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 September 30, 1999
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 November 9, 1999 23,462,194
Page 1 of 27 pages
2
DURAMED PHARMACEUTICALS, INC.
INDEX
PAGE
----
PART I. Financial Information
- ------- ---------------------
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . 3 - 4
Consolidated Statements of Operations . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 6
Consolidated Statements of Stockholders' Equity (Deficit) . . . . . . 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
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . .25
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 25
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . .26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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3
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 4,000 $ 3,500
Trade accounts receivable,
less allowance for doubtful accounts:
$861,000 and $903,000,
in 1999 and 1998 respectively 9,956,130 10,330,816
Inventories 26,930,968 19,786,705
Prepaid expenses and other assets 4,324,501 2,803,460
----------- -----------
Total current assets 41,215,599 32,924,481
Property, plant and equipment:
Land 1,000,000 1,000,000
Buildings 19,600,364 19,285,854
Equipment, furniture and fixtures 29,048,331 25,253,509
----------- -----------
49,648,695 45,539,363
Less accumulated depreciation
and amortization 20,123,963 18,309,535
----------- -----------
Property, plant and equipment - net 29,524,732 27,229,828
Deposits and other assets 1,282,572 1,270,041
----------- -----------
Total assets $72,022,903 $61,424,350
=========== ===========
See accompanying notes.
-3-
4
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, December 31,
1999 1998
-------------- -------------
Unaudited
Current liabilities:
Accounts payable $ 10,940,951 $ 4,370,181
Accrued liabilities 31,343,413 5,524,574
Current portion of long-term
debt and other liabilities 4,952,672 3,384,860
Current portion of capital lease obligations 935,200 708,891
------------- -------------
Total current liabilities 48,172,236 13,988,506
------------- -------------
Long-term debt, less current portion 34,479,402 22,718,408
Long-term capital leases, less current portion 1,507,973 441,632
------------- -------------
Total liabilities 84,159,611 37,148,546
------------- -------------
Mandatory redeemable convertible preferred stock 4,900,000 7,700,000
Stockholders' equity:
Common stock - authorized 50,000,000 shares,
par value $.01; issued and outstanding 21,752,281and
19,811,178 shares in 1999 and 1998 respectively 217,522 198,111
Additional paid-in capital 99,919,799 94,795,906
Accumulated deficit (117,174,029) (78,418,213)
------------- -------------
Total stockholders' equity (deficit) (17,036,708) 16,575,804
------------- -------------
Total liabilities and stockholders' equity (deficit) $ 72,022,903 $ 61,424,350
============= =============
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net sales $ 11,137,590 $ 11,249,591 $ 34,353,873 $ 35,672,485
Cost of goods sold 9,262,564 7,612,335 29,172,286 26,978,484
------------ ------------ ------------ ------------
Gross profit 1,875,026 3,637,256 5,181,587 8,694,001
------------ ------------ ------------ ------------
Operating expenses:
Product development 1,915,601 988,624 5,526,900 3,836,613
Selling 7,404,079 1,025,821 12,659,125 2,324,642
General and administrative 3,417,939 2,820,235 8,350,738 7,524,996
Litigation settlement 15,000,000 --- 15,000,000 ---
------------ ------------ ------------ ------------
27,737,619 4,834,680 41,536,763 13,686,251
------------ ------------ ------------ ------------
Operating loss (25,862,593) (1,197,424) (36,355,176) (4,992,250)
Net interest expense 985,839 619,965 2,400,640 1,696,758
------------ ------------ ------------ ------------
Loss before income tax and
preferred stock dividends (26,848,432) (1,817,389) (38,755,816) (6,689,008)
Preferred stock dividends 62,611 150,000 192,834 391,662
Deemed dividend on convertible
preferred stock --- 1,489,422 --- 3,853,070
------------ ------------ ------------ ------------
Net loss applicable
to common stockholders $(26,911,043) $ (3,456,811) $(38,948,650) $(10,933,740)
============ ============ ============ ============
Basic and diluted loss per share $ (1.24) $ (0.19) $ (1.83) $ (0.61)
============ ============ ============ ============
See accompanying notes.
-5-
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
1999 1998
------------ ------------
Cash flows from operating activities:
Net loss $(38,755,816) $ (6,689,008)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 2,203,565 2,084,508
Provision for doubtful accounts 136,671 137,356
Common stock issued in connection with
employee compensation plans 240,436 167,025
Changes in assets and liabilities:
Trade accounts receivable 238,015 295,075
Inventories (7,144,263) (8,964,625)
Prepaid expenses and other assets (1,656,254) 388,829
Accounts payable 6,570,770 (425,286)
Accrued liabilities 25,988,267 779,416
Other (157,592) (285,209)
------------ ------------
Net cash (used in) operating activities (12,336,201) (12,511,919)
------------ ------------
Investing activities:
Capital expenditures (4,232,521) (941,239)
Deposits on capital equipment (109,045) (74,581)
------------ ------------
Net cash (used for) investing activities (4,341,566) (1,015,820)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt, including current maturities (2,488,011) (2,597,966)
Net increase in revolving credit facility 6,539,025 3,927,859
Long-term borrowings 10,542,768 1,127,324
Issuance of preferred stock - net --- 11,399,376
Cash redemption of preferred stock --- (149,971)
Issuance of common stock 2,293,404 172,489
Preferred stock dividends paid (208,919) (351,372)
------------ ------------
Net cash provided by financing activities 16,678,267 13,527,739
------------ ------------
Net change in cash 500 ---
Cash at beginning of period 3,500 3,500
------------ ------------
Cash at end of period $ 4,000 $ 3,500
============ ============
Supplemental cash flow disclosures:
Interest paid $ 2,045,561 $ 1,470,785
See accompanying notes.
