1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File NO. 0-15242
DURAMED PHARMACEUTICALS, INC.
Incorporated Under the IRS Employer I.D.
Laws of the State No. 11-2590026
of Delaware
7155 East Kemper Road
Cincinnati, Ohio 45249
(513) 731-9900
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---
Common Stock, $.01 par value per share:
Shares Outstanding as of May 11, 2000 26,249,890
Page 1 of 26 pages
2
DURAMED PHARMACEUTICALS, INC.
INDEX
Page
----
PART I. Financial Information
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets.................................... 3-4
Consolidated Statements of Operations.......................... 5
Consolidated Statements of Cash Flows.......................... 6
Consolidated Statements of Stockholders'
Equity/Capital Deficiency................................... 7
Notes to Consolidated Financial Statements..................... 8-12
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............ 13-22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..... 23
PART II. Other Information
ITEM 1. Legal Proceedings.............................................. 23
ITEM 2. Changes in Securities.......................................... 24
ITEM 6. Exhibits and Reports on Form 8-K............................... 24
SIGNATURES............................................................... 25
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2000 1999
----------- -----------
Current assets:
Cash and cash equivalents $ 4,000 $ 4,000
Trade accounts receivable,
less allowance for doubtful accounts:
2000 - $979,000 1999 - $951,000 8,673,370 9,610,307
Inventories 31,620,542 32,910,493
Prepaid expenses and other assets 8,652,075 6,681,892
----------- -----------
Total current assets 48,949,987 49,206,692
Property, plant and equipment:
Land 1,000,000 1,000,000
Building 21,246,375 21,204,228
Equipment, furniture and fixtures 29,239,203 28,597,309
----------- -----------
51,485,578 50,801,537
Less accumulated depreciation and amortization 21,598,837 20,861,935
----------- -----------
Property, plant and equipment - net 29,886,741 29,939,602
----------- -----------
Deposits and other assets 1,702,798 1,627,123
----------- -----------
$80,539,526 $80,773,417
=========== ===========
See accompanying notes.
-3-
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY/CAPITAL DEFICIENCY
March 31, December 31,
2000 1999
------------- -------------
Current liabilities:
Accounts payable $ 8,410,475 $ 11,391,954
Accrued liabilities 20,949,961 28,459,817
Current portion of long-term debt
and other liabilities 6,537,288 5,783,232
Current portion of capital lease obligations 994,980 992,531
------------- -------------
Total current liabilities 36,892,704 46,627,534
------------- -------------
Long-term debt, less current portion 41,090,044 29,720,761
Long-term capital leases, less current portion 2,037,115 1,835,023
------------- -------------
Total liabilities 80,019,863 78,183,318
------------- -------------
Mandatory redeemable convertible preferred stock -- 4,900,000
------------- -------------
Stockholders' equity/capital deficiency:
Common stock - authorized 50,000,000 shares,
par value $.01; issued and outstanding 26,216,876
and 24,808,591 shares in 2000 and 1999, respectively 262,168 248,085
Additional paid-in capital 132,382,880 126,882,751
Accumulated deficit (132,125,385) (129,440,737)
------------- -------------
Total stockholders' equity/capital deficiency 519,663 (2,309,901)
------------- -------------
$ 80,539,526 $ 80,773,417
============= =============
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
2000 1999
------------ ------------
Net sales $ 16,593,618 $ 13,249,507
Cost of goods sold 10,974,883 10,417,537
------------ ------------
Gross profit 5,618,735 2,831,970
------------ ------------
Operating expenses:
Product development 1,264,620 1,302,723
Brand marketing expenses 1,990,375 --
Selling 970,027 895,986
General and administrative 2,629,462 2,326,601
------------ ------------
6,854,484 4,525,310
------------ ------------
Operating loss (1,235,749) (1,693,340)
Net interest expense 1,448,899 682,799
------------ ------------
Net loss (2,684,648) (2,376,139)
Preferred stock dividends 16,903 68,292
------------ ------------
Net loss applicable to
common stockholders $ (2,701,551) $ (2,444,431)
============ ============
Basic and diluted loss per share $ (0.10) $ (0.12)
============ ============
Weighted average number of
common and common equivalent
shares outstanding 25,831,042 20,609,007
============ ============
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss $ (2,684,648) $ (2,376,139)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 835,843 714,929
Provision for doubtful accounts 47,614 51,080
Common stock issued in connection with
employee compensation plans 111,705 86,423
Changes in assets and liabilities:
