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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 0-31781
American Pharmaceutical Partners, Inc.
(Exact name of registrant as specified in its charter)
Delaware 68-0389419
(State of Incorporation) (I.R.S. Employer Identification No.)
11777 San Vicente Boulevard, Suite 550
Los Angeles, California 90049
(Address of principal executive offices) (Zip Code)
(310) 826-8505
(Registrant's telephone number, including area code)
Indicate by check mark 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of May 7, 2002, the registrant had 49,769,538 shares of $0.001 par value
Common Stock outstanding.
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American Pharmaceutical Partners, Inc.
FORM 10-Q
For the Quarter Ended March 31, 2002
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - March 31, 2002 and December 31, 2001 3
Condensed consolidated statements of income - Three months ended March 31, 2002 and 2001 4
Condensed consolidated statements of cash flows - Three months ended March 31, 2002 and 2001 5
Notes to condensed consolidated financial statements - March 31, 2002 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
American Pharmaceutical Partners, Inc.
Condensed Consolidated Balance Sheets
March 31, December 31,
2002 2001
---------------- ----------------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 48,524,000 $ 96,688,000
Accounts receivable, net 21,369,000 15,649,000
Inventories 60,190,000 51,253,000
Prepaid expenses and other current assets 2,715,000 2,469,000
Deferred income taxes 8,860,000 9,222,000
---------------- ---------------
Total current assets 141,658,000 175,281,000
Deferred income taxes 610,000 4,758,000
Property, plant and equipment, net 54,883,000 53,821,000
Investment in Drug Source Co., LLC 1,953,000 1,512,000
Product license rights, net 255,000 270,000
Deferred financing costs, net 4,042,000 4,145,000
---------------- ---------------
Total assets $ 203,401,000 $ 239,787,000
================ ===============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 11,223,000 $ 10,593,000
Accrued expenses 17,336,000 16,438,000
Distribution payable to American BioScience, Inc. - 60,000,000
Current portion of liability to VivoRx, Inc. 11,102,000 11,829,000
---------------- ---------------
Total current liabilities 39,661,000 98,860,000
Liability to VivoRx, Inc., less current portion - 10,857,000
Commitments and contingencies
Stockholders' equity
Common stock - $.001 par value; 100,000,000 shares authorized,
49,752,188 and 48,272,628 shares issued and outstanding
in 2002 and 2001, respectively 50,000 48,000
Additional paid-in capital 177,280,000 149,041,000
Retained earnings 11,765,000 6,658,000
Amounts due from American BioScience, Inc. (21,636,000) (20,957,000)
Deferred stock-based compensation (3,712,000) (4,713,000)
Other comprehensive loss (7,000) (7,000)
---------------- ---------------
Total stockholders' equity 163,740,000 130,070,000
---------------- ---------------
Total liabilities and stockholders' equity $ 203,401,000 $ 239,787,000
================ ===============
See notes to the condensed consolidated financial statements.
3
American Pharmaceutical Partners, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31,
-------------------------------
2002 2001
-------------- --------------
Net sales $ 53,852,000 $ 39,034,000
Cost of sales 30,864,000 27,166,000
-------------- --------------
Gross margin 22,988,000 11,868,000
Operating expenses:
Research and development costs 4,325,000 2,732,000
Selling, general and administrative expenses 9,306,000 6,848,000
Stock-based compensation 862,000 274,000
Gain on litigation settlements, net - (250,000)
Equity in net income of Drug Source Co., LLC (441,000) (288,000)
-------------- --------------
Total operating expenses 14,052,000 9,316,000
-------------- --------------
Income from operations 8,936,000 2,552,000
Interest income (includes $293,000 from American
BioScience, Inc. in 2002) 508,000 42,000
Interest expense (422,000) (1,193,000)
-------------- --------------
Income before income taxes 9,022,000 1,401,000
Provision for income taxes 3,915,000 604,000
-------------- --------------
Net income 5,107,000 797,000
Imputed preferred stock dividends - (250,000)
-------------- --------------
Income applicable to common stock $ 5,107,000 $ 547,000
============== ==============
Income per common share:
Basic 0.10 0.02
============== ==============
Diluted 0.10 0.01
============== ==============
See notes to the condensed consolidated financial statements.
