Exhibit 99.1
RISK FACTORS
You should carefully consider the risks below before making a decision
to invest in our common stock or senior subordinated notes. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
may also impair our business operations. If any of the following risks actually
occurs, our business, financial condition or results of future operations could
be materially and adversely affected, the trading price of our securities could
decline, and you may lose all or part of your investment.
This report also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this report.
RISKS RELATING TO OUR BUSINESS
WE HAVE RECENTLY TRANSITIONED OUR COMPANY TO A SPECIALTY PHARMACEUTICAL COMPANY
WITH CHALLENGES AND RISKS THAT WE HAVE NOT HISTORICALLY FACED.
Our decision to commercialize branded products through our
pharmaceutical products ("Pharmaceutical") business unit represents a change in
our business with new challenges. We have only one years' experience in
acquiring, marketing and promoting branded products. In the past, we generally
partnered with customers in development projects, sharing the risk that the
project would be unsuccessful. We anticipate that the integration of our
acquired products will require significant management attention and expansion of
our sales force. In order to effectively manage our acquisitions, we must
maintain adequate operational, financial and management information systems and
motivate and manage an increasing number of employees. In addition, our acquired
branded products may generate lower-than-expected sales or need to be
reformulated. They may be subject to manufacturing delays, product shortages or
shut-downs due to FDA oversight and regulation, or product liability claims or
recalls. In addition, although we have thus far relied on a contract sales force
provided by a national pharmaceutical sales organization, we recently terminated
this arrangement and have begun hiring and managing our sales force. Moreover,
we plan to significantly expand our sales force during 2002. We have not
previously managed a sales force of this size. Our business, financial condition
and results of operations could be materially and adversely affected if we are
unable to meet these challenges associated with our new specialty pharmaceutical
business.
WE MAY INCUR SUBSTANTIAL EXPENSE TO DEVELOP PRODUCTS THAT WE NEVER SUCCESSFULLY
COMMERCIALIZE.
We will incur substantial research and development expenses, and other
expenses, attempting to develop new or improved products or product line
extensions. These expenses will substantially exceed our prior research and
development expenses. The products or line
extensions to which we devote operational and financial resources could be
commercial failures. Successful commercialization of products and product line
extensions requires accurate anticipation of market and customer acceptance of
particular products, customers' needs and emerging technological trends, among
other things. Additionally, we must complete many complex formulation and
analytical testing requirements and obtain regulatory approvals from the Food
and Drug Administration, or FDA, and other regulatory agencies. When developed,
new or reformulated drugs may not exhibit desired characteristics. Complications
can also arise during production scale-up. Our products and line extensions may
encounter unexpected, unresolvable patent conflicts or not have enforceable
intellectual property rights. Delays or problems also may arise from internal
conflicts for resource availability, personnel errors or equipment failures. In
addition, our rights to use proprietary technologies of others in developing
products may be terminated or limited prior to the completion of the development
of a particular product, which could prevent us from commercializing that
product. If we incur significant expenses for a product or line extension that
we do not successfully commercialize, there could be a material adverse effect
on our business, financial condition and results of operations.
OUR ACQUISITION STRATEGY COULD HAVE A MATERIAL AND ADVERSE EFFECT ON US.
We have increased our net revenues and net income through acquisitions
of branded products, and we intend to pursue additional acquisition
opportunities. The acquisition prices that we pay for branded products are based
upon many factors, including our analysis of sales history, cost of goods sold,
manufacturing and supply sources, marketing potential, brand strength,
competition and product improvement opportunities. While we carefully analyze
the prices that we pay, we may have overpaid, or may in the future overpay, for
a branded product line that may not produce sufficient cash flow to repay our
debt, including indebtedness incurred in connection with the acquisition, or
provide an acceptable rate of return on our investment.
Our growth strategy is dependent upon our ability to develop line
extensions or improvements related to our acquired branded products and acquire
branded products that can be promoted through our marketing and distribution
channels. Despite our strong relationships with many large pharmaceutical
companies which are our customers, other companies, including those with
substantially greater financial, marketing and sales resources, are competing
with us to acquire the same products. As a result, we may not be able to acquire
rights to additional products or may pay too much when we acquire them.
Additionally, our acquisitions will be dependent upon our ability to
obtain necessary financing. Our senior credit facilities and senior subordinated
notes limit our ability to obtain additional debt financing. Difficulties
encountered in developing line extensions or improvements to acquired products
may delay and increase the cost of a development project, requiring additional
external funding. Events beyond our control, such as terrorist attacks and their
aftermath, may adversely affect capital markets and limit our ability to obtain
the equity or debt financing that we would need to pursue additional product
line acquisitions. The inability to effect acquisitions of additional branded
products could have a material adverse effect on our future business, financial
condition and results of operations.
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WE ARE DEPENDENT ON THIRD PARTIES FOR ESSENTIAL BUSINESS FUNCTIONS, AND PROBLEMS
WITH THESE THIRD-PARTY ARRANGEMENTS COULD MATERIALLY ADVERSELY AFFECT OUR
ABILITY TO MANUFACTURE AND SELL PRODUCTS AND OUR BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
We are dependent on third parties for the manufacture of our products.
