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, 2001
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 4, 2001 26,685,856
Page 1 of 23 pages
2
DURAMED PHARMACEUTICALS, INC.
INDEX
Page
PART I. Financial Information ----
- -----------------------------
ITEM 1. Financial Statements
Consolidated Balance Sheets.................................... 3-4
Consolidated Statements of Operations.......................... 5
Consolidated Statements of Cash Flows.......................... 6
Consolidated Statements of Stockholders' Equity ............... 7
Notes to Consolidated Financial Statements..................... 8 - 11
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............ 12 - 20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..... 20
PART II. Other Information
- --------------------------
ITEM 1. Legal Proceedings ....................................... 21
ITEM 6. Exhibits and Reports on Form 8-K ........................... 22
SIGNATURES ........................................................... 23
-2-
3
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2001 2000
----------- -----------
Current assets:
Cash and cash equivalents $ 4,000 $ 4,000
Trade accounts receivable,
less allowance for doubtful accounts:
2001 - $1,323,000; 2000 - $1,195,000 19,531,091 19,157,503
Inventories 25,840,489 26,693,405
Prepaid expenses and other assets 5,595,942 5,572,579
----------- -----------
Total current assets 50,971,522 51,427,487
----------- -----------
Property, plant and equipment:
Land 1,000,000 1,000,000
Building 21,303,433 21,292,118
Equipment, furniture and fixtures 30,785,212 29,975,547
----------- -----------
53,088,645 52,267,665
Less accumulated depreciation
and amortization 24,619,854 23,776,180
----------- -----------
Property, plant and equipment - net 28,468,791 28,491,485
----------- -----------
Deposits and other assets 1,978,192 2,046,724
----------- -----------
$81,418,505 $81,965,696
=========== ===========
See accompanying notes.
-3-
4
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
March 31, December 31,
2001 2000
------------- -------------
Current liabilities:
Accounts payable $ 7,177,788 $ 7,405,020
Accrued liabilities 14,415,371 13,641,736
Current portion of long-term debt
and other liabilities 4,795,724 4,743,913
Current portion of capital lease obligations 871,590 870,675
------------- -------------
Total current liabilities 27,260,473 26,661,344
------------- -------------
Long-term debt, less current portion 35,956,353 39,107,431
Long-term capital leases, less current portion 1,639,414 1,640,284
------------- -------------
Total liabilities 64,856,240 67,409,059
------------- -------------
Mandatory redeemable convertible preferred stock 8,305,062 8,177,000
------------- -------------
Stockholders' equity:
Common stock - authorized 50,000,000
shares, par value $.01; issued and outstanding
26,618,020 and 26,355,013 shares in 2001 and 2000,
respectively 266,180 263,549
Additional paid-in capital 134,938,045 134,880,388
Accumulated deficit (126,947,022) (128,764,300)
------------- -------------
Total stockholders' equity 8,257,203 6,379,637
------------- -------------
$ 81,418,505 $ 81,965,696
============= =============
See accompanying notes.
-4-
5
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
2001 2000
------------ ------------
Net sales $ 27,323,586 $ 16,593,618
Cost of goods sold 14,570,892 10,974,883
------------ ------------
Gross profit 12,752,694 5,618,735
------------ ------------
Operating expenses:
Product development 1,090,049 1,264,620
Brand marketing expenses 4,549,035 1,990,375
Selling 969,843 970,027
General and administrative 3,186,050 2,629,462
------------ ------------
9,794,977 6,854,484
------------ ------------
Operating income (loss) 2,957,717 (1,235,749)
Net interest expense 1,108,269 1,448,899
------------ ------------
Income (loss) before income tax and dividends 1,849,448 (2,684,648)
Income tax provision 32,170 ---
------------ ------------
Net income (loss) 1,817,278 (2,684,648)
Preferred stock dividends 125,000 16,903
Deemed dividend on convertible preferred stock 83,437 ---
------------ ------------
Net income (loss) applicable to
common stockholders $ 1,608,841 $ (2,701,551)
============ ============
Income (loss) per average common and common
equivalent shares (basic and diluted): $ 0.06 $ (0.10)
============ ============
Weighted average number of
common and common equivalent
shares outstanding
Basic 26,434,429 25,831,042
============ ============
Diluted 26,904,002 25,831,042
============ ============
See accompanying notes.