4
American Pharmaceutical Partners, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
---------------------------------------
2002 2001
---------------- -----------------
Cash flows from operating activities:
Net income $ 5,107,000 $ 797,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 2,223,000 2,117,000
Amortization 228,000 33,000
Imputed interest on liability to VivoRx, Inc. 415,000 684,000
Income tax benefit from stock option exercises 536,000 -
Stock-based compensation 862,000 274,000
Loss on disposal of property, plant and equipment - 2,000
Deferred income taxes (170,000) (267,000)
Equity in net income of Drug Source Co., LLC (441,000) (288,000)
Common stock earned by Premier - 1,754,000
Changes in operating assets and liabilities:
Accounts receivable, net (5,720,000) (3,251,000)
Inventories (8,937,000) (3,417,000)
Prepaid expenses and other current assets (246,000) (242,000)
Accounts payable and accrued expenses 1,528,000 2,332,000
Distribution payable to American BioScience, Inc. (60,000,000) -
Liability to VivoRx, Inc. - (3,400,000)
---------------- -----------------
Net cash used in operating activities (64,615,000) (2,872,000)
Cash flows from investing activities:
Purchases of property, plant and equipment (3,285,000) (1,196,000)
---------------- -----------------
Net cash used in investing activities (3,285,000) (1,196,000)
Cash flows from financing activities:
Net borrowings on revolving line of credit - 12,112,000
Payments on long-term debt - (1,167,000)
Proceeds from the exercise of stock options 436,000 -
Increase in amounts due from American BioScience, Inc. (679,000) (7,370,000)
Payment of financing costs (109,000) -
Proceeds from the sale of common stock, net 20,088,000 -
---------------- -----------------
Net cash provided by financing activities 19,736,000 3,575,000
---------------- -----------------
Decrease in cash and cash equivalents (48,164,000) (493,000)
Foreign currency translation gain - (8,000)
Cash and cash equivalents at beginning of period 96,688,000 501,000
---------------- -----------------
Cash and cash equivalents at end of period $ 48,524,000 $ -
================ =================
See notes to the condensed consolidated financial statements.
5
AMERICAN PHARMACEUTICAL PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, these financial statements do not include all of
the information and notes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
The balance sheet information at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements.
A subsidiary of the Company owns a 50% share of Drug Source Co., LLC. Drug
Source Co., LLC is a joint venture with three other partners established in June
2000 to purchase raw materials for resale to pharmaceutical companies, including
the Company. The Company's equity in the net income (loss) of Drug Source Co.,
LLC is classified in operating expenses in the accompanying consolidated
statements of operations. Research and development costs include purchases from
Drug Source Co., LLC for $1,007,000 and $249,000 for the three months ended
March 31, 2002 and 2001, respectively.
For further information, refer to the consolidated financial statements and
notes thereto included in the American Pharmaceutical Partners, Inc. (Company)
Annual Report on Form 10-K for the year ended December 31, 2001.
(2) Quarterly Periods
The Company uses a 52-week, 53-week fiscal year that ends on the Saturday
nearest to December 31. For quarterly reporting purposes, the quarterly periods
end on the Saturday nearest to the end of the quarter. For clarity of
presentation comparative periods are presented as if the quarter ended on March
31. Both of the three-month periods ended March 31, 2002 and 2001 contained 13
weeks.
6
(3) Earnings Per Share Information
The following table sets forth the computation of basic and diluted earnings per
share for the periods indicated:
Three Months Ended March 31,
----------------------------------
2002 2001
---------------- -----------------
Basic and dilutive numerator:
Net income $ 5,107,000 $ 797,000
Less dividends on Series A convertible preferred stock - (250,000)
---------------- -----------------
Net income applicable to common stock $ 5,107,000 $ 547,000
================ =================
Denominator:
Weighted-average common shares outstanding 49,497,000 22,836,000
Weighted-average common shares earned by,
but not issued to, Premier - 88,000
---------------- -----------------
Weighted common shares - basic 49,497,000 22,924,000
Net effect of dilutive securities:
Stock options 2,108,000 3,037,000
Warrant - 165,000
Weighted-average conversion of convertible preferred stock:
Series B - 4,232,000
Series C - 1,410,000
Series D - 6,347,000
---------------- -----------------
Weighted common shares - diluted 51,605,000 38,115,000
================ =================
Income per common share - basic $ 0.10 $ 0.02
================ =================
Income per common share - diluted $ 0.10 $ 0.01
================ =================
The assumed conversion of the Series A convertible preferred stock which was
outstanding during the three-months ended March 31, 2001 was anti-dilutive.
(4) Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets (SFAS No. 141 and SFAS No. 142). Under the
new rules, effective January 1, 2002 for the Company, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. The
effect of adopting SFAS No. 141 and SFAS No. 142 had no impact on the Company's
statements of income or financial position. The Company does not have any
goodwill recorded in its consolidated balance sheets.
7
(5) Transactions with American BioScience, Inc.
Loans to American BioScience, Inc.