-6-
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Additional
---------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
---------------------------------- -------------- -------------- -------------
BALANCE - DECEMBER 31, 1998 19,811,178 $ 198,111 $ 94,795,906 $ (78,418,213) $ 16,575,804
Issuance of stock in connection
with benefit plans 30,130 301 240,135 240,436
Issuance of stock in connection
with stock options 918,193 9,182 2,284,222 2,293,404
Conversion of Series F
Preferred Stock 992,780 9,928 2,792,370 2,802,298
Net loss for 1999 (38,755,816) (38,755,816)
Preferred Stock dividend (192,834) (192,834)
------------- ------------- ------------- ------------- -------------
BALANCE - SEPTEMBER 30, 1999 21,752,281 $ 217,522 $ 99,919,799 $(117,174,029) $ (17,036,708)
============= ============= ============= ============= =============
See accompanying notes.
-7-
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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 nine month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. 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, 1998 (the "1998 10-K/A").
Note 2: Loss Per Common Share
- ------- ---------------------
The following table presents the calculation of losses applicable to common
stockholders. The Company has restated its consolidated financial statements for
the three and nine month periods ended September 30, 1998 to conform its
accounting for a beneficial conversion feature related to the issuance of
mandatory redeemable convertible preferred stock in February 1998 to Emerging
Issues Task Force Topic No. D-60 (Topic No. D-60). Topic No. D-60 requires that
the intrinsic value of beneficial conversion features of convertible preferred
stock should be treated as a return to the preferred stockholder over the period
from issuance to the first date that conversion can occur. The Company had not
previously assigned a value to the beneficial conversion feature of its Series F
mandatory redeemable convertible preferred stock which provided for maximum
discounts on conversion of 22%. The restated amount has been amortized over 300
days, the minimum period which the preferred shareholders can realize the
maximum beneficial conversion.
-8-
9
As a result of the aforementioned restatement, the net loss applicable to common
stockholders increased by $1,489,422 and $3,853,070 and basic and diluted loss
per share increased by $0.08 and $0.22 for the three and nine month periods
ended September 30, 1998, respectively.
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
----------------------------------- --------------------------------------
Net loss $(26,848,432) $ (1,817,389) $(38,755,816) $ (6,689,008)
Less dividends on
preferred shares 62,611 150,000 192,834 391,662
------------ ------------ ------------ ------------
Net loss applicable to
common stockholders
as previously reported $(26,911,043) $ (1,967,389) $(38,948,650) $ (7,080,670)
Less deemed dividend on
convertible preferred stock --- 1,489,422 --- 3,853,070
------------ ------------ ------------ ------------
Net loss applicable to
common stockholders $(26,911,043) $ (3,456,811) $(38,948,650) $(10,933,740)
============ ============ ============ ============
Basic and diluted loss per share
as previously reported $ (1.24) $ (0.11) $ (1.83) $ (0.39)
============ ============ ============ ============
Restated basic and diluted loss
per share $ (1.24) $ (0.19) $ (1.83) $ (0.61)
============ ============ ============ ============
Weighted average common shares outstanding for the computation of basic and
diluted loss per share were 21,735,515 and 21,278,715 for the three and nine
month periods ended September 30, 1999 and 17,960,329 and 17,928,015 for the
same periods in 1998.
For the nine month periods ended September 30, 1999 and 1998 outstanding options
and warrants covering 4,332,829 and 4,731,921 shares, respectively, were not
recognized in computing net loss per share as their effect would be
anti-dilutive.
-9-
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Note 3: Inventories
- -------------------------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventories include:
September 30, December 31,
1999 1998
------------- -------------
Raw materials $ 14,929,985 $ 6,841,241
Work-in-process 244,796 476,404
Finished goods 14,039,697 14,914,588
Obsolescence reserve (2,283,510) (2,445,528)
------------- -------------
Net inventory $ 26,930,968 $ 19,786,705
============= =============
As of September 30, 1999 the Company had not recorded shipments of its brand
product Cenestin(R) (synthetic conjugated estrogens, A) ("Cenestin") as revenue.
Through September 30, 1999 the Company had shipped and invoiced $12 million of
Cenestin, $8.3 million of which had been collected with the balance carried as
inventory at cost.
Note 4: Accrued Liabilities
- ----------------------------------
September 30, December 31,
1999 1998
--------------------------------
Litigation settlement $ 15,000,000 $ ---
Deferred revenue 8,283,982 ---
Accrued marketing expenses 2,461,806 ---
Other 5,597,625 5,524,574
------------ -----------
$ 31,343,413 $ 5,524,574
============ ===========
The $15 million represents the settlement of the litigation between the Company
and Schein Pharmaceutical, Inc. (see Legal Proceedings in Part II for additional
details).
Deferred revenues reflect amounts collected for shipments of Cenestin. The
Company will record these shipments as revenue as evidence of product movement
through the distribution system is obtained.
The $2.5 million accrued marketing expenses represents the liability for
marketing expenses related to Cenestin.
