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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 SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NO. 0-24425
KING PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
TENNESSEE 54-1684963
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
501 FIFTH STREET, BRISTOL TN 37620
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 989-8000
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 [ ]
Number of shares outstanding of Registrant's common stock as of November
12, 2001: 245,632,409
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 19,986 $ 76,395
Accounts receivable, net of allowance for doubtful
accounts of $6,200 and $5,000.......................... 131,533 120,702
Inventories............................................... 96,972 65,089
Deferred income taxes..................................... 16,862 26,733
Prepaid expenses and other current assets................. 6,005 28,324
---------- ----------
Total current assets.............................. 271,358 317,243
---------- ----------
Property, plant and equipment, net.......................... 138,977 128,521
Intangible assets, net...................................... 1,047,965 790,324
Other assets................................................ 65,813 46,307
---------- ----------
Total assets...................................... $1,524,113 $1,282,395
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 17,104 $ 25,010
Accrued expenses.......................................... 107,218 78,545
Income taxes payable...................................... 39,189 --
Current portion of long-term debt......................... 1,509 1,527
---------- ----------
Total current liabilities......................... 165,020 105,082
---------- ----------
Long-term debt:
Senior Subordinated Notes................................. 96,382 96,382
Other..................................................... 2,257 2,623
Deferred income taxes....................................... 17,074 16,989
Other liabilities........................................... 66,327 73,586
---------- ----------
Total liabilities................................. 347,060 294,662
---------- ----------
Commitments and contingencies (notes 5 and 6)
Shareholders' equity...................................... 1,177,053 987,733
---------- ----------
Total liabilities and shareholders' equity........ $1,524,113 $1,282,395
========== ==========
See accompanying notes.
1
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000(1) 2001 2000(1)
-------- -------- -------- --------
Revenues:
Net sales................................................. $218,481 $156,323 $581,887 $412,089
Royalty revenue........................................... 11,608 9,219 36,028 32,090
-------- -------- -------- --------
Total revenues..................................... 230,089 165,542 617,915 444,179
-------- -------- -------- --------
Operating costs and expenses:
Cost of revenues, including royalty expense of $2,113,
$2,533, $8,230 and $7,050............................... 47,348 37,060 129,108 105,021
Nonrecurring charge - cost of revenues - inventory
write-off............................................... 2,059 28,722 2,059 28,722
-------- -------- -------- --------
Total cost of revenues............................. 49,407 65,782 131,167 133,743
Selling, general and administrative....................... 33,079 31,159 95,469 95,160
Co-promotion fees......................................... 24,703 -- 62,552 --
Co-promotion marketing expense............................ 3,843 -- 14,302 --
Depreciation and amortization............................. 12,685 11,808 35,481 30,586
Research and development.................................. 7,417 6,019 17,932 15,700
Research and development - Special license rights......... -- -- 3,000 --
Nonrecurring charge - Research and development............ -- 6,107 -- 6,107
Merger, restructuring, and other nonrecurring charges..... 3,279 42,349 3,279 64,643
-------- -------- -------- --------
Total operating costs and expenses................. 134,413 163,224 363,182 345,939
-------- -------- -------- --------
Operating income.......................................... 95,676 2,318 254,733 98,240
-------- -------- -------- --------
Other income (expense):
Interest income........................................... 2,164 3,105 7,743 10,109
Interest expense.......................................... (3,358) (9,684) (8,949) (33,840)
Other, net................................................ 3,558 2,285 6,502 2,171
-------- -------- -------- --------
Total other income (expense)....................... 2,364 (4,294) 5,296 (21,560)
-------- -------- -------- --------
Income before income taxes, extraordinary item and
cumulative effect of change in accounting principle....... 98,040 (1,976) 260,029 76,680
Income tax expense.......................................... (36,569) (7,181) (96,991) (44,921)
-------- -------- -------- --------
Income before extraordinary item and cumulative effect of
change in accounting principle............................ 61,471 (9,157) 163,038 31,759
Extraordinary items:
Extinguishment of debt, net of taxes of $1,500 and $4,347,
respectively............................................ -- (2,561) -- (7,246)
Loss on disposed and impaired assets, net of taxes of
$5,612.................................................. -- (9,353) -- (9,353)
-------- -------- -------- --------
Income before cumulative effect of change in accounting
principle................................................. 61,471 (21,071) 163,038 15,160
Cumulative effect of change in accounting principle, net of
taxes of $325............................................. -- -- (545) --
-------- -------- -------- --------
Net income.................................................. $ 61,471 $(21,071) $162,493 $ 15,160
======== ======== ======== ========
Income per common share:
Basic:
Income before extraordinary item and cumulative effect
of change in accounting principle..................... $ 0.27 $ (0.04) $ 0.71 $ 0.15
Extraordinary item...................................... -- (0.06) -- (0.08)
Cumulative effect of change in accounting principle..... -- -- -- --
-------- -------- -------- --------
Net income.............................................. $ 0.27 $ (0.10) $ 0.71 $ 0.07
======== ======== ======== ========
Diluted:
Income before extraordinary item and cumulative effect
of change in accounting principle..................... $ 0.27 $ (0.04) $ 0.70 $ 0.15
Extraordinary item...................................... -- (0.06) -- (0.08)
Cumulative effect of change in accounting principle..... -- -- -- --
-------- -------- -------- --------
Net income.............................................. $ 0.27 $ (0.10) $ 0.70 $ 0.07
======== ======== ======== ========
---------------
(1) Restated; see Note 1 to financial statements.
See accompanying notes.
2
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- -------- -------- ----------
Balance at December 31, 2000...................... 170,841,178 $658,948 $328,785 $ 987,733
4 for 3 stock split (Note 10)..................... 56,941,365 (418) -- (418)
Net income and total comprehensive income......... -- -- 162,493 162,493
Exercise of stock options......................... 1,646,643 21,689 -- 21,689
Effect of acceleration of vesting of stock
options......................................... -- 5,556 -- 5,556
----------- -------- -------- ----------
Balance at September 30, 2001..................... 229,429,186 $685,775 $491,278 $1,177,053
=========== ======== ======== ==========
See accompanying notes.
3
KING PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2001 2000
-------- ---------
Cash flows from operating activities........................ $250,623 $ 92,854
-------- ---------
Cash flows from investing activities:
Purchase of investment securities......................... -- (142,922)
Proceeds from maturity and sale of investment
securities............................................. -- 258,020
Convertible senior note................................... (10,000) --
Loans receivable.......................................... (15,000) --
Purchases of property, plant and equipment................ (20,222) (13,116)
Purchase of intangible assets............................. (286,500) (204,000)
Proceeds from sale of product rights...................... 3,332 --
Proceeds from sale of assets.............................. 1,446 441
-------- ---------
Net cash used in investing activities............. (326,944) (101,577)
-------- ---------
Cash flows from financing activities:
Proceeds from revolving credit facility................... 75,000 114,000
Payments on revolving credit facility..................... (75,000) (159,000)
Proceeds from issuance of common shares and exercise of
stock options, net..................................... 21,689 263,157
Payments of cash dividends - Jones........................ -- (2,619)
Payments on other long-term debt and capital lease
obligations............................................ (384) (354,641)
Proceeds from bridge loan facility........................ -- 25,000
Debt issuance costs....................................... -- (850)
Other..................................................... (1,393) --
-------- ---------
Net cash provided by (used in) financing
activities....................................... 19,912 (114,953)
-------- ---------
Increase in cash and cash equivalents....................... (56,409) (123,676)
Cash and cash equivalents, beginning of period.............. 76,395 131,723
-------- ---------
Cash and cash equivalents, end of period.................... $ 19,986 $ 8,047
======== =========
See accompanying notes.
4
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
(IN THOUSANDS)
1. GENERAL
The accompanying unaudited interim condensed consolidated financial
statements of King Pharmaceuticals, Inc. (the "Company") have been prepared by
the Company in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X, and 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 (including
items of a normal recurring nature) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September 30,
2001 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2001. These interim statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's latest Annual Report on Form 10-K/A. The year-end condensed balance
sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
These consolidated financial statements include the accounts of King and
its wholly owned subsidiaries, Monarch Pharmaceuticals, Inc., Parkedale
Pharmaceuticals, Inc., King Pharmaceuticals Research and Development, Inc.
(formerly Medco Research, Inc.), Jones Pharma Incorporated, and King
Pharmaceuticals of Nevada, Inc. All intercompany transactions and balances have
been eliminated in consolidation.
2000 Restatement
The Company has restated its consolidated statement of income for the three
and nine months ended September 30, 2000 to reflect losses on disposed inventory
as operating expense rather than as an extraordinary item. The impact of this
change is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------- -------------------
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
Operating income.............................. $ 31,040 $ 2,318 $126,962 $ 98,240
-------- -------- -------- --------
Extraordinary items........................... $(29,865) $(11,914) $(34,550) $(16,599)
-------- -------- -------- --------
Net income.................................... $(21,071) $(21,071) $ 15,160 $ 15,160
-------- -------- -------- --------
2. EARNINGS PER SHARE
The basic and diluted income per common share was determined using the
following share data:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Basic income per common share:
Weighted average common shares............ 229,303 220,978 228,692 214,707
======= ======= ======= =======
Diluted income per common share:
Weighted average common shares............ 229,303 220,978 228,692 214,707
Effect of stock options................... 2,409 --(1) 2,463 4,868
------- ------- ------- -------
Weighted average common shares plus
assumed conversions.................... 231,712 220,978 231,155 219,575
======= ======= ======= =======
---------------
(1) The assumed exercise of stock options has an antidilutive effect on earnings
per share.
5
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventory consists of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Finished goods (including $13,823 and $6,821 of sample
inventory, respectively).................................. $62,539 $49,825
Work-in-process........................................... 9,959 6,662
Raw materials............................................. 24,474 8,602
------- -------
$96,972 $65,089
======= =======
4. ACQUISITIONS/INTANGIBLE ASSETS
On August 8, 2001, the Company acquired three branded pharmaceutical
products and a fully paid license to a fourth product from Bristol-Myers Squibb
("BMS") for $285.0 million plus approximately $1.5 million of expenses. The
products acquired include BMS's rights in the United States to Corzide(R),
Delestrogen(R), and Florinef(R). King acquired also a fully paid license to and
trademark for Corgard(R) in the United States. The acquisition was financed with
a combination of borrowings under its senior secured credit facility and cash on
hand.
On June 22 and July 7, 2000, the Company acquired the sales and marketing
rights, respectively, of Nordette(R), Wycillin(R), and Bicillin(R) from American
Home Products Corporation ("AHP") for $200.0 million plus assumed liabilities of
$3.0 million. This acquisition was financed with a draw of $10.0 million on a
$50.0 million bridge loan, $25.0 million in the form of a note issued to AHP,
$37.5 million of the proceeds from the sale of stock to AHP, $25.0 million
received in connection with the co-promotion agreement with AHP, $90.0 million
from the revolving credit facility and $12.5 million in excess cash from
operations.
The following unaudited pro forma summary presents the financial
information as if the acquisition of the Corzide(R), Delestrogen(R),
Florinef(R), Corgard(R), Nordette(R), Wycillin(R) and Bicillin(R) product lines
had occurred as of January 1, 2000. These pro forma results have been prepared
for comparative purposes and do not purport to be indicative of what would have
occurred had the acquisition been made on January 1, 2000, nor is it indicative
of future results.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues.................................. $234,183 $186,105 $632,979 $499,481
-------- -------- -------- --------
Net income (loss) before extraordinary item... $ 62,880 $ 70 $165,734 $ 64,431
-------- -------- -------- --------
Basic income per common share................. $ 0.27 $ 0.00 $ 0.72 $ 0.30
-------- -------- -------- --------
Diluted income per common share............... $ 0.27 $ 0.00 $ 0.72 $ 0.29
-------- -------- -------- --------
6
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible assets consist of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Trademarks and product rights............................... $1,048,190 $762,669
Patents................................................... 80,000 80,000
Goodwill.................................................. 16,251 16,251
Other intangibles......................................... 8,648 8,648
---------- --------
1,153,089 867,568
Less accumulated amortization............................. (105,124) (77,244)
---------- --------
$1,047,965 $790,324
========== ========
5. MERGERS, RESTRUCTURING AND NONRECURRING CHARGES
A. Merger with Medco
On February 25, 2000, the Company completed a merger with Medco Research,
Inc. ("Medco"). The Medco merger was accounted for as a pooling of interests. In
connection with this transaction the Company charged to expense $20,789 of
merger related costs in the first quarter of 2000. The types of costs incurred
and the actual cash payments made in 2001 as well as the remaining accrued
balances at September 30, 2001 are summarized below:
ACCRUED JANUARY 1, 2001 ACCRUED
BALANCE AT THROUGH BALANCE AT
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
2000 2001 PAYMENTS 2001
------------ --------------- -------------
Transaction costs............................... $ 797 $ -- $797
Employee costs and other........................ 439 439 --
------ ---- ----
Total................................. $1,236 $439 $797
====== ==== ====
B. Merger with Jones
On August 31, 2000, the Company completed a merger with Jones Pharma
Incorporated ("Jones"). The Jones merger was accounted for as a pooling of
interests. In connection with the merger with Jones, the Company incurred total
merger and restructuring related costs of $35,317 for the nine months ended
September 30, 2000. Additionally, during the third quarter of 2001, the Company
recorded employee costs related to the integration of Jones resulting in a
charge of $3.3 million. This additional integration resulted in the elimination
of 43 employees. The types of costs incurred and the actual cash payments made
in 2001 as well as the remaining accrued balances at September 30, 2001 are
summarized below:
ADDITIONAL ACTIVITY
ACCRUED CHARGE IN JANUARY 1, ACCRUED
BALANCE AT THIRD 2001 THROUGH BALANCE AT
DECEMBER 31, QUARTER SEPTEMBER 30, SEPTEMBER 30,
2000 OF 2001 2001 2001
------------ ---------- ------------- -------------
Transaction costs....................... $ 620 $ -- $ 620 $ --
Employee costs, including severance and
acceleration of vesting of stock
options............................... 3,707 3,279 6,986 --
------ ------ ------ ----
Total......................... $4,327 $3,279 $7,606 $ --
====== ====== ====== ====
All activity was paid in cash except for $3.9 million for the acceleration
of vesting for stock options.
