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 June 30, 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 August 7, 2001 27,100,222
Page 1 of 27 pages
2
DURAMED PHARMACEUTICALS, INC.
INDEX
PART I. Financial Information Page
- -------------------------------- ----
ITEM 1. Financial Statements
Consolidated Balance Sheets ................................. 3-4
Consolidated Statements of Operations ....................... 5
Consolidated Statements of Cash Flows ....................... 6
Consolidated Statement of Stockholders' Equity .............. 7
Notes to Consolidated Financial Statements .................. 8-13
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ......... 14-23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .. 23
PART II. Other Information
- ----------------------------
ITEM 1. Legal Proceedings ........................................... 24-25
ITEM 4. Submission to a Vote of Security Holders .................... 25
ITEM 6. Exhibits and Reports on Form 8-K............................. 26
SIGNATURES.............................................................. 27
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2001 2000
----------- -----------
Unaudited
Current assets:
Cash and cash equivalents $ 4,000 $ 4,000
Trade accounts receivable,
less allowance for doubtful accounts:
2001 - $1,151,000, 2000 - $1,195,000 28,612,548 19,157,503
Inventories 27,213,764 26,693,405
Prepaid expenses and other assets 6,752,361 5,572,579
----------- -----------
Total current assets 62,582,673 51,427,487
----------- -----------
Property, plant and equipment:
Land 1,145,000 1,000,000
Building 21,581,824 21,292,118
Equipment, furniture and fixtures 31,325,429 29,975,547
----------- -----------
54,052,253 52,267,665
Less accumulated depreciation
and amortization 25,500,665 23,776,180
----------- -----------
Property, plant and equipment - net 28,551,588 28,491,485
Deposits and other assets 1,716,399 2,046,724
----------- -----------
$92,850,660 $81,965,696
=========== ===========
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
June 30, December 31,
2001 2000
------------- -------------
Unaudited
Current liabilities:
Accounts payable $ 8,352,835 $ 7,405,020
Accrued liabilities 15,943,813 13,641,736
Current portion of long-term
debt and other liabilities 4,789,798 4,743,913
Current portion of capital lease obligations 897,941 870,675
------------- -------------
Total current liabilities 29,984,387 26,661,344
------------- -------------
Long-term debt, less current portion 39,984,368 39,107,431
Long-term capital leases, less current portion 1,536,404 1,640,284
------------- -------------
Total liabilities 71,505,159 67,409,059
------------- -------------
Mandatory redeemable convertible preferred stock 8,445,870 8,177,000
------------- -------------
Stockholders' equity:
Common stock - authorized 50,000,000 shares, par value
$.01; issued and outstanding 26,845,212 and
26,355,013 shares in 2001 and 2000, respectively 268,451 263,549
Additional paid-in capital 136,093,506 134,880,388
Accumulated deficit (123,462,326) (128,764,300)
------------- -------------
Total stockholders' equity 12,899,631 6,379,637
------------- -------------
$ 92,850,660 $ 81,965,696
============= =============
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 32,507,622 $ 20,667,278 $ 59,831,208 $ 37,260,896
Cost of goods sold 16,389,782 11,498,514 30,960,674 22,473,397
------------ ------------ ------------ ------------
Gross profit 16,117,840 9,168,764 28,870,534 14,787,499
------------ ------------ ------------ ------------
Operating expenses:
Product development 1,952,521 587,783 3,042,570 1,852,403
Brand marketing 4,507,793 2,591,245 9,056,828 4,581,620
Selling 910,516 1,339,291 1,880,359 2,309,318
General and administrative 4,124,715 2,930,652 7,310,765 5,560,114
------------ ------------ ------------ ------------
11,495,545 7,448,971 21,290,522 14,303,455
------------ ------------ ------------ ------------
Operating income 4,622,295 1,719,793 7,580,012 484,044
Net interest expense 1,067,599 1,370,412 2,175,868 2,819,311
------------ ------------ ------------ ------------
Income (loss) before income tax
and preferred stock dividends 3,554,696 349,381 5,404,144 (2,335,267)
Income tax provision 70,000 6,850 102,170 6,850
------------ ------------ ------------ ------------