A summary of activity in the note receivable from American BioScience Inc. (ABI)
account for the three months ended March 31, 2002, which is classified as a
deduction from stockholders' equity in the accompanying condensed consolidated
balance sheet, is as follows:
Note receivable from American BioScience, Inc.
Balance at January 1, 2002 $ 20,957,000
Payments on behalf of American BioScience, Inc.:
New product development (principally related to ABI-007) 768,000
Income tax refund (397,000)
Interest charged to American BioScience, Inc. 293,000
Other 15,000
--------------
Balance at March 31, 2002 $ 21,636,000
==============
Payments on behalf of ABI's new product development activities include the
Company's administrative salary and benefit allocations and charges for Company
services of employees related to ABI's products in development. The 2002
increase of $679,000, from $20,957,000 at December 31, 2001 to $21,636,000 at
March 31, 2002, has been repaid by ABI subsequent to March 31, 2002.
On July 24, 2001, the Company received a demand promissory note for the balance
outstanding from ABI (Demand Note). The Demand Note bears interest at a rate
equal to the Company's rate of interest on its term loans (5.6% at March 31,
2002).
In connection with the execution of the Demand Note, as security for payment of
the obligations under the Demand Note, the Company entered into a pledge
agreement with ABI under which ABI pledged and granted to the Company a security
interest in shares of the Company's common stock held by it having a fair market
value equal to 120% of the balance of the Demand Note.
VivoRx, Inc. Settlement
As of March 31, 2002, the Company is jointly and severally liable for the
remaining outstanding portion of ABI's share of the VivoRx, Inc. settlement, of
$12,000,000 due February, 2003, as more fully described in Note 12. As ABI makes
the payments to VivoRx, the liability to VivoRx in the Company's consolidated
balance sheet will be reduced and a corresponding capital contribution will be
recorded net of related deferred income taxes. In February 2002, ABI made the
scheduled $12,000,000 payment due in February 2002 with the resulting capital
contribution to the Company of $7,320,000, net of related deferred income taxes.
The Company expects that ABI will have sufficient liquid assets to fulfill its
portion of the liability to VivoRx. The amount due from ABI is classified as a
deduction from stockholders' equity in the accompanying consolidated balance
sheets. In 2001, ABI agreed that if it fails to timely make any of the
settlement payments due to VivoRx, ABI will surrender to the Company shares of
the Company's common stock having a fair market value of 120% of the unpaid
amount.
Guarantee of Borrowings
In December 2001, ABI pledged securities as collateral for the Company's credit
facility that is described in Note 8.
8
Product License Agreement
In November 2001, the Company entered into a license agreement with ABI under
which the Company acquired the exclusive rights to manufacture, market and sell
ABI-007 in North America, and which provides for initial license payments of
$60,000,000. ABI is responsible for substantially all costs associated with the
development of ABI-007, except that the Company has agreed to provide up to
$2,000,000 of ABI-007 for use in clinical trials. The cost of the clinical
product was charged to research and development expense in the year ended
December 31, 2001. The Company also is required to make milestone payments of up
to (a) $60,000,000 for indications related to breast, ovarian and lung cancers
and (b) $32,500,000 for indications relating to prostate cancer and other
indications agreed upon between ABI and the Company. The Company also may be
required to make additional milestone payments of up to an aggregate of
$110,000,000 based upon the achievement of particular annual sales levels.
Profits from any sales of ABI-007 will be shared equally with ABI after
deducting costs of goods sold, selling expenses and other appropriate
deductions. All costs and expenses related to product recalls and product
liability claims generally will be split equally between ABI and the Company.
The initial license payment has been accounted for as a distribution of
Company's stockholders' equity to ABI. As of December 31, 2001, the entire
$60,000,000 had been accrued as a distribution payable to ABI. The $60,000,000
was paid to ABI in January 2002. The income tax benefits related to this payment
will be credited to the Company's stockholders' equity as realized.
(6) Inventories
Inventories consist of the following:
March 31, December 31,
--------------- ---------------
2002 2001
--------------- ---------------
Finished goods $ 17,312,000 $ 15,792,000
Work in process 13,262,000 7,958,000
Raw materials 29,616,000 27,503,000
--------------- ---------------
$ 60,190,000 $ 51,253,000
=============== ===============
(7) Accrued Liabilities
Accrued liabilities consist of the following:
March 31, December 31,
--------------- ---------------
2002 2001
--------------- ---------------
Payroll and employee benefits $ 3,524,000 $ 6,207,000
Legal 1,248,000 1,015,000
Insurance 1,456,000 1,183,000
Sales and marketing 4,688,000 4,812,000
Accrued income taxes 5,540,000 2,211,000
Other 880,000 1,010,000
--------------- ---------------
$ 17,336,000 $ 16,438,000
=============== ===============
9
(8) Credit Facility
In December 2001, the Company entered into a credit facility providing for a
$25,000,000 term loan and a $50,000,000 revolving line of credit. This credit
facility replaced a former facility with another lender. Proceeds of the
Company's initial public offering were used to pay off all outstanding amounts
under the revolving line of credit and retire the term loan. The revolving line
of credit can be increased to $75,000,000 at the Company's request. The new
credit facility expires December 14, 2006.
