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Exhibit 99.1
RISK FACTORS
Key risk factors that may have a direct bearing on the Company's results,
performance and financial condition include:
o the Company's ability to successfully develop, on its own
behalf and on behalf of its customers, and timely and
successfully commercialize, launch and sell new and improved
pharmaceutical products and services;
o the ability and willingness of the Company's customers to
successfully commercialize, launch and sell new and improved
pharmaceutical products in which the Company has an economic
interest;
o the Company's ability to successfully enter into and perform
beneficial royalty, milestone and fee-for-service agreements
with pharmaceutical companies;
o the introduction and sale of new or modified pharmaceutical
products and technologies by other companies that affect the
demand for pharmaceutical products and services in which AAI
has a financial interest, either directly or through sales to,
or royalties, milestones or other fees to be received from,
AAI's customers and marketing partners;
o the Company's success in obtaining timely regulatory approvals
of the Company's internally developed products and to obtain
other regulatory approvals and regulatorily acceptable
governmental audits and inspections of the Company's
facilities, records and other regulated activities;
o our ability to hire and retain adequate numbers of qualified
employees;
o industry outsourcing trends and volumes;
o changes in economic and market conditions that impact the
demand for the Company's products and services;
o our ability to obtain suitable types and quantities of raw
materials, excipients and active pharmaceutical ingredients
used to develop, improve or manufacture products, at
commercially viable prices;
o federal, state and foreign regulatory and legal changes and
developments that impact the pharmaceutical industry and those
companies developing or providing services and products to the
pharmaceutical industry, including the Company, as well as the
outcome of related judicial cases involving or affecting the
industry or such companies, including any such changes,
developments or judicial cases pertaining to FDA or other
regulatory, environmental, health and safety matters;
o changes in tariffs and import/export controls and
restrictions;
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o account receivable collection by the Company, and bankruptcy,
insolvency or impaired ability by the Company's customers to
pay amounts owed to the Company, in full and on a timely
basis;
o risks inherent in international operations, including, e.g.,
possible economic, political, military, trade restraints or
restrictions, monetary, or currency instabilities or
developments affecting the United States, Canada, the European
Union and its member states, the People's Republic of China,
Turkey and Argentina, among others;
o the effects of vigorous competition and/or mergers and
acquisitions in the pharmaceutical industry and those
companies developing or providing services and products to the
pharmaceutical industry;
o changes in interpretations and application of generally
accepted accounting practices and policy standards by
regulatory and accounting bodies that may cause the Company's
reported financial results to differ from anticipated results;
o the concurrence of the Internal Revenue Service and state and
foreign taxation agencies with the Company's interpretation
and application of the applicable tax laws and regulations to
the Company's operations and financial results, including in
the Company's tax filings and returns;
o the Company's ability to successfully persuade the U.S. Patent
and Trademark Office and its foreign counterparts to issue
patents with strong claims, on a timely basis, and to enforce
such issued patents against infringing companies;
o the outcome of any government reviews, investigations, claims
or challenges that may arise with respect to the contracts,
asset and stock sales and acquisitions, mergers, and joint
ventures of or involving the Company;
o our ability to successfully find and complete advantageous
acquisitions, joint ventures and mergers, including, e.g., our
ability to accurately identify and assess the value,
strengths, weaknesses, synergies, contingent and other
liabilities and potential profitability of acquisition or
merger candidate or of joint ventures and to successfully
integrate acquired or merged operations into the operations of
the Company; and
o the compliance by the Company's customers, suppliers,
licensors, licensees or other third parties with which the
Company has contractual relations, with their contractual
obligations to the Company, as well as the Company's ability
to enforce such obligations through litigation, arbitration,
mediation or other dispute resolution efforts.
Discussion of Risk Factors in the Pharmaceutical Industry. The Company believes
that the pharmaceutical industry in which it currently operates through its
development and commercialization of new and improved pharmaceutical products
and services holds tremendous opportunities for companies successful in
competing in that industry. At the same time, the Company is aware of what it
takes to be successful in this industry and the risk factors associated with the
industry.