Net income (loss) 3,484,696 342,531 5,301,974 (2,342,117)
Preferred stock dividends 125,000 69,317 250,000 86,220
Deemed dividends on convertible
preferred stock 83,436 -- 166,873 --
------------ ------------ ------------ ------------
Net income (loss) applicable
to common shareholders $ 3,276,260 $ 273,214 $ 4,885,101 $ (2,428,337)
============ ============ ============ ============
Income (loss) per average common
and common equivalent shares:
Basic and diluted $ 0.12 $ 0.01 $ 0.18 $ (0.09)
============ ============ ============ ============
Weighted average number of common
and common equivalent shares
outstanding:
Basic 26,713,194 26,248,852 26,574,653 26,040,449
============ ============ ============ ============
Diluted 30,272,647 26,737,744 27,601,023 26,040,449
============ ============ ============ ============
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 5,301,974 $ (2,342,117)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 2,012,977 1,682,295
Provision for doubtful accounts 205,255 113,610
Common stock issued in connection with
employee compensation plans 245,304 183,148
Increase in cash surrender value of life insurance (39,402) --
Changes in assets and liabilities:
Trade accounts receivable (9,660,300) (3,495,078)
Inventories (520,359) 4,519,404
Prepaid expenses and other assets (1,179,782) 1,659,258
Accounts payable 947,815 (6,132,592)
Accrued liabilities 2,319,414 (11,351,183)
Other 159,314 (211,441)
------------ ------------
Net cash used in operating activities (207,790) (15,374,696)
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,376,400) (317,742)
Deposits on capital equipment (70,086) (25,677)
------------ ------------
Net cash used in investing activities (1,446,486) (343,419)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt, including current maturities (2,699,543) (11,627,438)
Net increase (decrease) in revolving credit facility 3,192,793 (3,280,087)
Long-term borrowings 21,436 29,950,010
Issuance of common stock 1,389,590 737,038
Dividends paid on convertible preferred stock (250,000) (61,408)
------------ ------------
Net cash provided by financing activities 1,654,276 15,718,115
------------ ------------
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:
Capital leases $ 408,188 $ 617,950
Interest paid $ 2,006,291 $ 2,226,314
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, 2000 26,355,013 $263,549 $134,880,388 $(128,764,300) $ 6,379,637
Issuance of stock in connection
with benefit plans 44,027 440 244,864 245,304
Issuance of stock in connection
with option exercises 446,172 4,462 1,385,128 1,389,590
Net income 5,301,974 5,301,974
Deemed dividend on convertible
preferred stock (166,874) (166,874)
Dividend on convertible
preferred stock (250,000) (250,000)
------------- -------- ------------ ------------- ------------
BALANCE - JUNE 30, 2001 26,845,212 $268,451 $136,093,506 $(123,462,326) $(12,899,631)
============= ======== ============ ============= ============
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 six-month period ended June 30, 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:
June 30, December 31,
2001 2000
------------ ------------
Raw materials $ 15,016,302 $ 15,464,667
Work-in-process 249,156 347,496
Finished goods 17,324,424 16,544,207
Obsolescence reserve (5,376,118) (5,662,965)
------------ ------------
Net inventory $ 27,213,764 $ 26,693,405
============ ============
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Note 3. Accrued Liabilities
The Company's accrued liabilities consist of the following:
June 30, December 31,
2001 2000
----------- -----------
Brand marketing expenses $ 5,219,268 $ 6,377,487
Profit sharing for joint product
development activities 4,544,355 2,719,487
Wages and other compensation 2,393,014 1,592,642
Taxes, other than income taxes 1,268,606 906,598
Deferred merger expense 750,000 --
Bio-studies 596,092 97,009
Other 1,172,478 1,948,592
----------- -----------
$15,943,813 $13,641,736
=========== ===========
Accrued brand marketing expenses represent the amount due Solvay
Pharmaceuticals, Inc. ("Solvay Pharmaceuticals") for reimbursement of marketing
expenses associated with Solvay Pharmaceuticals' promotion of the Company's
Cenestin(R) (synthetic conjugated estrogens, A) Tablets ("Cenestin") product.