-5-
6
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,817,278 $ (2,684,648)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 987,920 835,843
Provision for doubtful accounts 76,744 47,614
Common stock issued in connection with
employee benefit plans 157,560 111,705
Increase in cash surrender value of life insurance (19,701) ---
Changes in assets and liabilities:
Trade accounts receivable (450,332) 889,323
Inventories 852,916 1,289,951
Prepaid expenses and other assets (23,363) (1,986,108)
Accounts payable (227,232) (2,981,479)
Accrued liabilities 665,149 (7,454,719)
Other (7,141) (137,824)
------------ ------------
Net cash provided by (used in) operating activities 3,829,798 (12,070,342)
------------ ------------
Cash flows from investing activities:
Capital expenditures (820,980) (684,041)
Deposits on capital expenditures (43,173) (4,592)
------------ ------------
Net cash used in investing activities (864,153) (688,633)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt,
including current maturities (1,334,724) (9,222,100)
Net increase (decrease) in revolving credit facility (2,106,794) 1,035,190
Long-term borrowings 375,958 20,504,658
Issuance of common stock 111,165 502,507
Dividends paid on convertible preferred stock (11,250) (61,280)
------------ ------------
Net cash provided by (used in) financing activities (2,965,645) 12,758,975
------------ ------------
Net change in cash and cash equivalents --- ---
Cash and cash equivalents at beginning of period 4,000 4,000
------------ ------------
Cash and cash equivalents at end of period $ 4,000 $ 4,000
============ ============
Supplemental cash flow disclosures:
Interest paid $ 1,061,081 $ 1,089,919
See accompanying notes.
-6-
7
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital Deficit Total
------------------------ -------------- -------------- ------------
BALANCE - DECEMBER 31, 2000 26,355,013 $ 263,549 $ 134,880,388 $(128,764,300) $ 6,379,637
Issuance of stock in connection
with benefit plans 33,796 338 157,222 157,560
Issuance of stock in connection
with option exercises 229,211 2,293 108,872 111,165
Net income 1,817,278 1,817,278
Deemed dividend on convertible preferred stock (83,437) (83,437)
Dividend on convertible preferred stock (125,000) (125,000)
----------- ----------- -------------- -------------- ------------
BALANCE - MARCH 31, 2001 26,618,020 $ 266,180 $ 134,938,045 $(126,947,022) $ 8,257,203
=========== =========== ============== ============== ============
See accompanying notes.
-7-
8
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, 2001
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001. 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/A for the year
ended December 31, 2000 (the "2000 10-K/A").
Note 2: Inventories
- -----------------------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventories include:
March 31, December 31,
2001 2000
------------ ------------
Raw materials $ 15,124,433 $ 15,686,281
Work-in-process 319,919 347,496
Finished goods 17,224,663 17,226,616
Obsolescence reserve (6,828,526) (6,566,988)
------------ ------------
Net inventory $ 25,840,489 $ 26,693,405
============ ============
Note 3: Accrued Liabilities
- -------------------------------
The Company's accrued liabilities consist of the following:
March 31, December 31,
2001 2000
----------- -----------
Brand marketing expenses $ 6,066,940 $ 6,377,408
Profit sharing for joint product
development activities 2,913,595 2,719,487
Wages and other compensation 2,551,008 1,592,642
Taxes, other than income taxes 1,082,527 906,598
Bio-studies 597,184 97,009
Other 1,204,117 1,948,592
----------- -----------
$14,415,371 $13,641,736
=========== ===========
-8-
9
Accrued brand marketing expenses represent the amount due Solvay
Pharmaceuticals, Inc. ("Solvay Pharmaceuticals") for marketing expenses
associated with Solvay Pharmaceuticals' promotion of the Company's Cenestin(R)
(synthetic conjugated estrogens, A) Tablets ("Cenestin").