We have entered into agreements with third parties for many of our product
manufacturing requirements. Our manufacturing dependence upon third parties may
adversely affect our profit margins and our ability to deliver our products on a
timely and competitive basis. If we are unable to retain or replace third-party
manufacturers on commercially acceptable terms, we may not be able to distribute
our products as planned. If we encounter delays or difficulties with contract
manufacturers in producing or packaging our products, the distribution,
marketing and subsequent sales of these products would be adversely affected,
and we may have to seek alternative sources of supply, lose sales or abandon or
divest a product line on unsatisfactory terms. We may be unable to enter into
alternative supply arrangements at commercially acceptable rates on a timely
basis, if at all. The manufacturers that we utilize may not be able to provide
us with sufficient quantities of our products, and the products supplied to us
may not meet our specifications. Moreover, our contract manufacturers may not
comply with regulatory requirements and keep their facilities validated and in
good working order. Manufacturing at these facilities can be suspended and
halted for lengthy periods of time by the FDA if these manufacturers do not
comply with regulatory requirements. Additionally, modifications, enhancements
or changes in manufacturing sites of approved products are subject to FDA
approval that we may or may not be able to obtain and that may be subject to a
lengthy application process.
Our acquired products are subject to interim supply agreements, each
with terms generally not exceeding three years. After expiration of these
contracts, our manufacturing costs could be higher and the move of the
manufacturing of any of our products will cause us to incur significant start-up
costs associated with that move. Additionally, any move of the manufacturing
site of any of these products would require FDA approval of the new
manufacturing facility. FDA approval, however, is not within our control, and we
may not receive it for a long time, if at all.
We are dependent on third parties for the supply of critical raw
materials. Sales of our products are dependent on our ability to obtain
FDA-approved supplies of raw materials, including active and inactive
pharmaceutical ingredients, and packaging materials, at commercially acceptable
prices and terms, in time to satisfy critical product development, testing,
analytical and manufacturing activities, customer contracts, or our development
plans. Generally, there are limited suppliers, and in most cases only one
supplier, of a critical raw material. The FDA must approve the supply source of
many ingredients for our products. The qualification of a new supply source
could delay the manufacture of the drug involved. Arrangements with our foreign
suppliers are subject to certain additional risks, including the availability of
governmental clearances, export duties, political instability, currency
fluctuations and restrictions on the transfer of funds. Any constraints on the
supply of raw materials could materially and adversely affect our business,
financial condition and results of operations.
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We use, and are dependent on, a contract distribution program. We have
contracted with Integrated Commercialization Solutions, Inc., a national
pharmaceutical product distribution company, to provide warehousing, product
distribution, inventory tracking, customer service and financial administrative
assistance related to our distribution program. The Integrated Commercialization
Solutions contract may be terminated by either party with 180 days' written
notice, and we provided notice of termination of this agreement in May with an
effective date in November. We are in the process of negotiating a contract for
the provision of warehousing, product distribution, inventory tracking, customer
service and financial administrative assistance services. We are dependent on
the capabilities of this third party to distribute our products effectively and
interact with our customers. We do not have extensive experience performing
these functions ourselves and may suffer significant disruption if we have to do
so or find alternative providers. The failure to adequately support our
distribution efforts or effectively manage our relationships with customers
could have a material adverse effect on our business, financial condition and
results of operations.
WE ENCOUNTER AGGRESSIVE COMPETITION IN ALL AREAS OF OUR BUSINESS.
The pharmaceutical industry is highly competitive and innovative. Our
branded products are in competition with branded products marketed and promoted
by many other pharmaceutical companies, including large, fully integrated
companies with financial, marketing, legal and product development resources
substantially greater than ours. Additional competitors may emerge to compete
directly with us for acquisitions of branded product lines, any of which could
materially adversely affect our ability to successfully make additional
acquisitions of branded product lines or our ability to sell our products on a
successful basis. We also compete with pharmaceutical companies in developing,
marketing and promoting our own internally developed pharmaceutical products.
Because the sales prices of pharmaceutical products typically decline as
competition increases, this competition could materially adversely affect us.
Our branded products are subject to generic competition. There is no
proprietary protection for most of the branded pharmaceutical products that we
sell, and as a result our branded pharmaceutical products are or may become
subject to competition from generic substitutes. These generic substitutes for
our branded products are sold by competitors at significantly lower prices than
branded products, due to the significantly lower costs associated with them.
These generic products may be precisely identical, in every respect, to the
higher-priced branded drugs we sell. In addition, governmental and other
pressures, including from third-party payers such as health maintenance
organizations, or HMOs, and health insurers to reduce pharmaceutical costs may
result in physicians or pharmacies increasingly using generic substitutes for
our products. Further, Congress is currently considering legislation that would,
if enacted, reduce regulatory obstacles to approval of generic products.
Additional state and federal legislation may be considered in the future that
would adversely affect sales of branded pharmaceutical products in favor of
generic products, such as laws more broadly mandating substitution of generic
products for prescriptions written for branded products. Competition from
generic products or additional legislation or regulatory developments favoring
generic products could cause the revenues from our branded products to decrease
significantly and could have a material and adverse effect on our business,
financial condition and results of operations.