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Note 4: Debt and Mandatory Redeemable Convertible Preferred Stock
The Company's debt and mandatory redeemable convertible preferred stock consists
of the following:
June 30, December 31,
2001 2000
----------- -----------
Debt
Foothill Capital financing facilities:
Revolving credit facility $20,316,034 $17,123,241
Intangible term note 2,791,667 3,666,667
Equipment term note 2,457,929 2,860,208
Provident Bank mortgage notes 18,000,000 18,800,000
Note payable to contract sales organization 605,559 886,504
Installment notes payable 110,108 47,185
Other 492,869 467,539
----------- -----------
44,774,166 43,851,344
Less amount classified as current 4,789,798 4,743,913
----------- -----------
$39,984,368 $39,107,431
=========== ===========
Mandatory redeemable
convertible preferred stock $ 8,445,870 $ 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% (7.25% at June 30,
2001). The equipment term note, secured by specified equipment, bears interest
at the prime rate plus 0.75% (7.50% at June 30, 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% (8.00% at June 30, 2001). The
note requires monthly principal payments of $145,833 plus interest for the term
of the note.
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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 (6.75% at June 30, 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 represents 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 three and six month periods ended June 30, 2001, the Company amortized
$83,436 and $166,873, respectively, of the deemed dividend adjustment.
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Note 5: Earnings (Loss) Per Common Share
The following is a reconciliation of the numerators and denominators to
calculate earnings (loss) per common share:
Three Months Ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
Numerator:
Net income (loss) $ 3,484,696 $ 342,531 $ 5,301,974 $ (2,342,117)
Preferred stock dividends 208,436 69,317 416,873 86,220
------------ ------------ ------------ ------------
Numerator for basic earnings
(loss) per share - income
(loss) available to
common stockholders $ 3,276,260 $ 273,214 $ 4,885,101 $ (2,428,337)
Effect of dilutive securities:
Preferred stock dividends 208,436 -- -- --
------------ ------------ ------------ ------------
Numerator for diluted
earnings (loss) per share -
income (loss) available to
common stockholders after
assumed conversions $ 3,484,696 $ 273,214 $ 4,885,101 $ (2,428,337)
============ ============ ============ ============
Denominator:
Denominator for basic earnings
(loss) per share - weighted
average shares 26,713,194 26,248,852 26,574,653 26,040,449
Effect of dilutive securities:
Stock options and warrants 1,583,168 488,892 1,026,370 --
Convertible preferred stock 1,976,285 -- -- --
------------ ------------ ------------ ------------
Denominator for diluted
earnings
(loss) per share - adjusted
weighted-average shares
and assumed conversions 30,272,647 26,737,744 27,601,023 26,040,449
============ ============ ============ ============
Basic and diluted
earnings (loss) per share $ 0.12 $ 0.01 $ 0.18 $ (0.09)
============ ============ ============ ============
Not included in the calculation
of diluted earnings (loss)
per share because
their impact is antidilutive:
Stock options outstanding 206,420 1,119,118 206,420 3,147,066
Warrants 57,986 1,533,033 57,986 1,837,218
Preferred shares if converted -- 1,976,285 1,976,285 1,976,285
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Note 6: Merger Agreement
On June 29, 2001, Duramed and Barr Laboratories, Inc. ("Barr") announced the
planned merger of the two companies and executed a Definitive Agreement setting
forth the provisions of the merger. In the merger, holders of Duramed common
stock will receive .2562 shares of Barr common stock for each of their shares of
Duramed common stock and holders of Duramed preferred stock will receive 5.0632
shares of Barr common stock for each of their shares of Duramed preferred stock.
Duramed stockholders will receive cash for any fractional shares of Barr common
stock they would otherwise receive in the merger. The transaction, subject to
approval by the stockholders of Duramed and of Barr, antitrust clearance under
the Hart-Scott-Rodino Act and other customary approvals and conditions, is
expected to close late in Duramed's third quarter or early in its fourth quarter
and is expected to be a tax-free exchange, accounted for under the "pooling of
interests" method.