Note 4: Debt and Mandatory Redeemable Convertible Preferred Stock
- ---------------------------------------------------------------------
The Company's debt and mandatory redeemable convertible preferred stock consists
of the following:
March 31, December 31,
2001 2000
---------------------------
Foothill Capital financing facilities:
Revolving credit facility $15,016,447 $17,123,241
Intangible term note 3,229,167 3,666,667
Equipment term note 2,659,068 2,860,208
Provident Bank mortgage notes 18,400,000 18,800,000
Note payable to contract sales organization 747,795 886,504
Installment notes payable 95,065 47,185
Other 604,535 467,539
----------- -----------
40,752,077 43,851,344
Less amount classified as current 4,795,724 4,743,913
----------- -----------
$35,956,353 $39,107,431
=========== ===========
Mandatory redeemable
convertible preferred stock $ 8,305,062 $ 8,177,000
=========== ===========
Debt
- ----
The Company's principal lender is Foothill Capital Corporation ("Foothill"). The
initial term of the agreement with Foothill is through November 2002, with
provisions for renewals. The financing agreement provides for a revolving credit
facility--collateralized by the Company's trade receivables and inventories--and
two term notes. The Company's borrowing capacity under the revolving credit
facility fluctuates based on the dollar amount of eligible trade receivables and
inventory and bears interest at the prime rate plus 0.50% (8.50% at March 31,
2001). The equipment term note, secured by specified equipment, bears interest
at the prime rate plus 0.75% (8.75% at March 31, 2001) and requires monthly
principal payments of $67,047 plus interest for the remaining term of the note,
subject to renewal of the financing agreement. The intangible term note is a
four-year term loan, collateralized by the intangible assets of the Company,
which bears interest at the prime rate plus 1.25% (9.25% at March 31, 2001). The
note requires monthly principal payments of $145,833 plus interest for the term
of the note.
-9-
10
The Provident Bank mortgage notes represent a $12.0 million note and an $8.0
million note collateralized by a first mortgage on the Company's Cincinnati,
Ohio manufacturing facility. Both notes are guaranteed by Solvay America, the
parent of Solvay Pharmaceuticals.
The $12.0 million note bears interest at the prime rate (8.00% at March 31,
2001) and requires monthly payments of $100,000 plus interest for a ten-year
period commencing April 1, 2000. The $8.0 million note bears interest at the
prime rate and requires monthly payments of $33,333 plus interest commencing
April 1, 2000. Principal payments for the $8.0 million note are based upon a
twenty-year amortization with a balloon payment due on March 1, 2010 of $4.0
million.
The note 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 physician community. The firm with which the Company has contracted to
establish and manage the dedicated sales force agreed to finance its own 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 carrying value of the Company's debt approximates fair market value.
Mandatory Redeemable Convertible Preferred Stock
- ------------------------------------------------
On May 12, 2000, the Company completed a private placement of $10.0 million of
Series G Mandatory Redeemable Convertible Preferred Stock with an institutional
investor. The preferred shares are immediately convertible to shares of the
Company's Common Stock at a fixed price of $5.06 per share. The preferred stock
pays a dividend of 5% annually, payable quarterly in arrears, on all unconverted
shares. Any of the Series G Preferred Stock that remains outstanding will be
automatically redeemed on May 12, 2004. The investor also received warrants
which were valued at $765,000 to purchase 500,000 shares of Common Stock at a
price of $5.50 per share, exercisable at any time before May 12, 2005. In
conjunction with the Company's issuance of the Series G Preferred Stock, an
adjustment of $1.3 million was recorded in the year ended December 31, 2000 to
properly reflect deemed dividends beyond the stated 5% dividend rate and a
beneficial conversion feature as required by EITF 98-5 and 00-27. This
adjustment, which has reduced the carrying amount of the Series G Preferred
Stock and increased additional paid-in capital, will be amortized through May
12, 2004 and reflected as additional deemed dividends during this period. For
the quarter March 31, 2001, the Company has amortized $83,437 of the deemed
dividend adjustment.
-10-
11
Note 5: Earnings (Loss) Per Common Share
- --------------------------------------------
The following is a reconciliation of the numerators and denominators to
calculate income (loss) per common share:
Three Months Ended
March 31,
2001 2000
-----------------------------
Numerator:
Net income (loss) $ 1,817,278 $ (2,684,648)
Preferred stock dividends 208,437 16,903
------------ ------------
Numerator for basic and diluted earnings
(loss) per share - income (loss)
available to common stockholders $ 1,608,841 $ (2,701,551)
============ ============
Denominator:
Denominator for basic earnings (loss) per
share - weighted average shares 26,434,429 25,831,042
Effect of dilutive securities:
Stock options and warrants 469,573 ---
------------ ------------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares
and assumed conversions 26,904,002 25,831,042
============ ============
Basic and diluted earnings (loss) per share $ 0.06 $ (0.10)
============ ============
Not included in the calculation of diluted
earnings (loss) per share because
their impact is antidilutive:
Stock options outstanding 1,533,174 3,150,126
Warrants 1,544,033 1,349,426
Preferred shares, as if converted 1,976,285 ---
-11-
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
OVERVIEW
- --------
Certain statements in this Form 10-Q 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-Q 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 develops, 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--particularly the women's health and the hormone
replacement therapy market. The Company's product development efforts include
modified release technologies as well as controlled substances development.