Trade accounts receivable 889,323 53,806
Inventories 1,289,951 (1,194,546)
Prepaid expenses and other assets (1,986,108) (301,735)
Accounts payable (2,981,479) (86,533)
Accrued liabilities (7,454,719) (109,899)
Other (137,824) (29,624)
------------ ------------
Net cash used in operating activities (12,070,342) (3,192,238)
------------ ------------
Investing activities:
Capital expenditures (684,041) (576,079)
Refunds (deposits) on capital expenditures (4,592) 11,574
------------ ------------
Net cash used for investing activities (688,633) (564,505)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt,
including current maturities (9,222,100) (468,770)
Net increase in revolving credit facility 1,035,190 3,168,398
Long-term borrowings 20,504,658 240,953
Issuance of common stock 502,507 898,475
Preferred dividends paid (61,280) (81,813)
------------ ------------
Net cash provided by financing activities 12,758,975 3,757,243
------------ ------------
Net change in cash -- 500
Cash at beginning of period 4,000 3,500
------------ ------------
Cash and cash equivalents at end of period $ 4,000 $ 4,000
============ ============
Supplemental cash flow disclosures:
Interest paid $ 1,089,919 $ 554,932
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
--------------------------- ------------- ------------- ------------
BALANCE - DECEMBER 31, 1999 24,808,591 $ 248,085 $ 126,882,751 $(129,440,737) $ (2,309,901)
Issuance of stock in connection
with compensation plans 12,790 128 111,577 -- 111,705
Issuance of stock in connection
with stock options 101,575 1,016 501,491 -- 502,507
Conversion of Series F
Preferred Stock 1,293,920 12,939 4,903,964 -- 4,916,903
Net loss for 2000 -- -- -- (2,684,648) (2,684,648)
Preferred Stock dividends -- -- (16,903) -- (16,903)
----------- --------- ------------- ------------- ------------
BALANCE - MARCH 31, 2000 26,216,876 $ 262,168 $ 132,382,880 $(132,125,385) $ 519,663
=========== ========= ============= ============= ============
See accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Interim Financial Data
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2000
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2000. For further information, refer to the consolidated
financial statements and notes thereto included in the Annual Report of Duramed
Pharmaceuticals, Inc. (the "Company" or "Duramed") on Form 10-K for the year
ended December 31, 1999 (the "1999 10-K").
Note 2: Loss Per Common Share
The following table presents the calculation of losses applicable to common
stockholders:
Three Months Ended
March 31
2000 1999
--------------------------------
Net loss $(2,684,648) $(2,376,139)
Less dividends on
preferred shares 16,903 68,292
----------- -----------
Net loss applicable to
common stockholders $(2,701,551) $(2,444,431)
=========== ===========
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Weighted-average common shares outstanding for the computation of basic and
diluted loss per share were 25,831,042 and 20,609,007 for the periods ended
March 31, 2000 and 1999, respectively.
For the three-month periods ended March 31, 2000 and 1999 the recognition of
outstanding options and warrants in the amount of 4,499,552 and 4,564,317,
respectively, were not recognized in computing net loss per share as their
effect would be anti-dilutive.
Note 3: Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventories include:
March 31, December 31,
2000 1999
-------------- -------------
Raw materials $ 16,637,022 $ 17,239,214
Work-in-process 351,965 249,211
Finished goods 22,592,045 23,870,296
Obsolescence reserve (7,960,490) (8,448,228)
-------------- -------------
Net inventory $ 31,620,542 $ 32,910,493
============= =============
Finished goods inventory includes approximately $5.0 million of Cenestin(R)
(synthetic conjugated estrogens, A) Tablets ("Cenestin") carried at cost which
has been shipped to customers but not yet recognized.
Note 4. Accrued Liabilities
The Company's accrued liabilities consist of the following:
March 31, December 31,
2000 1999
----------- ------------
Litigation settlement $ -- $ 7,500,000
Accrued marketing expenses 5,068,760 5,876,198
Deferred revenue 3,784,789 5,836,737
Accrued profit sharing 3,412,830 2,256,605
Wages and other compensation 2,255,165 1,991,129
Accrued marketing reimbursement 1,990,375 --
Accrued bio-studies 1,216,641 908,658
Taxes, other than income taxes 780,526 694,860
Other 2,440,875 3,395,630
----------- -----------
$20,949,961 $28,459,817
=========== ============
The litigation settlement represented the balance due for the $15.0 million
settlement of the litigation between the Company and Schein Pharmaceutical,
Inc. ("Schein").
-9-
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The $5.1 million accrued marketing expenses represents the liability for
marketing expenses related to Cenestin.