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In addition, consideration of legislative or regulatory changes that favor
generic products or press reports of possible changes may adversely affect the
trading price of our common stock.
Newly developed branded products could adversely affect the
commercially valuable life of our products. The rapid product development and
technological changes occurring in the pharmaceutical industry could render our
branded products obsolete or uneconomical. New drugs to treat the conditions
addressed by our products could emerge. For example, we believe that sales of
Darvon and Darvocet-N decreased significantly in the early and mid-1990s, due to
the introduction of Oxycontin and the COX-2 class of drugs, which were thought
to be superior to Darvon and Darvocet-N. In fact, companies that sell or have
sold us a particular product line could be developing a competing product line
to replace the line they are selling or have sold to us. Our competitors also
may be able to complete the product regulatory approval process before us and,
therefore, begin marketing their products in advance of our products.
Additionally, technological advances, which could affect the efficacy, approval,
cost, production or marketing of products, could benefit our competitors without
similarly aiding us. Our business, financial condition and results of operations
could be materially and adversely affected by any one or more of these
developments.
Our fee-for-service business is subject to increasing competitive
pressures. We are also subject to the impact of marketplace actions of our
competitors in our fee-for-service business. For example, in the event of
business difficulties or changes in market supply and demand for products, a
competitor may decide to slash its prices or take other pricing or market
actions in order to obtain new business at any price. These actions could
disrupt the entire marketplace, resulting in potential reduced revenues, either
from responsive pricing reductions or a reduction in customer contracts. This
could adversely affect our business, financial condition and results of
operations.
WE MAY BE UNABLE TO OBTAIN GOVERNMENT APPROVAL FOR OUR PRODUCTS OR COMPLY WITH
GOVERNMENT REGULATIONS RELATING TO OUR BUSINESS.
The commercialization of pharmaceutical products is subject to
extensive federal, state and local regulation in the United States and similar
foreign regulation. We do not know the extent to which we may be affected by
legislative and other regulatory actions and developments concerning various
aspects of our operations, our products and the health care field generally. We
do not know what effect changes in governmental regulation and other actions or
decisions by governmental agencies may have on our business in the future. Any
changes could require changes to manufacturing methods or facilities, expanded
or different labeling, new approvals, the recall, replacement or discontinuance
of certain products, additional record keeping, and expanded documentation of
the properties of certain products and scientific substantiation. Any regulatory
changes could have a material adverse effect on our business, financial
condition and results of operations or our competitive position.
The manufacturing, processing, formulation, packaging, labeling,
distribution, importation, pricing, reimbursement and advertising of our
products, and disposal of waste products arising from these activities, are also
subject to regulation by the Drug Enforcement Administration, the Federal Trade
Commission, the Consumer Product Safety Commission, the U.S. Department of
Agriculture, the Occupational Safety and Health Administration, the U.S.
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Environmental Protection Agency, the U.S. Customs Service and the Centers for
Medicare and Medicaid Services, as well as state, local and foreign governments.
We are required to obtain approval from the FDA based upon pre-clinical
testing, clinical trials showing safety and effectiveness, chemistry and
manufacturing control data, and other data and information before marketing most
drug products. The generation of the required data is regulated by the FDA and
can be time-consuming and expensive, and the results might not justify approval.
Our FDA product filings may not be approved in a timely manner, if at all, and
we may be unable to meet other regulatory requirements for our products.
Pharmaceutical products also must be distributed, sampled, advertised and
promoted in accordance with FDA requirements.
Even if we are successful in obtaining all required pre-marketing
approvals, post-marketing requirements and our failure to comply with other
regulations could result in suspension or limitation of approvals. The FDA could
also require reformulation of products during the post-marketing stage. For
example, prior to our acquisition of the M.V.I. and Aquasol product lines, the
FDA determined that M.V.I.-12, an adult multivitamin injectable product, must be
reformulated (along with other similar adult multivitamin products) to include
higher doses of Vitamins B1, B6, C and folic acid and to add Vitamin K. Our
formulation development laboratory has been working closely with AstraZeneca on
this reformulation, and we are hopeful that FDA approval of the reformulation
can be obtained by the end of this year or early next year, although this
approval could take longer and may never be obtained.
All of our drugs must be manufactured in conformity with current Good
Manufacturing Practice regulations, as interpreted and enforced by the FDA, and
drug products subject to an FDA-approved application must be manufactured,
processed, packaged, held and labeled in accordance with information contained
in the application. Additionally, modifications, enhancements or changes in
manufacturing sites of approved products are, in many circumstances, subject to
FDA approval, which may be subject to a lengthy application process or which we
may be unable to obtain. Our facilities, including the facilities used in our
fee-for-service business, and those of our third-party manufacturers are
periodically subject to inspection by the FDA and other governmental agencies,
and operations at these facilities could be interrupted or halted if such
inspections are unsatisfactory.
Failure to comply with FDA or other governmental regulations can result
in fines, unanticipated compliance expenditures, recall or seizure of products,
total or partial suspension of production or distribution, suspension of the
FDA's review of our product applications, termination of ongoing research,
disqualification of data for submission to regulatory authorities, enforcement
actions, injunctions and criminal prosecution. Under certain circumstances, the
FDA also has the authority to revoke previously granted drug approvals. Although
we have instituted internal compliance programs, if our compliance is deficient
in any significant way, it could have a material adverse effect on us. Most of
our suppliers are subject to similar regulations and periodic inspections.