OUTLOOK
Business Strategy Outlook -- Based on assessments of the market opportunities
for hormone products and the related impact on Duramed's revenues and
profitability, management believes that (subject to business risks described
elsewhere in this document) the continued market penetration of Cenestin and
Apri(R) (desogestrel and ethinyl estradiol) Tablets ("Apri"), the introduction
of Aviane(TM)(levonorgestrel 100 mcg and ethinyl estradiol 20 mcg) Tablets,
("Aviane") and anticipated approvals of additional hormone products in 2001 will
continue to improve Duramed's long-term outlook and enhance the Company's
ability to become a leader in the women's health market.
-12-
13
To achieve its goals of leadership and improving operating performance, the
Company's business plan involves primary focus on three areas:
Maximize the Market Penetration of Cenestin -- Cenestin, an estrogen
replacement therapy (ERT), competes with other ERT/HRT (hormone
replacement therapy) products in a market approaching $2.0 billion in
the United States alone. According to leading pharmaceutical market
data providers, the HRT market is growing at a projected annual rate of
10-15%. ERT/HRT therapies are prescribed for women entering into or in
menopause. The average age for women entering menopause is 51 years.
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). 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.
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 Health Sales and Marketing
Services ("Cardinal") to perform the necessary direct-to-doctor sales
efforts.
To expand and enhance the promotion of Cenestin, in the fourth quarter
of 1999 Duramed entered into an agreement with Solvay Pharmaceuticals
to jointly promote three of the companies' hormone products in the
United States: Duramed's Cenestin and Solvay Pharmaceuticals'
Estratest(R)/Estratest(R) H.S. and Prometrium(R).
The agreement resulted in a combined national sales force of
approximately 300 Cardinal and Solvay Pharmaceuticals sales
representatives who promote the alliance's products to physicians
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.
-13-
14
The original agreements for the three product co-promotions had
expiration dates of December 31, 2000. The Company and Solvay have
continued the co-promotion of Estratest/Estratest H.S. and Prometrium
past that date without a formal extension of the agreements. Effective
January 1, 2000, the Company and Solvay entered into a letter agreement
relating to Cenestin which outlines a 10-year marketing agreement
whereby the two companies will share in the profits of Cenestin. Solvay
Pharmaceuticals assumed responsibility for the advertising and sales
promotion and agreed-upon expenses related to Cenestin, including the
direct selling expenses of Cardinal. In consideration of the
aforementioned services and funding, Solvay Pharmaceuticals receives
80% of the gross profit from Cenestin, and Duramed receives 20%, until
Solvay's cumulative selling and marketing investment is recovered and
Cenestin becomes an income-producing product. The Company records the
amount for reimbursement of Solvay Pharmaceuticals' marketing expenses
(80% of Cenestin gross profits) as "brand marketing expenses" on the
accompanying Consolidated Statement of Operations.
After the income producing level is achieved, Duramed will receive 80%
of the gross profit dollars and Solvay Pharmaceuticals 20% until
Duramed recovers the remaining portion of $38 million the Company
invested in the product during 1999. After each company has recovered
its specified investments, the net profit dollars will be split equally
for the remainder of the ten-year term of the agreement. Discussions
are continuing with Solvay with respect to maximizing the effects of
Cenestin marketing.
Successfully Commercialize Approved and Filed Products -- On May 1,
2001, the Company announced U.S. Food and Drug Administration ("FDA")
approval of its Abbreviated New Drug Application (ANDA) for Aviane.
Aviane is therapeutically equivalent to Alesse(TM). Aviane is the first
and only generic product deemed bioequivalent to and therapeutically
interchangeable with Alesse for all new and refill prescriptions.
According to IMS America, Ltd. data for drugstore and non-retail
purchases, Alesse sales in 2000 were approximately $130 million, up 35%
from 1999. Aviane is Duramed's second entry into the $2 billion oral
contraceptive market. Aviane is the first approved generic substitute
for Alesse and presently has no other generic competitors. Like Apri,
the Company will be marketing Aviane as a value brand, meaning that
the product can be written as a prescription by physicians and/or
substituted for the brand product by pharmacists.