Deferred revenues reflect amounts collected for shipments of Cenestin net of
returns and allowance not yet recognized. The Company will record these
shipments as revenue as evidence of product movement through the distribution
system is obtained.
Accrued marketing reimbursement represents the amount due Solvay
Pharmaceuticals, Inc. for reimbursement of marketing expenses per the
marketing agreement. See the "Outlook" portion of Management's Discussion
and Analysis for further discussion.
Note 5: Debt and Mandatory Redeemable Convertible Preferred Stock
March 31, December 31,
2000 1999
-------------------------------
Debt
Bank of America financing facilities:
Revolving credit facility $15,623,292 $14,588,102
Intangible term note 5,729,167 6,416,667
Equipment term note 3,828,807 4,303,832
Provident mortgage notes 20,000,000 --
Merrill Lynch note payable -- 7,719,404
Note payable to contract sales organization 1,449,227 1,490,051
Note payable to strategic alliance partner 549,467 544,737
Installment notes payable 51,307 55,266
Other 396,065 385,934
----------- -----------
47,627,332 35,503,993
Less amount classified as current 6,537,288 5,783,232
----------- -----------
$41,090,044 $29,720,761
=========== ===========
Mandatory redeemable
convertible preferred stock $ -- $ 4,900,000
=========== ===========
During the first quarter of 2000, the Company financed its operations with
borrowings on its revolving credit facility, net proceeds from the addition of
two mortgage notes payable to The Provident Bank ("Provident"), and proceeds
from the exercise of stock options.
-10-
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Debt
The Company's principal lender is Bank of America Commercial Finance ("Bank of
America"). The initial term of the agreement with Bank of America is through
November 2002 with provisions for renewals. The financing agreement provides for
a revolving credit facility, collateralized by the Company's receivables and
inventories, and two term notes. The Company's borrowing capacity under the
revolving credit facility adjusts based on the change in receivables and
inventory and bears an interest rate of prime plus 0.50% (9.50% at March 31,
2000). The equipment term note, secured by specified equipment, bears an
interest rate of prime plus 0.75% (9.75% at March 31, 2000) and requires
monthly principal payments of $158,342 plus interest through July 30, 2000 and
$67,047 plus interest for the remaining term of the note, subject to renewal of
the financing agreement. The intangible term note in the amount of $7.0 million
is a four-year term loan collateralized by the intangible assets of the Company.
The terms of the note requires monthly principal payments of $229,166 plus
interest through November 30, 2000 and $145,833 plus interest for the remaining
term of the note. The term note bears an interest rate of prime plus 1.25%
(10.25% at March 31, 2000).
The Company had an $8.1 million note payable to Merrill Lynch, which was
guaranteed by the Warner-Lambert Company ("Warner-Lambert"). Warner-Lambert held
a first mortgage on the Company's Cincinnati, Ohio manufacturing facility. The
note subsequently was paid in full by the Provident financing agreement.
On March 1, 2000 the Company refinanced its existing note payable collateralized
by its Cincinnati, Ohio manufacturing facility with a $12.0 million note and
$8.0 million note payable to Provident, both of which are guaranteed by Solvay
America. Provident holds a first mortgage on the Company's Cincinnati, Ohio
manufacturing facility. The $12.0 million note bears an interest rate of prime
(8.75% at March 31, 2000) and requires a monthly payment of $100,000 plus
interest for a ten-year period commencing April 1, 2000. The $8.0 million note
bears an interest rate of prime (8.75% at March 31, 2000) and requires a monthly
payment of $33,333 plus interest commencing April 1, 2000. Principal payments
are based upon a twenty-year amortization with a balloon payment due on March 1,
2010 of $4.0 million.
The loan payable to a contract sales organization, initially in the principal
amount of $1,650,000, represents the initial cost to establish the brand sales
force which is representing the Company's brand products (initially Cenestin) to
the physicians community. The firm with which the Company has contracted to
establish and manage the Company's dedicated sales force agreed to finance its
startup costs over the 36-month term of the agreement in exchange for a monthly
principal and interest payment by the Company of $53,240. The loan is unsecured
and carries an interest rate of 10%.
The note payable to a strategic alliance partner is an unsecured note. The note
required payment in full on April 30, 2000 and has been paid.
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Other long-term debt also includes facilities of varying amounts and terms,
which are generally collateralized by the assets financed.
The carrying value of the Company's debt approximates fair market value.
Mandatory Redeemable Convertible Preferred Stock
In February 1998, the Company issued $12.0 million in Series F Preferred Stock.