The federal health care program antikickback statute makes it illegal
for anyone to knowingly and willfully make or receive "kickbacks" in return for
any health care item or service
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reimbursed under any federally financed healthcare program. This statute applies
to arrangements between pharmaceutical companies and the persons to whom they
market, promote, sell and distribute their products. Federal false claims laws
prohibit any person from knowingly making a false claim to the federal
government for payment. Recently, several pharmaceutical companies have been
prosecuted under these laws, even though they did not submit claims to
government healthcare programs. The prosecutors alleged that they were inflating
drug prices they report to pricing services, which are in turn used by the
government to set Medicare and Medicaid reimbursement rates. Pharmaceutical
companies also have been prosecuted under these laws for allegedly providing
free products to customers with the expectation that the customers would bill
federal programs for the products.
Additionally, the majority of states have laws similar to the federal
antikickback law and false claims laws. Sanctions under these federal and state
laws include monetary penalties, exclusion from reimbursement for products under
government programs, criminal fines and imprisonment. While we have internal
policies and practices requiring and detailing compliance with the health care
fraud and abuse laws and false claims laws, it is possible that some of our
business practices could be subject to challenge under one or more of these
laws, which could have a material adverse effect on our business, financial
condition and results of operations. Additionally, our business involves the
controlled storage, use and disposal of hazardous or highly potent materials and
biological hazardous materials. We are subject to numerous environmental laws
and regulations in the jurisdictions in which we operate. Although we believe
that our safety procedures for handling and disposing of these hazardous
materials comply in all material respects with the standards prescribed by law
and regulation in each of our locations, the risk of accidental contamination or
injury from hazardous materials cannot be completely eliminated. In the event of
an accident, we could be held liable to governmental authorities or private
parties for any damages that result, and the liability could exceed our
resources. In addition, we may be held liable for costs associated with
contamination of our currently or formerly occupied properties, or at other
parties' disposal sites where we disposed of hazardous wastes, even though this
contamination may have been caused by third parties or the disposal may have
complied with the regulatory requirements then in place. Current or future
environmental laws and regulations, or adverse changes in the way current laws
and regulations are interpreted or enforced, may materially adversely affect our
business, financial condition and results of operations. We maintain liability
insurance for some environmental risks that our management believes to be
appropriate and in accordance with industry practice. However, we may incur
liabilities beyond the limits or outside the coverage of our insurance and may
not be able to maintain insurance on acceptable terms.
In connection with our activities outside the U.S., we are subject to
foreign regulatory requirements governing the testing, approval, manufacture,
labeling, marketing and sale of pharmaceutical products. These requirements vary
from country to country. Even if FDA approval has been obtained for a product,
approval by comparable regulatory authorities of foreign countries must be
obtained prior to marketing the product in those countries. For example, some of
our foreign operations are subject to regulations by the European Medicines
Evaluations Agency and the U.K. Medicines Control Agency. The approval process
may be more or less rigorous from country to country, and the time required for
approval may be longer or shorter than that required in the U.S. Clinical
studies conducted outside of any particular
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country may not be accepted by that country, and the approval of a
pharmaceutical product in one country does not assure that the product will be
approved in another country. In addition, regulatory agency approval of pricing
ixs required in many countries and may be required for our marketing of any drug
in those countries.
WE ARE VULNERABLE TO PRESSURES FROM THIRD-PARTY PAYERS.
Our commercial success in product sales will depend on patients being
reimbursed by third-party health care payers, such as government and private
health insurers and managed care organizations. Third-party payers are
increasingly challenging the pricing of medical products and services. For
example, third-party payers strenuously discourage use of branded products such
as ours when generic substitutes are available. As a result, reimbursement may
not be available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product acquisition and development. If
adequate reimbursement levels are not provided, our business, financial
condition and results of operations could be materially and adversely affected.
The market for our products may be limited by actions of third-party
payers. For example, many managed health care organizations are now limiting the
pharmaceutical products that are on their lists of approved drugs. The resulting
competition among pharmaceutical companies to place their products on these
formulary lists has created a trend of downward pricing pressure in the
industry. In addition, many managed care organizations are pursuing various ways
to reduce pharmaceutical costs and are considering formulary contracts primarily
with those pharmaceutical companies that can offer a broad line of products for
a given class of therapy or disease, which we cannot do. Our products may not be
included on the approved drug list of managed care organizations, and downward
pricing pressures in the industry generally could materially and adversely
impact our business, financial condition and results of operations.
Additionally, a number of legislative and regulatory proposals aimed at
reducing the costs of medical products and services have been enacted or
proposed. For example, President Bush's administration has recently proposed a
program that would give Medicare beneficiaries the right to purchase a discount
card for a nominal fee. The discount card would entitle the purchaser to receive
pre-negotiated discounts on certain prescription drugs. Additionally, certain
state governments have enacted legislation that seeks to reduce the price paid
by Medicaid recipients for prescription drugs. In Florida, pharmaceutical
companies that sell to state Medicaid programs are now required to offer rebates
in addition to the already discounted prices mandated by federal law, and a new
program in Michigan is designed to force pharmaceutical companies to reduce the
prices of their prescription drugs to be placed on the state's preferred list of
drugs eligible for Medicaid reimbursement. A number of states are considering
additional legislation and other measures that would, if enacted, further
adversely affect revenues from the sale of branded drugs, for example, through
limits on the purchase of branded drugs by state institutions and restrictions
on reimbursement for branded drugs in programs subject to state jurisdiction.