The credit facility's interest rate for the revolving line is equal to the sum
of an adjustable margin rate (3.75% for the three months ended March 31, 2002)
plus the greater of the prime rate or the Federal funds rate plus 0.5%. The
Company also has the option of converting revolving line loans to the
Eurocurrency Rate, as defined.
There were no outstanding balances under the revolving lines of credit at March
31, 2002. The loans under the credit facility are collateralized by
substantially all of the Company's assets. Under the credit facility, the
Company is prohibited from paying dividends and is subject to various covenants
and restrictions. At March 31, 2002, the Company was in compliance with all
covenants.
The credit facility limits the aggregate undrawn amount of all letters of credit
and assesses fees on the face amount of commercial and standby letters of
credit. A fee is assessed at 3.75% of the face amount of commercial and standby
letters of credit, respectively. The letters of credit are payable on demand.
There were no amounts outstanding under letters of credit at March 31, 2002.
(9) Exercise of Over-allotment Option
On January 10, 2002, the underwriters for the Company's initial public offering
in December 2001 exercised in full their option to purchase an additional
1,350,000 shares of the Company's common stock at the initial public offering
price of $16.00 per share in order to cover over-allotments. As a result of this
exercise, the Company received net proceeds of $20,088,000, after underwriting
discounts and commissions of $1,512,000.
(10) Shares Earned by Premier Purchasing Partners, L.P.
Pursuant to an agreement that expired March 31, 2001, Premier Purchasing
Partners, L.P. (Premier) earned, at no cost, shares of the Company's common
stock based upon the level of sales by the Company to Premier's partners. During
the three months ended March 31, 2001, the shares earned by Premier had a fair
value of $1,754,000 and were classified as a reduction of net sales in the
accompanying condensed consolidated statements of income.
(11) Stock Options
During the three months ended March 31, 2002, no stock options were granted and
129,560 options were exercised at an average exercise price of $3.38. Stock
based compensation charges were $862,000 and $274,000 for the three months ended
March 31, 2002 and 2001, respectively.
(12) Litigation
VivoRx, Inc. and VivoRx Diabetes, Inc.
During 1999, VivoRx brought an action against ABI, the Company and the Company's
chairman and chief executive officer relating to the development of the
businesses of ABI and the Company while the Company's chairman and chief
executive officer was also serving as the chief executive officer and chairman
of VivoRx.
10
This action was settled in February 2001 with ABI obtaining clear title and
ownership to its intellectual property, including the intellectual property
underlying ABI's ABI-007 product candidate. Under the settlement, the Company is
jointly and severally liable with ABI to pay VivoRx the remaining obligation
under the settlement agreement of $12,000,000 in February 2003. The respective
boards of directors of the Company and of ABI, in consultation with litigation
counsel, passed resolutions allocating $3,400,000 of the total settlement
obligation of $34,000,000 to the Company and the remaining $30,600,000 to ABI.
The allocation of the settlement was primarily based upon ABI obtaining clear
title and ownership to its intellectual property, including the intellectual
property underlying ABI's ABI-007 product candidate, and, accordingly, being the
primary beneficiary of the settlement.
Notwithstanding the agreed upon allocation of the settlement obligation between
ABI and the Company, the Company recorded the entire present value of
$30,354,000 of the litigation settlement with VivoRx as an expense of the
Company for the year ended December 31, 2000.
Other
The Company is from time to time subject to claims and litigation arising in
ordinary courses of business. These claims have included assertions that the
Company's products infringe existing patents and also claims that the use of the
Company's products has caused personal injuries. The Company intends to defend
vigorously any such litigation that may arise under all defenses that would be
available to the Company. In the opinion of management, the ultimate outcome of
such proceedings will not have a material adverse effect on the consolidated
financial position or results of operation of the Company.