The Series F Preferred Stock was convertible into shares of common stock and
paid a dividend of 5% annually, payable quarterly in arrears, on all unconverted
shares. As of February 3, 2000 all of the Series F Preferred Stock had been
converted into 4,088,622 shares of Common Stock at an average price of $3.07 per
share.
-12-
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Certain statements in this Form 10-K constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and events, particularly relating to sales of current
products as well as the introduction of new manufactured and distributed
products. Forward-looking statements involve known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of the
Company, which could cause actual results and outcomes to differ materially from
those expressed. Factors that might affect the forward-looking statements set
forth in this Form 10-K include, among others, (i) increased competition from
new and existing competitors and pricing practices of those competitors, (ii)
the amount of funds continuing to be available for internal research and
development and for research and development joint ventures, (iii) research and
development project delays or delays in obtaining regulatory approvals, (iv) the
ability of the Company to retain and attract personnel in key operational areas,
(v) the status of strategic alliances, and (vi) the success of brand marketing
efforts.
Duramed manufactures and distributes a line of prescription drug products in
tablet, capsule and liquid forms to customers throughout the United States.
Products sold by the Company include those of its own manufacture and those it
markets under arrangements with other drug manufacturers. The Company's results
include expenses associated with a product development program designed to
generate a stream of new product offerings. The Company's strategy has been to
focus its product development activities primarily on prescription drugs with
attractive market opportunities and potentially limited competition due to
technological barriers of entry, principally hormonal products. The Company's
product development capabilities include modified release technologies as well
as controlled substances development.
-13-
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OUTLOOK
Business Strategy Outlook -- Based on assessments of the market opportunities
for a synthetic conjugated estrogens product, the market for oral contraceptives
and the related potential impact on Duramed's revenues and profitability,
management believes that the approvals of Cenestin and Apri change Duramed's
long-term outlook and enhance the Company's ability to become a leader in the
women's health market in part by developing a family of hormone products.
To achieve its goals of leadership and sustainable profitability, the
Company's business plan involves primary focus on three initiatives:
Maximize the Market Penetration of Cenestin -- Cenestin, an estrogen replacement
therapy (ERT), competes with other ERT/HRT products in a market approaching $2
billion in the U.S. alone. According to Scrip Reports, a leading pharmaceutical
market data provider, the combined ERT/HRT market is growing at a projected
annual rate of 15%. ERT/HRT therapies are prescribed for women entering or in
menopause. The average age for women entering menopause is 51 years. According
to the American College of Obstetrics and Gynecology, the first wave of "baby
boomer" women (born between 1945-1960) is now entering menopause and another 20
million will reach menopause in the next decade. Currently more than 40 million
women in the U.S. are over 50 and, therefore, candidates to take either ERT
(estrogen only) or HRT (estrogen with progestin).
Duramed believes that the distinctive characteristics of its product will
contribute to its ability to capture a significant share of the ERT market. To
help communicate Cenestin's availability and favorable characteristics, on March
30, 1999 Duramed entered into a marketing and distribution agreement with
Cardinal MarketFORCE, a subsidiary of Cardinal Health, to perform the necessary
direct-to-doctor sales efforts.
To expand and enhance the promotion of Cenestin, on October 6, 1999 Duramed
entered into an agreement with Solvay Pharmaceuticals, Inc. to jointly promote
three of the companies' hormone products in the United States: Duramed's
Cenestin and Solvay Pharmaceuticals' Estratest/Estratest H.S. and Prometrium.
-14-
15
The agreement resulted in a combined national sales force of more than 300
Duramed and Solvay Pharmaceuticals sales representatives which promote the
alliance products to obstetricians and gynecologists across the United States.
Solvay Pharmaceuticals' resources also include teams of regional marketing
managers, district managers, medical liaison teams and a medical advisory
committee comprised of leading women's health physicians.
Cenestin was designated as the primary product in the Duramed/Solvay
Pharmaceuticals alliance while the Solvay Pharmaceuticals products address
additional important therapeutic requirements in women's health and complement
Cenestin in the pharmaceutical sales effort. All three products are expected to
benefit from the broadened exposure in the marketplace.