7
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following information presents certain unaudited financial data of the
separate companies during the three and nine months of 2000 (through date of
acquisition):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------ ------------------
Net Revenues:
Medco (through date of acquisition)................ $ -- $ 9,169
Jones (through date of acquisition)................ 32,809 130,175
------- --------
Total...................................... $32,809 $139,344
======= ========
Net Income:
------- --------
Medco (through date of acquisition)................ $ -- $ 7,244
Jones (through date of acquisition)................ 6,276 45,584
------- --------
Total...................................... $ 6,276 $ 52,828
======= ========
C. Discontinuance of Fluogen(R) Product
On September 27, 2000, the Company received written notification from the
United States Food and Drug Administration ("FDA") that it must cease
manufacturing and distributing Fluogen(R), an influenza vaccine, until the
Company demonstrated compliance with related FDA regulations. In addition, the
notification recommended that the Company properly dispose of Fluogen(R)
inventory on hand. As a result of this notification, the Company decided to
permanently discontinue Fluogen(R) production and distribution. This
restructuring plan resulted in the elimination of approximately 160 employees of
which approximately 110 were hourly and 50 were salaried. As a result of these
events, the Company recorded extraordinary losses on disposed and impaired
assets of $15.0 million, before tax benefit of $5.6 million, and a nonrecurring
charge of $37.3 million for the year ended December 31, 2000. A summary of the
types of costs incurred in 2001 and the remaining accrued balances at September
30, 2001 are summarized below:
ACCRUED ACCRUED
BALANCE AT BALANCE AT
DECEMBER 31, SEPTEMBER 30,
2000 PAYMENTS OTHER (1) 2001
------------ -------- --------- -------------
Nonrecurring charges
Employee costs, including severance and
acceleration of vesting of stock
options.................................. $5,270 $4,412 $858 $ --
Contractual commitments and cleanup
activities............................... 1,296 288 -- 1,008
------ ------ ---- ------
Total............................ $6,566 $4,700 $858 $1,008
====== ====== ==== ======
---------------
(1) Includes reclassification for acceleration of vesting for stock options to
shareholders' equity.
D. Discontinuance of Pallacor(TM) Research and Development Efforts
In September 2000 management decided to discontinue the research and
development efforts relating to Pallacor(TM) due to its inability to out-license
rights to the product and its assessment of the significance of projected
research and development costs relative to the likelihood of the project's
success resulting in a nonrecurring research and development charge of $6.1
million. At December 31, 2000 and September 30, 2001 the Company has $4.7
million and $0.3 million, respectively, accrued for all estimated remaining
contractual commitments associated with Pallacor(TM).
8
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. CONTINGENCIES
Fen/Phen Litigation
Many distributors, marketers and manufacturers of anorexigenic drugs have
been subject to claims relating to the use of these drugs. Generally, the
lawsuits allege that the defendants (1) misled users of the products with
respect to the dangers associated with them, (2) failed to adequately test the
products and (3) knew or should have known about the negative effects of the
drugs, and should have informed the public about the risks of such negative
effects. The actions generally have been brought by individuals in their own
right and have been filed in various state and federal jurisdictions throughout
the United States. They seek, among other things, compensatory and punitive
damages and/or court supervised medical monitoring of persons who have ingested
the product. The Company is one of many defendants in more than 33 lawsuits
which claim damages for personal injury arising from the Company's production of
the anorexigenic drug, phentermine, under contract for GlaxoSmithKline. The
Company expects to be named in additional lawsuits related to the Company's
production of the anorexigenic drug under contract for GlaxoSmithKline.
While the Company cannot predict the outcome of these suits, the Company
believes that the claims against it are without merit and intends to vigorously
pursue all defenses available to it. The Company is being indemnified in all of
these suits by GlaxoSmithKline for which it manufactured the anorexigenic
product, provided that neither the lawsuits nor the associated liabilities are
based upon the independent negligence or intentional acts of the Company, and
intends to submit a claim for all unreimbursed costs to its product liability
insurance carrier. However, in the event that GlaxoSmithKline is unable to
satisfy or fulfill its obligations under the indemnity, the Company would have
to defend the lawsuit and be responsible for damages, if any, which are awarded
against it or for amounts in excess of the Company's product liability coverage.
A reasonable estimate of possible losses related to these suits cannot be made.
In addition, Jones, a wholly-owned subsidiary of the Company is a defendant
in more than 1,100 multi-defendant lawsuits involving the manufacture and sale
of dexfenfluramine, fenfluramine and phentermine. These suits have been filed in
various jurisdictions throughout the United States, and in each of these suits,
Jones is one of many defendants, including manufacturers and other distributors
of these drugs. Although Jones has not at any time manufactured dexfenfluramine,
fenfluramine, or phentermine, Jones was a distributor of a generic phentermine
product, and, after the acquisition of Abana Pharmaceuticals, was a distributor
of Obenix, its branded phentermine product. The plaintiffs in these cases claim
injury as a result of ingesting a combination of these weight-loss drugs and are
seeking compensatory and punitive damages as well as medical care and court
supervised medical monitoring. The plaintiffs claim liability based on a variety
of theories including but not limited to, product liability, strict liability,
negligence, breach of warranty, and misrepresentation.
Jones denies any liability incident to the distribution of Obenix or its
generic phentermine product and intends to pursue all defenses available to it.
Jones has tendered defense of these lawsuits to its insurance carriers for
handling and they are currently defending Jones in these suits. The
manufacturers of fenfluramine and dexfenfluramine have settled many of these
cases. In the event that Jones' insurance coverage is inadequate to satisfy any
resulting liability, Jones will have to resume defense of these lawsuits and be
responsible for the damages, if any, that are awarded against it.
While the Company cannot predict the outcome of these suits, management
believes that the claims against Jones are without merit and intends to
vigorously pursue all defenses available. The Company is unable to disclose an
aggregate dollar amount of damages claimed. Many of the complaints are
multi-party suits and do not state specific damage amounts. Rather, these claims
typically state damages as may be determined by the court or similar language
and state no specific amount of damages against Jones. The Company, at this
time, cannot provide an aggregate dollar amount of damages claimed or a
reasonable estimate of possible losses related to the lawsuits.
9
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
State of Wisconsin Investment Board
On November 30, 1999, the Company entered into an agreement of merger with
Medco Research, Inc. ("Medco") pursuant to which the Company acquired Medco in
an all stock, tax-free pooling of interests transaction (Note 5), which was
subject to approval by the Medco shareholders. On January 5, 2000, Medco issued
to its stockholders a proxy statement with respect to the proposed transaction
and noticed a meeting to approve the transaction for February 10, 2000.
On January 11, 2000, the State of Wisconsin Investment Board, ("SWIB"), a
Medco shareholder which held approximately 11.6% of the outstanding stock of
Medco, filed suit on behalf of a proposed class of Medco shareholders in the
Court of Chancery for the State of Delaware, New Castle County, against Medco
and members of Medco's board of directors to enjoin the shareholder vote on the
merger and the consummation of the merger. State of Wisconsin Investment Board
v. Bartlett, et al., C.A. No. 17727. SWIB alleged, among other things, that the
proxy materials filed by Medco failed to disclose all material information and
included misleading statements regarding the transaction, its negotiation, and
its approval by the Medco board of directors; that the Medco directors were not
adequately informed and did not adequately inform themselves of all reasonably
available information before recommending the transaction to Medco shareholders;
and that the Medco directors were disloyal and committed waste in allegedly
enabling one of the Medco directors to negotiate the transaction purportedly for
his own benefit and in agreeing to terms that precluded what the complaint
alleged were more beneficial alternative transactions. SWIB also moved for a
preliminary injunction to enjoin the shareholder vote and the merger based on
the claims asserted in its complaint. Medco and the other defendants denied all
allegations and continue to deny them.
After Medco distributed a supplemental proxy statement on January 31, 2000
and the court postponed the February 10, 2000 vote on the merger agreement for
15 days to allow shareholders sufficient time to consider the supplemental
disclosures, the court rejected SWIB's claims in a February 24, 2000 Memorandum
Opinion and denied preliminary injunctive relief because SWIB had not shown a
reasonable likelihood of success following trial on the merits. The court made a
number of preliminary findings, including that the Medco board of directors
properly delegated to one of its directors the responsibility to negotiate the
merger; that the payment of the negotiating fee was a proper exercise of
business judgment and did not constitute waste; that the other merger provisions
were also valid; that the Medco directors were adequately informed of all
material information reasonably available to them prior to approving the merger
agreement; that the Medco directors acted independently and in good faith to
benefit the economic interests of the Medco shareholders; that the alleged
omissions in the proxy statements were not material; and that the Medco board of
directors fully met its duty of complete disclosure with respect to the
transaction.
SWIB has filed an Application for a Scheduling Order stating its intention
to dismiss the case, before a class has been certified, without prejudice. In
the meantime, the action is still pending. While SWIB has indicated that it does
not intend to prosecute the merits of the case further, another shareholder
could intervene and continue the action. Even though SWIB lost its motion for
preliminary injunction, and is going to dismiss the case, SWIB has claimed that
its attorneys are entitled to an award of attorney's fees and costs. SWIB has
petitioned the court for approximately $7.26 million in attorney's fees and
approximately $270,000 in costs.
A hearing on SWIB's petition to dismiss and for attorney's fees and costs
was held on June 26, 2000 in the Court of Chancery for the State of Delaware. No
ruling has yet been issued.
The Company believes that SWIB's case, including SWIB's claim for
significant attorney's fees which includes fees based on a formula related to an
alleged benefit conferred on Medco shareholders, is meritless, and the Company
is vigorously contesting it. The Company believes SWIB's actions did not confer
a benefit on the Medco shareholders. The Company also believes it is unlikely
that another shareholder will intervene to continue the action, but if that
results then the Company will vigorously contest it.
10
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other
The Parkedale Facility was one of six facilities owned by Pfizer subject to
a Consent Decree of Permanent Injunction issued August 1993 in United States of
America v. Warner-Lambert Company and Melvin R. Goodes and Lodewijk J.R. DeVink
(U.S. Dist. Ct., Dist. of N.J.) (the "Consent Decree"). The Parkedale Facility
is currently manufacturing pharmaceutical products subject to the Consent Decree
which prohibits the manufacture and delivery of specified drug products unless,
among other things, the products conform to current good manufacturing practices
and are produced in accordance with an approved abbreviated new drug application
or new drug application. The Company intends, when appropriate, to petition for
relief from the Consent Decree.
The Company is involved in various routine legal proceedings incident to
the ordinary course of its business.
Summary
Management believes that the outcome of all pending legal proceedings in
the aggregate will not have a material adverse affect on the Company's
consolidated financial position, results of operations, or cash flow.
7. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Senior subordinated notes................................... $ 96,382 $ 96,382
Notes payable to former owners, due in equal annual
installments of principal and interest (at a rate of 6%)
of $1,226 through December 2003........................... 3,276 3,276
Various capital leases with interest rates ranging from 8.3%
to 12.7% and maturing at various times through 2002....... 490 869
Other notes payable......................................... -- 5
-------- --------
100,148 100,532
Less current portion.............................. 1,509 1,527
-------- --------
$ 98,639 $ 99,005
======== ========
As a result of prepayments under the Senior Credit Facility, during the
three months and nine months ended September 30, 2000, an extraordinary charge
of $2.6 million and $7.2 million, net of related tax benefits, associated with
the write-off of certain unamortized deferred financing costs was recorded.
As of September 30, 2001 the Company has $100.0 million of availability
under the Senior Credit Facility. See footnote 14 for subsequent events.
8. SEGMENT REPORTING
The Company's business is classified into three reportable segments;
Branded Pharmaceuticals, Contract Manufacturing, and Licensed Products. Branded
Pharmaceuticals include a variety of branded prescription products over four
therapeutic areas, including cardiovascular, women's health/endocrinology,
anti-infective and critical care. Contract Manufacturing represents contract
manufacturing services provided for pharmaceutical and biotechnology companies.
Licensed products represent products for which the Company has transferred the
manufacturing and marketing rights to corporate partners in exchange for royalty
payments
11
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on product sales. The classification "all other" primarily includes generic
pharmaceutical products and development services.
The Company primarily evaluates its segments based on gross profit.
Reportable segments were separately identified based on revenues, gross profit
and total assets.
The following represents selected information for the Company's operating
segments for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Total Revenues:
Branded pharmaceuticals..................... $211,479 $143,765 $560,096 $373,203
Licensed products........................... 11,608 9,219 36,028 32,090
Contract manufacturing...................... 22,252 15,421 53,450 47,088
All other................................... 702 848 2,204 6,103
Eliminations................................ (15,952) (3,711) (33,863) (14,305)
-------- -------- -------- --------
Consolidated total revenues......... $230,089 $165,542 $617,915 $444,179
======== ======== ======== ========
Gross profit:
Branded pharmaceuticals..................... $172,518 $ 89,471 $462,841 $275,718
Licensed products........................... 9,961 7,305 29,218 26,669
Contract manufacturing...................... (1,793) 2,809 (5,461) 5,301
All other................................... (4) 175 150 2,748
-------- -------- -------- --------
Consolidated gross profit........... $180,682 $ 99,760 $486,748 $310,436
======== ======== ======== ========
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Total assets:
Branded pharmaceuticals................................... $1,409,323 $1,189,997
Licensed products......................................... 13,361 10,723
Contract manufacturing.................................... 103,526 82,314
All other................................................. 84 720
Eliminations.............................................. (2,181) (1,359)
---------- ----------
Consolidated total assets......................... $1,524,113 $1,282,395
========== ==========
The following represents revenues by therapeutic area:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Total Revenues:
Cardiovascular.............................. $ 93,480 $ 62,040 $246,534 $150,866
Women's health/endocrinology................ 61,361 45,373 156,916 113,028
Anti-infective.............................. 36,268 23,752 107,792 75,758
Critical care............................... 24,500 15,963 63,476 46,569
Other....................................... 14,480 18,414 43,197 57,958
-------- -------- -------- --------
Consolidated total revenues......... $230,089 $165,542 $617,915 $444,179
======== ======== ======== ========
12
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CO-PROMOTION AGREEMENT WITH AHP
On June 22, 2000, the Company entered into a co-promotion agreement with
American Home Products Corporation ("AHP") to promote Altace(R) in the United
States and Puerto Rico through October 29, 2008. Under the agreement, AHP and
the Company have agreed to share various marketing expenses related to the
promotion of Altace(R). The Company's share of these expenses are included in
the caption "Co-promotion marketing expense" in the accompanying financial
statements. In addition, AHP paid an up front fee of $75.0 million to King which
was classified as other liabilities and is being amortized over the life of the
agreement. The amortization is included as a reduction of Co-promotion marketing
expense in the accompanying financial statements.
In connection with the co-promotion agreement with AHP, the Company has
agreed to pay AHP a promotional fee as follows:
- For 2001 and 2002, 20% of net sales up to $165 million, 50% of net sales
from $165 million to $465 million and 52.5% of net sales in excess of
$465 million.
- For years subsequent to 2002 through 2008 the fee is based on the same
formula, except the fee for the first $165 million will be 15% of net
sales.
The co-promotion fee is being accrued quarterly based on a percentage of
net sales at a rate equal to the expected relationship of the expected
co-promotion fee for the year to applicable expected net sales for the year.