Additionally, several large pharmaceutical companies have recently adopted
discount plans for the elderly. Our business, financial condition and results of
operations could be materially and adversely affected if recently established or
future legislative or regulatory
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programs that are designed to reduce the costs of medical products and services
are effective or require consumers to use generic substitutes for our branded
products.
OUR SUCCESS IS DEPENDENT UPON A LIMITED NUMBER OF KEY PRODUCT LINES, WHICH MEANS
THAT ANY UNFAVORABLE DEVELOPMENTS WITH RESPECT TO ANY ONE PRODUCT LINE COULD
MATERIALLY AND ADVERSELY AFFECT US.
We have a significant investment in a limited number of key product
lines. Each of our branded product lines, and particularly Darvon and
Darvocet-N, will represent a significant portion of our total product sales for
the foreseeable future. On a pro forma basis as if we had completed the product
line acquisition on January 1, 2001, sales of Darvon and Darvocet-N would have
represented 26% of our net revenues and 37% of our gross margin dollars for
2001. Accordingly, any factor adversely affecting sales of any of our branded
products, such as any problem with their safety or efficacy, could have a
material adverse effect on our business, financial condition and results of
operations. In addition, any perceived problems with our products could have a
similar material adverse effect. We are aware of press and consumer advocate
reports challenging the safety of Darvon and Darvocet-N, alleging that these
products are addictive, not effective and have caused fatalities in the case of
overdoses. Challenges to the safety and efficacy of Darvon and Darvocet-N could
have a material adverse effect on our business, financial condition and results
of operations.
CONSOLIDATION OF OUR DISTRIBUTION NETWORK FOR PHARMACEUTICAL PRODUCTS COULD
RESULT IN REDUCED PRODUCT PURCHASES AND INCREASED PRODUCT RETURNS BY OUR
CUSTOMERS.
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. These large,
well-established distributors are our Pharmaceutical business unit's primary
customers. We anticipate that as our Pharmaceutical business unit's business
expands, some of these wholesalers and distributors may become significant
customers accounting for 10% or more of our consolidated net revenues. We have
experienced concentration of business in our other business units in the past,
and in 2001 and 2000 the same customer and its affiliates accounted for
approximately 15% of our consolidated net revenues. This consolidation trend
could cause our distributors to stop carrying or reduce their inventory levels
of our products, return our products or reduce our product offerings. For
example, many pharmacies do not carry Darvon and Darvocet-N, instead carrying
only generic substitutes. Additionally, there could be negative developments
with any of these distributors or any of them could have financial difficulties.
Any of these factors could have a material adverse effect on our business,
financial condition and results of operations.
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THE PRO FORMA INFORMATION INCLUDED IN THIS REPORT IS BASED ON ESTIMATES AND
ASSUMPTIONS AND MAY NOT NECESSARILY BE INDICATIVE OF OUR ACTUAL REVENUES AND
COSTS.
The pro forma financial information included in this report is based
upon the historical financial information for the Darvon and Darvocet-N product
lines and on estimated costs to be incurred by our Pharmaceutical business unit
for selling, general and administrative, and research and development expenses.
While we believe that our assumptions are reasonable, our actual costs may not
be the same. Additionally, we will probably move manufacturing of our products
to new sites. This will involve costs and require FDA approval of the new
manufacturing facilities. We may not receive this FDA approval for a long time,
if at all. Our pro forma financial information, which use the prices in our
supply agreements, do not include or estimate the possibility of these higher
costs. Therefore, this pro forma financial information does not represent what
our results of operations would actually have been if the events described
therein had in fact occurred on the date indicated or project our results of
operations for any future period. For all these reasons, investors should not
place undue reliance on the pro forma financial data contained in this report.
PRODUCT LIABILITY CLAIMS OR PRODUCT RECALLS COULD HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
We face an inherent business risk of exposure to product liability
claims in the event that the use of our products is alleged to have resulted in
adverse effects. Such risks will exist even with respect to those products that
receive regulatory approval for commercial sale. While we take what we believe
are appropriate precautions, we may not be able to avoid significant product
liability exposure. We currently have product liability insurance in the amount
of $10 million for aggregate annual claims. This insurance is subject to
significant limitations, including a $100,000 deductible per incident, among
other things. This level of insurance coverage, however, may not be sufficient
to cover all potential claims against us or involving our products. Also,
adequate insurance coverage may not be available in the future at acceptable
costs, if at all. When we acquire or develop new products, we cannot assure you
that additional liability insurance coverage for these new products will be
available on acceptable terms, if at all. Although we have yet to face a product
liability claim, the assertion of this type of claim could have a material
adverse affect on our business, financial condition and results of operations.