On March 1, 2000 the co-promotion agreement was expanded and extended into a
long-term arrangement when Duramed and Solvay Pharmaceuticals entered into an
expanded 10-year marketing agreement whereby the two companies will share in the
profits of Cenestin. Effective January 1, 2000, Solvay Pharmaceuticals assumed
responsibilities for the marketing of Cenestin. This responsibility also
includes assuming all advertising, selling and promotional expenses for
Cenestin, including all expenses associated with Duramed's sales force (Cardinal
MarketFORCE)). During this initial stage of the marketing agreement, Solvay
Pharmaceuticals will receive 80%, and Duramed will receive 20%, of Cenestin's
gross profit until Cenestin revenues have increased to the level that Solvay
Pharmaceuticals has recovered all of the ongoing advertising and marketing
expenses and Cenestin becomes an income-producing product. The Company has
recorded the amount available (80% of Cenestin gross profits) for reimbursement
of Solvay Pharmaceuticals' marketing expense as brand marketing expenses.
The agreement then moves into a second stage, where Duramed will receive 80% of
Cenestin net profit dollars and Solvay Pharmaceuticals will receive 20%, until
Duramed recovers the $38 million (inclusive of a $15 million litigation
settlement with Schein) it invested in Cenestin from when the product was
approved in March 1999 through December 31, 1999.
Upon completion of these two stages, when both Duramed and Solvay
Pharmaceuticals have recovered the specified investments, the two companies each
will receive 50% of Cenestin net profit dollars on a moving-forward basis.
Duramed also granted Solvay Pharmaceuticals a worldwide exclusive license to
Cenestin outside the United States. The global rights to Cenestin include all
countries except Eastern European countries that are currently covered by other
established marketing partners and Puerto Rico. Solvay Pharmaceuticals and
Duramed will enter into mutually agreed upon license and supply agreements for
each country based on a country-by-country selection process. Solvay
Pharmaceuticals has also been granted the option to an exclusive worldwide
license to Verapamil SR, a calcium channel blocker for the treatment of
hypertension, which has been previously approved by the FDA.
-15-
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Management's original goal was for Cenestin to reach $100 million in annualized
revenues within 15-18 months of the July 1999 launch date. While management
remains confident this milestone of revenue is achievable, because of the
extremely competitive nature of this category and the complexities of the
managed care approval process, it is likely that reaching this milestone will
take longer than originally anticipated.
Successfully Commercialize Recently Approved and Filed Products -- On August 12,
1999 the FDA approved the Company's first oral contraceptive product,
Desogestrel and Ethinyl Estradiol .15mg/0.03mg, which has been brand named Apri.
Apri is the first, and currently the only, product therapeutically
interchangeable with Ortho-Cept and Desogen tablets for all new and refill
prescriptions. This product is the first product marketed under the Company's
agreement with Gedeon Richter, Ltd. The agreement provides for the profits
generated by products under the agreement to be split between Duramed and Gedeon
Richter. The market for these products at brand prices is estimated to be
approximately $143 million.
Since the beginning of 1999, the FDA has approved the Cenestin NDA and eight
ANDAs submitted by the Company. The Company currently has six ANDAs on file with
the Food and Drug Administration. Four of these ANDAs are for hormone products,
with three additional hormone products expected to be filed during the second
half of this year. Approvals of these filings are expected to begin in early
2001.
Continue to Invest in Product Development Activities -- With the approval of
Cenestin, the Company intends to continue to expand its research and development
in the women's health care area. On March 13, 2000 the Company received
approval of the 1.25mg dosage strength of Cenestin, which represents a $250
million market accounting for approximately 19% of all conjugated estrogens
prescriptions written and 23% of total conjugated estrogens revenues in the
U.S. last year. In late 1999, the Company completed a bone marker study that
demonstrated that Cenestin caused a favorable reduction in bone markers, which
indicates a bone preservation effect. In addition, in the cardiovascular
evaluation, a positive lipid profile was found. The Company anticipates
beginning a full osteoporosis clinical study of Cenestin in the future to
confirm the beneficial results indicated by the bone marker study.
-16-
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On June 1, 1999 the Company was granted a formulation patent for the composition
of Cenestin (synthetic conjugated estrogens, A) Tablets and solid oral dose
pharmaceutical products containing Cenestin in combination with a
progestin. The Company intends to initiate clinical studies of this combination
as funds generated from recently approved products and other resources that may
be available to the Company become available.
As discussed previously, effective January 1, 2000 Solvay Pharmaceuticals
became responsible for the Cenestin physicians' office promotion and payment of
all related expenses in exchange for a share in the profits of Cenestin.
The elimination of the spending on Cenestin sales, marketing and promotion
resulted in a material improvement in the Company's operating performance in
the first quarter of 2000 compared to the fourth quarter of 1999. Management
believes that a combination of reduced spending levels resulting from the
Company's agreement with Solvay Pharmaceuticals, and its projection of revenue
levels, could be sufficient to position the Company to return to profitability
in 2000.