10. STOCK SPLIT
On June 20, 2001, the Company's Board of Directors declared a four for
three stock split for shareholders of record as of July 3, 2001, to be
distributed July 19, 2001. The stock split has been reflected in all share data
contained in these consolidated financial statements.
11. OTHER THIRD QUARTER TRANSACTIONS
In the third quarter, the Company recognized a gain of approximately $6.2
million on its primary derivative, a $20.0 million convertible senior note from
Novavax, Inc., which has been recognized as other income in the accompanying
financial statements.
The Company incurred a non-recurring inventory charge of $2.1 million in
the third quarter related to the write-off of obsolete Levoxyl(R) inventory. The
U.S. Food and Drug Administration ("FDA") approved the new drug application for
a new formulation of Levoxyl(R) on May 25, 2001. Pursuant to FDA guidance, the
Company may distribute only the FDA approved new formulation of Levoxyl(R) after
August 14, 2001. This non-recurring charge is included in total cost of revenues
in the accompanying financial statements.
12. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS
No. 141 requires all business combinations to be accounted for under the
purchase method of accounting. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001, as well as all business combinations
accounted for under the purchase method of accounting for which the date of
acquisition is July 1, 2001, or later.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 modifies the accounting and
reporting for acquired intangible assets at the time of acquisition and in
subsequent periods. Intangible assets which have finite lives must be amortized
over their estimated useful life. Intangible assets with indefinite lives will
not be amortized, but evaluated annually
13
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for impairment. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. In accordance with SFAS 142, the Company has implemented the
standard for acquisitions in the third quarter of 2001 related to the
Corgard(R), Corzide(R), Delestrogen(R) and Florinef(R) products. The purchase
price allocation among the products acquired, the determination as to whether
the useful life is indefinite or finite and the assignment of lives to the
intangibles designated as having finite lives under SFAS No. 142 are preliminary
and subject to further evaluation and interpretation. The Company is in the
process of reviewing the impact of this pronouncement on previous acquisitions.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company is in the process of
reviewing the impact of these pronouncements.
13. GUARANTOR FINANCIAL STATEMENTS
The Company's wholly-owned subsidiaries Monarch Pharmaceuticals, Inc., King
Pharmaceuticals Research and Development, Inc., Parkedale Pharmaceuticals, Inc.,
Jones Pharma Incorporated and King Pharmaceuticals of Nevada, Inc. (the
"Guarantor Subsidiaries") have guaranteed the Company's performance under the
$150,000, 10 3/4% Senior Subordinated Notes due 2009 on a joint and several
basis. There are no restrictions under the Company's financing arrangements on
the ability of the Guarantor Subsidiaries to distribute funds to the Company in
the form of cash dividends, loans or advances. The following combined financial
data provides information regarding the financial position, results of
operations and cash flows of the Guarantor Subsidiaries (condensed consolidating
financial data). Separate financial statements and other disclosures concerning
the Guarantor Subsidiaries are not presented because management has determined
that such information would not be material to the holders of the notes.
14
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2000 SEPTEMBER 30, 2001
------------------------------------------------------ -------------------------
GUARANTOR ELIMINATING KING GUARANTOR
KING SUBSIDIARIES ENTRIES CONSOLIDATED KING SUBSIDIARIES
---------- ------------ ----------- ------------ ---------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash
equivalents............. $ 82,316 $ (5,921) $ -- $ 76,395 $ 25,677 $ (5,691)
Accounts receivable,
net..................... 7,027 115,034 (1,359) 120,702 5,761 127,953
Inventories............... 3,856 61,233 -- 65,089 22,065 74,907
Deferred income taxes..... 23,939 2,794 -- 26,733 14,234 2,628
Prepaid expenses and other
current assets.......... 39,637 (11,313) -- 28,324 2,352 3,653
---------- ---------- ----------- ---------- ---------- --------
Total current
assets........... 156,775 161,827 (1,359) 317,243 70,089 203,450
---------- ---------- ----------- ---------- ---------- --------
Property, plant, and
equipment, net............ 28,831 99,690 -- 128,521 38,041 100,936
Intangible assets, net...... 418,895 371,429 -- 790,324 688,771 359,194
Investment in
subsidiaries.............. 911,602 -- (911,602) -- 1,146,248 --
Other assets................ 24,940 21,367 -- 46,307 43,851 21,962
---------- ---------- ----------- ---------- ---------- --------
Total assets....... $1,541,043 $ 654,313 $ (912,961) $1,282,395 $1,987,000 $685,542
========== ========== =========== ========== ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......... $ 2,080 $ 24,289 $ (1,359) $ 25,010 $ 2,542 $ 16,743
Accrued expenses.......... 13,048 65,497 -- 78,545 3,050 104,168
Income taxes payable...... -- -- -- -- (10,700) 49,889
Current portion of
long-term debt.......... 1,498 29 -- 1,527 1,489 20
---------- ---------- ----------- ---------- ---------- --------
Total current
liabilities...... 16,626 89,815 (1,359) 105,082 (3,619) 170,820
---------- ---------- ----------- ---------- ---------- --------
Long-term debt.............. 98,992 13 -- 99,005 98,639 --
Deferred income taxes....... 14,592 2,397 -- 16,989 14,592 2,482
Other liabilities........... 71,714 1,872 -- 73,586 66,327 --
Intercompany (receivable)
payable................... 351,386 (351,386) -- -- 634,008 (634,008)
---------- ---------- ----------- ---------- ---------- --------
Total
liabilities...... 553,310 (257,289) (1,359) 294,662 809,947 (460,706)
---------- ---------- ----------- ---------- ---------- --------
Shareholders' equity........ 987,733 911,602 (911,602) 987,733 1,177,053 1,146,248
---------- ---------- ----------- ---------- ---------- --------
Total liabilities
and shareholders'
equity........... $1,541,043 $ 654,313 $ (912,961) $1,282,395 $1,987,000 $685,542
========== ========== =========== ========== ========== ========
SEPTEMBER 30, 2001
--------------------------
ELIMINATING KING
ENTRIES CONSOLIDATED
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash
equivalents............. $ -- $ 19,986
Accounts receivable,
net..................... (2,181) 131,533
Inventories............... -- 96,972
Deferred income taxes..... -- 16,862
Prepaid expenses and other
current assets.......... -- 6,005
----------- ----------
Total current
assets........... (2,181) 271,358
----------- ----------
Property, plant, and
equipment, net............ -- 138,977
Intangible assets, net...... -- 1,047,965
Investment in
subsidiaries.............. (1,146,248) --
Other assets................ -- 65,813
----------- ----------
Total assets....... $(1,148,429) $1,524,113
=========== ==========
LIABILITIES AND SHAREHOLDERS
Current liabilities:
Accounts payable.......... $ (2,181) $ 17,104
Accrued expenses.......... -- 107,218
Income taxes payable...... -- 39,189
Current portion of
long-term debt.......... -- 1,509
----------- ----------
Total current
liabilities...... (2,181) 165,020
----------- ----------
Long-term debt.............. -- 98,639
Deferred income taxes....... -- 17,074
Other liabilities........... -- 66,327
Intercompany (receivable)
payable................... -- --
----------- ----------
Total
liabilities...... (2,181) 347,060
----------- ----------
Shareholders' equity........ (1,146,248) 1,177,053
----------- ----------
Total liabilities
and shareholders'
equity........... $(1,148,429) $1,524,113
=========== ==========
15
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------------------
GUARANTOR ELIMINATING KING
KING SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ----------- ------------
(UNAUDITED)
Revenues:
Net sales............. $ 3,984 $154,585 $(2,246) $156,323
Royalty revenue....... -- 9,219 -- 9,219
-------- -------- ------- --------
Total
revenues...... 3,984 163,804 (2,246) 165,542
-------- -------- ------- --------
Operating costs and
expenses:
Costs of revenues..... 4,174 63,854 (2,246) 65,782
Selling, general and
administrative
(including co-
promotion
expenses)........... 3,560 27,599 -- 31,159
Depreciation and
amortization........ 5,659 6,149 -- 11,808
Research and
development......... 315 5,704 -- 6,019
Research and
development -- Special
license rights...... -- -- -- --
Nonrecurring charge --
research and
development......... -- 6,107 -- 6,107
Merger, restructuring
and other
nonrecurring
charges............. (26,034) 68,383 -- 42,349
-------- -------- ------- --------
Total operating
costs and
expenses...... (12,326) 177,796 (2,246) 163,224
-------- -------- ------- --------
Operating income........ 16,310 (13,992) -- 2,318
-------- -------- ------- --------
Other income (expense):
Interest income....... 385 2,720 -- 3,105
Interest expense...... (9,683) (1) -- (9,684)
Other, net............ 2,564 (279) -- 2,285
Equity in earnings of
subsidiaries........ (12,634) -- 12,634 --
Intercompany interest
(expense)........... 1,793 (1,793) -- --
-------- -------- ------- --------
Total other
income
(expense)..... (17,575) 647 12,634 (4,294)
-------- -------- ------- --------
Income before income
taxes and
extraordinary item.... (1,265) (13,345) 12,634 (1,976)
Income tax (expense)
benefit............... (7,892) 711 -- (7,181)
-------- -------- ------- --------
Income before
extraordinary item.... (9,157) (12,634) 12,634 (9,157)
Extraordinary item...... (11,914) -- -- (11,914)
-------- -------- ------- --------
Net income...... $(21,071) $(12,634) $12,634 $(21,071)
======== ======== ======= ========
THREE MONTHS ENDED SEPTEMBER 30, 2001
----------------------------------------------------
GUARANTOR ELIMINATING KING
KING SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ----------- ------------
(UNAUDITED)
Revenues:
Net sales............. $ 7,220 $217,190 $ (5,929) $218,481
Royalty revenue....... -- 11,608 -- 11,608
-------- -------- -------- --------
Total
revenues...... 7,220 228,798 (5,929) 230,089
-------- -------- -------- --------
Operating costs and
expenses:
Costs of revenues..... 7,340 47,996 (5,929) 49,407
Selling, general and
administrative
(including co-
promotion
expenses)........... 1,843 59,782 -- 61,625
Depreciation and
amortization........ 6,199 6,486 -- 12,685
Research and
development......... 2,500 4,917 -- 7,417
Research and
development -- Special
license rights...... -- -- -- --
Nonrecurring charge --
research and
development......... -- -- -- --
Merger, restructuring
and other
nonrecurring
charges............. (361) 3,640 -- 3,279
-------- -------- -------- --------
Total operating
costs and
expenses...... 17,521 122,821 (5,929) 134,413
-------- -------- -------- --------
Operating income........ (10,301) 105,977 -- 95,676
-------- -------- -------- --------
Other income (expense):
Interest income....... 1,719 445 -- 2,164
Interest expense...... (3,442) 84 -- (3,358)
Other, net............ 5,750 (2,192) -- 3,558
Equity in earnings of
subsidiaries........ 62,810 -- (62,810) --
Intercompany interest
(expense)........... 4,139 (4,139) -- --
-------- -------- -------- --------
Total other
income
(expense)..... 70,976 (5,802) (62,810) 2,364
-------- -------- -------- --------
Income before income
taxes and
extraordinary item.... 60,675 100,175 (62,810) 98,040
Income tax (expense)
benefit............... 796 (37,365) -- (36,569)
-------- -------- -------- --------
Income before
extraordinary item.... 61,471 62,810 (62,810) 61,471
Extraordinary item...... -- -- -- --
-------- -------- -------- --------
Net income...... $ 61,471 $ 62,810 $(62,810) $ 61,471
======== ======== ======== ========
16
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2000
-----------------------------------------------------
GUARANTOR ELIMINATING KING
KING SUBSIDIARIES ENTRIES CONSOLIDATED
--------- ------------ ----------- ------------
(UNAUDITED)
Revenues:
Net sales................. $ 15,838 $401,470 $ (5,219) $412,089
Royalty revenue........... -- 32,090 -- 32,090
--------- -------- -------- --------
Total revenues...... 15,838 433,560 (5,219) 444,179
--------- -------- -------- --------
Operating costs and
expenses:
Costs of revenues......... 13,103 125,859 (5,219) 133,743
Selling, general and
administrative.......... 10,825 84,335 -- 95,160
Depreciation and
amortization............ 16,135 14,451 -- 30,586
Research and
development............. 848 14,852 -- 15,700
Nonrecurring charge-
research and
development............. -- 6,107 -- 6,107
Merger, restructuring and
other nonrecurring
charges................. (19,809) 84,452 -- 64,643
--------- -------- -------- --------
Total operating
costs and
expenses.......... 21,102 330,056 (5,219) 345,939
--------- -------- -------- --------
Operating income............ (5,264) 103,504 -- 98,240
--------- -------- -------- --------
Other income(expense):
Interest income........... 982 9,127 -- 10,109
Interest expense.......... (33,837) (3) -- (33,840)
Other, net................ 2,478 (307) -- 2,171
Equity in earnings of
subsidiaries............ 72,773 -- (72,773) --
Intercompany interest
(expense)............... 4,148 (4,148) -- --
--------- -------- -------- --------
Total other
income(expense)... 46,544 4,669 (72,773) (21,560)
--------- -------- -------- --------
Income before income taxes,
extraordinary item and
cumulative effect of
charge in accounting
principle................. 41,280 108,173 (72,773) 76,680
Income tax (expense)
benefit................... (9,521) (35,400) -- (44,921)
--------- -------- -------- --------
Income before extraordinary
item and cumulative effect
of charge in accounting
principle................. 31,759 72,773 (72,773) 31,759
Extraordinary item.......... (16,599) -- -- (16,599)
--------- -------- -------- --------
Cumulative effect of charge
in accounting principle... -- -- -- --
Net income.......... $ 15,160 $ 72,773 $(72,773) $ 15,160
========= ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 2001
----------------------------------------------------
GUARANTOR ELIMINATING KING
KING SUBSIDIARIES ENTRIES CONSOLIDATED
-------- ------------ ----------- ------------
(UNAUDITED)
Revenues:
Net sales................. $ 18,978 $578,140 $ (15,231) $581,887
Royalty revenue........... -- 36,028 -- 36,028
-------- -------- --------- --------
Total revenues...... 18,978 614,168 (15,231) 617,915
-------- -------- --------- --------
Operating costs and
expenses:
Costs of revenues......... 18,738 127,660 (15,231) 131,167
Selling, general and
administrative.......... 4,999 167,324 -- 172,323
Depreciation and
amortization............ 16,870 18,611 -- 35,481
Research and
development............. 5,198 12,734 -- 17,932
Nonrecurring charge-
research and
development............. 3,000 -- -- 3,000
Merger, restructuring and
other nonrecurring
charges................. (361) 3,640 -- 3,279
-------- -------- --------- --------
Total operating
costs and
expenses.......... 48,444 329,969 (15,231) 363,182
-------- -------- --------- --------
Operating income............ (29,466) 284,199 -- 254,733
-------- -------- --------- --------
Other income(expense):
Interest income........... 6,488 1,255 -- 7,743
Interest expense.......... (9,364) 415 -- (8,949)
Other, net................ 8,742 (2,240) -- 6,502
Equity in earnings of
subsidiaries............ 199,002 -- (199,002) --
Intercompany interest
(expense)............... 10,671 (10,671) -- --
-------- -------- --------- --------
Total other
income(expense)... 215,539 (11,241) (199,002) 5,296
-------- -------- --------- --------