Product recalls may be issued at our discretion or at the discretion of
the FDA, other government agencies or others having regulatory authority for
pharmaceutical product sales. Any product recall could materially adversely
affect our business, financial condition and results of operations.
WE MAY BE UNABLE TO SECURE OR ENFORCE ADEQUATE INTELLECTUAL PROPERTY RIGHTS TO
PROTECT THE NEW PRODUCTS OR TECHNOLOGIES WE DEVELOP, AND OUR EXISTING
INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATE TO PROTECT US OR PROVIDE US
WITH A COMPETITIVE ADVANTAGE.
Our ability to successfully commercialize new branded products or
technologies is dependent upon our ability to secure and enforce strong
intellectual property rights, generally
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patents, and we may be unable to do so. To obtain patent protection we must be
able to successfully persuade the U.S. Patent and Trademark Office and its
foreign counterparts to issue patents on a timely basis and possibly in the face
of third party challenges. Even if we are granted a patent, our rights may later
be challenged or circumvented by third parties. The issuance of a patent is not
conclusive as to its validity or enforceability. In addition, from time to time,
we have received notices from third parties regarding patent claims against us.
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 us to incur significant expenses. In addition, any potential intellectual
property litigation could require that we stop selling our products, obtain a
license from the owner to sell or use the relevant intellectual property, which
we may not be able to obtain on favorable terms, if at all, or modify our
products to avoid using the relevant intellectual property. In the event of a
successful claim of infringement against us, our business, financial condition
and results of operations could be materially and adversely affected.
Additionally, we also rely on trade secrets and other unprotected
proprietary knowledge, which we generally seek to protect by confidentiality,
non-disclosure and assignment of invention agreements with our employees,
consultants, licensees and other companies. These agreements, however, may be
breached, may not be enforceable or we may not have adequate remedies for a
breach by the other party. Additionally, our trade secrets may become known by
our competitors. Parties to those agreements may claim rights to intellectual
property arising out of their work. The disclosure or misappropriation of our
intellectual property for any of these reasons could materially and adversely
affect our business, financial condition or results of operations.
WE DEPEND ON KEY PERSONNEL.
We are highly dependent on key personnel, and the loss of any of them,
particularly Frederick D. Sancilio, Ph.D., our Executive Chairman and Chief
Scientific Officer, would be disruptive and could materially and adversely
affect our business and prospects for success. Although we believe that we are
adequately staffed in key positions and that we will be successful in retaining
skilled and experienced management, operational and scientific personnel, we
cannot assure you that we will be able to attract and retain such personnel on
acceptable terms. The loss of the services of key scientific, technical and
management personnel could have a material adverse effect on us, especially in
light of our recent growth. We do not maintain key-person life insurance on, or
have any employment agreements with, any of our executives other than Dr.
Sancilio.
A SIGNIFICANT PORTION OF OUR FACILITIES ARE LOCATED IN AREAS SUSCEPTIBLE TO
HURRICANES AND MAJOR STORM DAMAGE.
A significant portion of our research and development facilities, our
corporate headquarters and other critical business operations and some of our
key suppliers are located in geographic areas that have had, and are likely to
continue to have, hurricanes and major storms. Although we maintain business
interruption and other insurance coverage, this coverage is
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subject to significant limitations and deductibles and may not be sufficient to
offset the impact to our operations and infrastructure caused by future
hurricanes and storms.
RISKS RELATED TO OUR STOCK PRICE AND CORPORATE CONTROL
OUR EXECUTIVE OFFICERS AND DIRECTORS AND ENTITIES AFFILIATED WITH THEM, WHOSE
INTERESTS MAY DIFFER FROM OTHER STOCKHOLDERS, WILL HAVE THE ABILITY TO EXERCISE
SIGNIFICANT CONTROL OVER US.
Our executive officers, directors and entities affiliated with them
will, as a group, beneficially owned more than 50% our common stock as of the
date of June 30, 2002. Dr. Sancilio individually owned approximately 23% of our
common stock. These stockholders, particularly Dr. Sancilio, will be able to
exercise significant influence over all matters requiring approval by our
stockholders, including the election of directors and the approval of
significant corporate transactions, including a change of control of our
company. The interests of these stockholders may differ from the interests of
our other stockholders.
FUTURE SALES OF COMMON STOCK BY OUR PRINCIPAL STOCKHOLDERS MAY CAUSE OUR STOCK
PRICE TO DECLINE.
These stockholders are free to sell these shares, subject to the volume
limitations of Rule 144 under the Securities Act of 1933 and any lock-up
agreement that they may enter into with the underwriters of our proposed equity
offering. Some of these stockholders have registration rights under our
investors' agreement. We cannot predict when any of these stockholders may sell
their shares or in what volumes. However, the market price of our common stock
could decline significantly if these stockholders sell a large number of shares
into the public market or if the market believes that these sales may occur.
OUR STOCK PRICE MAY BE VOLATILE AND MAY DECLINE.