In order to assist our stockholders in better understanding the risk factors in
the pharmaceutical industry, the Company is taking this opportunity to summarize
and discuss them:
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COMPETITION. The Company encounters aggressive competition in all areas
of its business. Our competitors are numerous, ranging from large
pharmaceutical companies to many smaller specialized firms. AAI
competes primarily on the basis of innovation, ability to obtain
regulatory approvals successfully and at early dates, technology and
patents, a sophisticated understanding of chemistry, finding and
developing novel chemical opportunities with respect to new or existing
pharmaceutical products, service performance, price, quality,
reliability, and customer service and support.
Product opportunities frequently arise as innovator drugs approach the
end of their patent lives. These include both product life cycle
management (PLCM) activities to extend the product franchise life
cycles for innovator pharmaceutical firms and to engage in generic
product development. Developing new or improved drug products is
complex and difficult, both technically and from a regulatory
standpoint. Commercial success and viability depends on whether (and
how many) other companies are developing new or improved competing
drugs or generic equivalents to innovator drugs, which companies
receive the earliest regulatory approvals to market the competing or
generic products, and differences in the competing products'
characteristics, effectiveness, safety, stability and side effects
profiles. The product development process requires, often years in
advance, accurate anticipation of market and customer acceptance of
particular products, customers' needs, emerging technological trends,
and a timely ability to complete successfully many dependent and
complex chemistry, analytical, testing and regulatory approval
requirements. When developed, new formulations may not accomplish
desired delivery, clinical or product stability characteristics, and
new or reformulated drugs may not have acceptable safety,
effectiveness, stability or side effect profiles. Complications can
also arise during production scale-up and/or developing or using
acceptable analytical methodologies that materially affect the
commercial or technical viability of a new or improved product. New or
improved products can also encounter unexpected unresolvable patent
conflicts. Delays or problems may also arise from internal conflicts
for resource availability, personnel errors or equipment failures.
Pharmaceutical product development life cycles are long (typically
several years) with substantial risks of failure in any of the
development and clinical testing phases. The windows of opportunity to
develop and commercialize such products open and close quickly with
regulatory and market developments. To remain competitive, the Company
must develop or license new and improved products, find, develop and
commercialize PLCM opportunities for innovator drugs whose patent
protection is soon to expire or generic products, periodically enhance
its existing products and services, and compete effectively on the
basis of the factors described above.
The Company is also subject to the impact of marketplace actions of its
competitors. For example, in the event of business difficulties faced by a major
competitor, the competitor may decide to slash its prices or take other pricing
or market actions in order to obtain new business at any price, thereby
disrupting the entire marketplace for pricing and obtaining of new business for
the Company and other marketplace participants. There can be no assurance that
disruptive actions by the Company's competitors will not occur or affect the
Company's financial results or business operations.
SELECTION AND INVESTMENT IN NEW RESEARCH AND DEVELOPMENT PROJECTS. The
Company seeks to select new or improved products and services to work
on in its judgment of those that may yield strong commercial success
for the Company, in light of its then-available resources, technical
capabilities and alternatives. However, in light of the multi-year
product development cycle times, the Company must make long-term
investments in its research and
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development projects and commit significant resources before knowing
whether its predictions will eventually result in products that achieve
customer and market acceptance and success.
MARKETING OF NEW AND IMPROVED PRODUCTS AND SERVICES. After a new or
improved pharmaceutical product or service is successfully developed,
the Company must either find a pharmaceutical marketing partner and
successfully enter into a profitable license and distribution agreement
or seek to sell the product or service through its own sales force.
Commercial success by the Company depends on our ability to create and
maintain such effective marketing channels.
MANUFACTURING OBLIGATIONS. Frequently, the Company has related
manufacturing obligations that require it to manufacture sufficient
volumes of marketable product at acceptable costs. This is a process
that requires accurate forecasting of costs, volumes and mix of
products and service estimates. Moreover, the supply and timing of a
new product or service must match customers' demand and timing for the
particular product or service. Given the wide variety of products and
services the Company offers and is developing, the process of planning
production and projecting profitable cost charges is difficult.