Income before income taxes,
extraordinary item and
cumulative effect of
charge in accounting
principle................. 186,073 272,958 (199,002) 260,029
Income tax (expense)
benefit................... (23,035) (73,956) -- (96,991)
-------- -------- --------- --------
Income before extraordinary
item and cumulative effect
of charge in accounting
principle................. 163,038 199,002 (199,002) 163,038
Extraordinary item.......... -- -- -- --
-------- -------- --------- --------
Cumulative effect of charge
in accounting principle... (545) -- -- (545)
Net income.......... $162,493 $199,002 $(199,002) $162,493
======== ======== ========= ========
17
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000
-----------------------------------------------------
GUARANTOR ELIMINATING KING
KING SUBSIDIARIES ENTRIES CONSOLIDATED
--------- ------------ ----------- ------------
(UNAUDITED)
Net cash flows (used in)
provided by operating
activities.................... $ (48,391) $ 141,245 $ -- $ 92,854
--------- --------- ---- ---------
Cash flows from investing
activities:
Purchase of investment
securities.................. -- (142,922) -- (142,922)
Proceeds from maturity and
sale of investment
securities.................. -- 258,020 -- 258,020
Loans receivable.............. -- -- -- --
Convertible senior note....... -- -- -- --
Purchases of property, plant
and equipment............... (3,143) (9,973) -- (13,116)
Purchases of intangible
assets...................... -- (204,000) -- (204,000)
Intercompany transfer of
property, plant and
equipment................... -- -- -- --
Proceeds from sale of
products.................... -- -- -- --
Proceeds from sale of
assets...................... 398 43 -- 441
--------- --------- ---- ---------
Net cash (used in) provided by
investing activities.......... (2,745) (98,832) -- (101,577)
--------- --------- ---- ---------
Cash flows from financing
activities:
Proceeds from revolving credit
facility.................... 114,000 -- -- 114,000
Payments on revolving credit
facility.................... (159,000) -- -- (159,000)
Proceeds from issuance of
common shares and exercise
of stock options, net....... 259,991 3,166 -- 263,157
Payments of cash dividends --
Jones....................... -- (2,619) -- (2,619)
Payment of senior
subordinated................ -- -- -- --
Payments on other long-term
debt........................ (354,621) (20) -- (354,641)
Proceeds from bridge loan
facility.................... 25,000 -- -- 25,000
Debt issuance costs........... (850) -- -- (850)
Other......................... -- -- -- --
Intercompany.................. 164,181 (164,181) -- --
--------- --------- ---- ---------
Net cash provided by (used in)
financing activities.......... 48,701 (163,654) -- (114,953)
--------- --------- ---- ---------
Increase in cash and cash
equivalents................... (2,435) (121,241) -- (123,676)
Cash and cash equivalents,
beginning of period........... 11,683 120,040 -- 131,723
--------- --------- ---- ---------
Cash and cash equivalents, end
of period..................... $ 9,248 $ (1,201) $ -- $ 8,047
========= ========= ==== =========
NINE MONTHS ENDED SEPTEMBER 30, 2001
-----------------------------------------------------
GUARANTOR ELIMINATING KING
KING SUBSIDIARIES ENTRIES CONSOLIDATED
--------- ------------ ----------- ------------
(UNAUDITED)
Net cash flows (used in)
provided by operating
activities.................... $ (55,396) $ 306,019 $ -- $ 250,623
--------- --------- ---- ---------
Cash flows from investing
activities:
Purchase of investment
securities.................. -- -- -- --
Proceeds from maturity and
sale of investment
securities.................. -- -- -- --
Loans receivable.............. -- (15,000) -- (15,000)
Convertible senior note....... (10,000) -- -- (10,000)
Purchases of property, plant
and equipment............... (10,599) (9,623) -- (20,222)
Purchases of intangible
assets...................... (286,500) -- -- (286,500)
Intercompany transfer of
property, plant and
equipment................... (223) 223 -- --
Proceeds from sale of
products.................... 3,332 -- -- 3,332
Proceeds from sale of
assets...................... -- 1,446 -- 1,446
--------- --------- ---- ---------
Net cash (used in) provided by
investing activities.......... (303,990) (22,954) -- (326,944)
--------- --------- ---- ---------
Cash flows from financing
activities:
Proceeds from revolving credit
facility.................... 75,000 -- -- 75,000
Payments on revolving credit
facility.................... (75,000) -- -- (75,000)
Proceeds from issuance of
common shares and exercise
of stock options, net....... 21,689 -- -- 21,689
Payments of cash dividends --
Jones....................... -- -- -- --
Payment of senior
subordinated................ -- -- -- --
Payments on other long-term
debt........................ (362) (22) -- (384)
Proceeds from bridge loan
facility.................... -- -- -- --
Debt issuance costs........... -- -- -- --
Other......................... (1,393) -- -- (1,393)
Intercompany.................. 282,813 (282,813) -- --
--------- --------- ---- ---------
Net cash provided by (used in)
financing activities.......... 302,747 (282,835) -- 19,912
--------- --------- ---- ---------
Increase in cash and cash
equivalents................... (56,639) 230 -- (56,409)
Cash and cash equivalents,
beginning of period........... 82,316 (5,921) -- 76,395
--------- --------- ---- ---------
Cash and cash equivalents, end
of period..................... $ 25,677 $ (5,691) -- $ 19,986
========= ========= ==== =========
13. SUBSEQUENT EVENTS
On November 7, 2001 the Company completed the sale of 16,000,000 newly
issued shares of common stock for $38.00 per share ($36.72 per share net of
commissions and expenses) resulting in net proceeds of $587.5 million.
Additionally on November 7, 2001 the Company issued $300 million of 2 3/4%
Convertible Debentures due November 15, 2021. The debentures are unsecured
unsubordinated obligations and the payment of principal and interest is
guaranteed by the Company's domestic subsidiaries on a joint and several basis.
The debentures accrue interest at an initial rate of 2 3/4%, which will be reset
(but not below 2 3/4% or above 4 1/2%) on May 15, 2006, May 15, 2011, and May
15, 2016. Interest is payable on May 15 and November 15 of each year.
18
KING PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On or after November 20, 2006, the Company may redeem for cash all or part
of the debentures that have not previously been converted or repurchased at a
price equal to 100% of the principal amount of the debentures plus accrued
interest up to but not including the date of redemption. Holders may require us
to repurchase for cash all or part of their debentures on November 15, 2006,
November 15, 2011 or November 15, 2016, at a price equal to 100% of the
principal amount of the debentures plus accrued interest up to but not including
the date of repurchase. In addition, upon a change of control, each holder may
require us to repurchase for cash all or a portion of the holder's debentures.
Holders may surrender their debentures for conversion into shares of King
common stock at the conversion price (initially $50.16 per share and subject to
certain adjustments) if any of the following conditions is satisfied:
- if the closing sale price of King common stock, for at least 20 trading
days in the 30 trading day period ending on the trading day prior to the
date of surrender, exceeds 110% of the conversion price per share of King
common stock on that preceding trading day;
- if we have called the debentures for redemption; or
- upon the occurrence of specified corporate transactions.
The Company has reserved 5,980,861 shares of common stock in the event such
debentures are converted into shares of the Company's common stock.
On November 9, 2001, the Company announced its intention to tender for the
remaining $96.4 million of 10 3/4% senior subordinated notes due 2009. As a
result, the Company expects to record an extraordinary charge of approximately
$13.0 to 14.0 million after tax, or $0.05 to $0.06 per share, in the fourth
quarter of 2001.
On November 5, 2001, the Company terminated the senior credit facility,
including the revolver.
19
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion contains certain forward-looking statements that
reflect management's current views of future events and operations. This
discussion should be read in conjunction with the following: (a) "Risk Factors"
set out below and other sections of our Annual Report on Form 10-K/A for the
year ended December 31, 2000, which are supplemented by the discussion which
follows; (b) our audited consolidated financial statements which are included in
our Annual Report on Form 10-K/A for the year ended December 31, 2000; and (c)
our unaudited consolidated financial statements and related notes thereto
included in this report.
OVERVIEW
General
The following summarizes net revenues by operating segment (in thousands).
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------
2001 2000 2001 2000
--------- --------- -------- --------
Branded pharmaceuticals.................... $211,479 $143,765 $559,378 $373,203
Licensed products.......................... 11,608 9,219 36,028 32,090
Contract manufacturing..................... 6,300 11,710 20,305 32,783
Other...................................... 702 848 2,204 6,103
-------- -------- -------- --------
Total............................ $230,089 $165,542 $617,915 $444,179
======== ======== ======== ========
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues
Net revenues increased $64.6 million, or 39.0%, to $230.1 million in 2001
from $165.5 million in 2000, due primarily to the acquisition and growth of
branded pharmaceutical products.
Net sales from branded pharmaceutical products increased $67.7 million, or
47.1%, to $211.5 million in 2001 from $143.8 million in 2000. This increase was
due primarily to growth in net sales of Altace(R), and Levoxyl(R). While we
expect continued growth in net sales of our branded pharmaceuticals in the
future, we refer you to the "Risk Factors" that appear below, particularly those
related to Altace(R) and Levoxyl(R), that could cause results to differ.
Revenues from licensed products increased $2.4 million, or 26.1%, to $11.6
million in 2001 from $9.2 million in 2000.
Revenues from contract manufacturing and other decreased $5.6 million, or
44.4%, to $7.0 million in 2001 from $12.6 million in 2000, primarily due to (1)
the conclusion of two manufacturing and supply agreements during the fourth
quarter of 2000; and (2) reduced revenues derived under a third manufacturing
and supply agreement during the third quarter of 2001 as compared to the third
quarter of 2000. While contract manufacturing and generic pharmaceutical sales
remain a part of our business, we do not consider contract manufacturing and
generic pharmaceutical sales as significant components of our growth strategy.
Operating Costs and Expenses
Total operating costs and expenses decreased $28.8 million, or 17.6%, to
$134.4 million in 2001 from $163.2 million in 2000. The decrease was primarily
due to merger, restructuring and other nonrecurring charges of $77.2 million
during the third quarter of 2000, partially offset by $28.5 million in
co-promotion fees
20
and marketing expense in 2001 primarily related to the co-promotion agreement
with American Home Products Corporation for the promotion of Altace(R) in the
United States and Puerto Rico.
Cost of revenues decreased $16.4 million, or 24.9% to $49.4 million in 2001
from $65.8 million in 2000. The decrease is due to $28.7 million of nonrecurring
write-off of inventory charges related to the discontinuance of Fluogen(R)
during the third quarter of 2000. On September 27, 2000, we received
notification from the FDA that we must cease manufacturing and distribution of
Fluogen(R), an influenza vaccine, until we demonstrate compliance with related
FDA regulations. In addition, the notification recommended that we properly
dispose of Fluogen(R) inventory on hand. As a result of this notification, we
decided to permanently discontinue Fluogen(R) production and distribution. We
recorded a nonrecurring write-off of inventory associated with these events (the
"FDA Fluogen(R) Notification"). This decrease was partially offset by a
nonrecurring write-off of obsolete Levoxyl(R) inventory of $2.1 million in the
third quarter of 2001. The FDA approved the new drug application for a new
formulation of Levoxyl(R) on May 25, 2001. Pursuant to FDA guidance, we may
distribute only the FDA approved new formulation of Levoxyl(R) after August 14,
2001. Excluding the nonrecurring inventory write-off charges described above,
cost of revenues increased $10.2 million, or 27.5%, to $47.3 million in 2001
from $37.1 million in 2000. The increase resulted from cost of revenues
associated with the increase in net sales of branded pharmaceutical products
described above. As a percentage of revenues, excluding the nonrecurring
inventory write-off charges described above, cost of revenues decreased to 20.6%
in 2001 from 22.4% in 2000 due to the increase in sales of higher profit margin
products.
Selling, general and administrative expenses remained relatively flat at
$33.1 million in 2001 as compared to $31.2 million in 2000. As a percentage of
revenues, selling, general, and administrative expenses decreased to 14.4% in
2001 from 18.8% in 2000 due to increased revenues, realization of cost synergies
from the Medco and Jones mergers, and the classification of all Altace(R)
related marketing expenses as co-promotion marketing expense rather than
selling, general and administrative during the three months ended September 30,
2001.
During the three months ended September 30, 2001, we incurred $24.7 million
in co-promotion fees and $3.8 million in co-promotion marketing expense
primarily pursuant to the Co-Promotion Agreement with American Home Products for
the promotion of Altace(R) in the United States and Puerto Rico.
Depreciation and amortization expense increased $0.9 million, or 7.6%, to
$12.7 million in 2001 from $11.8 million in 2000. The increase was due primarily
to additional amortization expense resulting from the acquisition of Corgard(R)
and Corzide(R) in August 2001.
Research and development expense increased to $7.4 million in 2001 from
$6.0 million in 2000. During the three months ended September 30, 2000, we
incurred a nonrecurring research and development charge of $6.1 million related
to our decision to discontinue the development of Pallacor(TM).
During the three months ended September 30, 2000, we incurred merger,
restructuring, and other nonrecurring charges of $42.4 million. These charges
related to merger and restructuring costs of $33.8 million associated with our
tax-free pooling of interests transaction with Jones during August 2000 and
other restructuring activities, and restructuring and nonrecurring charges of
$8.6 million related to employee severance arising from our decision to
discontinue Fluogen(R). During the three months ended September 30, 2001, we
incurred merger, restructuring, and other nonrecurring charges of $3.3 million
related to employee severance arising from the Jones merger.
Operating Income
Operating income increased $93.4 million to $95.7 million in 2001 from $2.3
million in 2000. This increase was primarily due to the $77.2 million of
nonrecurring charges incurred in the three months ended September 30, 2000
described above, as well as the increase in branded pharmaceutical sales during
the three months ended September 30, 2001 as compared to the three months ended
September 30, 2000, partially offset by $28.5 million of co-promotion fees and
marketing expenses in 2001.
21
Other Income(Expense)
Interest income decreased $0.9 million, or 29.0%, to $2.2 million in 2001
compared to $3.1 million in 2000.
