-PM project. A corresponding amount was included as a liability under
the caption "Due to Elan Corporation, plc and subsidiaries". In connection with
the licensing of the IS5MN-PM rights to Elan, the prepaid amount and the related
liability were eliminated. A decrease in sample inventory related to the
Company's promotional activities and the Vectrin(R) sale also contributed to the
drop in prepaid expense and other current assets.
Accounts payable declined $6.1 million to $2.7 million at the end of the third
quarter 1999 from year-end 1998 due to the decreased investment in generic
inventory and the timing of certain generic inventory purchases. The amounts due
to Elan decreased as payment of amounts due to Elan, including the remaining
development obligation for IS5MN-PM discussed above, were processed during the
period. Accrued liabilities remained consistent with year-end 1998. These
factors resulted in a decline in current liabilities of $13.6 million from $22.8
million at year-end 1998.
As compared to year-end 1998, the Company's working capital facility debt
declined $4.4 million to $16.0 million at September 30, 1999. The Company
entered into this $30 million facility agreement on March 30, 1998 with a
syndicate of banks, led by PNC Business Credit, to fund a portion of its
investment in inventories and accounts receivable. Credit availability under the
PNC facility is based on the balances of certain inventory, accounts receivable
and other assets of Warner Chilcott, Inc., the Company's wholly-owned United
States operating subsidiary. As of September 30, 1999, an additional $6.7
million of potential borrowings was available to the Company.
The Company posted a loss for the nine months ended September 30, 1999 and
losses may continue throughout 1999 and beyond. In addition, the Company may
invest in additional working capital or make capital expenditures to support its
various business activities. Management believes the combination of the
Company's cash balances and availability under its working capital credit
facility provide Warner Chilcott with access to sufficient capital to meet its
requirements for at least the next two years. There can be no assurance,
however, that such funds will be sufficient. Beyond such period, and in the
absence of the Company generating cash from operations, the Company would need
to raise additional funds. The Company expects that it would seek additional
funding through public or private equity or debt financings or through
collaborations. To the extent the Company raises additional capital by issuing
equity securities, ownership dilution to existing shareholders will result and
future investors may be granted rights superior to those of existing
shareholders. There can be no assurance that additional funding will be
available on acceptable terms, or at all.
14
Inflation
- ---------
Inflation had no material impact on Warner Chilcott's operations during the
three months ended September 30, 1999.
Year 2000
- ---------
During 1997, the Company initiated a plan to identify, assess and remediate
"Year 2000" issues. This plan consists of three phases as follows: Phase I -
identification of all internal business critical systems and applications, key
vendors, and major customers. Although completed in June 1998, Phase I includes
the ongoing assessment of new vendors and customers as they become associated
with the Company's business activities. Phase II - assessment of Year 2000
compliance for all systems and activities identified in Phase I. Phase II was
completed by December 31, 1998. Phase III - remediation and/or development of
contingency plans for non-compliant systems and activities. Although all issues
requiring remediation or contingency plans have been addressed, the Company
continues to review its systems and contingency plans through the Year 2000
transition.
Primarily the finance, administration, billing, distribution and selling
operations of the Company's U.S. operating subsidiary rely on information
technology systems. Since the Acquisition in March 1996, the Company has put
into place new systems to replace those systems previously provided by
Warner-Lambert Company to the former Division. As a result, the Company's
computer systems and applications have been recently developed. Year 2000
upgrades of network software and hardware, and financial software are complete.
All internal business critical systems and applications are also Year 2000
compliant.
The Company has sent written inquiries to its key vendors and major customers as
to their progress in identifying and addressing Year 2000 compliance issues.
Those vendors and customers who have responded have reported that they expect to
be Year 2000 compliant well before the critical date.
The Company does not expect the costs associated with Year 2000 compliance to be
material. As of September 30, 1999, the Company incurred less than $100,000 in
the above mentioned system and application upgrades. These costs were paid from
available funds. The Company does not expect to incur additional costs of
significance and has not deferred information systems projects in order to
address Year 2000 issues.
The Company's most reasonably likely worst case scenario is an interruption in
the supply of products that the Company markets. Warner Chilcott heavily relies
on five third-party vendors to manufacture its portfolio of proprietary
products. In the event that any of these vendors' operations prove not to be
Year 2000 compliant, these vendors may not be able to supply the Company with a
continuous supply of products to sell, putting the Company's business operations
seriously at risk. During 1998 and 1999, the Company has closely monitored these
vendors' efforts to obtain Year 2000 compliance. All five of these vendors have
informed the Company that they are either compliant or will be compliant before
the critical date. In order to ease the possible impact of an interruption in
product manufacture and delivery, the Company has built up a two-month inventory
in accordance with its Disaster Recovery Plan. The Company believes that this
supply would enable the Company to continue operations while the vendor worked
to resume manufacturing.
The Company's operations also rely heavily on the ongoing supply of the
Schering-Plough products which the Company promotes, as well as
Schering-Plough's continuing ability to report
15
sales and, subsequently, compute royalties payable to Warner Chilcott. Schering-
Plough has informed the Company that they are Year 2000 compliant.
Warner Chilcott utilizes third-party vendors to perform additional functions
including, but not limited to, warehousing, distribution, billing services and
market research. Critical vendors have provided the Company with written
confirmation of their anticipation of Year 2000 compliance.