(13) Net Sales by Product Line
Net Sales by product line is as follows:
Three Months Ended March 31,
----------------------------
2002 2001
------------ ------------
Oncology $ 9,483,000 $ 6,931,000
Anti-infective 14,600,000 10,644,000
Critical care 28,056,000 21,552,000
Contract manufacturing 1,455,000 1,390,000
Other 258,000 271,000
------------ ------------
53,852,000 40,788,000
Less fair value of common shares earned by Premier - (1,754,000)
------------ ------------
$ 53,852,000 $ 39,034,000
============ ============
Estimated net sales to the Company's wholesalers of
products resold to Premier's members included in
above amounts $ 14,223,000 $ 12,090,000
============ ============
(14) Enterprise Resource Planning System
In March 2002, the Company entered into various licensing agreements for the
implementation of a new Enterprise Resource Planning (ERP) business system
application. During the three months ended March 31, 2002, the Company
capitalized license fees of $2.1 million.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note Regarding Forward-Looking Statements
Statements contained in this Form 10-Q, which are not historical facts, are
forward-looking statements, as the term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements, whether
expressed or implied, are subject to risks and uncertainties which can cause
actual results to differ materially from those currently anticipated, due to a
number of factors, which include, but are not limited to:
. the impact of competitive products and pricing;
. the availability and pricing of raw materials and components used in the
manufacture of our pharmaceutical products;
. the ability to successfully manufacture products in an efficient,
time-sensitive and cost effective manner;
. the acceptance of and demand for our existing and new pharmaceutical
products;
. the impact of laws and regulations, and their interpretations, which
govern or affect the pharmaceutical industry;
. the impact of patents and other proprietary rights licensed or owned by
us, our competitors and other third parties;
. the difficulty in predicting the timing or outcome of product development
efforts and regulatory approvals;
. the actual results achieved in the Phase III clinical trials for ABI-007;
. the timing of the completion of Phase III trials for ABI-007;
. licenses or acquisitions; and
. relationships and agreements with other parties.
Forward-looking statements also include the assumptions underlying or relating
to any of the foregoing or other such statements. When used in this report, the
words "may," "will," "should," "could," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "continue," and similar expressions are
generally intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. We
undertake no obligation to revise or publicly release the results of any
revision to these forward-looking statements.
12
Results of Operations
The following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
Three Months Ended March 31,
----------------------------
2002 2001
---------- ----------
Statement of Operations Data:
Net sales 100.0 % 100.0 %
Cost of sales 57.3 % 69.6 %
---------- ----------
Gross margin 42.7 % 30.4 %
Operating Expenses:
Research and development costs 8.0 % 7.0 %
Selling, general, and administration expenses 17.3 % 17.5 %
Stock-based compensation 1.6 % 0.7 %
Gain on litigation settlements - (0.6)%
Equity in net income of Drug Source Co., LLC (0.8)% (0.7)%
---------- ----------
Total operating expenses 26.1 % 23.9 %
---------- ----------
Income from operations 16.6 % 6.5 %
Interest income 1.0 % 0.1 %
Interest expense (0.8)% (3.1)%
---------- ----------
Income before income taxes 16.8 % 3.5 %
Provision for income taxes 7.3 % 1.5 %
---------- ----------
Net income 9.5 % 2.0 %
========== ==========
Three Months Ended March 31, 2002 and 2001
Net sales. Net sales were $53.9 million and $39.0 million for the three months
ended March 31, 2002 and 2001, respectively, representing an increase of $14.9
million, or 38.2%. This increase was due primarily to sales of products launched
within the last twelve months, two of which contributed $5.9 million to net
sales. Sales for a specific critical care product, which was launched in March
2001, were $2.6 million for the first quarter of 2002 compared to $1.1 million
for the first quarter of 2001. Another factor contributing to the net sales
increase was the increase in sales of certain critical care products, which
occurred as a result of our competitors' inability to supply product. These
increases were offset by the decrease in sales from two products we no longer
produce. In addition, net sales for the first quarter of 2001 were reduced by
$1.8 million for common stock earned by Premier.
In 2002, we expect additional competitors to enter the generic market, which
will force us to lower selling prices to maintain our market, which is typical
of the generic product life cycle. Concurrently, we will continue to attempt to
be the first to launch new products to capture market share and optimize gross
profit.
Cost of sales. Cost of sales were $30.9 million and $27.2 million for the three
months ended March 31, 2002 and 2001, respectively, representing an increase of
$3.7 million. This increase was primarily due to the increase in net sales in
2002. Cost of sales as a percentage of net sales decreased to 57.3% for the
three months ended March 31, 2002 from 69.6% for the same period in 2001. The
decrease in percentage was driven primarily by the inclusion of higher margin
products which we recently introduced and higher priced opportunistic sales.