Interest expense decreased $6.3 million, or 64.9%, to $3.4 million in 2001
from $9.7 million in 2000. This decrease is due to the reduced average debt
balance in 2001 resulting from our prepayment of debt obligations during 2000.
Other income increased $1.3 million to $3.6 million in 2001, from $2.3
million in 2000, primarily due to an unrealized gain of approximately $6.2
million on our primary derivative, a $20.0 million convertible senior note from
Novavax, Inc.
Income Tax Expense
The effective tax rate in 2001 was 37.3%. The rate in 2000 was higher than
the statutory rate due to nondeductible merger related costs.
Extraordinary Item
During the third quarter of 2000, we repaid outstanding debt under our
senior credit facility prior to maturity. The early repayment caused us to
recognize in the third quarter of 2000 an extraordinary loss of $2.6 million,
net of related tax benefits of $1.5 million, from the write-off of related
deferred financing costs. We also recorded extraordinary losses on impaired
assets associated with the FDA Fluogen(R) Notification of $9.4 million, net of
related tax benefits of $5.6 million, in the third quarter of 2000.
Net Income
Due to the factors set forth above, net income increased $82.6 million to
$61.5 million in 2001 from a loss of $21.1 million in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues
Net revenues increased $173.7 million, or 39.1%, to $617.9 million in 2001
from $444.2 million in 2000, due primarily to the acquisition and growth of
branded pharmaceutical products.
Net sales from branded pharmaceutical products increased $186.2 million, or
49.9%, to $559.4 million in 2001 from $373.2 million in 2000. This increase was
due primarily to growth in net sales of Altace(R) and Levoxyl(R). While we
expect continued growth in net sales of our branded pharmaceuticals in the
future, we refer you to the "Risk Factors" that appear below, particularly those
related to Altace(R) and Levoxyl(R), that could cause results to differ.
Revenues from licensed products increased $3.9 million, or 12.1%, to $36.0
million in 2001 from $32.1 million in 2000, primarily due to an increase in the
net sales of Adenoscan(R) and Adenocard(R), on which we receive royalty
revenues. The increase in revenues from licensed products was affected by a
contractual reduction in the percentage royalty we receive on net sales of
Adenoscan(R) that became effective during the third quarter of 2000.
Revenues from contract manufacturing and other decreased $16.4 million, or
42.2%, to $22.5 million in 2001 from $38.9 million in 2000, primarily due to (1)
the conclusion of two manufacturing and supply agreements during the fourth
quarter of 2000; (2) reduced revenues derived under two additional manufacturing
and supply agreements during the nine months ended September 30, 2001, as
compared to the same period of the prior year; and (3) reduced sales of generic
private label neomycin and polymyxin B sulfates and hydrocortisone suspension
and solution. While contract manufacturing and generic pharmaceutical sales
remain a part of our business, we do not consider contract manufacturing and
generic pharmaceutical sales as significant components of our growth strategy.
22
Operating Costs and Expenses
Total operating costs and expenses increased $17.3 million, or 5.0%, to
$363.2 million in 2001 from $345.9 million in 2000. The increase was primarily
due to $76.9 million in co-promotion fees and marketing expense in 2001
primarily related to the co-promotion agreement with American Home Products for
the promotion of Altace(R) in the United States and Puerto Rico, an increase of
$24.1 million in cost of sales excluding nonrecurring charges, an increase of
$4.9 million in depreciation and amortization expenses, offset by $99.5 million
of merger and other nonrecurring charges in 2000.
Cost of revenues decreased $2.5 million, or 1.9% to $131.2 million in 2001
from $133.7 million in 2000. The decrease is due to $28.7 million of
nonrecurring write-off of inventory charges related to the FDA Fluogen(R)
Notification during the third quarter of 2000. This decrease was partially
offset by a nonrecurring write-off of obsolete Levoxyl(R) inventory of $2.0
million in the third quarter of 2001. Excluding the nonrecurring inventory
write-off charges described above, cost of revenues increased $24.1 million, or
23.0%, to $129.1 million in 2001 from $105.0 million in 2000. The increase
resulted from cost of revenues associated with the increase in net sales of
branded pharmaceutical products described above. As a percentage of revenues,
excluding the nonrecurring inventory write-off charges described above, cost of
revenues decreased to 20.9% in 2001 from 23.6% in 2000 due to the increase in
sales of higher margin products.
Selling, general and administrative expenses remained relatively flat at
$95.5 million in 2001 as compared to $95.2 million in 2000. As a percentage of
revenues, selling, general, and administrative expenses decreased to 15.5% in
2001 from 21.4% in 2000 due to increased revenues and the classification of all
Altace(R) related marketing expenses as co-promotion marketing expense rather
than selling, general and administrative during the nine months ended September
30, 2001, and realization of cost synergies from the Medco and Jones mergers.
During the nine months ended September 30, 2001, we incurred $62.6 million
in co-promotion fees and $14.3 million in co-promotion marketing expense
primarily pursuant to the June 2000 co-promotion agreement with American Home
Products for the promotion of Altace(R) in the United States and Puerto Rico.
Depreciation and amortization expense increased $4.9 million, or 16.0%, to
$35.5 million in 2001 from $30.6 million in 2000. The increase was due primarily
to additional amortization expense resulting from the acquisitions in July 2000
and August 2001.
Research and development expense increased to $17.9 million in 2001 from
$15.7 million in 2000. In June of 2001, we incurred $3.0 million of "research
and development-special license rights" for fees we paid Novavax, Inc. as
consideration for an agreement which (1) expands our exclusive license to
promote, market, distribute and sell Estrasorb(TM) worldwide, following
approval, except in the United States and Puerto Rico where the parties will
co-market the product; and (2) grants us an additional exclusive worldwide
license to promote, market and distribute Androsorb(TM), following approval,
except in the United States and Puerto Rico where the parties will co-market the
product. During the third quarter of 2000, we incurred a nonrecurring research
and development charge of $6.1 million related to our decision to discontinue
the development of Pallacor(TM).
During the nine months ended September 30, 2000, we incurred merger,
restructuring, and other nonrecurring charges of $64.6 million. These charges
related to merger and restructuring costs of $35.3 million associated with our
tax-free pooling of interests transaction with Jones during August 2000 and
other restructuring activities, restructuring and nonrecurring charges of $8.6
million related to employee severance arising from our decision to discontinue
Fluogen(R), and $20.8 million of merger and restructuring costs associated with
our tax-free pooling of interests transaction with Medco in February 2000.
During the nine months ended September 30, 2001, we incurred merger,
restructuring, and other nonrecurring charges of $3.3 million related to
employee severance arising from the Jones merger.
Operating Income
Operating income increased $156.5 million, or 159.4%, to $254.7 million in
2001 from $98.2 million in 2000. This increase was due primarily to the increase
in branded pharmaceutical sales during the nine months
23
ended September 30, 2001 as compared to the nine months ended September 30, 2000
as well as $99.5 million of merger restructuring and other non-recurring charges
recorded in 2000 described above.
Other Income (Expense)
Interest income decreased $2.4 million from $10.1 million in 2000 to $7.7
million in 2001 due to lower balances of invested cash and cash equivalents as
well as lower interest rates during the nine months ended September 30, 2001 as
compared to the nine months ended September 30, 2000.
Interest expense decreased $24.9 million, or 73.7%, to $8.9 million in 2001
from $33.8 million in 2000. This decrease is due to the reduced average debt
balance in 2001 resulting from the Company's prepayment of debt obligations
during 2000.
Other income increased from $2.2 million in 2000 to $6.5 million income in
2001 primarily due to unrealized gains on our derivatives.
Income Tax Expense
The effective tax rate in 2000 of 58.6% was reduced to 37.3% in 2001 due
primarily to nondeductible merger, restructuring and other non-recurring charges
in 2000.
Extraordinary Item
During the nine months ended September 30, 2000, we repaid outstanding debt
under our senior credit facility prior to maturity. The early repayment caused
us to recognize an extraordinary loss of $7.3 million, net of related tax
benefits of $4.3 million, from the write-off of related deferred financing
costs. We also recorded extraordinary losses on impaired assets associated with
the FDA Fluogen(R) Notification of $9.4 million, net of related tax benefits of
$5.6 million, in the nine months ended September 30, 2000.
Cumulative Effect of Accounting Change
We recognized an expense of $0.5 million, net of income taxes of $0.3
million, in 2001 due to the cumulative effect of a change in accounting
principle as a result of the adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 138,
which establishes accounting and reporting standards for derivative instruments
and hedging activities.
Net Income
Due to the factors set forth above, net income increased $147.3 million, or
969.1%, to $162.5 million in 2001 from $15.2 million in 2000.
LIQUIDITY AND CAPITAL RESOURCES
General
On November 7, 2001 we completed the sale of 16,000,000 newly issued shares
of common stock for $38.00 per share ($36.72 per share net of expenses)
resulting in net proceeds of $587.5 million. Additionally, on November 7, 2001
we issued $300 million of 2 3/4% Convertible Debentures due November 15, 2021.
On August 8, 2001, we acquired three branded pharmaceutical products and a
fully paid license to a fourth product from Bristol-Myers Squibb ("BMS") for
$285.0 million. The products acquired include BMS's rights in the United States
to Corzide(R), Delestrogen(R), and Florinef(R). We also acquired a fully paid
license to and trademark for Corgard(R) in the United States. The acquisition
was financed with a combination of borrowings under our senior secured credit
facility and cash on hand.
We believe that cash generated from operations and the cash obtained from
the issuance of the equity and convertible debentures noted above are sufficient
to finance our current operations and working capital requirements. However, in
the event we make significant future acquisitions or change our capital
structure,
24
we may be required to raise funds through additional borrowings or the issuance
of additional debt or equity securities.
At present, we are actively pursuing potential acquisitions that may
require the use of substantial capital resources.
NINE MONTHS ENDED JUNE 30, 2001
As of September 30, 2001 we had available up to $100.0 million under our
senior credit facility. On November 5, 2001, we terminated the senior credit
facility.
We generated net cash from operations of $250.6 million for the nine months
ended September 30, 2001. Our net cash provided from operations was primarily
the result of $162.5 million in net income, adjusted for non-cash depreciation
and amortization of $35.5 million, an adjustment to deferred income taxes of
$10.0 million, a change in income taxes payable of $59.2 million, and an
increase in accrued expenses of $29.2 million. Primary uses of cash flow
included an increase in inventory of $21.4 million, an increase in accounts
receivable of $12.4 million, a decrease in accounts payable of $7.6 million,
amortization of deferred revenue of $6.8 million, and an unrealized gain on
derivative instruments of $8.5 million.
Cash flows used in investing activities for the nine months ended September
30, 2001 was $326.9 million due to the purchase of intangible assets of $286.5
million, $20.2 million of capital expenditures, $15.0 million of loans
receivable, and a $10.0 million convertible senior note, offset by $3.3 million
received as proceeds from the sale of product rights and $1.4 million received
as proceeds from the sale of assets.
Financing activities for the nine months ended September 30, 2001 provided
$19.9 million comprised principally of $21.7 million from the exercise of
employee stock options, $75.0 million in proceeds from the senior credit
facility, offset by repayments of $75.0 million on the senior credit facility.
Certain Indebtedness and Other Matters
As of September 30, 2001, we had $100.1 million of long-term debt
(including current portion) and we had available up to $100.0 million under our
senior credit facility. The senior credit facility was terminated November 5,
2001. Our financing arrangements required us to maintain minimum net worth, debt
to equity, cash flow and current ratio requirements. As of September 30, 2001,
we were in compliance with these covenants.
On June 20, 2001, the board of directors declared a four for three stock
split for shareholders of record as of July 3, 2001, to be distributed July 19,
2001. The stock split has been reflected in all share data contained in this
report.
On November 7, 2001 we issued $300 million of 2 3/4% Convertible Debentures
due November 15, 2021. The debentures are unsecured unsubordinated obligations
and the payment of principal and interest is guaranteed by our domestic
subsidiaries on a joint and several basis. The debentures accrue interest at an
initial rate of 2 3/4%, which will be reset (but not below 2 3/4% or above
4 1/2%) on May 15, 2006, May 15, 2011, and May 15, 2016. Interest is payable on
May 15 and November 15 of each year.
On or after November 20, 2006, we may redeem for cash all or part of the
debentures that have not previously been converted or repurchased at a price
equal to 100% of the principal amount of the debentures plus accrued interest up
to but not including the date of redemption. Holders may require us to
repurchase for cash all or part of their debentures on November 15, 2006,
November 15, 2011 or November 15, 2016, at a price equal to 100% of the
principal amount of the debentures plus accrued interest up to but not including
the date of repurchase. In addition, upon a change of control, each holder may
require us to repurchase for cash all or a portion of the holder's debentures.
25
Holders may surrender their debentures for conversion into shares of our
common stock at the conversion price (initially $50.16 per share and subject to
certain adjustments) if any of the following conditions is satisfied:
- if the closing sale price of our common stock, for at least 20 trading
days in the 30 trading day period ending on the trading day prior to the
date of surrender, exceeds 110% of the conversion price per share of our
common stock on that preceding trading day;
- if we have called the debentures for redemption; or
- upon the occurrence of specified corporate transactions.
We have reserved 5,980,861 shares of common stock in the event the
debentures are converted into shares of our common stock.
On November 9, 2001, we announced our intention to tender for the remaining
$96.4 million of 10 3/4% senior subordinated notes due 2009. As a result, we
expect to record an extraordinary charge of approximately $13.0 to $14.0 million
after tax, or $0.05 to $0.06 per share, in the fourth quarter of 2001.
Capital Expenditures
Capital expenditures, including capital lease obligations, were $6.1
million and $4.1 million for the three months ended September 30, 2001 and 2000,
respectively, and $20.2 million and $13.1 million for the nine months ended
September 30, 2001 and 2000, respectively. The principal capital expenditures
included property and equipment purchases and building improvements.
IMPACT OF INFLATION
We have experienced only moderate raw material and labor price increases in
recent years. While we have passed some price increases along to our customers,
we have primarily benefited from rapid sales growth negating most inflationary
pressures.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations." SFAS No. 141 requires all business combinations to be
accounted for under the purchase method of accounting. SFAS No. 141 is effective
for all business combinations initiated after June 30, 2001, as well as all
business combinations accounted for under the purchase method of accounting for
which the date of acquisition is July 1, 2001, or later.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 modifies the accounting and
reporting for acquired intangible assets at the time of acquisition and in
subsequent periods. Intangible assets which have finite lives must be amortized
over their estimated useful life. Intangible assets with indefinite lives will
not be amortized, but evaluated annually for impairment. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001.