-10-
11
Note 5: Debt
- -------------------
September 30, December 31,
1999 1998
-------------------------------
Revolving credit facility $17,240,514 $10,701,489
Merrill Lynch note payable 7,825,654 8,144,404
Term note 6,854,167 ---
Equipment term note 4,778,857 5,564,866
Loan payable to contract sales organization 1,530,537 ---
Note payable to strategic alliance partner 535,432 1,081,146
Installment notes payable 59,145 31,270
Other 607,768 580,093
----------- -----------
39,432,074 26,103,268
Less amount classified as current 4,952,672 3,384,860
----------- -----------
$34,479,402 $22,718,408
=========== ===========
Mandatory redeemable
convertible preferred stock $ 4,900,000 $ 7,700,000
=========== ===========
During the third quarter of 1999, the Company financed its operations with
borrowings on its revolving credit facility and the addition of a four-year term
loan from Bank of America Commercial Finance, Commercial Funding Division
(formerly NationsCredit Commercial Corporation) in the amount of $7.0 million.
Debt
- ----
The Company's principal lender is Bank of America Commercial Finance ("Bank of
America"). The initial term of the agreement with Bank of America is through
November 2002 with provisions for renewals. The financing agreement provides for
a revolving credit facility collateralized by the Company's receivables and
inventories and a $5,631,913 term note secured by the Company's equipment. The
Company's borrowing capacity under the revolving credit facility adjusts based
on the change in receivables and inventory and bears an interest rate of prime
plus 0.50% (8.75% at September 30, 1999). The $5,631,913 term note bears an
interest rate of prime plus 0.75% (9.00% at September 30, 1999) and requires
monthly principal payments of $158,342 plus interest through July 30, 2000 and
$67,047 plus interest for the remaining term of the note, subject to renewal of
the financing agreement.
On August 4, 1999, the Company announced the addition of a second four-year
term loan, in the amount of $7.0 million. Under the terms of the agreement, the
new term note requires monthly principal payments of $229,166 plus interest
through November 30, 2000 and $145,833 plus interest for the remaining term of
the note bears an interest rate of prime plus 1.25% (9.50% at September 30,
1999). The term note is collateralized by the intangible assets of the Company.
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The Company has an $8.1 million note payable to Merrill Lynch, which is
guaranteed by the Warner-Lambert Company ("Warner-Lambert"). Warner-Lambert
holds a first mortgage on the Company's Cincinnati, Ohio manufacturing facility.
The note payable to Merrill Lynch bears a variable interest rate based upon the
average commercial paper dealer rate plus 2.65% (7.95% on September 30, 1999).
The monthly principal payment required is $35,417 plus interest. Principal
payments are based upon a twenty year amortization with a balloon payment due on
October 1, 2007 of $4,250,000.
The $1,650,000 loan payable to a contract sales organization represents the
initial cost to establish the brand sales force which is representing the
Company's branded products (initially Cenestin) to the physicians community. The
firm with which the Company has contracted to establish and manage the Company's
dedicated sales force agreed to finance its startup costs over the 36-month term
of the agreement in exchange for a monthly principal and interest payment by the
Company of $53,240. The loan is unsecured and carries an interest rate of 10%.
The note payable to a strategic alliance partner is an unsecured note. The note
requires payment in full on April 30, 2000.
Other long-term debt also includes facilities of varying amounts and terms which
are generally collateralized by the assets financed.
The carrying value of the Company's debt approximates fair market value.
Mandatory Redeemable Convertible Preferred Stock
- ------------------------------------------------
In February 1998, the Company issued $12.0 million in Series F Preferred Stock.
The Series F Preferred Stock is convertible into shares of common stock and pays
a dividend of 5% annually, payable quarterly in arrears, on all unconverted
shares. Any of the Series F Preferred Stock that remains outstanding will be
redeemed automatically on February 4, 2000. The terms of the Series F Preferred
Stock limit the number of shares of Common Stock that can be issued upon
conversion to 3,580,252, with an option for the Company to satisfy any remaining
unconverted Series F Preferred Stock in cash or stock. In November 1998, the
Company received a waiver of the Nasdaq requirement for shareholder approval,
thereby permitting the Company to issue, as required, 1,401,584 shares beyond
the original 3,580,252. The terms of the Series F Preferred Stock provide for a
conversion price based upon a trailing 20 day period and are structured so that
the Series F Preferred Shares are convertible into common shares at varying
discounts to the market price (as defined) depending on the date the conversion
occurs.
-12-
13
At November 12, 1999 $7.1 million of the stated value of the Series F Preferred
Stock had been converted into 2,794,702 shares of Common Stock at an average
price of $2.54 per share. Per the terms of the Series F Stock, assuming that the
stock price remains above $4.88 and the Series F holder converts, the balance of
the Series F preferred shares will convert into common shares at $3.80 per
share. Based upon a $3.80 conversion price, the Company will be required to
issue approximately 1.3 million additional common shares. This would result in
the Company issuing 4.1 million common shares at an average price of $2.94 upon
the complete conversion of the Series F Stock.
-13-
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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 future events, particularly relating to sales of
current products as well as the introduction of new manufactured and distributed
products. Such 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
herein. Factors that might affect such forward-looking statements set forth in
this Form 10-Q include, among others, (i) increased competition from new and
existing competitors and pricing practices from such 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 its brand marketing
efforts.
Duramed develops, manufactures and markets prescription drug products. Products
sold by the Company include those of its own manufacture and those it markets
under certain arrangements with other drug manufacturers. The Company's results
include expenses associated with a product development program designed to
generate a stream of new product offerings. The Company's strategy has been to
focus its product development activities primarily on prescription drugs with
attractive market opportunities and potentially limited competition due to
technological barriers of entry, principally, hormonal products. The Company's
product development capabilities include modified release technologies as well
as controlled substances development.