Apri, the Company's first oral contraceptive product is the first, and
currently the only, product therapeutically interchangeable with
Ortho-Cept(R) and Desogen(R) tablets for all new and refill
prescriptions. This product was 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
-14-
15
Richter. The market for these desogestrel products at brand prices is
estimated to be approximately $159 million. Prescriptions for Apri
totaled 674,000 for the first quarter 2001, up approximately 100% from
first quarter 2000, the first full quarter of oral contraceptive sales,
and up 9% from the fourth quarter 2000. Apri has captured more than 40%
of the total prescriptions in the segment in which it competes and more
than 3% of the entire oral contraceptive market since its launch in the
fourth quarter of 1999.
The Company currently has four ANDAs on file with the FDA. Three of
these ANDAs are for oral contraceptive products. Of the four products
awaiting approval at FDA, one, the Company's filing on Mircette(TM),
represents an ANDA for which Duramed was first to file. In 2000, the
brand sales for this product were approximately $120 million. Approvals
of these filings are expected to begin in 2001.
The Company's filing on Mircette(TM) is currently under litigation. The
Mircette patent is held by Biotechnology General Corp., which has filed
suit for declaratory and injunctive relief claiming Duramed's product
infringes its patent.
Duramed is vigorously defending this lawsuit, claiming that the patent
at issue is invalid and, in any event, not infringed. The Waxman-Hatch
Act provides that Duramed will be awarded a 180-day period of generic
marketing exclusivity should it prevail in the lawsuit.
Continue to Invest in Product Development Activities -- During the
remainder of 2001, the Company expects to file five additional ANDAs
for hormones, including a progestin, an estrogen, and three oral
contraceptives. Duramed also anticipates filing three non-hormone
ANDAs. The 2000 combined brand sales on these eight items exceeded $550
million. The progestin product is a micronized natural progesterone on
which the necessary development work is complete. The Company
anticipates filing this ANDA in late 2001. Clinical studies for the
combination therapy of this product plus Cenestin will be initiated as
funds generated from recently approved products and other resources
become available.
Duramed has five products, in various stages of development, that the
Company intends to file as NDAs. These products, including the
combination of Cenestin with a natural progesterone, if approved,
should expand the Cenestin brand franchise. Evaluation of the potential
for patenting the technology used to develop these extensions of the
Cenestin franchise is also in process. Assuming successful completion
of the required clinical studies and FDA approval, the Company
anticipates these products could be to market in three to four years.
-15-
16
With the resources provided by the Company's expanding female hormone
product portfolio, the Company intends to expand its research and
development in the women's healthcare area. The Company continues its
Phase IV Studies program to examine the multiple benefits of Cenestin
in areas such as the central nervous system, cardiovascular system,
skeletal system, and fibromyalgia. In the first quarter studies
commenced involving 0.3 mg, 0.625 mg, and 1.25 mg Cenestin dosage
strengths.
In the central nervous system (CNS), two studies are underway to
measure Cenestin's effects on cerebral blood flow. Another CNS study
evaluates Cenestin's capacity to improve sleep quality. In the area of
fibromyalgia, the Company also commenced a study regarding Cenestin's
potential ability to positively impact pain and range of motion
disorders. This study will provide information on Cenestin's effects on
BMD - bone mineral density. 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's business strategy includes pursuing strategic
partnerships on product projects where appropriate in order to fund
projects.
The Company's ability to achieve its business plan is dependent upon a number of
factors including: (1) the rate at which Cenestin continues to penetrate the ERT
market; (2) the sales performance of Apri and Aviane; (3) the successful
approval and commercialization of products on file with the FDA and the
development of additional potential sources of revenue; (4) the profit level
generated from the Company's current business; and (5) the level of spending on
product development projects including clinical and bioequivalency studies.
-16-
17
RESULTS OF OPERATIONS
- ---------------------
NET SALES
Net sales increased $10.7 million (64.7%) for the three months ended March 31,
2001 compared to the same period in 2000. Of the $27.3 million revenue generated
in the quarter, $14.6 million (53.3%) came from hormone product sales. Hormone
product sales for the first quarter of 2000 were $7.5 million (45.2%). First
quarter 2001 Cenestin revenues were $6.6 million, as compared to $2.9 million in
the first quarter 2000. Oral contraceptive revenues were $7.2 million as
compared to $4.0 million in the first quarter 2000.