13
Research and development. Research and development costs were $4.3 million and
$2.7 million for the three months ended March 31, 2002 and 2001, respectively,
representing an increase of $1.6 million. This increase was primarily the result
of the timing of the use of raw materials in research and development
activities.
We anticipate research and development expenses to continue to increase from
2001 amounts as a result of higher raw material costs associated with the
specific products being developed.
Selling, general and administrative. Selling, general and administrative
expenses were $9.3 million and $6.8 million for the three months ended March 31,
2002 and 2001, respectively, representing an increase of $2.5 million. This
increase was primarily due to increased salaries and related expenses due to
headcount additions, increased legal expenses and increased costs related to the
Company's status as a public company such as insurance, professional services
and franchise tax expenses.
Stock-based compensation. Stock-based compensation was $0.9 million and $0.3
million for the three months ended March 31, 2002 and 2001, respectively,
representing an increase of $0.6 million. This increase was the result of stock
options granted throughout 2001 for which the exercise price was less than the
estimated fair value of our common stock on the grant date.
Litigation settlements. There was no gain on litigation settlements, net for the
three months ended March 31, 2002. The gain on litigation settlements was $0.3
million for the three months ended March 31, 2001. Under the terms of a 2000
legal settlement, we were entitled to receive a series of payments, which began
in March 2000 and concluded in 2001. All payments due to us under this
settlement agreement were received during 2001 and 2000.
Equity in Drug Source Co., LLC. In June 2000, a limited liability company, Drug
Source Co., LLC, was formed to engage in the business of selling raw materials
to the pharmaceutical industry. We own 50% of Drug Source Co., LLC, and account
for this interest on the equity method from which income of $0.4 million for the
three months ended March 31, 2002 was recognized compared to income of $0.3 for
the three months ended March 31, 2001.
Interest income. Interest income was $0.5 million and $42,000 for the three
months ended March 31, 2002 and 2001, respectively, representing an increase of
$0.5 million. This increase was primarily the result of interest charges on
amounts due from ABI beginning in February 2001. In addition in 2002, we earned
interest on the cash proceeds from our initial public offering.
Interest expense. Interest expense was $0.4 million and $1.2 million for the
three months ended March 31, 2002 and 2001, respectively, representing a
decrease of $0.8 million. This decrease was primarily due to the absence of bank
debt, for which there was $0.5 million of interest expense for the three months
ended March 31, 2001. Our bank debt was paid off in December 2001 with proceeds
from our initial public offering. The imputed interest expense related to the
amounts due to VivoRx also declined as a result of scheduled payments made in
accordance with the related settlement agreement.
Provision for income taxes. Provision for income taxes was $3.9 million and $0.6
million for the three months ended March 31, 2002 and 2001, respectively,
representing an increase of $3.3 million due to higher net income. Our effective
tax rates were 43.4% and 43.1% for the three months ended March 31, 2002 and
2001, respectively.
Significant Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
most significant estimates in the Company's consolidated financial statements
are discussed below. Actual results could vary from those estimates.
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Revenue recognition
We recognize revenue from the sale of a product when that product is shipped to
a customer, acceptance terms are fulfilled and no significant contractual
obligations remain. We sell a majority of our products to wholesalers, who
generally sell our products to hospitals or alternative healthcare facilities at
contractual prices previously agreed upon between us and group purchasing
organizations, or GPOs, on behalf of end users such as hospitals. GPOs enter
into collective purchasing contracts with pharmaceutical suppliers for products
in an effort to secure favorable drug pricing on behalf of their members. We
invoice wholesalers at our wholesale list price. Net sales represent our
wholesale list price offset by wholesaler chargebacks, further adjusted for
estimated discounts and contractual allowances, including GPO fees. Wholesaler
chargebacks represent the difference between the wholesale list price and the
estimated contractual sales price, based upon our historical experience ratings.
The most significant estimates which affect net sales are our allowances for
doubtful accounts, cash discounts, sales credits and wholesaler chargebacks. The
allowances for doubtful accounts, cash discounts and sales credits are estimated
monthly by applying historical percentages (based on credits issued for each
category), which are reassessed periodically, to the product sales for the
month. The wholesaler chargeback calculation is computed as described in the
preceding paragraph.
Expense recognition
Cost of sales represents the costs of the products which we have sold and
consists of labor, raw materials, components, packaging, quality assurance and
quality control, shipping and manufacturing overhead costs and the cost of
finished products purchased from third parties. Our inventories are valued at
the lower of cost or market as determined under the first-in, first-out (FIFO)
method.
Research and development costs are expensed as incurred and consist primarily of
salaries and other personnel-related expenses, as well as depreciation of
equipment, allocable facility, raw material and production expenses and contract
and consulting fees. We have made, and will continue to make, substantial
investment in research and development to expand our new product offerings and
grow our business.