INTELLECTUAL PROPERTY. The Company generally relies upon patent,
copyright, trademark and trade secret laws in the United States and in
selected other countries to establish and maintain its proprietary
rights in its intellectual property, technology and products. However,
there can be no assurance that any of the Company's proprietary rights
will not be challenged, invalidated or circumvented, or that any such
rights will provide significant competitive advantages. Moreover,
because of the rapid pace of technological change in the pharmaceutical
industry, many of the Company's products rely on key technologies
developed by itself or others that may be obsoleted at any time. There
can be no assurance that the Company will be able to continue to
develop or obtain licenses to necessary technologies. In addition, from
time to time, the Company receives notices from third parties regarding
patent claims. Any such claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert
management's attention and resources and cause the Company to incur
significant expenses. In the event of a successful claim of
infringement against the Company and failure or inability of the
Company to license the infringed technology or to substitute similar
non-infringing technology, the Company's business could be adversely
affected. The Company also routinely enters into confidential
disclosure agreements with third parties and customers that restrict
the disclosure and/or use of the Company's intellectual property,
including its confidential and proprietary information, disclosed to
such third parties. Failure of such third-parties to honor their
confidentiality and non-use obligations owed to AAI can materially harm
the Company.
RELIANCE ON SUPPLIERS. The Company's operations are dependent on our
ability to obtain suppliers of quality raw materials, excipients and
active pharmaceutical ingredients at commercially acceptable prices and
terms, in time to satisfy critical product development, testing,
analytical and manufacturing activities, customer contracts, or the
development plans of the Company. The Company from time to time
experiences constrained timely and cost-effective supplies of such
desired materials. Such constraints, if persistent or widespread, may
adversely affect the Company's operating results until resolved or
alternate sourcing can be developed.
DEVELOPMENT OF DIRECT SALES OF NICHE PHARMACEUTICAL PRODUCTS. The
Company is currently planning the development of its own distribution
channels for certain "niche" pharmaceutical
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products not intended to conflict with products being sold by the
Company's customers. The Company is in the process of developing its
own, and seeking to identify and buy from third parties,
non-conflicting "niche" pharmaceutical products. There is no assurance
that such distribution channels can be successfully developed, that
such products can be successfully identified, acquired or developed, or
that the Company's customers may not react adversely to such marketing
efforts by the Company. The Company's operational and financial results
could be materially and adversely affected due to any such adverse
reactions.
INTERNATIONAL. Sales outside the United States make up a significant
portion of the Company's revenues. In addition, a significant portion
of the Company's facilities and personnel, along with key customers and
suppliers, are located outside the United States. Accordingly, the
Company's future results could be adversely affected by a variety of
factors, including changes in a specific country's or region's
political conditions or changes or continued weakness in economic
conditions, trade protection measures, import or export licensing
requirements, facility or ownership interest nationalization, the
overlap of different tax structures, unexpected changes in regulatory
requirements, military conflicts or actions, and natural disasters.
MANAGEMENT AND SKILLED PERSONNEL. As with any technological company,
the Company's operations require adequate numbers of skilled scientific
and technical personnel, as well as strong management and sales
capabilities, to be successful. Such personnel are in strong demand by
many other companies and the Company's personnel are frequently hired
away by other companies. Retaining skilled personnel, and hiring
replacements, are critical to the Company's success. There can be no
assurance that the loss of key personnel, whether to other companies or
to accident, illness, death, injury or retirement, will not occur at a
time or in a manner that will not disrupt or delay key projects and
activities of the Company and thereby adversely affect our operations
or financial results.
DEMANDS OF GROWTH. In recent years, the Company has been growing in
size and complexity of operations. An organization bears many burdens
organizationally caused by such growth, including, among others,
successfully improving, increasing and changing the financial,
information technology, operational, personnel-related and other
systems, policies and practices of the organization and the
organizational structure of the business and its management, as well as
finding and hiring the appropriate people for new or changed positions.
The Company believes that it is presently meeting the challenges of
growth, but any failure or inability to meet such challenges, or to
successfully create, maintain or use such systems, policies or
practices, can materially and adversely affect the operations and
financial result of the Company.