Non-hormone product sales were $12.7 million in the first quarter 2001, as
compared to $9.1 million in first quarter 2000, an increase of 39.6%, due
primarily to increased sales of selected seasonal cough/cold products.
GROSS MARGIN
Gross margins, and the corresponding percentages of net sales, for the
three-month periods ended March 31, 2001 and 2000, were $12.8 million (46.7%),
and $5.6 million (33.9%), respectively.
The gross margin improvement (128.6%) was due to greater sales of higher margin
products, principally hormone products and seasonal cough/cold products.
Various factors are expected to impact the Company's gross margin in 2001 and
beyond, the most significant of which will be the rate at which Cenestin
penetrates the ERT market and the contribution from recently approved products,
such as Aviane. Approvals of pending applications, and the contributions from
manufacturing service revenues could also favorably impact the gross margin. FDA
approval of the Company's pending applications is outside the Company's control
and management cannot precisely 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; this has occurred with some of the
Company's products, such as methylprednisolone. These impacts can be material
depending on the products affected.
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PRODUCT DEVELOPMENT
Product development expenditures for the three-month period ended March 31,
2001, decreased $175,000 compared to the same period in 2000. The reduction
resulted from the savings realized by the consolidation of product development
activities into the Company's Cincinnati, Ohio facility.
The Company's product development emphasis is on hormone therapies, modified
release technologies and controlled substances. The Company will continue to
leverage its formulation and production capabilities to pursue opportunities for
both branded and multi-source products in the women's healthcare market, as this
field offers significant profit potential. Duramed's top priority will be to
focus on solid oral dose hormone products developed in-house. The Company also
plans to enter into strategic partnerships, where possible, so as to expand its
product development capabilities.
Such partnering may occur in order to fund clinical studies that require large
financial commitments. Other product development projects will be funded
internally. The expense level in the first quarter is consistent with the
Company's business plan, and expected 2001 product development expenditures
remain at $10.0 million compared to $3.8 million in 2000. Product development
expenses are dependent on the timing of biostudies and clinical studies and the
Company's continuing efforts to balance product development spending and
available resources.
BRAND MARKETING AND SELLING
The Company's brand marketing and selling expenses for the three months ended
March 31, 2001 increased $2.6 million compared with the same period in 2000. The
increase represents Solvay Pharmaceuticals' share of Cenestin profits resulting
from increased Cenestin revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $557,000 for the three months
ended March 31, 2001 compared with the same period in 2000, principally due to
additional hires and personnel-related expenses.
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NET INTEREST EXPENSE AND INTEREST RATE RISK
The Company's borrowings are primarily variable rate facilities. Net interest
expense decreased by $340,000 in the first quarter of 2001 compared to the same
period in 2000, due to reduced interest rates and the reduced balance
outstanding of interest bearing obligations.
At March 31, 2001 the Company had floating rate debt totaling $39.3 million,
with interest fluctuating based on changes in the prime rate. As a result,
annual interest expense in 2001 will fluctuate based upon fluctuations in
those rates.
INCOME TAXES
The income tax provision in the three months ended March 31, 2001 represents
alternative minimum tax. A provision for alternative minimum tax was not
required for the three months ended March 31, 2000, due to the net loss. A
provision for regular income tax was not required for the three months ended
March 31, 2001, due to net operating loss carryforwards of approximately $108
million.
PREFERRED DIVIDENDS
The Series G Mandatory Redeemable Convertible Preferred Stock (issued in May
2000) provides for a 5% dividend on unconverted shares. Preferred stock
dividends and deemed dividends aggregated $208,437 for the three-month period
ended March 31, 2001, and represented dividends associated with the unconverted
portion of the Series G Preferred Stock.
The Series F Mandatory Redeemable Convertible Preferred Stock (issued in
February 1998) provided for a 5% dividend on unconverted shares. Preferred Stock
dividends of $16,905 in the three-month period ended March 31, 2000 represented
dividends associated with the unconverted portion of Series F Preferred Stock.
These shares now have all been converted into Common Stock.