In accordance with SFAS 142, the Company has implemented the standard for
acquisitions in the third quarter of 2001 related to the Corgard(R), Corzide(R),
Delestrogen(R) and Florinef(R) products. The purchase price allocation among the
products acquired, the determination as to whether the useful life is indefinite
or finite and the assignment of lives to the intangibles designated as having
finite lives under SFAS No. 142 are preliminary and subject to further
evaluation and interpretation. We are in the process of reviewing the impact of
this pronouncement on existing intangible assets.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 144 addresses
26
financial accounting and reporting for the impairment or disposal of long-lived
assets. We are in the process of reviewing the impact of these pronouncements.
RISK FACTORS
The risks described below are not the only ones facing our company.
Additional risks not presently known to us or that we currently deem immaterial
may also impair our business operations. If any of the adverse events described
in this "Risk Factors" section actually occurs, our business, results of
operations and financial condition could be materially adversely affected, the
trading price, if any, of our securities could decline and you might lose all or
part of your investment.
RISKS RELATED TO OUR BUSINESS
IF SALES OF OUR MAJOR PRODUCTS OR ROYALTY PAYMENTS TO US DECREASE, OUR RESULTS
OF OPERATIONS COULD BE ADVERSELY AFFECTED.
Altace(R) accounted for approximately 32% of our net sales for the nine
months ended September 30, 2001, and Altace(R), Lorabid(R), Levoxyl(R),
Thrombin-JMI(R), and royalty revenues collectively accounted for approximately
60% of our net sales during the same period. We believe that sales of these
products will continue to constitute a significant portion of our total revenues
for the foreseeable future. Accordingly, any factor adversely affecting sales of
any of these products or products for which we receive royalty payments could
have a material adverse effect on our business, financial condition, results of
operations and cash flows.
WE MAY NOT ACHIEVE OUR INTENDED BENEFITS FROM THE MARKETING ALLIANCE WITH
AMERICAN HOME PRODUCTS CORPORATION FOR THE PROMOTION OF ALTACE(R).
We entered into a marketing alliance with American Home Products
Corporation for Altace(R). We call this marketing alliance the "Co-Promotion
Agreement." We entered into this alliance partially because we believed a larger
pharmaceutical company with more sales representatives and, in our opinion, with
substantial experience in the promotion of pharmaceutical products to physicians
would significantly increase the sales revenue potential of Altace(R). By
efficiently co-marketing the new indications for Altace(R) which were approved
by the U.S. Food and Drug Administration, which we refer to in this report as
the "FDA," on October 4, 2000, we intend to increase the demand for the product.
In the agreement, both of us have incentives to maximize the sales and profits
of Altace(R) and to optimize the marketing of the product by coordinating our
promotional activities.
Under the Co-Promotion Agreement, American Home Products and we agreed to
establish an annual budget of marketing expenses to cover, among other things,
direct-to-consumer advertising, such as television advertisements and
advertisements in popular magazines and professional journals. One of the goals
of the direct-to-consumer advertising campaign is to encourage the targeted
audience to ask their own physicians about Altace(R) and whether it might be of
benefit for them. The direct-to-consumer campaign may not be effective in
achieving this goal. Furthermore, the direct-to-consumer advertising campaign
has not yet begun and the date for its launch is yet to be determined.
Physicians may not prescribe Altace(R) for their patients to the extent we might
otherwise hope if patients for whom Altace(R) is indicated do not ask their
physicians about Altace(R).
It is possible that we or American Home Products or both of us will not be
successful in effectively promoting Altace(R) or in optimizing its sales. The
content of agreed-upon promotional messages for Altace(R) may not sufficiently
convey the merits of Altace(R) and may not be successful in convincing
physicians to prescribe Altace(R) instead of other angiotensin converting
enzyme, or "ACE," inhibitors or competing therapies. The targets for sales force
staffing, the number and frequency of details to physicians and the physicians
who are called upon may be inadequate to realize our expectations for the
revenues from Altace(R). Neither we nor American Home Products may be able to
overcome the perception by physicians of a class effect, which we discuss below.
Further, developments in technologies, the introduction of other products or new
therapies may make it more attractive for American Home Products to concentrate
on the promotion of a product or products other than Altace(R) or to lessen its
emphasis on the marketing of Altace(R). Our strategic
27
decisions in dealing with managed health care organizations may not prove to be
correct and we could consequently lose sales in this market to competing ACE
inhibitor products or alternative therapies. If any of these situations occur,
they could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
IF OUR BRISTOL FACILITY IS NOT QUALIFIED AS A MANUFACTURING AND PACKAGING SITE
FOR ALTACE(R) OR IF THERE IS AN INTERRUPTION IN THE SUPPLY OF RAW MATERIAL FOR
ALTACE(R), THE DISTRIBUTION, MARKETING AND SUBSEQUENT SALES OF THE PRODUCT COULD
BE ADVERSELY AFFECTED.
We are currently working to qualify our Bristol facility as a manufacturing
and packaging site for Altace(R). While Aventis Pharmaceuticals, Inc. (USA),
successor to Hoechst Marion Roussel, Inc. from which we purchased Altace(R),
will remain as a supplier of the finished Altace(R) product to us, we intend our
Bristol facility to ultimately be the primary source for the manufacture and
packaging of Altace(R) for us. If we are unable to secure the approval of our
Bristol facility as a manufacturing and packaging site or do not do so in a
timely manner, we may not be able to meet the anticipated demand for Altace(R).
While Aventis (USA) will remain an alternative or back-up supplier of Altace(R),
if we encounter delays or difficulties with the approval of our Bristol facility
as a site for the manufacture and packaging of Altace(R), the distribution,
marketing and subsequent sales of Altace(R) nonetheless could be adversely
affected. If we are delayed or unsuccessful in securing approval of the Bristol
facility as a supplier, we might not be able to make alternative supply
arrangements for additional amounts of the finished product at commercially
reasonable rates, if at all.
When we have qualified our Bristol facility as a manufacturing and
packaging site for Altace(R), Aventis Pharma Deutscheland GmbH (Germany) will
continue to be our single supplier of ramipril, the active ingredient in
Altace(R). Because the manufacture of ramipril is a patented process, we cannot
secure the raw material from another source. Aventis (USA) currently
manufactures and packages Altace(R) for us for sales in the United States and
for itself for distribution outside of the United States. Any interruptions or
delays in receiving the finished product or raw material used for the future
production of Altace(R) could have a material adverse effect on our business,
financial condition, results of operations and cash flows. We have entered into
a supply agreement with Aventis (Germany) and we believe that it adequately
protects our supply of raw material, but there can be no guarantee that there
will not be interruptions or delays in the supply of the raw material.
SALES OF ALTACE(R) MAY BE AFFECTED BY THE PERCEPTION OF A CLASS EFFECT, AND
ALTACE(R) AND OUR OTHER PRODUCTS MAY BE SUBJECT TO VARIOUS SOURCES OF
COMPETITION FROM ALTERNATE THERAPIES.
Although the FDA has approved new indications for Altace(R), we may be
unable to meet investors' expectations regarding sales of Altace(R) due to a
perceived class effect or the inability to market Altace(R)'s new uses and
indications effectively.
All prescription drugs currently marketed by pharmaceutical companies may
be grouped into existing drug classes, but the criteria for inclusion vary from
class to class. For some classes, specific biochemical properties may be the
defining characteristic. For example, Altace(R) (ramipril) is a member of a
class of products known as ACE inhibitors because ramipril is one of several
chemicals that inhibits the production of enzymes that convert angiotensin,
which could otherwise lead to hypertension.
When one drug from a class is demonstrated to have a particularly
beneficial or previously undemonstrated effect (e.g., the benefit of Altace(R)
as shown by the Heart Outcomes Prevention Evaluation, which we refer to as the
"HOPE trial"), marketers of other drugs in the same class (for example, other
ACE inhibitors) will represent that their products offer the same benefit simply
by virtue of membership in the same drug class. Consequently, other companies
with ACE inhibitors that compete with Altace(R) will represent that their
products are equivalent to Altace(R). By doing so, these companies will
represent that their products offer the same efficacious results demonstrated by
the HOPE trial. Regulatory agencies do not decide whether products within a
class are quantitatively equivalent in terms of efficacy or safety. Because
comparative data among products in the same drug class are rare, marketing
forces often dictate a physician's decision to use one ACE inhibitor over
another. We may not be able to overcome other companies' representations that
their ACE
28
inhibitors will offer the same benefits as Altace(R) as demonstrated by the HOPE
trial. As a result, sales of Altace(R) may suffer from the perception of a class
effect.
Currently, there is no generic form of Altace(R) available. That is, there
is no product that has the same active ingredient as Altace(R). Although no
generic substitute for Altace(R) has been approved by the FDA, there are other
ACE inhibitors whose patents have expired or will expire in the next few years
and there are generic forms of other ACE inhibitors. Also, there are different
therapeutic agents that may be used to treat certain conditions treated by
Altace(R). For example, the group of products known as beta-blockers, calcium
channel blockers and diuretics, may be prescribed to treat certain conditions
that Altace(R) is used to treat. New ACE inhibitors, increased sales of generic
forms of other ACE inhibitors or of other therapeutic agents that compete with
Altace(R) may adversely affect the sales of Altace(R).
OUR MARKETING ALLIANCE WITH AMERICAN HOME PRODUCTS FOR ALTACE(R) COULD BE
TERMINATED BEFORE WE REALIZE ALL OF THE BENEFITS OF THE AGREEMENT OR IT COULD BE
ASSIGNED TO ANOTHER COMPANY BY AMERICAN HOME PRODUCTS OR AMERICAN HOME PRODUCTS
COULD MARKET A COMPETING PRODUCT.
Our exclusive Co-Promotion Agreement for Altace(R) with Wyeth-Ayerst
Laboratories, a division of American Home Products Corporation, could be
terminated before we realize all of the benefits of the agreement. American Home
Products and we each have the right to terminate the agreement if annualized net
sales of Altace(R) have not reached $300.0 million by October 4, 2003. There are
other reasons why either American Home Products or we could terminate the
Co-Promotion Agreement. If the Co-Promotion Agreement is terminated for any
reason, we may not realize increased sales which we believe may result from the
expanded promotion of Altace(R). If we must unwind our marketing alliance
efforts because of the reasons mentioned above, there may be a material adverse
effect on the sales of Altace(R).
If another company were to acquire, directly or indirectly, over 50% of the
combined voting power of American Home Products' voting securities or more than
half of its total assets, then American Home Products could assign its rights
and obligations under the Altace(R) Co-Promotion Agreement to a successor
without our prior consent. However, a successor would be required to first
assume in writing the obligations of American Home Products under the
Co-Promotion Agreement before the rights of American Home Products were assigned
to it. Another party might not market Altace(R) as effectively or efficiently as
American Home Products did. Also, a company which acquires American Home
Products might not place as much emphasis on the Co-Promotion Agreement, might
expend fewer marketing resources, such as a fewer number of sales
representatives, than American Home Products did, or might have less experience
or expertise in marketing pharmaceutical products to physicians. In any of these
cases, there may be a material adverse effect on the sales of Altace(R).
When feasible, American Home Products must give us six months' written
notice of its intent to sell, market or distribute any product competitive with
Altace(R). Under the Co-Promotion Agreement, a product competes with Altace(R)
if it is an ACE inhibitor, an angiotensin II receptor blocker, which we refer to
as an "ARB," or an ACE inhibitor or ARB in combination with other cardiovascular
agents in a single product. However, an ARB alone or in combination with other
cardiovascular agents competes with Altace(R) only if the level of promotional
effort used by American Home Products for the ARB is greater than 50% of that
applied to Altace(R). A product would not compete with Altace(R) if in the last
12 months it had net sales of less than $100.0 million or 15% of net sales of
Altace(R), whichever was higher. Also, a product would not compete with
Altace(R) under the Co-Promotion Agreement if the product were acquired by
American Home Products through a merger with or acquisition by a third party and
the product was no longer actively promoted by American Home Products or its
successor through detailing the product to physicians.
Once we have been notified in writing of American Home Products' intent to
market, sell or distribute a competing product, then American Home Products has
90 days to inform us as to whether it intends to divest its interest in the
competing product. If American Home Products elects to divest the competing
product, it must try to identify a purchaser and to enter into a definitive
agreement with the purchaser as soon as practicable. If American Home Products
elects not to divest the competing product or fails to divest the product within
one year of providing notice to us of its plan to divest the competing product,
then both of us
29
must attempt to establish acceptable terms under which we would together market
the competing product for the remaining term of our Altace(R) Co-Promotion
Agreement. Alternatively, American Home Products and we could agree upon another
commercial relationship, such as royalties payable to us for the sale of the
competing product, or we could agree to adjust the promotion fee we pay to
American Home Products for the marketing of Altace(R). If American Home Products
and we are unable to establish acceptable terms under any of these options, then
we have the option at our sole discretion to reacquire all the marketing rights
to Altace(R) and terminate the Co-Promotion Agreement upon 180 days' prior
written notice to American Home Products. In the event we decided to reacquire
all the marketing rights to Altace(R) we would be obligated to pay American Home
Products an amount of cash equal to twice the net sales of Altace(R) in the
United States for the 12 month period preceding the reacquisition. Such a
decision could have a material effect on our business, financial condition, the
results of our operations and cash flows.
OUR SALES OF LEVOXYL(R) COULD BE AFFECTED BY FUTURE ACTIONS OF THE FDA AND BY
UNCERTAINTY IN THE LEVOTHYROXINE SODIUM PRODUCT MARKET.
On August 14, 1997, the FDA announced in the Federal Register (62 FR 43535)
that orally administered levothyroxine sodium drug products are new drugs. The
notice stated that manufacturers who wish to continue to market these products
must submit applications as required by the Food, Drug and Cosmetic Act, or "FDC
Act," as it is generally known, by August 14, 2000. On April 26, 2000, the FDA
issued a second Federal Register notice extending the deadline for filing these
applications until August 14, 2001.
On May 25, 2001, the FDA approved our previously filed New Drug Application
for Levoxyl(R), our levothyroxine sodium drug product. Other manufacturers of
levothyroxine sodium drug products have filed New Drug Applications for their
levothyroxine sodium products. Jerome Stevens, Inc. has also received approval
for its levothyroxine sodium product Unithroid. After August 14, 2001, the FDA
will refuse to accept a New Drug Application for a levothyroxine sodium drug
product that is pharmaceutically equivalent to an approved product. However, the
FDA has stated it will continue to review applications which were submitted by
August 14, 2001. Further, the FDA is requiring a phasing-out of the distribution
of levothyroxine sodium products for which New Drug Applications were pending
but not approved by August 14, 2001. Other manufacturers who wish to submit an
application for an equivalent product after August 14, 2001 must submit an
Abbreviated New Drug Application. Also, since the Jerome Stevens product has
been approved, a manufacturer could submit an Abbreviated New Drug Application
demonstrating in vivo bioequivalence (in other words, the two products produce
identical effects on the body) to the Jerome Stevens product. If the FDA were to
determine that another levothyroxine sodium product is bioequivalent to
Levoxyl(R), generic substitution for Levoxyl(R) may become possible which could
result in a decrease in sales of our product Levoxyl(R).