The Company's ability to attain profitability, the time frame required to do so,
and the potential level of such profitability, are dependent upon a number of
factors including: (1) the rate at which Cenestin penetrates the ERT market; (2)
the successful commercialization of Apri and other products recently approved by
the FDA; (3) development of additional potential sources of revenue; (4) the
profit level generated from the Company's current business base (including the
level of revenue received under an agreement by which the Company manufactures
a certain product for Warner-Lambert); and (5) the level of spending on
clinical and bioequivalency studies.
-17-
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RESULTS OF OPERATIONS
NET SALES
Net sales of $16.6 million for the three months ended March 31, 2000 include
$2.9 million in Cenestin revenue, $4.1 million from Apri, $1.2 million from
manufacturing contract revenues and $8.4 million for all of the Company's
other ("baseline") products. Net sales of the baseline products decreased by
$4.9 million (36.6%) for the three months ended March 31, 2000 compared with
1999. The decline was primarily attributable to price erosion on certain of
these products. For the three months ended March 31, 2000 and 1999, products
manufactured by Duramed accounted for 77.4% and 54.2% of net sales,
respectively.
In keeping with the Company's revenue recognition policy, approximately $2.9
million in sales of Cenestin was recognized in the first quarter of 2000, based
on end-user prescription data and current quarter shipments. Management
believes the Company's approach to revenue recognition for Cenestin is
appropriate due to the limited time Cenestin has been promoted by the joint
Solvay Pharmaceuticals/Duramed sales force, the fact that Cenestin is Duramed's
first introduction of a brand product, the more than 600,000 sample packages
that have been supplied to the sales force and the large pipeline fill of
Cenestin.
Management believes that Cenestin has the potential to become a market leader in
the ERT market and will become a significant component of the Company's total
sales.
Apri also is expected to become a major contributor to the Company's 2000
results. Based on prescription data for the week ending April 21, 2000, Apri has
achieved a 31% new prescription market share for desogestrel products.
GROSS MARGIN
Gross margins, and the corresponding percentages of net sales, for the
three-month periods ended March 31, 2000 and 1999, were $5.6 million (33.9%),
and $2.8 million (21.4%), respectively.
Gross margin in the first quarter of 2000 was favorably impacted by the $2.9
million revenue recognized for Cenestin and the Apri revenue of $4.1 million.
The Company expects gross margin to increase in 2000 with the anticipated
increase in Cenestin and Apri revenues. As discussed in the "Outlook" above,
Solvay Pharmaceuticals will be reimbursed marketing expenses from the gross
profits generated from Cenestin and Gedeon Richter will share in the profits of
Apri.
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Various factors are expected to impact the Company's gross margin in 2000 and
beyond, the most significant of which will be the rate at which Cenestin
penetrates the ERT market. Additionally, the Company's gross margin could be
favorably impacted by successful introduction and marketing of other recently
approved products, additional approvals of pending applications and
contributions from manufacturing service revenues. FDA approval of
the Company's pending applications is outside the Company's control and
management cannot predict whether or when these approvals will be obtained.
The Company's generic products are subject to price deterioration as market
conditions change, particularly when additional competitive products are
introduced as a result of FDA approvals as experienced with certain of the
Company's products, particularly methylprednisolone. These impacts can be
material depending on the products affected.
PRODUCT DEVELOPMENT
Product development expenditures for the quarters ended March 31, 2000 and 1999
were comparable. The Company's product development emphasis is on hormonal
therapies, modified release technologies, and controlled substances development.
Product development expenses for 2000 and beyond are dependent on the timing of
biostudies and clinical studies and the Company's continuing efforts to balance
product development spending and available resources.
SALES AND MARKETING
The Company's sales and marketing expenses for the three months ended March 31,
2000 increased $74,000 compared with the same period in 1999. The increase
principally relates to the positive impact in 1999 of the recovery of a
customer account previously written off.
As previously discussed, effective January 1, 2000, Solvay Pharmaceuticals
assumed responsibilities for the Cenestin physicians' office promotion and
payment of all related expenses, in exchange for a share of the Cenestin
profits. Under the Company's agreement with Solvay, Solvay receives 80% of the
gross profit from Cenestin until its selling and marketing investment is
recovered. Accordingly, until the selling and marketing investment is
recovered the profit split to Solvay is classified as brand marketing expense.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $303,000 for the three months
ended March 31, 2000 compared with the same period in 1999 principally due to
increased personnel expenses.