LITIGATION, INVESTIGATIONS AND CLAIMS. Any company, including AAI,
always faces the risk of potential litigation being brought against it
in the course of its business operations. By their nature, litigation,
pre-litigation investigations and controversies, and claim demands
occur when disputes arise between two parties, or between a party and a
government agency, as to whether legal obligations are owed or
breached. These are often difficult or impossible to predict, avoid or
mitigate in advance. When they occur, litigation, investigations and
claim demands may be based on either valid or unfounded claims. In
either case, however, litigation typically seeks substantial amounts of
money and/or injunctive relief and involve substantial legal fees and
expenses, and pre-litigation investigations and claim demands
frequently involve major costs and diversions of management and
personnel time and attention, which, in each case, can materially and
adversely affect the Company's operations or financial results.
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CREDITWORTHINESS AND CONTRACT COMPLIANCE OF CUSTOMERS. The magnitude of
the Company's contracts are often substantial in comparison to the
Company's size. While many of the Company's customers are large and
well-funded pharmaceutical companies, others are small (or are
"virtual" companies) with substantially less resources which can run
into financial or operational difficulties from time to time. In the
event that a customer with a significant contract with the Company runs
into financial or credit difficulties, declares bankruptcy, becomes
insolvent or otherwise is unable or unwilling to pay monies owed to the
Company on a timely basis or otherwise honor its obligations under such
a contract, the Company could be materially and adversely affected.
DERIVATIVE FINANCIAL INSTRUMENTS. As is common with companies operating
internationally, the Company is exposed to foreign currency exchange
rate risk inherent in its contracts, business dealings, and assets and
liabilities denominated in currencies other than the U.S. dollar, as
well as interest rate risk inherent in the Company's debt, investment
and accounts receivable portfolio. The Company's risk management
strategy utilizes derivative financial instruments, including forwards
and swaps, to hedge certain foreign currency and interest rate
exposures, with the intent of offsetting gains and losses that occur on
the underlying exposures with gains and losses on the derivative
contracts hedging them. The Company does not enter into derivatives for
trading purposes.
The Company has performed a sensitivity analysis assuming a
hypothetical adverse movement of 10% in foreign exchange rates and 1% in
interest rates (applied to variable rate debt and leases tied to interest
rates). As of March 31, 2000, the analysis indicated that such hypothetical
market movements would have an effect of lowering operating results year-to-date
by approximately $244,000 due to the exchange rate and annual interest rate
expense would increase by approximately $288,000 or $72,000 a quarter. Actual
gains and losses in the future may differ materially from that analysis,
however, based on changes in the timing and amount of interest rate and foreign
currency exchange rate movements and the Company's actual exposures and hedges.
ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES.
From time to time, the Company engages in discussions with a variety of
parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. The implementation or integration of a
transaction may contribute to the Company's results differing from the
investment community's expectation in a given quarter. Divestitures may
result in the cancellation of orders and charges to earnings.
Acquisitions and strategic alliances may require, among other things,
integration or coordination with a different company culture,
management team organization and business infrastructure. They may also
require the development, manufacture and marketing of product offerings
that enhance or detract from the performance of the combined business
or product line. Depending on the size and complexity of the
transaction, successful integration depends on a variety of factors,
including the hiring and retention of key employees, management of
geographically separate facilities, and the integration or coordination
of different research and development and product manufacturing
facilities. All of these efforts require varying levels of management
resources, which may temporarily adversely impact other business
operations.
HURRICANES. A significant portion of the Company's research and
development activities, its corporate headquarters, and other critical
business operations and certain of its suppliers are located in
geographic areas that have had, and are likely to continue to have,
hurricanes and major storms. To mitigate this risk, the Company
maintains certain levels of business interruption and other insurance
coverage. However, the ultimate impact on the Company, its
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operations and its infrastructure of future hurricanes and storms
cannot be foreseen or controlled at this time.
