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EXHIBIT 99(a)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
supplementary consolidated financial statements and notes thereto included
elsewhere in this Form 8-K. Historical results and percentage relationships set
forth in the statement of operations, including trends that might appear, are
not necessarily indicative of future operations.
On June 2, 2000, the Board of Directors declared a 3 for 2 stock split
effected in the form of a stock dividend. All share data reflect this 3 for 2
stock split.
OVERVIEW
We are a vertically integrated pharmaceutical company that researches,
develops, manufactures, markets and sells primarily branded prescription
pharmaceutical products. Through a national sales force of over 400
representatives and co-promotion arrangements, we market our branded
pharmaceutical products to general/family practitioners, internal medicine
physicians, cardiologists, endocrinologists, pediatricians and hospitals across
the country.
Our primary business strategy is to acquire established branded
pharmaceutical products and to increase their sales through focused marketing
and promotion, life cycle management as well as by securing new indications,
developing product line extensions and devising new formulations or dosages. In
pursuing acquisitions, we seek to capitalize on opportunities in the
pharmaceutical industry created by cost containment initiatives and
consolidation among large, global pharmaceutical companies. We also seek
attractive company acquisitions that add products or product pipelines,
technologies or sales and marketing capabilities to our key therapeutic areas.
These activities are attractive to us because they may expand the market for our
branded pharmaceutical products, provide market exclusivity or sales levels that
do not attract significant competition. In addition to branded pharmaceuticals,
we also provide contract manufacturing for a number of the world's leading
pharmaceutical and biotechnology companies, including Warner-Lambert Company,
Centocor, Inc., Genetics Institute, Inc. and Hoffman-La Roche Inc.
Our branded pharmaceutical products can be divided primarily into five
therapeutic areas: (i) cardiovascular (including Altace(R), Thalitone(R) and
Procanbid(R)), (ii) anti-infectives (including Lorabid(R), Cortisporin(R),
Neosporin(R) and Coly-Mycin M(R)), (iii) vaccines and biologicals (including
Thrombin-JMI(R) and Aplisol(R)), (iv) thyroid-disorder drugs (including
Levoxyl(R), Tapazole(R), Cytomel(R), and Triostat(R)), and (v) women's health
(including Menest(R) and Pitocin(R)). Most of these products are marketed to
general/family practitioners and internal medicine physicians. Unlike many of
our competitors, we have a broad therapeutic focus that provides us with
opportunities to purchase a wide variety of products. In addition, we have well
known products in all of our therapeutic categories that generate high
prescription volumes. Our portfolio of well-recognized prescription brand names
includes, among others, Altace(R), Lorabid(R), Neosporin(R), Cortisporin(R),
Levoxyl(R), Tapazole(R), Cytomel(R), Menest(R), Pitocin(R), and Anusol-HC(R).
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We acquired from Glaxo Wellcome the Cortisporin(R) product line in
March 1997, the Viroptic(R) product line in May 1997 and six additional branded
products, including Septra(R), and exclusive licenses, free of royalty
obligations, for the prescription formulations of Neosporin(R) and Polysporin(R)
in November 1997 (the "Glaxo Acquisition").
In June 1997, through Jones Pharma Incorporated discussed below, we
acquired Cytomel(R) and Triostat(R) from SmithKline Beecham Corporation for a
purchase price of $22.8 million. In connection with the acquisition, we entered
into manufacturing agreements for the supply of both products.
In February 1998 we acquired from Warner-Lambert 15 branded
pharmaceutical products, the Parkedale Facility located in Rochester, Michigan
and certain manufacturing contracts for third parties for $127.9 million,
including $2.9 million of assumed liabilities (the "Sterile Products
Acquisition").
In June 1998 we launched our new Cortisporin(R)-TC Otic line.
Cortisporin(R)-TC Otic is a product line extension for our Cortisporin(R) Otic
Suspension product.
In December 1998 we acquired from Hoechst Marion Roussel, Inc.,
predecessor to Aventis ("HMR"), for $362.5 million the United States rights to
Altace(R), and Angiotensin Converting Enzyme inhibitor, HMR's worldwide rights
to Silvadene(R) and HMR's worldwide rights to AVC(TM), (the "Altace
Acquisition"). Aventis currently manufactures Altace(R) for us. We anticipate
moving the manufacturing of Altace(R) to the Bristol facility prior to December
31, 2001. Aventis will continue to supply raw materials for the process and we
anticipate that Aventis will continue to be the secondary manufacturer for this
product.