NET INTEREST EXPENSE AND INTEREST RATE RISK
The Company's borrowings are primarily variable rate facilities. Net interest
expense increased by $766,000 in the first quarter of 2000 compared the same
period in 1999 due to an increase in average borrowings under the Company's
revolving credit facility and the amortization incurred in connection with the
Bank of America financing agreements.
The Company has floating rate debt totaling $45.0 million, with interest
fluctuating based on changes in the prime rate and in commercial paper rates. As
a result, annual interest expense in 2000 will fluctuate based upon fluctuations
in those rates.
INCOME TAXES
Due to net losses in the first quarters of 2000 and 1999, the Company did not
record a provision for income taxes during the periods.
PREFERRED DIVIDENDS
The Series F Mandatory Redeemable Preferred Stock (issued in February 1998)
provided for a 5% dividend on unconverted shares. Preferred Stock dividends of
$16,905, and $68,292 in the first quarter of 2000 and 1999, respectively,
represented dividends associated with the unconverted portion of Series F
Preferred Stock. These shares now have all been converted into Common Stock.
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LIQUIDITY AND CAPITAL RESOURCES
On May 12, 2000 the Company completed a private placement of $10 million of
Series G Convertible Preferred Stock with an institutional investor. The
preferred shares are immediately convertible at a fixed price of $5.06 per
share. The preferred stock will pay a dividend of 5% annually, payable
quarterly in arrears, on all unconverted preferred stock. Any of the Series G
Preferred Stock that remains outstanding will be automatically redeemed on May
12, 2004.
The investor also received warrants to purchase 500,000 shares of Common stock
at a price of $5.50 per share, exercisable at any time before May 12, 2005.
At the closing of this transaction, Duramed had approximately 26.2 million
common shares outstanding. Based on a conversion price of $5.06 per share, the
number of common shares expected to be issued in satisfaction of conversion
would be approximately 2 million. A portion of the proceeds from this
transaction will be used to address obligations remaining from the Cenestin
launch.
While the Series G Preferred Shares initially issued remain outstanding, the
Company must obtain the written consent of the holders of at least two-thirds of
the outstanding Series G Preferred Shares in order to authorize or issue any
capital stock that is of senior or equal rank to the Series G Preferred Shares,
in respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company.
As of May 8, 2000 the Company's borrowing capacity under its revolving credit
facility was $15.5 million of which the Company has utilized $14.1 million,
leaving a net availability of $1.4 million excluding the $9.7 million in
proceeds from the issuance of the Series G Preferred Stock. See "Available
Funds" for a discussion of the Company's current financial condition.
Operating Activities
In the first quarter of 2000 Company had a net operating loss of $2.7 million
and cash used in operating activities of $12.1 million. Cash used in operating
activities included the decrease in accrued liabilities relating principally to
payment of the balance of the litigation settlement with Schein. The increase
in prepaid expenses and other assets represent amounts owed to the Company
under its Cenestin marketing agreement and manufacturing services agreement.
The $3.0 million decrease in accounts payable is a result of the timing of
payments to trade vendors.
Investing Activities
In the first quarter of 2000 capital expenditures were $.7 million. Expenditures
were principally for manufacturing and packaging equipment.
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Financing Activities
On March 1, 2000, the Company entered into a $20 million financing transaction
collateralized by its Cincinnati facility and secured by a loan guaranty from
Solvay America. The proceeds from this financing were utilized to pay off the
facility's existing $7.7 million mortgage and to pay the second $7.5 million
required under the Schein settlement agreement. The $4.8 million balance was
utilized to pay down trade creditors and reduce amounts owed under the Company's
revolving line of credit.
In February 1998, the Company raised $12.0 million ($11.4 million net of
issuance cost) through an offering of 120,000 shares of Series F Mandatory
Redeemable 5% Cumulative Convertible Preferred Stock ("Series F Preferred
Stock"). As of December 31, 1999, $7.1 million of Series F Preferred Stock had
been converted into Common Stock. In the first quarter of 2000 the remaining
$4.9 million of Series F Preferred Stock was converted into Common Stock. The
Company issued 4,088,622 shares of Common Stock in connection with the
conversion of the Series F Preferred Stock, at an average conversion price of
$3.07 per share.
The term of the Company's financing agreement with Bank of America is four
years, commencing November 1998 with provisions for renewals. The financing
agreement provides for a revolving credit facility collateralized by the
Company's receivables and inventory and a term note secured by the Company's
equipment. The Company's borrowing capacity under the revolving credit facility
adjusts based on the change in receivables and inventory.