Results for the three-year period ended December 31, 1998 and the nine-month
period ended September 30, 1999 reflect the substantial resources Duramed
invested in the development of an ANDA generic conjugated estrogens product
and, subsequently, an NDA brand conjugated estrogens product. In March 1999,
the Company received U.S. Food and Drug Administration ("FDA") marketing
approval of the NDA product, its first branded prescription product.
Cenestin(R) (synthetic conjugated estrogens, A) Tablets is a plant-derived
synthetic conjugated estrogens product for the treatment of moderate-to-severe
vasomotor symptoms associated with menopause. The approval of Cenestin, which
is expected to become the Company's single largest source of revenue, should
permit Duramed to move ahead with its long-term product development program
designed to ultimately make the Company a leader in women's health care and in
the near term, the hormone replacement market, in part by developing a family
of hormone products.
-14-
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OUTLOOK
Business Strategy Outlook -- Based on an assessment of the market opportunities
for a plant derived, modified release conjugated estrogens product, and the
related potential impact on Duramed's revenues and profitability, management
believes that the approval of Cenestin in March 1999 significantly changes
Duramed's long-term outlook and greatly enhances the Company's ability to fund
its efforts to become a leader in the women's health care market.
To achieve that goal, as well as generate sustainable profitability, the
Company's business plan involves primary focus on three initiatives:
Maximize the Market Penetration of Cenestin -- Cenestin, an estrogen replacement
therapy (ERT), will compete with other ERT/HRT products in a market approaching
$2 billion in the U.S. alone. According to NDC(R) Health Information Services, a
leading pharmaceutical market data provider, the combined ERT/HRT market is
growing at a projected annual rate of 15%. ERT/HRT therapies are prescribed for
women entering or in menopause. The average age for women entering menopause is
51. According to the American College of Obstetrics and Gynecology, the first
wave of "baby boomer" women (born between 1945-1960) is now entering menopause
and another 20 million will reach menopause in the next decade. Currently more
than 40 million women in the U.S. are over 50 and therefore, candidates to take
either ERT (estrogen only) or HRT (estrogen with progestin). Duramed believes
that the distinctive characteristics of its product will contribute to its
ability to capture a significant share of the ERT market. To help communicate
Cenestin's availability and favorable characteristics, on March 30, 1999 Duramed
entered into a marketing and distribution agreement with Cardinal MarketFORCE, a
subsidiary of Cardinal Health, Inc., to perform the necessary
direct-to-physicians sales effort and national distribution. Under the terms of
the three-year agreement, Cardinal MarketFORCE is to recruit, train and deploy a
team of dedicated, full-time sales professionals and experienced sales managers.
Duramed will compensate Cardinal MarketFORCE according to a fixed schedule with
performance incentives for achievement of certain market share targets. At the
end of the three-year period, Duramed may transition the sales team to full-time
Duramed employees. The Cardinal MarketFORCE management team for Duramed has
substantial experience in contract sales, pharmaceutical sales and women's
health. All regional managers and the sales force had been hired by mid-June
1999, and the direct-to-physicians sales effort commenced in early July.
-15-
16
On October 6, 1999 the Company announced a joint promotion alliance with Solvay
Pharmaceuticals, Inc. Solvay Pharmaceuticals, Inc., based in Marietta, Ga., is a
research-based pharmaceuticals company, active in the therapeutic areas of
cardiology, gastroenterology, mental health and women's health. It is a member
of the worldwide Solvay Group of chemical and pharmaceutical companies,
headquartered in Brussels, Belgium. The Group's members employ some 33,000
people in 46 countries. Its 1998 revenue worldwide was 7.5 billion EUR ($8.7
billion) from four operating sectors: Chemicals, Plastics, Processing, and
Pharmaceuticals. With the joint promotion alliance the companies will jointly
promote three products, Duramed's Cenestin and Solvay's Estratest(R)/
Estratest(R) H.S. Brand Tablets (esterified estrogens and methyltestosterone)
and Prometrium(R) (progesterone) Capsules. On October 11, 1999 a combined
national sales force of more than 300 Duramed and Solvay Pharmaceuticals sales
representatives began to promote the alliance products to obstetricians and
gynecologists across the United States. Cenestin is designated as the primary
product in the Duramed/Solvay Pharmaceuticals alliance while the Solvay
Pharmaceuticals products will address additional important therapeutic
requirements in women's health. Additionally, the Company initiated a print
advertising campaign in the fourth quarter of 1999 promoting Cenestin
direct-to-consumers. The marketing program for Cenestin in the Year 2000 is in
the process of being finalized. Management's goal is for Cenestin to reach an
annualized rate of at least $100 million in revenues within 15-18 months of the
July 1999 launch date.
Invoiced shipments of Cenestin through September 30, 1999 amounted to $12
million of which approximately $8 million had been paid as of September 30,
1999. The Company has not recorded the Cenestin shipments as revenue as of
September 30, 1999. The cash received from the payment of Cenestin revenue has
been recorded as deferred revenue and is included in the accrued liabilities. In
accordance with the rules governing revenue recognition, the Company will record
these shipments as revenue when evidence of product movement through the
distribution system is obtained. Since the approval, the Company has incurred
substantial marketing and launch related expenses and will maintain and, as
appropriate, expand this effort during the ramp-up of product sales over the
coming months, impacting financial performance throughout 1999.
