<PAGE> 1
Exhibit 99.1
RISK FACTORS
Key risk factors that may have a direct bearing on the Company's results,
performance and financial condition include:
- the Company's ability to successfully develop, on its own behalf and
on behalf of its customers, and timely and successfully commercialize,
launch and sell new and improved pharmaceutical products and services;
- the ability and willingness of the Company's customers to successfully
commercialize, launch and sell new and improved pharmaceutical
products in which the Company has an economic interest;
- the Company's ability to successfully enter into and perform
beneficial royalty, milestone and fee-for-service agreements with
pharmaceutical companies;
- the introduction and sale of new or modified pharmaceutical products
and technologies by other companies that affect the demand for
pharmaceutical products and services in which AAI has a financial
interest, either directly or through sales to, or royalties,
milestones or other fees to be received from, AAI's customers and
marketing partners;
- the Company's success in obtaining timely regulatory approvals of the
Company's internally developed products and to obtain other regulatory
approvals and regulatorily acceptable governmental audits and
inspections of the Company's facilities, records and other regulated
activities;
- our ability to hire and retain adequate numbers of qualified
employees;
- industry outsourcing trends and volumes;
- changes in economic and market conditions that impact the demand for
the Company's products and services;
- our ability to obtain suitable types and quantities of raw materials,
excipients and active pharmaceutical ingredients used to develop,
improve or manufacture products, at commercially viable prices;
- federal, state and foreign regulatory and legal changes and
developments that impact the pharmaceutical industry and those
companies developing or providing services and products to the
pharmaceutical industry, including the Company, as well as the outcome
of related judicial cases involving or affecting the industry or such
companies, including any such changes,
<PAGE> 2
developments or judicial cases pertaining to FDA or other regulatory,
environmental, health and safety matters;
- changes in tariffs and import/export controls and restrictions;
- account receivable collection by the Company, and bankruptcy,
insolvency or impaired ability by the Company's customers to pay
amounts owed to the Company, in full and on a timely basis;
- risks inherent in international operations, including, e.g., possible
economic, political, military, trade restraints or restrictions,
monetary, or currency instabilities or developments affecting the
United States, Canada, the European Union and its member states, the
People's Republic of China, Turkey and Argentina, among others;
- the effects of vigorous competition and/or mergers and acquisitions in
the pharmaceutical industry and those companies developing or
providing services and products to the pharmaceutical industry;
- changes in interpretations and application of generally accepted
accounting practices and policy standards by regulatory and accounting
bodies that may cause the Company's reported financial results to
differ from anticipated results;
- the concurrence of the Internal Revenue Service and state and foreign
taxation agencies with the Company's interpretation and application of
the applicable tax laws and regulations to the Company's operations
and financial results, including in the Company's tax filings and
returns;
- the Company's ability to successfully persuade the U.S. Patent and
Trademark Office and its foreign counterparts to issue patents with
strong claims, on a timely basis, and to enforce such issued patents
against infringing companies;
- the outcome of any government reviews, investigations, claims or
challenges that may arise with respect to the contracts, asset and
stock sales and acquisitions, mergers, and joint ventures of or
involving the Company;
- our ability to successfully find and complete advantageous
acquisitions, joint ventures and mergers, including, e.g., our ability
to accurately identify and assess the value, strengths, weaknesses,
synergies, contingent and other liabilities and potential
profitability of acquisition or merger candidate or of joint ventures
and to successfully integrate acquired or merged operations into the
operations of the Company; and
- the compliance by the Company's customers, suppliers, licensors,
licensees or other third parties with which the Company has
contractual relations, with their contractual obligations to the
Company, as well as the Company's ability
<PAGE> 3
to enforce such obligations through litigation, arbitration, mediation
or other dispute resolution efforts.
Discussion of Risk Factors in the Pharmaceutical Industry. The Company believes
that the pharmaceutical industry in which it currently operates through its
development and commercialization of new and improved pharmaceutical products
and services holds tremendous opportunities for companies successful in
competing in that industry. At the same time, the Company is aware of what it
takes to be successful in this industry and the risk factors associated with the
industry.