Under certain specified circumstances, if the merger is not consummated the
Company is obligated to pay Barr $15 million. Additionally, Barr is obligated to
pay Duramed a termination fee of $15 million if the Barr stockholders do not
approve issuance of Barr common stock in connection with the merger.
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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-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 products in the women's health and
the hormone replacement therapy markets.
MERGER AGREEMENT
On June 29, 2001, Duramed and Barr Laboratories, Inc. ("Barr") announced the
planned merger of the two companies and executed a Definitive Agreement setting
forth the provisions of the merger. In the merger, holders of Duramed common
stock will receive .2562 shares of Barr common stock for each of their shares of
Duramed common stock and holders of Duramed preferred stock will receive 5.0632
shares of Barr common stock for each of their shares of Duramed preferred stock.
Duramed stockholders will receive cash for any fractional shares of Barr common
stock they would otherwise receive in the merger. The transaction, subject to
approval by the stockholders of Duramed and of Barr, antitrust clearance under
the Hart-Scott-Rodino Act and other customary approvals and conditions, is
expected to close late in Duramed's third quarter or early in its fourth quarter
and is expected to be a tax-free exchange, accounted for under the "pooling of
interests" method.
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Under certain specified circumstances, if the merger is not consummated the
Company is obligated to pay Barr $15 million. Additionally, Barr is obligated to
pay Duramed a termination fee of $15 million if the Barr stockholders do not
approve issuance of Barr common stock in connection with the merger. Except as
specifically noted, the statements in this report do not reflect the effects of
the merger and present Duramed's business on a "stand-alone" basis.
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"), the approval of the Company's third oral contraceptive, Enpresse(TM)
(levonorgestrel and ethinyl estradiol) Tablets ("Enpresse") 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.
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
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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.
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.
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.
Successfully Commercialize Approved and Filed Products -- On July 17,
2001, the Company announced FDA approval of its Abbreviated New Drug
Application ("ANDA") for its third oral contraceptive, Enpresse(TM)
(levonorgestrel and ethinyl estradiol) Tablets,
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a triphasic regimen oral contraceptive. Enpresse is bioequivalent to
and therapeutically interchangeable with Triphasil(R) and Tri-Levlen(R)
for all new and refill prescriptions. According to IMS America Ltd.
("IMS") data for drugstore and non-retail purchases, branded and
generic equivalent sales in 2000 for all levonorgestrel and ethinyl
estradiol triphasic regimen oral contraceptive drug products exceeded
$230 million. Shipping of Enpresse, Duramed's seventh solid oral dose
hormone product, is scheduled to begin in November upon completion of
the products' validation. Like Apri and Aviane, the Company will be
marketing Enpresse 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.
On May 1, 2001, the Company announced FDA approval of its ANDA for
Aviane. Aviane is therapeutically equivalent to Alesse(TM). Aviane is
the first generic product deemed bioequivalent to and therapeutically
interchangeable with Alesse for all new and refill prescriptions.
According to IMS data, 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.
Shipping of Aviane commenced on May 8, 2001, and the product totaled
94,000 prescriptions for the second quarter of 2001.
Apri, the Company's first oral contraceptive product is the first, and
currently the only, product bioequivalent to and 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 Richter. The market for these
desogestrel products at brand prices is estimated to be approximately
$159 million. Prescriptions for Apri totaled 720,000 for the second
quarter 2001, up approximately 63% from second quarter 2000 and up 7%
from the first quarter 2001. Apri has captured more than 43% 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 three ANDAs on file with the FDA. Two of
these ANDAs are for oral contraceptive products. Of the three 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 in 2001 or early 2002.
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
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18
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 will continue work on four ANDAs now
expected to be filed in early 2002. The four products include a
progestin, an estrogen and two non-hormone products. Other ANDA
products in development have been delayed due to the Company's
re-assessment of its development schedule in light of the pending
transaction with Barr Laboratories.
Duramed has five products, in various stages of development, which 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. 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.
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 is continuing
its Phase IV Studies (post product launch) 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 of 2001 studies commenced involving 0.3 mg, 0.625 mg,
and 1.25 mg Cenestin dosage strengths. Phase III work has been
completed on a 0.3 mg Cenestin tablet. The Company plans to file a
supplemental NDA for the dosage strength with the FDA in August 2001.