Maximize Market Penetration of Other New Products -- On August 12, 1999 the FDA
approved the Company's first oral contraceptive product, Desogestrel and
Ethinyl Estradiol .15mg/0.03mg, and granted the product bioequivalency, thereby
making it therapeutically interchangeable with Ortho-Cept and Desogen tablets
for all new and refill prescriptions. The Company is marketing the product as a
value brand under the name Apri(TM).
Apri is the first and, at present, only substitutable equivalent oral
contraceptive for Ortho-Cept and Desogen tablets. Annual combined brand revenue
for the two products in 1998 was approximately $155 million. Duramed commenced
shipping Apri on October 26, 1999.
-16-
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Since the beginning of 1999, the FDA has approved the Cenestin NDA and seven
ANDAs submitted by the Company. The Company has two ANDAs on file. The Company
plans to submit NDAs and ANDAs for other projects in 1999 and beyond, as
appropriate to its business strategy.
Continue to Invest in Product Development Activities -- While product
development expenditures were curtailed in 1998 as part of an effort to conserve
resources while awaiting the FDA's decision regarding Cenestin, management is
encouraged by the results to date from its product development program. With the
approval of Cenestin, the Company intends to accelerate spending for research
and development in the women's health care area and to hire incremental
personnel and procure necessary equipment to prepare for the production and
launch of certain products on file. Duramed also is continuing to move ahead
with additional tablet strengths and indications for Cenestin. The Company has
completed a bone marker study. Preliminary results are favorable and show a
reduction in bone markers, which indicates a bone preservation effect. In
addition, in the cardiovascular evaluation, a positive lipid profile was found.
The Company anticipates beginning the full osteoporosis clinical study in 2000
to confirm the beneficial results indicated by the bone marker study. The
Company intends to initiate these studies based upon the availability of funds
generated from operations through the sale of Cenestin, profits generated from
recently approved products, and other resources that may be available to the
Company. Further, Duramed anticipates receiving approval for the 1.25mg dosage
of Cenestin by December 1999 and approval for the 0.3mg dosage in mid-2000.
The Company's ability to attain profitability, the time frame required to do so,
and the potential level of such profitability, are dependent upon a number of
factors including: (1) the success of its brand marketing efforts relating to
Cenestin and the rate at which Cenestin penetrates the ERT market; (2) the level
of spending required to launch and promote Cenestin to health care professionals
and consumers; (3) the profit level generated from the Company's current
business base (including the level of revenue received under the Company's
manufacturing agreement with Warner-Lambert); (4) the approval of products
pending before the FDA and the successful commercialization of products recently
approved by the FDA; and (5) the level of spending on clinical and
bioequivalency studies.
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RESULTS OF OPERATIONS
- ---------------------
NET SALES
Net sales for the three and nine month periods ended September 30, 1999 were
$11.1 million and $34.4 million as compared to $11.2 million and $35.7 million
for the same periods in 1998. Net sales for the three-month period ended
September 30, 1999 were comparable to the same period in 1998. Net sales
decreased $1.3 million (3.7%) for the nine-month period ended September 30,
1999, primarily due to price erosion on certain of the Company's existing
products. As previously indicated, net sales amounts do not include revenue
from Cenestin, which will be recorded commencing in the fourth quarter when
adequate evidence of product movement through the distribution channel is
obtained. The Company has agreements with several manufacturers whereby the
Company markets and distributes their prescription drug products. The terms of
these agreements vary, but typically provide for a sharing of profits between
the Company and the manufacturer. For the three and nine month periods ended
September 30, 1999, the percentage of the Company's sales comprised of products
marketed for others was 30% and 39% as compared to 41% and 45% for the same
periods in 1998.
GROSS MARGIN
Gross margin, and the corresponding percentage of net sales, was $1.9 million
(16.8%) and $5.2 million (15.1%) for the three and nine months ended September
30, 1999 compared to $3.6 million (32.3%) and $8.7 million (24.4%) for the same
periods in 1998. The reduced gross margin in the third quarter and first nine
months of 1999 compared to the same periods in 1998 reflects the decline in
selling prices as well as approximately $1.4 million in start-up production
activities necessary to commercialize Cenestin and other recently approved
products. The Company expects gross margin to increase in the fourth quarter of
1999 as a result of revenue for Cenestin being recorded and of revenue
contributions commencing from recently approved products most notably the
Company's first oral contraceptive product Desogestrel and Ethinyl Estradiol
(Apri) approved by the FDA on August 12, 1999.
There can be no assurance that, with the Company's current product line, the
present gross margin levels can be maintained if the Company's products,
particularly methylprednisolone, should experience increased competition.
OPERATING EXPENSES
Product Development
Product development expenditures increased by $0.9 million (93.9%) and $1.7
million (44.1%) for the three and nine-month periods ended September 30, 1999
compared to the same periods in 1998. The increase was due to spending for
bioequivalency studies and the continued investment on selected projects. The
product development emphasis is on hormonal therapies, modified release
technologies and controlled substances development.
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19
Selling
The Company's sales and marketing expenses increased by $6.4 million (621.8%)
and $10.3 million (444.6%) for the three and nine month periods ended September
30, 1999 compared to the same periods in 1998. The increase in selling expenses
was primarily a result of the Company's brand marketing campaign for Cenestin.