In order to assist our stockholders in better understanding the risk factors in
the pharmaceutical industry, the Company is taking this opportunity to summarize
and discuss them:
COMPETITION. The Company encounters aggressive competition in all areas
of its business. Our competitors are numerous, ranging from large
pharmaceutical companies to many smaller specialized firms. AAI
competes primarily on the basis of innovation, ability to obtain
regulatory approvals successfully and at early dates, technology and
patents, a sophisticated understanding of chemistry, finding and
developing novel chemical opportunities with respect to new or existing
pharmaceutical products, service performance, price, quality,
reliability, and customer service and support.
Product opportunities frequently arise as innovator drugs approach the
end of their patent lives. These include both product life cycle
management (PLCM) activities to extend the product franchise life
cycles for innovator pharmaceutical firms and to engage in generic
product development. Developing new or improved drug products is
complex and difficult, both technically and from a regulatory
standpoint. Commercial success and viability depends on whether (and
how many) other companies are developing new or improved competing
drugs or generic equivalents to innovator drugs, which companies
receive the earliest regulatory approvals to market the competing or
generic products, and differences in the competing products'
characteristics, effectiveness, safety, stability and side effects
profiles. The product development process requires, often years in
advance, accurate anticipation of market and customer acceptance of
particular products, customers' needs, emerging technological trends,
and a timely ability to complete successfully many dependent and
complex chemistry, analytical, testing and regulatory approval
requirements. When developed, new formulations may not accomplish
desired delivery, clinical or product stability characteristics, and
new or reformulated drugs may not have acceptable safety,
effectiveness, stability or side effect profiles. Complications can
also arise during production scale-up and/or developing or using
acceptable analytical methodologies that materially affect the
commercial or technical viability of a new or improved product. New or
improved products can also encounter unexpected unresolvable patent
conflicts. Delays or problems may also arise from internal conflicts
for resource availability, personnel errors or equipment
<PAGE> 4
failures. Pharmaceutical product development life cycles are long
(typically several years) with substantial risks of failure in any of
the development and clinical testing phases. The windows of opportunity
to develop and commercialize such products open and close quickly with
regulatory and market developments. To remain competitive, the Company
must develop or license new and improved products, find, develop and
commercialize PLCM opportunities for innovator drugs whose patent
protection is soon to expire or generic products, periodically enhance
its existing products and services, and compete effectively on the
basis of the factors described above.
The Company is also subject to the impact of marketplace actions of its
competitors. For example, in the event of business difficulties faced by a major
competitor, the competitor may decide to slash its prices or take other pricing
or market actions in order to obtain new business at any price, thereby
disrupting the entire marketplace for pricing and obtaining of new business for
the Company and other marketplace participants. There can be no assurance that
disruptive actions by the Company's competitors will not occur or affect the
Company's financial results or business operations.
SELECTION AND INVESTMENT IN NEW RESEARCH AND DEVELOPMENT PROJECTS. The
Company seeks to select new or improved products and services to work
on in its judgment of those that may yield strong commercial success
for the Company, in light of its then-available resources, technical
capabilities and alternatives. However, in light of the multi-year
product development cycle times, the Company must make long-term
investments in its research and development projects and commit
significant resources before knowing whether its predictions will
eventually result in products that achieve customer and market
acceptance and success.
MARKETING OF NEW AND IMPROVED PRODUCTS AND SERVICES. After a new or
improved pharmaceutical product or service is successfully developed,
the Company must either find a pharmaceutical marketing partner and
successfully enter into a profitable license and distribution agreement
or seek to sell the product or service through its own sales force.
Commercial success by the Company depends on our ability to create and
maintain such effective marketing channels.
MANUFACTURING OBLIGATIONS. Frequently, the Company has related
manufacturing obligations that require it to manufacture sufficient
volumes of marketable product at acceptable costs. This is a process
that requires accurate forecasting of costs, volumes and mix of
products and service estimates. Moreover, the supply and timing of a
new product or service must match customers' demand and timing for the
particular product or service. Given the wide variety of products and
services the Company offers and is developing, the process of planning
production and projecting profitable cost charges is difficult.