Based on the Company's assessment efforts to date, the Company believes that
Year 2000 issues will not be disruptive to its operations, nor have a material
adverse effect on its financial condition or results of operations. The
Company's beliefs and expectations, however, are based on certain assumptions
and expectations that ultimately may prove to be inaccurate. There can be no
assurance that the failure to ensure Year 2000 compliance by a third party would
not have a material adverse effect on the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about Warner Chilcott's exposure in market risk of
financial instruments contains forward-looking statements. Actual results may
differ materially from those described.
The Company's 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. Warner Chilcott does not invest in portfolio equity
securities or commodities or use financial derivatives for trading purposes.
Warner Chilcott's debt security portfolio represents funds held temporarily
pending use in the Company's business and operations. The Company manages these
funds accordingly. Warner Chilcott seeks reasonable assuredness of the safety of
principal and market liquidity by investing in fixed rate income securities
while at the same time seeking to achieve a favorable rate of return. Warner
Chilcott's market risk exposure consists principally of exposure to changes in
interest rates. The Company's holdings are also exposed to the risks of changes
in the credit quality of issuers. Warner Chilcott invests in the shorter-end of
the maturity spectrum, and at September 30, 1999, 100% of such holdings mature
in one year or less.
The Company has long-term senior subordinated notes outstanding. As of October
25, 1998, the discount on these notes had been fully amortized and the note
began to accrue interest at a rate of 16.8%. The Company believes that the fair
value of the senior subordinated notes approximates the carrying value. While
changes in market interest rates may affect the fair value of the senior
subordinated notes, management does not believe that the impact, if any, of
reasonably possible near term changes in the fair value of such notes is likely
to have a material impact on the Company's financial statements.
The Company also has long-term debt outstanding under its working capital credit
facility. Borrowings under the credit facility are subject to market-driven
variable lending rates. The Company has not purchased interest rate derivative
contracts to fix the interest rate on any portion of the debt outstanding under
the facility. Accordingly, management believes that the fair value of the
long-term debt outstanding under the facility approximates the carrying value
and that near-term changes in interest rates would have little, if any, impact
on the fair value of this debt.
16
Part II - Other Information
Item 1. Legal Proceedings
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business, including product liability claims.
On July 1, 1999 the U.S. Court of Appeals for the Federal Circuit, which has
jurisdiction of appeals in patent cases, affirmed a decision by the U.S.
District Court for the Northern District of Illinois in which the District Court
held invalid Abbott Laboratories' U.S. Patent on anhydrous terazosin
hydrochloride (the " `207 patent"), Abbott Laboratories v. Geneva
Pharmaceuticals, et al., Dkt. Nos. 98-1593, - 1594, - 1595. Although the Company
is not a party to that action, it was the defendant in a separate action in the
same District Court, in which Abbott alleged that the Company had infringed the
`207 patent by filing an application with the Food and Drug Administration
("F.D.A.") for approval to market anhydrous terazosin chloride. Abbott
Laboratories v. Warner Chilcott. Because that action was pending, F.D.A. was
precluded by law from approving the Company's application for thirty months.
Based on the District Court's decision in Abbott v. Geneva Pharmaceuticals the
District Court entered summary judgment in favor of the Company in Abbott v.
Warner Chilcott again holding the patent invalid. The decision by the Court of
Appeals affirming the invalidity of the patent in Abbott v. Geneva thus has the
effect of affirming the invalidity of the patent in Abbott v. Warner Chilcott as
well. Subject to any rights any of the defendants in Abbott v. Geneva may have
under the Hatch-Waxman Act to a 180-day statutory period of marketing
exclusivity, the Court of Appeals' decision ends the statutory period in which
F.D.A. was statutorily barred from approving the Company's application. Abbott's
counsel have indicated that Abbott intends to ask the Court of Appeals to
reconsider its decision and, if that application is not successful, Abbott may
seek review of the Court of Appeals' decision in the Supreme Court.
There have been no other significant developments in the proceedings described
in the Company's 1998 Annual Report on Form 10-K filed with the Securities and
Exchange Commission, and the Company has not become involved in any additional
material proceedings.
Item 5. Other Information
Pursuant to newly adopted rules of the Securities and Exchange Commission, any
Company shareholder who intends to present a proposal at the Company's Annual
General Meeting of Shareholders in 2000 without requesting that the Company
include such proposal in the Company's proxy materials should be aware that he
or she must notify the Company no later than January 25, 2000 of his or her
intention to present such proposal. Otherwise, the Company may exercise
discretionary voting with respect to such shareholder proposal pursuant to
authority conferred on the Company by proxies delivered to the Company in
connection with the meeting.
17
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - The following exhibits are filed with this document:
Exhibit No. Description
- ----------- -----------
10.1 Asset Purchase Agreement between Warner Chilcott, Inc. and
Medicis Pharmaceutical Corporation, dated September 14, 1999 *
27 Financial Data Schedule
____________
* Confidential material has been omitted from this exhibit and filed separately
with the SEC pursuant to a request for confidential treatment.
b. Reports on Form 8-K:
No report was filed during the three months ended September 30, 1999.
18
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
WARNER CHILCOTT PUBLIC LIMITED COMPANY
(Registrant)
November 9, 1999 /s/ Paul S. Herendeen
-------------------------
Paul S. Herendeen
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
November 9, 1999 /s/ David G. Kelly
------------------
David G. Kelly
Group Vice President, Finance
(Principal Accounting Officer)
19