DRUG ENFORCEMENT AGENCY ("DEA") REGULATION. Certain of the Company's
development, testing and other activities are subject to the Controlled
Substances Act, administered by the Drug Enforcement Agency (the
"DEA"), which regulates strictly all narcotic and habit-forming
substances. The Company maintains separate, restricted-access
facilities and heightened control procedures for projects involving
such substances due to the level of security and other controls
required by the DEA. Any failure or inability by the Company to comply
with such Act and regulations could materially and adversely affect the
business, operations and financial results of the Company.
ENVIRONMENTAL AND HAZARDOUS MATERIALS IN THE WORKPLACE. Certain of the
Company's operations involve the use of substances regulated under
various federal, state, local, and international laws governing the
environment. Moreover, the Company's activities involve the controlled
use of hazardous materials and chemicals. The Company is subject to
federal, state and local laws and regulations governing the use,
storage, handling and disposal of such materials and certain waste
products. In the event of an accident, discharges (e.g., to the
groundwater or air) or other non-compliance, the Company could be held
liable for any damages that result, including damages or injuries,
including deaths, to persons, property or the environment, which could
materially and adversely affect the financial condition and operations
of the Company.
PROFIT MARGIN. The profit margins realized by the Company vary among
its products and services, its customers, its competitive situation,
and its geographic areas of operation. Consequently, the overall
profitability of the Company's operations in any given period is
partially dependent on the product, service, customer and geographic
mix, and competitive situation, reflected in that period's net sales.
CHANGES IN LAWS AND REGULATIONS. The Company operates in a highly
regulated business. Failure or inability to comply with the laws and
regulations applicable to our business would materially and adversely
affect the Company's business and financial results. Moreover, these
laws and regulations and governmental interpretations and applications
thereof, both in the United States and in foreign countries, change
over time. The Company can give no assurance that the laws and
regulations applicable to our business will not change, or be
interpreted or re-interpreted by governmental agencies or bodies, in
ways harmful to the Company and its financial results and business
operations.
CREDIT FACILITIES AND AVAILABILITY OF CASH. The Company is dependent on
its bank relationships and credit facilities to provide cash and
funding for Company operations. In the event of any future disruption
or limitation in such relationships or facilities, any decision by the
Company's banks to terminate, reduce or impose limitations on our
credit facilities or to exercise rights to impose restrictions or
declare breaches under banking contract provisions, any decisions by
the Company's banks to collect on any assets of the Company as
collateral for such lending facilities, or in the event that the
Company requires more cash than is available to it under such credit
facilities, the Company's operations and financial condition could be
materially and adversely affected.
FLUCTUATIONS AND VOLATILITY OF STOCK PRICES. In the pharmaceutical
industry, future revenue and margin trends cannot be reliably predicted
and may cause the Company to adjust its
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operations, which could cause period-to-period fluctuations in
operating results. The Company's stock price, like that of other small
pharmaceutical companies, is subject to significant volatility. The
announcement of new products, services, technological innovations or
business developments by the Company or its competitors, quarterly or
annual variations in the Company's results of operations, changes in
revenue or earnings estimates by the investment community, and
speculation in the press, Internet web sites or investment community
are among the factors affecting the Company's stock price. In addition,
the stock price may be affected by general market conditions and
domestic and international macroeconomic factors unrelated to the
Company's performance. Moreover, major potential contracts or business
arrangements being negotiated or pursued by the Company frequently
occur late in given financial quarters or years. Any failure or
inability by the Company in achieving, or even brief delays in
implementing, potential licensing, product life cycle management,
product development and other major contracts or arrangements being
pursued or negotiated by the Company can, and from time to time does,
move the financial and sales impact of expected or planned sales and
contracts from one accounting period to another or prevent them from
being booked at all. Such delays or inabilities are difficult or
impossible to predict or control and can materially and adversely
affect quarterly or annual revenues and profitability, which can
materially and adversely affect the price of the Company's stock. In
addition, typical trading volumes in the Company stock are thin, so
that the purchase or sale of relatively small amounts of the Company
stock and announcements of Company-related news and developments can
materially affect the price of such stock, either through increases or
decreases. Because of the foregoing reasons, recent trends should not
be considered reliable indicators of future stock prices or financial
results.