Our stock price has been volatile in the past, due, in part, to low
trading volume and the small percentage of our outstanding common stock held by
public investors. From January 1, 2000 through June 30, 2002, our stock price
has ranged from a low trading price of $6.31 per share to a high trading price
of $39.99 per share. Our stock price may continue to be volatile after this
offering. The market price of our common stock may also be affected by our
ability to meet analysts' and investors' expectations. Failure to meet these
expectations, even slightly, could cause the market price of our common stock to
fall significantly.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, WHICH COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could deter or prevent a change in control of our
company or our management that stockholders may consider favorable or
beneficial. These provisions could discourage proxy contests and make it more
difficult for you and other stockholders to elect directors and take other
corporate actions. These provisions could also limit the price that investors
might be willing to pay in the future for shares of our common stock. These
provisions, which may be
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amended only upon recommendation by our board of directors and approval by our
stockholders include:
- a staggered board of directors, so that it would take three
successive annual meetings to replace all directors;
- authorization of special meetings of stockholders only upon a
call by the board of directors;
- authorization to issue "blank check" preferred stock, which is
preferred stock that can be created and issued by the board of
directors without prior stockholder approval, with rights
senior to our common stockholders;
- prohibition on stockholder action by written consent; and -
advance notice requirements for the submission by stockholders
of nominations for election to the board of directors and for
proposing matters that can be acted upon by stockholders at a
meeting.
In addition, our senior credit facilities and senior subordinated notes
could deter a change of control that our stockholders consider favorable or
beneficial. A change of control of our company constitutes an event of default
under our senior credit facilities, and upon a change of control, we are
required to offer to repay all of our outstanding senior subordinated notes. Our
senior credit facilities, however, prevent us from repaying any of these notes
prior to repaying all obligations under our senior credit facilities. As of June
30, 2002, we had approximately $310 million outstanding, including the current
portion, under these debt agreements.
RISKS RELATING TO OUR CAPITALIZATION
OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR CASH FLOW AND PREVENT US FROM
FULFILLING OUR OBLIGATIONS.
We have a significant amount of debt and will continue to have a
significant amount of debt following the completion of this offering and the use
of the net proceeds to repay a portion of our debt. We may have more debt in the
future. We have not had this level of debt in the past. Our substantial amount
of debt could have important consequences to you. For example, it:
- will make it more difficult for us to satisfy our obligations
under our senior credit facilities and senior subordinated
notes;
- will increase our vulnerability to general adverse economic
and industry conditions and adverse changes in governmental
regulations;
- will require us to dedicate a substantial portion of our cash
flow from operations to make payments on our debt, reducing
the availability of our cash flow to fund future capital
expenditures, working capital, execution of our growth
strategy, research and development costs and other general
corporate requirements;
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- could limit our flexibility in planning for, or reacting to,
changes in our business and the pharmaceutical industry, which
may place us at a competitive disadvantage compared with
competitors that have less debt; and
- could limit our ability to borrow additional funds, even when
necessary to maintain adequate liquidity.
The terms of our senior credit facilities and senior subordinated notes
allow us to incur substantial amounts of additional debt, subject to certain
limitations. We might incur additional debt for various reasons, particularly to
pay for the additional product line acquisitions that we may make for our
Pharmaceutical business unit.
TO SERVICE OUR DEBT, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH, WHICH MAY NOT
BE AVAILABLE TO US.
Our ability to make payments on or refinance our debt will depend
largely upon our future operating performance. Our future operating performance
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. We cannot assure you that our
business will generate cash flow from operations in an amount sufficient to
enable us to pay our debt or to fund our other liquidity needs. For example, in
1999 we had a loss from operations of $8.8 million and net cash used in
operating activities of $12.7 million. If we are unable to generate sufficient
cash flow to meet our debt service requirements, we may have to renegotiate the
terms of our debt. We cannot assure you that we will be able to repay or
refinance any of our debt, including our senior credit facilities or senior
subordinated notes, on commercially reasonable terms or at all. If we were
unable to refinance our debt or obtain new financing under these circumstances,
we would have to consider other options, such as:
- sales of certain assets to meet our debt service obligations;
- sales of equity; and
- negotiations with our lenders to restructure the applicable
debt.
However, these options may not be feasible or prove adequate. Our
credit agreement and the indenture may restrict, or market or business
conditions may limit, our ability to do some of these things.
THE FINANCING AGREEMENTS GOVERNING OUR DEBT, INCLUDING OUR SENIOR CREDIT
FACILITIES AND SENIOR SUBORDINATED NOTES, CONTAIN VARIOUS COVENANTS THAT LIMIT
OUR DISCRETION IN THE OPERATION OF OUR BUSINESS AND COULD LEAD TO ACCELERATION
OF DEBT.
Our existing financing agreements impose operating and financial
restrictions on our activities. These restrictions require us to comply with or
maintain certain financial tests and ratios, and limit or prohibit our ability
to, among other things:
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- incur additional debt and issue preferred stock;
- create liens;
- redeem and/or prepay certain debt;
- sell capital stock of subsidiaries or other assets;
- make certain investments;
- enter new lines of business;
- engage in consolidations, mergers and acquisitions;
- make certain capital expenditures; and - pay dividends and
make other distributions.
These restrictions on our ability to operate our business could
seriously harm our business by, among other things, limiting our ability to take
advantage of financing, merger and acquisition and other corporate
opportunities.
Various risks, uncertainties and events beyond our control could affect
our ability to comply with these covenants and maintain the financial tests and
ratios required by some of the instruments governing our financing arrangements.