The Company initiated healthcare advertising in August 1999 and direct to
consumer advertising in September 1999. Sales and marketing expenses will
continue to increase in 1999 and beyond as the Company executes its brand sales
and marketing program designed to maximize the market penetration of Cenestin.
General and Administrative
Excluding a $15 million charge resulting from the settlement with Schein
Pharmaceutical, Inc. of litigation between Duramed and Schein pertaining to a
1992 agreement relating to the development of a generic version of the
conjugated estrogen product Premarin(R), general and administrative expenses
increased $0.6 million (21.2%) and $0.8 million (11.0%) for the three and nine
month periods ended September 30, 1999 compared to the same periods in 1998 due
principally to increased legal fees associated with the Schein litigation and
other legal matters. Additionally, the Company has expanded its information
technology infrastructure to address the implementation of its Year 2000
compliance program as well as other information technology needs.
Net Interest Expense
Net interest expense for the three and nine month periods ended September 30,
1999 increased $366,000 (59.0%) and $704,000 (41.2%) compared to the same period
in 1998 due to an increase in average borrowings under the Company's revolving
credit facility.
Income Taxes
Due to the net losses in the first three quarters of 1999 and 1998, no
provisions for income tax were recorded.
Preferred Dividends
Preferred dividends of $62,611 and $150,000 in the third quarters and $192,834
and $391,662 in the first nine months of 1999 and 1998, respectively, represent
dividends associated with the unconverted portion of the Company's Series F
Convertible Preferred Stock.
Year 2000 Compliance
Many computer systems ("IT systems") and equipment and instruments with embedded
microprocessors ("non-IT systems") were designed to recognize only the last two
digits of a calendar year. With the arrival of the Year 2000 ("Y2K"), these
systems and microprocessors may encounter operating problems due to their
inability to distinguish years after 1999 from years preceding 2000. As a
result, the Company has initiated a program to identify and remedy or replace
its date-sensitive IT systems and non-IT systems.
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20
The Company's IT systems consist of the primary business and science information
systems, electronic data interchange ("EDI") with customers, personal
computer/terminal hardware and related network software. Non-IT systems include
primarily manufacturing, facility and telecommunication equipment that is
computer controlled.
To date, the Company has identified date-sensitive areas and is in the process
of remedying or replacing the internally identified systems. Regarding IT
systems within the Company, compliant software upgrades and testing of primary
business systems have been completed, and the systems are confirmed as
compliant. A Y2K compliant science information system has been installed and is
operational at the Company's Somerset, New Jersey facility and a similar system
upgrade is in process at the Company's Cincinnati facility. This upgrade is in
the final stages of implementation and will be compliant by the end of the
fourth quarter. Upgrade of the Company's network of PCs and terminals commenced
in mid-1998 and is continuing with the evaluation of all installed personal
computer hardware. The full upgrade of all units for Y2K compliance is in final
stages and will be completed by the end of the fourth quarter. EDI compliance
evaluation and testing is complete. The analysis of the Company's non-IT
systems has been substantially completed and for the most part the items
identified as possibly being affected by the Y2K issue have been concluded to
be compliant. All others are being addressed in order to be compliant by
year-end.
The Company estimates the cost of hardware and system upgrades in order to
address the IT aspects of the Y2K issue to be approximately $700,000. For non-IT
aspects of the Y2K issue, the cost of compliance is estimated to be
approximately $150,000. Of these cost estimates, approximately $550,000
represents capital expenditures which will be amortized over the estimated
useful life of the asset. The remaining $300,000 is being expensed as incurred
and has been or will be included in the Company's operating results on a ratable
basis between June 1998 and October 1999. The amounts do not include the cost
incurred by the Company as a result of the use of its own employees but do
include approximately $150,000 for the use of outside consultants who are
assisting the Company in evaluating, implementing and testing aspects of the Y2K
issue and the Company's compliance program.
The Company is dependent upon its customers and suppliers in meeting its ongoing
business needs. The Company's Y2K program includes identifying these third
parties and determining, based on both written and verbal communication, that
they are either in compliance or expect to be in compliance. Lack of compliance
by a third party on whom the Company depends for critical goods or services
could have a material adverse effect on the Company's operations in the absence
of the third party's ability to meet the Company's needs through a contingency
plan or the Company's ability to obtain the goods or services elsewhere.
Currently, the Company believes the largest area of exposure concerning Y2K lies
with third party suppliers of raw materials especially those located in foreign
countries. The Company believes that it has sufficient raw material inventory
levels to mitigate the potential of disruption among its suppliers.
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21
The estimates and conclusions in this description of the Y2K issue contain
forward-looking statements and are based on management's estimates of future
events.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the third quarter of 1999 the Company financed its operations through
borrowings under its revolving credit facility and an additional $7.0 million
term note from Bank of America.
The increase in inventory from December 1998 through September 1999 resulted
from stocking raw material for new Duramed produced products as well as finished
products sourced through other manufacturers. Receivables are comparable to the
same period in 1998. Prepaid and other assets increased due to deposits to raw
material suppliers to secure active raw material for recently approved products.
Accounts payable and accrued expenses have increased due to increased spending
levels associated with the commercialization of recently approved products, the
$15 million settlement with Schein and the $8.3 million of deferred Cenestin
revenue. As a result of the Company's continued investment in working capital,
the Company had $36.9 million in receivables and inventory at September 30,
1999.