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
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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, cardiovascular markers demonstrated a
positive lipid profile.
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, Aviane and Enpresse; (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.
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20
RESULTS OF OPERATIONS
NET SALES
Net sales increased $11.8 million (57.3%) and $22.6 million (60.6%) for the
three and six-month periods ended June 30, 2001 as compared with the same
periods in 2000. Hormone product sales for the three and six month periods ended
June 30, 2001 were $20.4 million and $35.0 million compared to $8.6 million and
$16.1 million for the same periods in 2000. Net sales for the three and six
months ended June 30, 2001 include $6.6 million and $13.2 million in Cenestin
revenue compared to $3.8 million and $6.7 million in the same periods in 2000.
Oral contraceptive revenues were $13.0 million and $20.2 million for the three
and six months ended June 30, 2001 as compared to $4.1 million and $8.1 million
for the same periods in 2000.
Non-hormone product sales were $12.2 million and $24.9 million for the three and
six month periods ended June 30, 2001 compared to $12.1 million and $21.2
million in the same periods in 2000. The increase in 2001 is due principally to
increased sales of selected seasonal cough/cold products.
GROSS MARGIN
The gross margin, and the corresponding percentage of net sales, was $16.1
million (49.6%) and $28.9 million (48.3%) for the three and six months ended
June 30, 2001 compared with $9.2 million (44.4%) and $14.8 million (39.7%) for
the same periods in 2000. The gross margin improvement (95.3%) in the first half
of 2001 was due to greater sales of higher margin products, principally hormone
products. The gross margin improvement also reflects increased operating
efficiency of the hormone manufacturing facility through greater utilization.
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 the Company's
hormone products penetrate the market. Additionally, the Company's gross margin
could be favorably impacted by increased sales performance of 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 approval; 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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21
PRODUCT DEVELOPMENT
Product development expenditures increased $1.4 million (232.5%) and $1.2
million (64.3%) for the three and six-month periods ended June 30, 2001 compared
with the same periods in 2000. The increase was due to the purchase of raw
material and the timing of bioequivalency and clinical studies. The increase is
consistent with the Company's 2001 business plan. The Company's product
development emphasis is on prescription drugs with attractive market
opportunities and potentially limited competition due to technological barriers
of entry - particularly products in the women's health and the replacement
therapy markets.
BRAND MARKETING AND SELLING
The Company's brand marketing and sales and marketing expenses increased by $1.5
million (64.3%) and $4.0 million (58.7%) for the three and six month periods
ended June 30, 2001 compared with the same periods in 2000. The increase
represents Solvay Pharmaceuticals' share of Cenestin profits resulting from
increased Cenestin revenues, partially offset by higher selling expenses in 2000
relating to Cenestin that were not covered by the Solvay agreement.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $1.2 million (40.8%) and $1.8
million (31.5%) for the three and six-month periods ended June 30, 2001 compared
with the same periods in 2000. The increase was due principally to additional
hires and personnel-related expenses.
NET INTEREST EXPENSE AND INTEREST RATE RISK
The Company's borrowings are primarily variable rate facilities. Net interest
expense for the three and six month periods ended June 30, 2001 decreased $0.3
million (22.1%) and $0.6 million (22.8%) compared to the same period in 2000 due
to reduced interest rates and the reduced average balance outstanding of
interest bearing obligations.
The Company has floating rate debt totaling $43.6 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, in
addition to the average balance outstanding variable rate facilities.
INCOME TAXES
The income tax provision in the three and six month periods ended June 30, 2001
and the three month period ended June 30, 2000 represents alternative minimum
tax. A provision for regular income tax was not required for the three and six
month periods ended June 30, 2001, due to net operating loss carryforwards of
approximately $105 million.
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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 $208,436 and $416,873 for the three
and six month periods ended June 30, 2001, and $69,317 in the second quarter of
2000 represented dividends associated with the unconverted portion of the Series
G Convertible Preferred Stock.