<PAGE> 5
INTELLECTUAL PROPERTY. The Company generally relies upon patent,
copyright, trademark and trade secret laws in the United States and in
selected other countries to establish and maintain its proprietary
rights in its intellectual property, technology and products. However,
there can be no assurance that any of the Company's proprietary rights
will not be challenged, invalidated or circumvented, or that any such
rights will provide significant competitive advantages. Moreover,
because of the rapid pace of technological change in the pharmaceutical
industry, many of the Company's products rely on key technologies
developed by itself or others that may be obsoleted at any time. There
can be no assurance that the Company will be able to continue to
develop or obtain licenses to necessary technologies. In addition, from
time to time, the Company receives notices from third parties regarding
patent claims. Any such claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert
management's attention and resources and cause the Company to incur
significant expenses. In the event of a successful claim of
infringement against the Company and failure or inability of the
Company to license the infringed technology or to substitute similar
non-infringing technology, the Company's business could be adversely
affected. The Company also routinely enters into confidential
disclosure agreements with third parties and customers that restrict
the disclosure and/or use of the Company's intellectual property,
including its confidential and proprietary information, disclosed to
such third parties. Failure of such third-parties to honor their
confidentiality and non-use obligations owed to AAI can materially harm
the Company.
RELIANCE ON SUPPLIERS. The Company's operations are dependent on our
ability to obtain suppliers of quality raw materials, excipients and
active pharmaceutical ingredients at commercially acceptable prices and
terms, in time to satisfy critical product development, testing,
analytical and manufacturing activities, customer contracts, or the
development plans of the Company. The Company from time to time
experiences constrained timely and cost-effective supplies of such
desired materials. Such constraints, if persistent or widespread, may
adversely affect the Company's operating results until resolved or
alternate sourcing can be developed.
DEVELOPMENT OF DIRECT SALES OF NICHE PHARMACEUTICAL PRODUCTS. The
Company is currently planning the development of its own distribution
channels for certain "niche" pharmaceutical products not intended to
conflict with products being sold by the Company's customers. The
Company is in the process of developing its own, and seeking to
identify and buy from third parties, non-conflicting "niche"
pharmaceutical products. There is no assurance that such distribution
channels can be successfully developed, that such products can be
successfully identified, acquired or developed, or that the Company's
customers may not react adversely to such marketing efforts by the
Company. The Company's operational and financial results could be
materially and adversely affected due to any such adverse reactions.
<PAGE> 6
INTERNATIONAL. Sales outside the United States make up a significant
portion of the Company's revenues. In addition, a significant portion
of the Company's facilities and personnel, along with key customers and
suppliers, are located outside the United States. Accordingly, the
Company's future results could be adversely affected by a variety of
factors, including changes in a specific country's or region's
political conditions or changes or continued weakness in economic
conditions, trade protection measures, import or export licensing
requirements, facility or ownership interest nationalization, the
overlap of different tax structures, unexpected changes in regulatory
requirements, military conflicts or actions, and natural disasters.
MANAGEMENT AND SKILLED PERSONNEL. As with any technological company,
the Company's operations require adequate numbers of skilled scientific
and technical personnel, as well as strong management and sales
capabilities, to be successful. Such personnel are in strong demand by
many other companies and the Company's personnel are frequently hired
away by other companies. Retaining skilled personnel, and hiring
replacements, are critical to the Company's success. There can be no
assurance that the loss of key personnel, whether to other companies or
to accident, illness, death, injury or retirement, will not occur at a
time or in a manner that will not disrupt or delay key projects and
activities of the Company and thereb adversely affect our operations or
financial results.
DEMANDS OF GROWTH. In recent years, the Company has been growing in
size and complexity of operations. An organization bears many burdens
organizationally caused by such growth, including, among others,
successfully improving, increasing and changing the financial,
information technology, operational, personnel-related and other
systems, policies and practices of the organization and the
organizational structure of the business and its management, as well as
finding and hiring the appropriate people for new or changed positions.