Failure to comply with any of the covenants in our financing agreements could
result in a default under those agreements and under other agreements containing
cross-default provisions. A default would permit lenders to accelerate the
maturity of the debt under these agreements and to foreclose upon any collateral
securing that debt. Under these circumstances, we might not have sufficient
funds or other resources to satisfy all of our obligations, including our
obligations under our senior credit facilities and senior subordinated notes. In
addition, the limitations imposed by these financing agreements on our ability
to incur additional debt and to take other actions might significantly impair
our ability to obtain other financing. We may not be able to obtain future
waivers or amendments, if necessary.
RISKS RELATING TO OUR SENIOR SUBORDINATED NOTES
PAYMENTS ON THE NOTES MAY BE ADVERSELY AFFECTED BY THE RIGHTS OF OUR SENIOR
CREDITORS.
Our senior subordinated notes and the related guarantees are general
unsecured obligations, junior in right of payment to all existing and future
senior debt. As a result, upon any distribution to our creditors in a
bankruptcy, liquidation or reorganization or similar proceeding relating to us,
the holders of our senior debt will be entitled to be paid in full in cash
before any payment may be made on the notes. Our existing senior debt is also
secured by virtually all of our assets except for the assets of our foreign
subsidiaries and one-third of their capital stock. Therefore our senior lenders
will also have priority with respect to the assets
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securing their loans. The indenture governing our senior subordinated notes
provides that all debt we may incur can be senior and secured.
In the event of a bankruptcy or similar proceeding relating to us,
holders of the notes will participate ratably with all of our general unsecured
creditors. However, because the indenture requires that, until all of our senior
debt is repaid, amounts otherwise payable to holders of the notes in a
bankruptcy or similar proceeding be paid to holders of senior debt instead,
holders of the notes may receive less, ratably, than our other general unsecured
creditors in any such proceeding. In these cases, we may not have sufficient
funds to pay all of our creditors, including the holders of the notes.
The subordination provisions of the indenture also provide that, in
most circumstances, we may not make payment to you during the continuance of
payment defaults on our senior debt, and payments to you may be suspended for a
period of up to 179 days if a nonpayment default exists under our senior debt.
FEDERAL AND STATE LAWS PERMIT A COURT TO VOID THE SUBSIDIARY GUARANTEES UNDER
CERTAIN CIRCUMSTANCES
The guarantee of the notes by our domestic restricted subsidiaries will
be subject to review under federal or state fraudulent transfer laws if the
guarantors are called upon to pay under the guarantees. While the relevant laws
vary from state to state, under such laws, generally the issuance of a guarantee
will be a fraudulent conveyance if (1) any of our subsidiaries issued subsidiary
guarantees with the intent of hindering, delaying or defrauding creditors, or
(2) the subsidiary guarantors received less than reasonably equivalent value or
fair consideration in return for issuing their respective guarantees, and, in
the case of (2) only, one of the following is also true:
- any of the subsidiary guarantors were insolvent, or became
insolvent, when they paid the consideration;
- issuing the guarantees left the applicable subsidiary
guarantor with an unreasonably small amount of capital; or
- the applicable subsidiary guarantor intended to, or believed
that it would, be unable to pay debts as they matured.
If the issuance of any guarantee were a fraudulent conveyance, a court
could, among other things, void any of our subsidiary guarantor's obligations
under its respective guarantee and require the repayment of any amounts paid
under the guarantee.
Generally, an entity will be considered insolvent if:
- the sum of its debts is greater than the fair value of its
property;
- the present fair value of its assets is less than the amount
that it will be required to pay on its existing debts as they
become due; or
- it cannot pay its debts as they become due.
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Circumstance (2) identified above will be applicable to most of the
guarantors because they will not receive anything in return for guaranteeing the
notes.
NOT ALL OF OUR SUBSIDIARIES GUARANTEE OUR OBLIGATIONS UNDER THE NOTES, AND THE
ASSETS OF THE NON-GUARANTOR SUBSIDIARIES MAY NOT BE AVAILABLE TO MAKE PAYMENTS
ON THE NOTES.
Our foreign subsidiaries are not guarantors of the notes. Our present
and future domestic restricted subsidiaries of which we own 80% or more of the
diluted equity interests guarantee the notes. Payments on the notes are only
required to be made by us and the subsidiary guarantors, but no payments are
required to be made from assets of other subsidiaries. In addition, our
consolidated financial statements included in this report are presented on a
consolidated basis, including all of our foreign subsidiaries. Our non-guarantor
subsidiaries had net revenues of $3.5 million in the second quarter of 2002, or
5.7% of our total net revenues. There is no specific limitation in the indenture
on our ability to transfer assets to non-guarantor subsidiaries.
In the event of a bankruptcy, liquidation or reorganization of any of
our non-guarantor subsidiaries, their creditors, including trade creditors, will
generally be entitled to payment of their claims from the assets of those
subsidiaries before any assets are made available for distribution to us. As a
result, the notes are effectively subordinated to the indebtedness of these
non-guarantor subsidiaries. As of June 30, 2002, the total liabilities or our
non-guarantor subsidiaries, excluding intercompany liabilities, were $6.0
million.
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