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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 potential outcomes and commercial implications of clinical trials
related to products under development by the Company;
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
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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;
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
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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:
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
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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 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
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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 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 actively seeking to 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
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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
thereb 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,
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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.
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) and disclosed
the results in Part I, Item 3 of the current Form 10-Q. 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
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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 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.
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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 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
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decreases. Because of the foregoing reasons, recent trends should not be
considered reliable indicators of future stock prices or financial results.