BENEFICIAL CONVERSION DIVIDEND
In conjunction with the issuance of the Series G Preferred Stock, the Company
recorded an adjustment of $1.3 million in the year ended December 31, 2000 to
properly reflect deemed dividends beyond the stated 5% dividend rate and a
beneficial conversion feature as required by EITF 98-5 and 00-27. This
adjustment, which has reduced the carrying amount of the Series G Preferred
Stock and increased additional paid-in-capital, will be amortized through May
12, 2004 and reflected as additional deemed dividends during this period. For
the three-month period ended March 31, 2001, the Company has amortized $83,437
of the deemed dividend adjustment.
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LIQUIDITY AND CAPITAL RESOURCES
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Operating and Financing Activities
For the first quarter of 2001 the Company had net income of $1.8 million which
contributed to $3.8 million of cash flows from operating activities, $2.1
million of which was used to reduce the outstanding balance on the Company's
revolving credit facility and $1.3 million of which was used to reduce scheduled
long-term debt.
Investing Activities
In the first quarter of 2001, capital expenditures were $0.9 million.
Expenditures were principally for manufacturing and packaging equipment.
AVAILABLE FUNDS
The resources provided by the Company's expanding product portfolio are expected
to allow the Company to access sufficient funds to execute the Company's
business plan within the existing financing arrangements. As noted above,
certain product development activities may depend on obtaining additional
sources of financing, through partnering or other means.
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 Net Interest Expense and
Interest Rate Risk.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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On September 5, 2000, the Company filed an antitrust lawsuit against
Wyeth-Ayerst Laboratories, Inc., the makers of Premarin(R). The complaint,
(Duramed Pharmaceuticals, Inc. vs. Wyeth-Ayerst Laboratories, Inc., Case No.
C-1-00-735), filed in the Cincinnati Federal District Court, alleges that
Wyeth-Ayerst, a subsidiary of American Home Products Corporation, has illegally
perpetuated a monopoly in conjugated estrogens products by, among other things,
inducing managed care organizations (MCOs) into exclusive contracts for
Premarin, therefore eliminating the possibility of Cenestin being placed on
formulary with those same MCOs.
Duramed seeks actual and treble damages associated with profits lost due to
Wyeth-Ayerst's conduct in violation of antitrust laws and seeks to permanently
enjoin Wyeth-Ayerst from engaging in anti-competitive and exclusionary conduct.
Duramed is the sole plaintiff for the litigation. Duramed's marketing partner
for Cenestin, Solvay Pharmaceuticals, is not associated with the lawsuit.
Among other things, the suit alleges that, on or about the time of the FDA
approval of Cenestin, Wyeth-Ayerst began forming exclusive contracts with MCOs
that contained language stating that Premarin be used as "the sole and exclusive
conjugated estrogens" on the MCO's formulary. By agreeing to this contract, MCOs
would be eligible for Wyeth-Ayerst's rebates and/or administrative fees tied
directly to sales of Premarin.
Further alleged is that Wyeth-Ayerst has employed "disguised" exclusive
contracts that tie the rebates and/or administrative fees that Wyeth-Ayerst pays
to an individual MCO to that MCO's national market share of Premarin sales.
This, in effect, compels the MCO to promote Premarin and ignore Cenestin.
Duramed alleges that both types of contracts violate 15 U.S.C.ss.1 and 2, the
Sherman Act, and 15 U.S.C.ss.3, the Clayton Act.
On October 26, 2000, Wyeth-Ayerst filed a Motion to Dismiss the Complaint in its
entirety, as well as a Motion to Strike certain allegations in the Complaint. On
November 7, 2000, Duramed filed a Memorandum in Opposition to Wyeth-Ayerst's
Motion to Dismiss and Motion to Strike. Wyeth-Ayerst's Motion remains pending
before the Court.
On March 1, 2001, Duramed filed a Motion to Compel further production of
documents from Wyeth-Ayerst. On March 22, 2001, Wyeth-Ayerst filed a Memorandum
in Opposition to Duramed's Motion to Compel. Duramed's Motion remains pending
before the Court. In the meantime, discovery is proceeding, with both parties
having exchanged documents.
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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, their disposition will not, in the
opinion of management, result in a material adverse effect on the Company's
financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
None
(b) Reports on Form 8-K for the quarter ended March 31, 2001:
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 9, 2001 by: /s/ E. Thomas Arington
-------------------------- ---------------------------------
E. Thomas Arington
Chairman of the Board
Chief Executive Officer
Dated: May 9, 2001 by: /s/ Timothy J. Holt
-------------------------- ---------------------------------
Timothy J. Holt
Senior Vice President
Finance and Administration,
Treasurer, Chief Financial Officer
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