WE CANNOT ASSURE YOU THAT SALES OF LORABID(R) WILL INCREASE IN THE FUTURE. IF
SALES DO NOT INCREASE, THERE MAY BE A MATERIAL ADVERSE EFFECT UPON OUR RESULTS
OF OPERATIONS.
Prior to our acquisition of Lorabid(R), sales of that product were on the
decline because we believe that the prior owner was not actively promoting the
product. Increased sales of Lorabid(R) depend upon effective marketing to
physicians which leads them to write prescriptions for our product. Since the
antibiotic market is very competitive, we cannot assure you that sales of
Lorabid(R) will increase in the future. If Lorabid(R) sales do not increase or
if they continue to decrease, there may be a material adverse effect upon our
results of operations and cash flow.
IF WE CANNOT IMPLEMENT OUR STRATEGY TO GROW OUR BUSINESS THROUGH INCREASED SALES
AND ACQUISITIONS, OUR COMPETITIVE POSITION IN THE PHARMACEUTICAL INDUSTRY MAY
SUFFER.
We have historically increased our sales and net income through strategic
acquisitions and related internal growth initiatives intended to develop
marketing opportunities with respect to acquired product lines. Our strategy is
focused on increasing sales and enhancing our competitive standing through
acquisitions that complement our business and enable us to promote and sell new
products through existing marketing and
30
distribution channels. Moreover, since we engage in limited proprietary research
activity with respect to product development, we rely heavily on purchasing
product lines from other companies.
Other companies, many of which have substantially greater financial,
marketing and sales resources than we do, may compete with us for the
acquisition of products or companies. We may not be able to acquire rights to
additional products or companies on acceptable terms, if at all, or be able to
obtain future financing for acquisitions on acceptable terms, if at all. The
inability to effect acquisitions of additional branded products could limit the
overall growth of our business. Furthermore, even if we obtain rights to a
pharmaceutical product or acquire a company, we may not be able to generate
sales sufficient to create a profit or otherwise avoid a loss. For example, our
marketing strategy, distribution channels and levels of competition with respect
to acquired products may be different than those of our current products,
limiting our ability to compete favorably in those product categories.
IF WE CANNOT INTEGRATE THE BUSINESS OF COMPANIES OR PRODUCTS WE ACQUIRE, OUR
BUSINESS MAY SUFFER.
We anticipate that the integration of newly acquired companies and products
into our business will require significant management attention and expansion of
our sales force. In order to manage our acquisitions effectively, we must
maintain adequate operational, financial and management information systems and
motivate and effectively manage an increasing number of employees. Our recent
acquisitions, including the acquisition of Jones Pharma Incorporated, have
significantly expanded our product offerings, operations and number of
employees. Our future success will also depend in part on our ability to retain
or hire qualified employees to operate our expanding facilities efficiently in
accordance with applicable regulatory standards. If we cannot integrate our
acquisitions successfully, these changes and acquisitions could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
IF WE ARE NOT ABLE TO DEVELOP OR LICENSE NEW PRODUCTS, OUR BUSINESS MAY SUFFER.
We compete with other pharmaceutical companies, including large
pharmaceutical companies with financial resources and capabilities substantially
greater than ours, in the development and licensing of new products. We cannot
assure you that we will be able to
- engage in product life cycle management to develop new indications and
line extensions for existing and acquired products;
- develop, license or successfully commercialize new products on a timely
basis or at all; or
- develop or license new products in a cost effective manner.
For example, we are
- engaged in the development of binodisine (MRE0470), a myocardial
pharmacologic stress imaging agent;
- in a licensing agreement with Novavax to develop recombinant human
papillomavirus (HPV) virus-like particle (VLP) vaccines; and
- in exclusive license agreements with Novavax to promote, market,
distribute and sell Estrasorb(TM), a topical transdermal estrogen
replacement therapy, and Androsorb(TM), a topical testosterone
replacement therapy for testosterone deficient women, upon their approval
by the FDA.
However, we cannot assure you that we will be successful in any or all of
these projects.
Further, other companies may license or develop products or may acquire
technologies for the development of products that are the same as or similar to
the products we have in development or that we license. Because there is rapid
technological change in the industry and because many other companies may have
more financial resources than we do, other companies may
- develop or license their products more rapidly than we can,
- complete any applicable regulatory approval process sooner than we can,
31
- market or license their products before we can market or license our
products, or
- offer their newly developed or licensed products at prices lower than our
prices,
and thereby have a negative impact on the sales of our newly developed or
licensed products. Technological developments or the FDA's approval of new
therapeutic indications for existing products may make our existing products or
those products we are licensing or developing obsolete or may make them more
difficult to market successfully, which could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
WE DO NOT HAVE PROPRIETARY PROTECTION FOR MOST OF OUR BRANDED PHARMACEUTICAL
PRODUCTS, AND OUR SALES COULD SUFFER FROM COMPETITION BY GENERIC SUBSTITUTES.
Although most of our revenue is generated by products not subject to
competition from generic products, there is no proprietary protection for most
of our branded pharmaceutical products, and generic substitutes for most of
these products are sold by other pharmaceutical companies. In addition,
governmental and other pressure to reduce pharmaceutical costs may result in
physicians prescribing products for which there are generic substitutes.
Increased competition from the sale of generic pharmaceutical products may cause
a decrease in revenue from our branded products and could have a material
adverse effect on our business, financial condition and results of operations.
In addition, our branded products for which there is no generic form available
may face competition from different therapeutic agents used for the same
indications for which our branded products are used.
THIRD PARTIES MANUFACTURE OR SUPPLY MATERIALS FOR MANY OF OUR PRODUCTS, AND ANY
DELAYS OR DIFFICULTIES EXPERIENCED BY THEM MAY REDUCE OUR PROFIT MARGINS AND
REVENUES OR HARM OUR REPUTATION.
Many of our product lines, including Altace(R), Lorabid(R) and
Cortisporin(R), are currently manufactured by third parties. Our dependence upon
third parties for the manufacture of our products may adversely impact our
profit margins or may result in unforeseen delays or other problems beyond our
control. If for any reason we are unable to obtain or retain third-party
manufacturers on commercially acceptable terms, we may not be able to distribute
our products as planned. If we encounter delays or difficulties with contract
manufacturers in producing or packaging our products, the distribution,
marketing and subsequent sales of these products would be adversely affected,
and we may have to seek alternative sources of supply or abandon or sell product
lines on unsatisfactory terms. We might not be able to enter into alternative
supply arrangements at commercially acceptable rates, if at all. We also cannot
assure you that the manufacturers we utilize will be able to provide us with
sufficient quantities of our products or that the products supplied to us will
meet our specifications.
We require a supply of quality raw materials and components to manufacture
and package pharmaceutical products for us and for third parties with which we
have contracted. Generally, we have not had difficulty obtaining raw materials
and components from suppliers in the past. Currently, we rely on over 500
suppliers to deliver the necessary raw materials and components. We have no
reason to believe that we will be unable to procure adequate supplies of raw
materials and components on a timely basis. However, if we are unable to obtain
sufficient quantities of any of the raw materials or components required to
produce and package our products, we may not be able to distribute our products
as planned. In this case, our business, financial condition and results of
operations could be materially and adversely affected.
OUR PARKEDALE FACILITY HAS BEEN THE SUBJECT OF FDA CONCERNS. IF WE CANNOT
ADEQUATELY ADDRESS THE FDA'S CONCERNS, WE MAY BE UNABLE TO OPERATE THE PARKEDALE
FACILITY AND, ACCORDINGLY, OUR BUSINESS MAY SUFFER.
Our Parkedale facility, located in Rochester, Michigan, manufactures both
drug and biological pharmaceutical products. Prior to our acquisition of the
Parkedale facility in February 1998, it was one of six Pfizer facilities subject
to a consent decree issued by the U.S. District Court of New Jersey in August
1993 as a result of FDA concerns about compliance issues within Pfizer
facilities in the period before the decree was entered.
32
The Parkedale facility was inspected by the FDA in February 2001. When an
FDA inspector completes an authorized inspection of a manufacturing facility,
the FDC Act mandates that the inspector give to the owner/operator of the
facility a written report listing the inspector's observations of objectionable
conditions and practices. This written report is known as an "FDA Form 483" or
simply as a "483." The observations in a 483 are reported to the manufacturer in
order to assist the manufacturer in complying with the FDC Act and the
regulations enforced by the FDA. Often a pharmaceutical manufacturer receives a
483 after an inspection and our Parkedale facility received a 483 following the
February 2001 inspection. While no law or regulation requires us to respond to a
483, we have submitted a written response detailing our plan of action with
respect to each of the observations made on the February 483 and our commitment
to correct the objectionable practice or condition. The risk to us of a 483, if
left uncorrected, could include, among other things, the imposition of civil
monetary penalties, the commencement of actions to seize or prohibit the sale of
unapproved or non-complying products, or the cessation of manufacturing
operations at the Parkedale facility that are not in compliance with current
Good Manufacturing Practices, generally known as "cGMP." While we believe the
receipt of the 483 will not have a material adverse effect on our business,
financial condition, results of operation and cash flows, we cannot assure you
that future inspections may not result in adverse regulatory actions. The 483
from February 2001 does not require us to delay or discontinue the production of
any products made at the Parkedale facility.
AN INCREASE IN PRODUCT LIABILITY CLAIMS, PRODUCT RECALLS OR PRODUCT RETURNS
COULD HARM OUR BUSINESS.
We face an inherent business risk of exposure to product liability claims
in the event that the use of our technologies or products are alleged to have
resulted in adverse effects. These risks will exist for those products in
clinical development and with respect to those products that receive regulatory
approval for commercial sale. While we have taken, and will continue to take,
what we believe are appropriate precautions, we may not be able to avoid
significant product liability exposure. We currently have product liability
insurance in the amount of $75.0 million for aggregate annual claims with a
$50,000 deductible per incident and a $500,000 aggregate annual deductible;
however, we cannot assure you that the level or breadth of any insurance
coverage will be sufficient to cover fully all potential claims. Also, adequate
insurance coverage might not be available in the future at acceptable costs, if
at all.
Product recalls may be issued at our discretion, at the discretion of the
FDA, or at the discretion of other government agencies or other companies having
regulatory authority for pharmaceutical product sales. From time to time, we may
recall products for various reasons. To date, however, these recalls have not
been significant and have not had a material adverse effect on our business,
financial condition, results of operations and cash flows. However, we cannot
assure you that the number and significance of recalls will not increase in the
future.
Although product returns were approximately 2.4% of gross sales for the
year ended December 31, 2000, we cannot assure you that actual levels of returns
will not increase or significantly exceed the amounts we have anticipated.
OUR WHOLLY OWNED SUBSIDIARY, JONES PHARMA, IS A DEFENDANT IN LITIGATION WHICH IS
CURRENTLY BEING HANDLED BY ITS INSURANCE CARRIERS. SHOULD THIS COVERAGE BE
INADEQUATE OR SUBSEQUENTLY DENIED OR WERE WE TO LOSE SOME OF THESE LAWSUITS, OUR
RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
Our wholly owned subsidiary, Jones Pharma, is a defendant in more than
1,800 multi-defendant lawsuits involving the manufacture and sale of
dexfenfluramine, fenfluramine and phentermine, which is usually referred to as
"fen/phen." In 1996 Jones acted as a distributor of Obenix(R), a branded
phentermine product. Jones also distributed a generic phentermine product. Jones
believes that its phentermine products have been identified in less than 100 of
the foregoing cases. The plaintiffs in these cases claim injury as a result of
ingesting a combination of these weight-loss drugs. They seek compensatory and
punitive damages as well as medical care and court-supervised medical
monitoring. The plaintiffs claim liability based on a variety of theories
including but not limited to, product liability, strict liability, negligence,
breach of warranties and misrepresentation. These suits are filed in various
jurisdictions throughout the United States, and in each of these suits Jones is
one of many defendants, including manufacturers and other distributors of these
drugs.
33
Jones denies any liability incident to the distribution of its phentermine
product and intends to pursue all defenses available to it. Jones has tendered
defense of these lawsuits to its insurance carriers for handling and they are
currently defending Jones in these suits. In the event that insurance coverage
is inadequate to satisfy any resulting liability, Jones will have to resume
defense of these lawsuits and be responsible for the damages, if any, that are
awarded against it.
SALES OF THROMBIN-JMI(R) MAY BE AFFECTED BY THE PERCEPTION OF RISKS ASSOCIATED
WITH SOME OF THE RAW MATERIALS USED IN ITS MANUFACTURE.
The source material for our product Thrombin-JMI(R) comes from bovine
plasma and lung tissue. Bovine-sourced materials from outside the United States
may be of some concern because of potential transmission of Bovine Spongiform
Encephalopathy, or BSE. However, we have taken precautions to minimize the risks
of contamination from BSE in our source materials including, primarily, the use
of bovine materials only from FDA-approved sources in the United States.
Although no BSE has been documented in the United States, the United States is
considered a Category II BSE-risk country, meaning that the United States is
probably BSE-free but has some history of importing cattle from the United
Kingdom.
We receive the bovine raw materials from a single vendor and any
interruption or delay in the supply of that material could adversely affect the
sales of Thrombin-JMI(R). In addition to other actions taken by us and our
vendor to minimize the risk of BSE, we are developing steps to further purify
the material of other contaminants. While we believe that our procedures and
those of our vendor for the supply, testing and handling of the bovine material
comply with all federal, state, and local regulations, we cannot eliminate the
risk of contamination or injury from these materials. We will continue
surveillance of the source and believe that the risk of BSE-contamination in the
source materials for Thrombin-JMI(R) is very low. There are high levels of
global public concern about BSE. Physicians could determine not to administer
Thrombin-JMI(R) because of the perceived risk which could adversely affect our
sales of the product. Any injuries resulting from BSE contamination could expose
us to extensive liability. Also there is currently no alternative to the bovine-
sourced materials for Thrombin-JMI(R). If BSE spreads to the United States, the
manufacture and sale of Thrombin-JMI(R) and our business, financial condition
and results of operations could be materially and adversely affected.
THE LOSS OF OUR KEY PERSONNEL COULD HARM OUR BUSINESS.
We are highly dependent on the principal members of our management staff,
the loss of whose services might impede the achievement of our acquisition and
development objectives. Although we believe that we are adequately staffed in
key positions and that we will be successful in retaining skilled and
experienced management, operational, scientific and development personnel, we
cannot assure you that we will be able to attract and retain key personnel on
acceptable terms. The loss of the services of key personnel could have a
material adverse effect on us, especially in light of our recent growth. We do
not maintain key-person life insurance on any of our employees. In addition, we
do not have employment agreements with any of our key employees.