Under the terms of the settlement agreement with Schein Pharmaceutical, Schein
has given up any claim to rights in Cenestin. Duramed made an initial $7.5
million payment to Schein on October 22, 1999. A second $7.5 million payment
must be received by Schein on or before January 20, 2000, or Schein can require
Duramed to issue shares of common stock, equal in value to $7.5 million, at the
lower of the closing price on October 22, 1999 ($8.75) or the date Schein
requires the shares to be issued. Further, if Cenestin achieves total profits
(product sales less product-specific cost of goods sold, sales and marketing
and other relevant expenses) of greater than $100 million over any five year or
less period within the next 15 years, Duramed will pay Schein a one-time
additional payment of $15 million. The settlement resolves all disputes between
Duramed and Schein, and the litigation pending between them has been dismissed
with prejudice.
The term of the Company's financing agreement with Bank of America is four
years, commencing November 1998 with provisions for renewals. The financing
agreement provides for a revolving credit facility collateralized by the
Company's receivables and inventory and a term note secured by the Company's
equipment. The Company's borrowing capacity under the revolving credit facility
adjusts based on the change in receivables and inventory. As of November 10,
1999 the Company's borrowing capacity under this revolving credit facility was
$19.9 million of which the Company has utilized $15.3 million (net of the
proceeds from the recent term loan described below), leaving a net availability
of $4.6 million.
Additionally, the terms of the Bank of America financing provide for a financing
commitment of up to $3.0 million, subject to the results of an appraisal, to
allow the Company to purchase its Somerset, New Jersey facility, and a $5.0
million credit line for the purchase of new eligible equipment based upon an
appraisal value.
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22
On August 4, 1999, the Company announced the amendment of the Bank of America
loan agreement providing for the addition of a second four-year term loan,
subject to renewal of the overall financing agreement with Bank of America, in
the amount of $7.0 million. Under the terms of the agreement, the new term note
will be repaid in monthly installments and bears an interest rate of prime plus
1.25%. The term note is collateralized by the intangible assets of the Company.
On October 22, 1999 Solvay Pharmaceuticals, Inc. completed the purchase of
1,666,666 shares of Duramed common stock at $9.00 per share. By December 31,
1999, Solvay Pharmaceuticals intends to purchase the remaining 1,333,334 shares
of Duramed stock available under an option granted October 6, 1999, subject to
certain conditions, including satisfactory completion of all applicable
regulatory requirements, including Hart-Scott-Rodino antitrust review.
Following this later purchase, Duramed will create an additional position on
Duramed's board of directors to be filled as designated by Solvay
Pharmaceuticals. Duramed is being advised by Banc of America Securities LLC on
the stock purchase transactions between Solvay Pharmaceuticals and Duramed as
well as the other aspects of the relationship.
In February 1998, the Company issued $12.0 million in Series F Preferred Stock
which is convertible into shares of common stock and pays an annual dividend of
5% on all unconverted shares. Any of the Series F Preferred Stock that remains
outstanding will be redeemed automatically on February 4, 2000. The terms of
the Series F Preferred Stock limit the number of shares of Common Stock that
can be issued upon conversion to 3,580,252, with an option for the Company to
satisfy any remaining unconverted Series F Preferred Stock in cash or stock. In
November 1998, the Company received a waiver of the Nasdaq requirement for
shareholder approval, thereby permitting the Company to issue, as required,
1,401,584 shares beyond the original 3,580,252. The terms of the Series F
Preferred Stock provide for a conversion price based upon a trailing 20 day
period and are structured such that the Series F Preferred Shares are
convertible into common shares at varying discounts to the market price (as
defined) depending on the date the conversion occurs.
At November 12, 1999 $7.1 million of the stated value of the Series F Preferred
Stock had been converted into 2,794,702 shares of Common Stock at an average
price of $2.54 per share. Per the terms of the Series F Stock, assuming that
the stock price remains above $4.88 and the Series F holder converts, the
balance of the Series F preferred shares will convert into common shares at
$3.80 per share. Based upon a $3.80 conversion price the Company will be
required to issue approximately 1.3 million additional common shares. This
would result in the Company issuing 4.1 million common shares at an average
price of $2.94 upon the complete conversion of the Series F Stock.
On October 2, 1998 the holder of the Series F Preferred Stock was granted
500,000 warrants at an exercise price of $5.74. The warrants vested immediately
and expire in October 2002.
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AVAILABLE FUNDS
As previously discussed, on October 22, 1999 the Company issued 1,666,666 shares
of common stock at $9 per share to Solvay Pharmaceuticals. The Company received
$7.5 million of the $15 million in proceeds from the stock issuance and the $7.5
million balance was paid to Schein Pharmaceutical as required under the
litigation settlement with Schein.
Solvay has agreed to purchase an additional 1,333,334 shares of Duramed stock,
subject to certain conditions, including satisfactory completion of all
applicable regulatory requirements, including Hart-Scott-Rodino antitrust
review. The Company anticipates that this purchase will be closed prior to
December 31, 1999.
The Company's level of need for additional financing beyond the Solvay
Pharmaceuticals equity transaction is dependent upon several factors including:
(1) the level and timing of the profit contribution from products approved by
the FDA in recent months, principally Cenestin and Apri; (2) the level of
spending necessary to commercialize Cenestin; (3) the ability of the Company to
maintain the current business base as well as the success of other aspects of
its business plan; and, (4) any proceeds received from the exercise of stock
options and warrants. Additionally, capital will be required for facility and
equipment to execute the Company's business plan.