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 in the first quarter of 2000 represented dividends associated with the
unconverted portion of Series F Preferred Stock. These shares 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, or upon conversion, and reflected as additional deemed dividends
during this period. For the three and six month periods ended June 30, 2001, the
Company amortized $83,436 and $166,873, respectively, of the deemed dividend
adjustment.
LIQUIDITY AND CAPITAL RESOURCES
Operating and Financing Activities
For the first half of 2001 operating activities resulted in the net use of cash
of $200,000 with the most significant component being working capital required
to fund a $9.7 million increase in accounts receivable, due to increased sales
level, including the launch of Aviane, offset by cash generated from net income
exclusive of non-cash transactions.
Investing Activities
In the first half of 2001, capital expenditures were $1.4 million. Expenditures
were principally for manufacturing and packaging equipment.
AVAILABLE FUNDS
As previously discussed, the Company has entered into a merger agreement with
Barr Laboratories, Inc. In the event that the merger is not consummated, the
resources provided by the Company's expanding product portfolio are expected to
allow the Company to access sufficient
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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
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. Section 1 and 2,
the Sherman Act, and 15 U.S.C. Section 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. On August 2, 2001, the United States
District Court for the Southern District of Ohio filed an order, denying
Wyeth-Ayerst's motion to dismiss Duramed's antitrust lawsuit against Wyeth. The
court specifically upheld Duramed's right to proceed on all claims for relief
against Wyeth, holding that "Duramed has sufficiently stated claims for
antitrust violations."
The court order recognized the legal adequacy of Duramed's allegations that
Wyeth has offered rebates "in order to entice health plans into entering overt
exclusive dealing contracts or that the discount programs themselves are de
facto, or "disguised" exclusive dealing contracts because
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25
the incentives are too attractive, or in the alternative, too punitive,
financially to pass up." Wyeth must now answer Duramed's complaint and defend
the case on the merits.
The court's order leaves available all factual allegations of the complaint to
support Duramed's four claims for relief, except those allegations pertaining to
Wyeth's petitioning activities of the U.S. Food and Drug Administration that are
protected under the Noerr-Pennington doctrine, a legal doctrine that immunizes
from antitrust liability attempts to influence the legislative process--even if
prompted by monopolistic intent.
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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 2001 Annual Meeting of Stockholders of Duramed Pharmaceuticals, Inc.
(the "Meeting") was held on May 10, 2001. The holders of 21,875,908 shares
of the Company's 26,612,346 then outstanding shares of common stock
(approximately 83%) were present at the Meeting in person or by proxy.
(b) At the Meeting, the following nine individuals were duly nominated and
properly elected as Directors of the Company to serve until the 2002 Annual
Meeting or until their successors are elected and qualified - E. Thomas
Arington, Jeffrey T. Arington, George W. Baughman, Vernon A. Brunner,
Richard R. Frankovic, Peter R. Seaver, S. Sundararaman, Philip M. Uhrhan
and Gerald L. Wolken. The number of votes cast for and against/withheld
with respect of each nominee is indicated below:
Against/
For Withheld
---------- --------
E. Thomas Arington....................... 21,698,760 177,148
Jeffrey T. Arington...................... 21,628,933 246,975
George W. Baughman....................... 21,765,218 110,690
Vernon A. Brunner........................ 21,763,243 112,665
Richard R. Frankovic..................... 21,549,943 325,965
Peter R. Seaver.......................... 21,767,503 108,405
S. Sundararaman.......................... 21,765,518 110,390
Philip M. Uhrhan......................... 21,764,153 111,755
Gerald L. Wolken......................... 21,764,793 111,115
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(c) At the Meeting, a proposal to ratify the appointment of Ernst & Young LLP
as the Company's independent auditors for fiscal 2001 was approved as
follows:
Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
21,727,679 113,381 34,848 -0-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K for the quarter ended June 30, 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: August 14, 2001 by: /s/ E. Thomas Arington
------------------------ -----------------------------
E. Thomas Arington
Chairman of the Board
Chief Executive Officer
Dated: August 14, 2001 by: /s/ Timothy J. Holt
------------------------ -----------------------------
Timothy J. Holt
Senior Vice President
Finance and Administration,
Treasurer, Chief Financial Officer
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