IF WE ARE UNABLE TO SECURE OR ENFORCE PATENT RIGHTS, TRADEMARKS, TRADE SECRETS
OR OTHER INTELLECTUAL PROPERTY, OUR BUSINESS COULD BE HARMED.
We may not be successful in securing or maintaining proprietary patent
protection for products we develop or technologies we license. In addition, our
competitors may develop products similar to ours using methods and technologies
that are beyond the scope of our intellectual property protection, which could
reduce our sales. The validity of patents can be subject to expensive
litigation. We can give you no assurance that our patents will not be
challenged. Competitors may be able to develop similar or competitive products
outside the scope of our patents which could have a material adverse effect on
sales of our products or the amounts of royalty revenues we receive.
We also rely upon trade secrets, unpatented proprietary know-how and
continuing technological innovation, where patent protection is not believed to
be appropriate or attainable, in order to maintain our
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competitive position. We cannot assure you that others will not independently
develop substantially equivalent proprietary technology and techniques or
otherwise gain access to our trade secrets or disclose the technology, or that
we can adequately protect our trade secrets.
OUR SHAREHOLDER RIGHTS PLAN AND BYLAWS DISCOURAGE UNSOLICITED TAKEOVER PROPOSALS
AND COULD ENTRENCH CURRENT MANAGEMENT AND PREVENT SHAREHOLDERS FROM REALIZING A
PREMIUM ON THEIR COMMON STOCK.
We have a shareholder rights plan that may have the effect of discouraging
unsolicited takeover proposals, thereby entrenching current management and
possibly depressing the market price of our common stock. The rights issued
under the shareholder rights plan would cause substantial dilution to a person
or group which attempts to acquire us on terms not approved in advance by our
board of directors. In addition, our charter and bylaws contain provisions that
may discourage unsolicited takeover proposals that shareholders may consider to
be in their best interests. These provisions include:
- a classified board of directors,
- the ability of the board of directors to designate the terms of and issue
new series of preferred stock,
- advance notice requirements for nominations for election to the board of
directors, and
- special voting requirements for the amendment of our charter and bylaws.
We are also subject to anti-takeover provisions under Tennessee laws, each of
which could delay or prevent a change of control. Together these provisions and
the rights plan may make more difficult the removal of management and may
discourage transactions that otherwise could involve payment of a premium over
prevailing market prices for common stock.
RISKS RELATED TO OUR INDUSTRY
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD AFFECT OUR ABILITY TO
OPERATE OUR BUSINESS.
Virtually all aspects of our activities are regulated by federal and state
statutes and government agencies. The manufacturing, processing, formulation,
packaging, labeling, distribution and advertising of our products, and disposal
of waste products arising from these activities, are subject to regulation by
one or more federal agencies, including the FDA, the Drug Enforcement
Administration, or "DEA," the Federal Trade Commission, the Consumer Product
Safety Commission, the U.S. Department of Agriculture, the Occupational Safety
and Health Administration and the Environmental Protection Agency, or "EPA," as
well as by foreign governments in countries where we distribute some of our
products.
Noncompliance with applicable FDA policies or requirements could subject us
to enforcement actions, such as suspensions of manufacturing or distribution,
seizure of products, product recalls, fines, criminal penalties, injunctions,
failure to approve pending drug product applications or withdrawal of product
marketing approvals. Similar civil or criminal penalties could be imposed by
other government agencies, such as the DEA, the EPA or various agencies of the
states and localities in which our products are manufactured, sold or
distributed and could have ramifications for our contracts with government
agencies such as the Veteran's Administration or the Department of Defense.
These enforcement actions could have a material adverse effect on our business,
financial condition and results of operations.
All manufacturers of human pharmaceutical products are subject to
regulation by the FDA under the authority of the FDC Act or the Public Health
Service Act, which we refer to as the "PHS Act," or both. New drugs, as defined
in the FDC Act, and new human biological drugs, as defined in the PHS Act, must
be the subject of an FDA-approved new drug or biologic license application
before they may be marketed in the United States. Some prescription and other
drugs are not the subject of an approved marketing application but, rather, are
marketed subject to the FDA's regulatory discretion and/or enforcement policies.
Any change in the FDA's enforcement discretion and/or policies could have a
material adverse effect on our business, financial condition and results of
operations.
35
We manufacture some pharmaceutical products containing controlled
substances and, therefore, are also subject to statutes and regulations enforced
by the DEA and similar state agencies which impose security, record keeping,
reporting and personnel requirements on us. Additionally, we manufacture
biological drug products for human use and are subject to regulatory burdens as
a result of these aspects of our business. There are additional FDA and other
regulatory policies and requirements covering issues such as advertising,
commercially distributing, selling, sampling and reporting adverse events
associated with our products with which we must continuously comply.
Noncompliance with any of these policies or requirements could result in
enforcement actions which could have a material adverse effect on our business,
financial condition and results of operations.
The FDA has the authority and discretion to withdraw existing marketing
approvals and to review the regulatory status of marketed products at any time.
For example, the FDA may require an approved marketing application for any drug
product marketed if new information reveals questions about a drug's safety or
efficacy. All drugs must be manufactured in conformity with cGMP requirements,
and drug products subject to an approved application must be manufactured,
processed, packaged, held and labeled in accordance with information contained
in the approved application.
While we believe that all of our currently marketed pharmaceutical products
comply with FDA enforcement policies, have approval pending or have received the
requisite agency approvals, our marketing is subject to challenge by the FDA at
any time. Through various enforcement mechanisms, the FDA can ensure that
noncomplying drugs are no longer marketed. In addition, modifications,
enhancements, or changes in manufacturing sites of approved products are in many
circumstances subject to additional FDA approvals which may or may not be
received and which may be subject to a lengthy FDA review process. Our
manufacturing facilities and those of our third-party manufacturers are
continually subject to inspection by governmental agencies. Manufacturing
operations could be interrupted or halted in any of those facilities if a
government or regulatory authority is unsatisfied with the results of an
inspection. Any interruptions of this type could have a material adverse effect
on our business, financial condition, results of operations and cash flows.
We cannot determine what effect changes in regulations, enforcement
positions, statutes or legal interpretation, when and if promulgated, adopted or
enacted, may have on our business in the future. Changes could, among other
things, require changes to manufacturing methods or facilities, expanded or
different labeling, new approvals, the recall, replacement or discontinuance of
certain products, additional record keeping and expanded documentation of the
properties of certain products and scientific substantiation. These changes, or
new legislation, could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
ANY REDUCTION IN REIMBURSEMENT LEVELS BY MANAGED CARE ORGANIZATIONS OR OTHER
THIRD-PARTY PAYORS MAY HAVE AN ADVERSE EFFECT ON OUR REVENUES.
Commercial success in producing, marketing and selling products depends, in
part, on the availability of adequate reimbursement from third-party health care
payors, such as government and private health insurers and managed care
organizations. Third-party payors are increasingly challenging the pricing of
medical products and services. For example, many managed health care
organizations are now controlling the pharmaceutical products that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has reduced prices across the
industry. In addition, many managed care organizations are considering formulary
contracts primarily with those pharmaceutical companies that can offer a full
line of products for a given therapy sector or disease state. We cannot assure
you that our products will be included on the formulary lists of managed care
organizations or that downward pricing pressures in the industry generally will
not negatively impact our operations.
NEW LEGISLATION OR REGULATORY PROPOSALS MAY ADVERSELY AFFECT OUR ABILITY TO
RAISE CAPITAL AND OUR REVENUES.
A number of legislative and regulatory proposals aimed at changing the
health care system, including the cost of prescription products, reimportation
of prescription products and changes in the levels at which
36
pharmaceutical companies are reimbursed for sales of their products, have been
proposed. While we cannot predict when or whether any of these proposals will be
adopted or the effect these proposals may have on our business, the pending
nature of these proposals, as well as the adoption of any proposal, may harm our
ability to raise capital, may exacerbate industry-wide pricing pressures and
could have a material adverse effect on our financial condition, results of
operations or cash flows.
THE INDUSTRY IS HIGHLY COMPETITIVE, AND OTHER COMPANIES IN OUR INDUSTRY HAVE
MUCH GREATER RESOURCES THAN WE DO.
In the industry, comparatively smaller pharmaceutical companies like us
compete with large, global pharmaceutical companies with substantially greater
financial resources for the acquisition of products, technologies and companies.
COMPETITION FOR ACQUISITIONS. We compete with other pharmaceutical
companies for product and product line acquisitions. These competitors include
Forest Laboratories, Inc., Shire Pharmaceuticals Group plc, Biovail Corporation,
Watson Pharmaceuticals, Inc., Medicis Pharmaceutical Corporation and other
companies which also acquire branded pharmaceutical products and product lines
from other pharmaceutical companies. We cannot assure you that
- we will be able to continue to acquire commercially attractive
pharmaceutical products, companies or technologies;
- additional competitors will not enter the market; or
- competition for acquisition of products, companies, technologies and
product lines will not have a material adverse effect on our business,
financial condition and results of operations.
PRODUCT COMPETITION. Additionally, since our products are generally
established and commonly sold, they are subject to competition from products
with similar qualities.
Our largest product Altace(R) competes in the market with other
cardiovascular therapies, including in particular, the following ACE inhibitors:
- Zestril(R) (AstraZeneca PLC),
- Acupril(R) (Pfizer Inc.),
- Prinivil(R) (Merck & Co., Inc.),
- Lotensin(R) (Novartis AG), and
- Monopril(R) (Bristol-Meyers Squibb Company).
Our second largest product Levoxyl(R) competes with the following
levothyroxine sodium products:
- Synthroid(R) (Abbott Laboratories),
- Levothroid(R) (Forest Laboratories, Inc.), and
- Unithroid(R) (Watson Pharmaceuticals, Inc.)
We intend to market these products aggressively by, among other things
- detailing and sampling to the primary prescribing physician groups
- sponsoring physician symposiums, including continuing medical education
seminars, and
- conducting a planned direct-to-consumer advertising campaign for
Altace(R).
Our branded pharmaceutical products may be subject to competition from
alternate therapies and from generic equivalents.
Many of our branded pharmaceutical products have either a strong market
niche or competitive position. Some of our branded pharmaceutical products face
competition from generic substitutes. For example, during
37
2000 the FDA approved for sale generic substitutes for Tapazole(R). Of our
branded pharmaceutical products, based on a percentage of net revenues, we
believe that only a small portion face significant generic competition because
many of our branded pharmaceutical products are too difficult to manufacture or
prove bioequivalence (i.e., the two products produce identical effects on the
body) or have sales levels that are too low to attract competition.
The manufacturers of generic products typically do not bear the related
research and development costs and, consequently, are able to offer such
products at considerably lower prices than the branded equivalents. There are,
however, a number of factors which enable products to remain profitable once
patent protection has ceased. For a manufacturer to launch a generic substitute,
it must prove to the FDA when filing an application to make a generic substitute
that the branded pharmaceutical and the generic substitute have bioequivalence.
We believe it typically takes two or three years to prove bioequivalence and
receive FDA approval for many generic substitutes. By focusing our efforts in
part on products with bioequivalence or complex manufacturing requirements and
products with a strong brand image with the prescriber or the consumer,
supported by the development of a broader range of alternative product
formulations or dosage forms, we are better able to protect market share and
produce sustainable high margins and cash flows.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
our future prospects, developments and business strategies.
These forward-looking statements are identified by their use of terms and
phrases, such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained in
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" in our Annual Report on Form 10-K/A
for the year ended December 31, 2000 and in sections of this report, including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which includes a section entitled "Risk Factors".
Forward-looking statements include, but are not limited to:
- the future growth potential of, and prescription trends for our branded
pharmaceutical products, particularly Altace(R), Levoxyl(R) and
Thrombin-JMI(R);
- expected trends with respect to particular income and expense line items;
- the development and potential commercialization of HPV vaccines,
Estrasorb(TM) and Androsorb(TM) by Novavax and King;
- the development by King Pharmaceuticals Research and Development of
binodisine, pre-clinical programs, and product life cycle development
projects;
- our continued successful execution of our growth strategies;
- anticipated developments and expansions of our business;
- increases in sales of recently acquired products or royalty payments;
- the success of existing co-promotion agreements;
- the high cost and uncertainty of research, clinical trials and other
development activities involving pharmaceutical products;
- development of product line extensions;
- the unpredictability of the duration or future findings and
determinations of the FDA and other regulatory agencies worldwide;
38
- debt service and leverage requirements;
- the products which we expect to offer;
- the intent to market and distribute certain of our products
internationally;
- the intent to manufacture certain products in our own facilities which
are currently manufactured for us by third parties;
- the intent, belief or current expectations, primarily with respect to our
future operating performance;
- expectations regarding sales growth, gross margins, manufacturing
productivity, capital expenditures and effective tax rates; and
- expectations regarding our financial condition and liquidity as well as
future cash flows and earnings.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different from those contemplated by our forward-looking statements. These known
and unknown risks, uncertainties and other factors are described in detail in
the section entitled "Risk Factors" beginning on page 27.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Certain of our financial instruments are subject to market risks, including
interest rate risk. Our financial instruments are not currently subject to
foreign currency risk or commodity price risk. We have no financial instruments
held for trading purposes.
As of September 30, 2001, there were no significant changes in our
qualitative or quantitative market risk since the prior reporting period.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is incorporated by reference to Note
5 to the Condensed Consolidated Financial Statements included elsewhere in this
document.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
We filed the following Current Reports on Form 8-K during the quarter ended
September 30, 2001:
(1) A Current Report on Form 8-K filed July 23, 2001 furnished under
Item 9 additional financial information pertaining to our four-for-three
stock split declared by the board of directors on June 20, 2001 for
shareholders of record as of July 3, 2001, and distributed on July 19,
2001.
(2) A Current Report on Form 8-K filed August 9, 2001, and amended
August 24, 2001 and October 19, 2001 reported under Items 2 and 7 the
Company's acquisition of three branded pharmaceutical products and a
license to a fourth product from Bristol-Myers Squibb Company. The products
acquired include Bristol-Myers Squibb's rights in the United States to
Corzide(R), Delestrogen(R), and Florinef(R). King also acquired a fully
paid license to market Corgard(R) in the United States. Total consideration
paid by King for the four branded pharmaceutical products equals $285
million. The acquisition was financed with a combination of borrowings
under our senior secured credit facility and cash on hand.
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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.
KING PHARMACEUTICALS, INC.
Date: November 14, 2001 By: /s/ JOHN M. GREGORY
------------------------------------
John M. Gregory
Chairman and Chief Executive Officer
Date: November 14, 2001 By: /s/ JAMES R. LATTANZI
------------------------------------
James R. Lattanzi
Chief Financial Officer
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