The Company believes that it is presently meeting the challenges of
growth, but any failure or inability to meet such challenges, or to
successfully create, maintain or use such systems, policies or
practices, can materially and adversely affect the operations and
financial result of the Company.
LITIGATION, INVESTIGATIONS AND CLAIMS. Any company, including AAI,
always faces the risk of potential litigation being brought against it
in the course of its business operations. By their nature, litigation,
pre-litigation investigations and controversies, and claim demands
occur when disputes arise between two parties, or between a party and a
government agency, as to whether legal obligations are owed or
breached. These are often difficult or impossible to predict, avoid or
mitigate in advance. When they occur, litigation, investigations and
claim demands may be based on either valid or unfounded claims. In
either case, however, litigation typically seeks substantial amounts of
money and/or injunctive relief and involve substantial legal fees and
expenses, and pre-litigation investigations and claim demands
frequently involve major costs and diversions
<PAGE> 7
of management and personnel time and attention, which, in each case,
can materially and adversely affect the Company's operations or
financial results.
CREDITWORTHINESS AND CONTRACT COMPLIANCE OF CUSTOMERS. The magnitude of
the Company's contracts are often substantial in comparison to the
Company's size. While many of the Company's customers are large and
well-funded pharmaceutical companies, others are small (or are
"virtual" companies) with substantially less resources which can run
into financial or operational difficulties from time to time. In the
event that a customer with a significant contract with the Company runs
into financial or credit difficulties, declares bankruptcy, becomes
insolvent or otherwise is unable or unwilling to pay monies owed to the
Company on a timely basis or otherwise honor its obligations under such
a contract, the Company could be materially and adversely affected.
DERIVATIVE FINANCIAL INSTRUMENTS. As is common with companies operating
internationally, the Company is exposed to foreign currency exchange
rate risk inherent in its contracts, business dealings, and assets and
liabilities denominated in currencies other than the U.S. dollar, as
well as interest rate risk inherent in the Company's debt, investment
and accounts receivable portfolio. The Company's risk management
strategy utilizes derivative financial instruments, including forwards
and swaps, to hedge certain foreign currency and interest rate
exposures, with the intent of offsetting gains and losses that occur on
the underlying exposures with gains and losses on the derivative
contracts hedging them.
The Company does not enter into derivatives for trading purposes.
The Company has performed a sensitivity analysis assuming a
hypothetical adverse movement of 10% in foreign exchange rates and 1% in
interest rates (applied to variable rate debt and leases tied to interest rates)
and disclosed the results in Part I, Item 3 of the current Form 10-Q. Actual
gains and losses in the future may differ materially from that analysis,
however, based on changes in the timing and amount of interest rate and foreign
currency exchange rate movements and the Company's actual exposures and hedges.
ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES.
From time to time, the Company engages in discussions with a variety of
parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. The implementation or integration of a
transaction may contribute to the Company's results differing from the
investment community's expectation in a given quarter. Divestitures may
result in the cancellation of orders and charges to earnings.
Acquisitions and strategic alliances may require, among other things,
integration or coordination with a different company culture,
management team organization and business infrastructure. They may also
require the development, manufacture and marketing of product offerings
that enhance or detract from the performance of the combined business
or product line. Depending on the size and complexity of the
transaction, successful integration depends on a variety of factors,
including the hiring and retention of key employees, management of
geographically
<PAGE> 8
separate facilities, and the integration or coordination of different
research and development and product manufacturing facilities. All of
these efforts require varying levels of management resources, which may
temporarily adversely impact other business operations.
HURRICANES. A significant portion of the Company's research and
development activities, its corporate headquarters, and other critical
business operations and certain of its suppliers are located in
geographic areas that have had, and are likely to continue to have,
hurricanes and major storms. To mitigate this risk, the Company
maintains certain levels of business interruption and other insurance
coverage. However, the ultimate impact on the Company, its operations
and its infrastructure of future hurricanes and storms cannot be
foreseen or controlled at this time.