Selling, general and administrative expenses consist primarily of salaries,
commissions and other personnel-related expenses, as well as costs for travel,
trade shows and conventions, promotional material and catalogs, advertising and
promotion, allocable facilities and professional fees for general, legal and
accounting services. We believe that our selling, general and administrative
expenses will continue to increase due to the growth of our business and
increased expenses associated with being a public company.
Stock-based compensation
Stock-based compensation related to research and development cost and selling,
general and administrative expenses are presented separately in our consolidated
statement of operations. Stock-based compensation represents the difference
between the exercise price of options granted and the deemed fair value of our
common stock on the grant date in accordance with Accounting Principles Board
Opinion No. 25 and its related interpretations. We recognize stock-based
compensation over the option vesting period, typically four years, on an
accelerated basis using the graded vesting method in accordance with Financial
Accounting Standards Board Interpretation No. 28.
15
We have recorded deferred stock-based compensation related to unvested options
granted to employees and outside directors. Based upon the number of unvested
options outstanding as of March 31, 2002, we expect to amortize approximately
$3.7 million of deferred stock-based compensation in future periods as follows:
$1.7 million for the remainder of 2002; $1.3 million in 2003; $0.6 million in
2004; and $0.1 million in 2005. We anticipate that the exercise price of stock
options granted after our December 14, 2001 initial public offering will be at
the reported market price of our common stock and, therefore, no additional
deferred stock-based compensation will result from these option grants.
Liquidity and Capital Resources
Net cash used by operating activities was $64.6 million for the three months
ended March 31, 2002 as compared to $2.9 million for the comparable period of
2001. The primary use of cash for the three months ended March 31, 2002 was the
$60.0 million payment to ABI in accordance with the terms of the ABI-007 license
agreement, see discussion below. For the three months ended March 31, 2002 and
2001, operating cash flows were impacted by the increase in net income and
changes in working capital, mainly in accounts receivable, inventory, accounts
payable and accrued expenses.
Net cash used in investing activities was $3.3 million for the three months
ended March 31, 2002 as compared to $1.2 million for the comparable period of
2001. Our investing activities have primarily consisted of capital expenditures
for new manufacturing equipment and, in 2002, licensing fees related to the
implementation of a new Enterprise Resource Planning (ERP) business system
application, which is being implemented by the Company.
Net cash provided by financing activities was $19.7 million for the three months
ended March 31, 2002 as compared to $3.6 million for the comparable period of
2001. Our financing activities in 2002 included net proceeds received from the
sale of common stock of $20.1 million, which was a result of the underwriters of
our December 14, 2001 initial public offering exercising the over-allotment on
January 10, 2002 and the exercise of stock options of $0.4 million. This was
offset by an increase in amounts due from ABI of $0.7 million and payments of
financing costs of $0.1 million. Our financing activities in 2001 included net
borrowings on our revolving line of credit of $12.1 million. This was offset by
an increase in amounts due from ABI of $7.4 million and payments of long-term
debt of $1.2 million.
In December 2001, the Company entered a new credit agreement with a syndicate of
banks headed by the Canadian Imperial Bank of Commerce (CIBC). The CIBC
agreement includes a $50 million revolving line of credit and a $25 million term
loan. The credit facility is secured by substantially all of our assets, is
guaranteed by each of our subsidiaries and our majority stockholder, and
contains various operating and financial covenants. The revolving credit
facility has a term of five years and can be increased to $75 million at our
request. The initial CIBC term loan balance of $25 million, the proceeds of
which were used to repay our indebtedness under a former credit facility, was
repaid and permanently reduced with proceeds from our initial public offering.
The revolving credit facility balance of $12.7 million was also paid in full
with proceeds from our initial public offering. The CIBC credit facility expires
in 2006. There were no outstanding balances due under the CIBC credit facility
at March 31, 2002.
As of March 31, 2002, we were jointly and severally liable with ABI for payments
due to VivoRx, Inc. pursuant to a litigation settlement requiring $12.0 million
to be paid prior to February 26, 2003. Under the terms of an agreement between
ABI and us, ABI has agreed to pay this obligation in full. If ABI fails or is
unable to pay the remaining obligation of $12.0 million due on February 26,
2003, we will be liable for any amounts that remain unpaid, which could
adversely affect our financial condition.