AVAILABLE FUNDS
The Company intends to use a portion of the proceeds from the Series G Preferred
Stock offering to reduce its existing obligations to unsecured trade creditors.
The Company expects that the remaining obligations to unsecured trade creditors
can be satisfied out of improvements to cash flow resulting from the Company's
expected return to profitability.
The Company's ability to return to profitability is dependent upon several
factors including: (1) the rate and growth in sales and profits from products
approved by the FDA in recent months, principally Cenestin and Apri; (2)
contract revenues from the Company's contract with Warner Lambert; and, (3) the
ability of the Company to maintain or increase the sales of products in its
current business base as well as the success of other aspects of its business
plan.
A source of capital for the Company is the proceeds from the exercise of stock
options and warrants. Exercise prices for outstanding stock options and warrants
vary. The exercise of all vested stock options and warrants would provide
approximately $15.0 million in proceeds to the Company. The decision to
exercise options and warrants is at the discretion of the holder, influenced by
the trading price of the Company's Common Stock and, therefore, is beyond the
control of the Company.
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Management believes that the Company has sufficient resources to address its
obligations and execute its business plan. An important aspect of managing the
Company's current financial situation is the continued support of its creditors.
The Company's net worth at March 31, 2000 did not meet the net worth
requirements of the Nasdaq National Market for continued listing of the
Company's Common Stock. However, at that time the Company met the requirement
for an alternative listing standard. This alternative standard requires a
minimum bid price for the common stock of $5.00 per share. On May 12, 2000 the
bid price was $4.91 per share. If the bid price remains below $5.00 per share,
and Nasdaq determines the Company does not meet the listing requirements, the
Company intends to request an exemption to permit continued listing on the
Nasdaq National Market. If this request is not granted, trading will continue
in the over-the-counter market. Loss of Nasdaq National Market listing could
have an adverse effect on the liquidity of outstanding shares and on the
ability of the Company to raise funds through the issuance of additional
shares of Common Stock.
SEASONALITY
Certain of the Company's generic products have a degree of seasonality, the
effect of which the Company attempts to mitigate by adding complementary
products to its line.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 is included in Liquidity and Capital
Resources.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 22, 1999, the Company reached a settlement with Schein
Pharmaceutical, Inc. in a litigation between Duramed and Schein pertaining to a
1992 agreement between the companies relating to the development of a generic
version of the conjugated estrogens product Premarin(R)
Under terms of the settlement agreement, Schein has given up any claim to rights
in Duramed's Cenestin and Duramed has paid $15 million to Schein. Further, if
Cenestin achieves total profits (product sales less product-specific cost of
goods sold, sales and marketing and other relevant expenses) of greater than
$100 million over any five year or less period within the next 15 years, Duramed
will pay Schein a one-time additional payment of $15 million. The settlement
resolves all disputes between Duramed and Schein, and the litigation pending
between them has been dismissed with prejudice.
The Company is involved in various additional lawsuits and claims, which arise
in the ordinary course of business. Although the outcome of such lawsuits and
claims cannot be predicted with certainty, the disposition thereof will not, in
the opinion of management, result in a material adverse effect of the Company's
financial position or results of operations.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
At the end of the quarter, the Company issued a total of 1,692 shares of its
Common Stock to its non-employee directors as partial payment of their
directors' fees. These shares were issued pursuant to the Company's 1998 Stock
Plan for Non-Employee Directors. The issuance of these shares was exempt from
registration under the Securities Act of 1933 on the basis that no sale was
involved in their issuance as defined under such Act or, in the alternative, on
the basis of the exemption from registration provided in Section 4 (2) of the
Act.
During the quarter ended March 31, 2000, the Company issued 1,293,920 shares of
Common Stock upon the conversion of shares of Series F Preferred Stock. This
issuance was exempt from registration under the Securities Act of 1933 on the
basis of the exemption provided in Section 3(a)(9) of that Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4.4) Certificate of Designations of 5% Cumulative Convertible
Preferred Stock, Series G
(27) Financial Data Schedule
(b) Reports on Form 8-K for the quarter ended March 31, 2000:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DURAMED PHARMACEUTICALS, INC.
Dated: May 15, 2000 by: /s/ E. Thomas Arington
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E. Thomas Arington
President, Chairman of the Board
Chief Executive Officer
Dated: May 15, 2000 by: /s/ Timothy J. Holt
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Timothy J. Holt
Senior Vice President
Finance and Administration,
Treasurer, Chief Financial Officer