DRUG ENFORCEMENT AGENCY ("DEA") REGULATION. Certain of the Company's
development, testing and other activities are subject to the Controlled
Substances Act, administered by the Drug Enforcement Agency (the
"DEA"), which regulates strictly all narcotic and habit-forming
substances. The Company maintains separate, restricted-access
facilities and heightened control procedures for projects involving
such substances due to the level of security and other controls
required by the DEA. Any failure or inability by the Company to comply
with such Act and regulations could materially and adversely affect the
business, operations and financial results of the Company.
ENVIRONMENTAL AND HAZARDOUS MATERIALS IN THE WORKPLACE. Certain of the
Company's operations involve the use of substances regulated under
various federal, state, local, and international laws governing the
environment. Moreover, the Company's activities involve the controlled
use of hazardous materials and chemicals. The Company is subject to
federal, state and local laws and regulations governing the use,
storage, handling and disposal of such materials and certain waste
products. In the event of an accident, discharges (e.g., to the
groundwater or air) or other non-compliance, the Company could be held
liable for any damages that result, including damages or injuries,
including deaths, to persons, property or the environment, which could
materially and adversely affect the financial condition and operations
of the Company.
PROFIT MARGIN. The profit margins realized by the Company vary among
its products and services, its customers, its competitive situation,
and its geographic areas of operation. Consequently, the overall
profitability of the Company's operations in any given period is
partially dependent on the product, service, customer and geographic
mix, and competitive situation, reflected in that period's net sales.
CHANGES IN LAWS AND REGULATIONS. The Company operates in a highly
regulated business. Failure or inability to comply with the laws and
regulations applicable to our business would materially and adversely
affect the Company's business
<PAGE> 9
and financial results. Moreover, these laws and regulations and
governmental interpretations and applications thereof, both in the
United States and in foreign countries, change over time. The Company
can give no assurance that the laws and regulations applicable to our
business will not change, or be interpreted or re-interpreted by
governmental agencies or bodies, in ways harmful to the Company and its
financial results and business operations.
CREDIT FACILITIES AND AVAILABILITY OF CASH. The Company is dependent on
its bank relationships and credit facilities to provide cash and
funding for Company operations. In the event of any future disruption
or limitation in such relationships or facilities, any decision by the
Company's banks to terminate, reduce or impose limitations on our
credit facilities or to exercise rights to impose restrictions or
declare breaches under banking contract provisions, any decisions by
the Company's banks to collect on any assets of the Company as
collateral for such lending facilities, or in the event that the
Company requires more cash than is available to it under such credit
facilities, the Company's operations and financial condition could be
materially and adversely affected.
FLUCTUATIONS AND VOLATILITY OF STOCK PRICES. In the pharmaceutical industry,
future revenue and margin trends cannot be reliably predicted and may cause the
Company to adjust its operations, which could cause period-to-period
fluctuations in operating results. The Company's stock price, like that of other
small pharmaceutical companies, is subject to significant volatility. The
announcement of new products, services, technological innovations or business
developments by the Company or its competitors, quarterly or annual variations
in the Company's results of operations, changes in revenue or earnings estimates
by the investment community, and speculation in the press, Internet web sites or
investment community are among the factors affecting the Company's stock price.
In addition, the stock price may be affected by general market conditions and
domestic and international macroeconomic factors unrelated to the Company's
performance. Moreover, major potential contracts or business arrangements being
negotiated or pursued by the Company frequently occur late in given financial
quarters or years. Any failure or inability by the Company in achieving, or even
brief delays in implementing, potential licensing, product life cycle
management, product development and other major contracts or arrangements being
pursued or negotiated by the Company can, and from time to time does, move the
financial and sales impact of expected or planned sales and contracts from one
accounting period to another or prevent them from being booked at all. Such
delays or inabilities are difficult or impossible to predict or control and can
materially and adversely affect quarterly or annual revenues and profitability,
which can materially and adversely affect the price of the Company's stock. In
addition, typical trading volumes in the Company stock are thin, so that the
purchase or sale of relatively small amounts of the Company stock and
announcements of Company-related news and developments can materially affect the
price of such stock, either through increases or decreases. Because of the
foregoing reasons, recent trends should not be considered reliable indicators of
future stock prices or financial results.