Exercise prices for outstanding stock options and warrants vary. The exercise of
all in-the-money vested stock options and warrants would provide approximately
$15.0 million in proceeds to the Company. The decision to exercise options and
warrants is at the discretion of the holder and, therefore, is beyond the
control of the Company.
Management believes that capital in excess of that available to the Company from
the Solvay equity transaction and its existing credit agreements will be needed
if it is to execute its business plan. However, management believes also that
approval of Cenestin and other recently approved products expands the Company's
potential sources of capital and anticipates that it should be able to access
sufficient funds to meet its business plan. The Company is exploring various
capital raising alternatives, but no definitive arrangements have been reached
at this time. These alternatives may include raising additional equity capital.
If equity capital is raised, the extent of dilution to current shareholders will
be dependent on the amount of equity capital obtained and the terms under which
it is raised. If capital is not available, implementation of the Company's
business plan will be restricted or delayed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------------
The information required by Item 3 is included in Liquidity and Capital
Resources.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -----------------------------
On October 22, 1999, the Company reached a settlement with Schein
Pharmaceutical, Inc. in a litigation between Duramed and Schein pertaining to a
1992 agreement between the companies relating to the development of a generic
version of the conjugated estrogens product Premarin(R). Under the Schein
Agreement, Schein was to provide project funding while Duramed was responsible
for product development and manufacturing. Both firms were to participate in the
marketing and distribution of the generic product and share equally in the
profits. In May 1997, the Company was notified by the FDA that at that time, it
would not approve a generic conjugated estrogens product. On August 7, 1997, the
Company filed a complaint for a declaratory judgment against Schein in the Court
of Common Pleas, Hamilton County, Ohio. The Company sought a declaration that
the Schein Agreement applied only to a product approved on the basis of an ANDA
and which would be fully substitutable for Premarin(R) and that the Schein
Agreement did not apply to the Company's efforts to develop or market any
conjugated estrogens product which would be approved and marketed on the basis
of an NDA. Schein subsequently filed a counterclaim against the Company alleging
that the Company breached its obligations to Schein under an alleged joint
venture arising between the parties and that unnamed defendants tortiously
interfered with Schein's prospective business advantage and were liable to
Schein. Schein sought various forms of relief against the Company, including
injunctions barring the Company from the development of a conjugated estrogens
product with any person or company other than Schein and requiring specific
performance from the Company according to the terms of the Schein Agreement and
alleged joint venture and accounting and money damages and a constructive trust.
Under terms of the settlement agreement, Schein has given up any claim to rights
in Duramed's Cenestin (synthetic conjugated estrogens, A) Tablets. Duramed has
made an initial $7.5 million payment to Schein. A second $7.5 million payment
must be received by Schein on or before January 20, 2000, or Schein can require
Duramed to issue shares of common stock, equal in value to $7.5 million, at the
lower of the closing price on October 22, 1999 ($8.75) or the date Schein
requires the shares to be issued. Further, if Cenestin achieves total profits
(product sales less product-specific cost of goods sold, sales and marketing and
other relevant expenses) of greater than $100 million over any five year or less
period within the next 15 years, Duramed will pay Schein a one-time additional
payment of $15 million. The settlement resolves all disputes between Duramed and
Schein, and the litigation pending between them has been dismissed with
prejudice.
The Company is involved in various additional lawsuits and claims, which arise
in the ordinary course of business. Although the outcome of such lawsuits and
claims cannot be predicted with certainty, the disposition thereof will not, in
the opinion of management, result in a material adverse effect of the Company's
financial position or results of operations.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- -----------------------------------------------------
During the third quarter, the Company issued a total of 606 shares of its common
stock to its three non-employee directors as partial payment of their directors'
fees. These shares were issued pursuant to the Company's 1998 Stock Plan for
Non-Employee Directors. The issuance of these shares was exempt from
registration under the Securities Act of 1933 on the basis of the exemption from
registration provided in Section 4 (2) of the Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------
(a) The 1999 Annual Meeting of Shareholders of Duramed Pharmaceuticals, Inc.
(the "Meeting") was held on September 30, 1999. The holders of 19,997,651
shares of the Company's 21,744,108 then outstanding shares of common
stock (approximately 91%) were present at the Meeting in person or by
proxy.
(b) At the Meeting, the following six individuals were duly nominated and
properly elected as Directors of the Company to serve until the Annual
Meeting of Shareholders in 2000 or until their successors are elected and
qualified - E. Thomas Arington, Jeffrey T. Arington, George W. Baughman,
Richard R. Frankovic, Peter R. Seaver and S. Sundararaman. The number of
votes cast for and withheld with respect of each nominee is indicated
below:
Against/
For Withheld
--- --------
E. Thomas Arington 19,828,615 169,036
Jeffrey T. Arington 19,743,768 253,883
George W. Baughman 19,839,375 158,276
Richard R. Frankovic 19,838,680 158,971
Peter R. Seaver 19,842,630 155,021
S. Sundararaman 19,838,675 158,976
At the Meeting, a proposal to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for fiscal 1999 was approved as follows:
Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
19,776,097 94,354 137,200 -0-
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ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
- --------------------------------------------
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K for the quarter ended September 30, 1999: 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: November 10, 1999 by: /s/ E. Thomas Arington
----------------- ----------------------------------
E. Thomas Arington
President, Chairman of the Board
Chief Executive Officer
Dated: November 10, 1999 by: /s/ Timothy J. Holt
----------------- ----------------------------------
Timothy J. Holt
Senior Vice President - Finance
Treasurer, Chief Financial Officer
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