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In November 2001, we entered into a license agreement with ABI for the exclusive
North American manufacturing and sales rights to ABI-007 under which we made
initial license payments totaling $60 million in January 2002. ABI is
responsible for substantially all costs associated with the development of
ABI-007, except that we have agreed to manufacture up to $2 million of product
for use in clinical trials. We are also required to make milestone payments of
up to (a) $60 million for indications relating to breast, ovarian and lung
cancers and (b) $32.5 million for indications relating to prostate cancer and
other indications agreed upon between ABI and us. We also may be required to
make additional milestone payments, up to an aggregate of $110 million, based
upon the achievement of particular annual sales levels. Under the terms of the
license agreement, profits from any sales of ABI-007 will be shared equally
between us and ABI after deducting costs of goods sold, selling expenses and
other appropriate deductions. All costs and expenses related to product recalls
and product liability claims generally will be split equally between ABI and us.
The initial license payment has been accounted for as a distribution of
Company's stockholders' equity to ABI. As of December 31, 2001, the entire
$60,000,000 had been accrued as a distribution payable to ABI. The $60,000,000
was paid to ABI in January 2002. The income tax benefits related to this payment
will be credited to the Company's stockholders' equity as realized.
Our capital requirements depend on numerous factors, including the requirements
of our product development and commercialization efforts, need for capacity
expansion and improvement, need for information technology requirements, and the
growth of our business. We believe that our current cash reserves, cash
generated from operations and funds available from our revolving line of credit
will be sufficient to finance our operations and capital expenditures for at
least the next 12 months. We may, however, need to raise additional capital that
may not be available on terms favorable or acceptable to us, if at all. In the
event we engage in future acquisitions, we may have to raise additional capital
through additional borrowings or the issuance of debt or equity securities.
Adequate funds for these purposes may not be available when needed or on terms
acceptable to us. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may include restrictive
covenants. If we cannot raise more money when needed, we may have to reduce our
capital expenditures, scale back our development of new products or reduce our
workforce.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets (SFAS No. 141 and SFAS No. 142). Under the
new rules, effective January 1, 2002, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The effect of adopting SFAS
No. 141 and SFAS No. 142 had no impact on the our statement of income or
financial position. We do not have any goodwill recorded in our consolidated
balance sheets.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our activities
without increasing risk. Some of the securities that we invest in may have
market risk. This means that a change in prevailing interest rates may cause the
fair value of the principal amount of the investment to fluctuate. For example,
if we hold a security that was issued with a fixed interest rate at the
prevailing rate and the prevailing rate later rises, the fair value of the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
government and non-government debt securities and money market funds. The
average duration of all our investments has been less than one year. Due to the
short-term nature of these investments, we believe we have no material exposure
to interest rate risk arising from our investments. Therefore, no quantitative
tabular disclosure is presented.
We have operated primarily in the United States and the majority of our
activities with our collaborators outside the United States to date have been
conducted in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency exchange rate fluctuations.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 14, 2001, we completed our initial public offering of 9,000,000
shares of common stock at a public offering price of $16.00 per share and
realized an aggregate offering price of $144.0 million. We received net proceeds
of $133.9 million. These proceeds are net of $10.1 million in underwriting
discounts and commissions. Of the net proceeds, we used $37.7 million of the net
proceeds to repay in full and terminate our term loan and to repay amounts
outstanding under the revolving credit facility with CIBC. In addition, expenses
of $2.9 million relating to the issuance and distribution of the securities sold
were incurred.
On January 10, 2002, the underwriters for our initial public offering exercised
in full their option to purchase an additional 1,350,000 shares of our common
stock at the initial public offering price of $16.00 per share in order to cover
over-allotments. As a result of this exercise, we received proceeds of
$20,088,000. This is net of underwriting discounts and commissions of
$1,512,000.
Also in January 2002, we made an initial license payment of $60,000,000 to
American BioScience, Inc., of which $55,000,000 was used from the net proceeds
from our initial public offering and $5,000,000 was used from general operating
funds. Under this agreement, we acquired the exclusive rights to market and sell
ABI-007 in North America. For the three months ended March 31, 2002, $7,000,000
of the net proceeds from our initial public offering was used for general
corporate purposes.
We intend to use the remaining net proceeds for general corporate purposes,
including working capital, capital expenditures, and potential acquisitions and
licensing opportunities. At this time, we do not have any commitments or
agreements with respect to any material acquisition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AMERICAN PHARMACEUTICAL PARTNERS, INC.
By: /s/ PATRICK SOON-SHIONG, M.D.
-----------------------------------------------
Patrick Soon-Shiong, M.D.
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
By: /s/ DEREK J. BROWN
-----------------------------------------------
Derek J. Brown
Chief Operating Officer and Director
(Principal Financial and Accounting Officer)
Date: May 10, 2002
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