In August 1999, we acquired the antibiotic Lorabid(R) from Eli Lilly
and Company for $91.7 million including acquisition costs plus sales performance
milestones that could bring the total value of the deal to $158.0 million. The
final contingent payment will be made if we achieve $140.0 million in annual net
sales of Lorabid(R). As part of the agreement, we acquired or licensed all of
Lilly's rights in the United States and Puerto Rico to Lorabid(R) including
Lorabid(R)'s new drug applications, investigational new drug applications, and
certain patents and associated United States copyright and trademark material.
Lilly manufactures Lorabid(R) for us. Lorabid(R) has United States patent
protection through December 31, 2005.
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On February 25, 2000, we acquired Medco in an all stock transaction
accounted for as a pooling of interests valued at approximately $366 million.
Medco is now one of our wholly-owned subsidiaries. We exchanged approximately
10.8 million shares of King common stock for all of the outstanding shares of
Medco. Each share of Medco was exchanged for 1.01355 shares of King common
stock. In addition, outstanding Medco stock options were converted at the same
exchange ratio to purchase approximately 1,050,000 shares of King common stock.
Medco is engaged in the development and global commercialization of
cardiovascular medicines and adenosine-receptor technologies. Medco's products
and the related intellectual property rights are typically obtained under
license from academic or corporate sources who have received United States
patents. Medco then sponsors and directs any additional preclinical studies and
clinical testing needed for product registration and marketing approval. These
late-stage product development activities are outsourced to independent clinical
research organizations to maximize efficiency and minimize internal overhead.
Historically Medco has licensed the manufacturing and marketing rights to its
products to corporate partners in exchange for licensing fees and royalty
payments on future sales. A portion of the formulation development, as well as
microbiology, chemistry, manufacturing and controls information, are typically
provided by Medco's licensed corporate partner, and Medco then submits to the
United States Food and Drug Administration (FDA), a New Drug Application (NDA)
to obtain the FDA's clearance to market the drug. Medco has successfully
developed two adenosine-based products, Adenocard(R) and Adenoscan(R). The NDAs
for Adenocard(R) and Adenoscan(R) are held by Fujisawa Healthcare, Inc. and
Medco receives a royalty based on the sales of the products.
On June 23, 2000, we entered into a co-promotion agreement with
American Home Products Corporation (AHP) to market Altace(R), an Angiotensin
Converting Enzyme ("ACE") inhibitor, in the United States and Puerto Rico.
Subject to the terms of the co-promotion agreement, we will pay AHP an annual
fee based on a percentage of net sales in exchange for its marketing efforts.
Additionally, AHP purchased $75 million of our common stock and paid us $25
million in cash upon execution of the co-promotion agreement. AHP will pay us an
additional $50 million in November 2000 as a result of the FDA's final approval
of potential new indications for Altace(R) based on a supplemental new drug
applications previously filed with the FDA.
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On July 7, 2000, we completed the acquisition of United States
marketing rights to the Nordette(R), Bicillin(R), and Wycillin(R) product lines
from AHP as contemplated by the co-promotion agreement discussed above valued at
$200 million, plus the assumption of certain liabilities, 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 cash from
operations.
On August 31, 2000, we acquired Jones Pharma Incorporated (Jones) in an
all stock transaction accounted for as a tax-free pooling of interests for
approximately $2.4 billion. Jones is now one of our wholly-owned subsidiaries.
We exchanged approximately 74 million shares of King common stock for all of the
outstanding shares of Jones. Each share of Jones was exchanged for 1.125 shares
of King common stock. In addition, outstanding Jones stock options were
converted at the same exchange ratio to purchase approximately 4.0 million
shares of King common stock. Jones was an emerging specialty pharmaceutical
company with a national sales force of approximately 120 dedicated sales
representatives who promoted Jones' products throughout the United States.
Jones' strategy was to build a portfolio of growing products through the
acquisition of under-promoted, promotion sensitive FDA approved products from
other pharmaceutical companies. About half of Jones' sales were generated by the
thyroid-disorder drugs Levoxyl(R), Tapazole(R), Cytomel(R), and Triostat(R).
Jones' other products included Thrombin-JMI(R) for controlling blood loss during
surgery; Brevital Sodium(R), an anesthetic; and veterinary pharmaceuticals
including Soloxine(R), Tussigon(R), and Pancrezyme(R).
Our strategy is to continue to acquire branded pharmaceutical products
and to create value by leveraging our marketing, manufacturing and product
development capabilities. The success of our marketing strategy will be aided by
our having gained approval from the FDA on October 5, 2000 of the new
indications for Altace(R) requested under the Supplemental New Drug Application.
As soon as practicable after regulatory requirements are satisfied and when
advantageous, we expect that manufacturing some of these acquired pharmaceutical
products ourselves will increase our margins because the cost of producing
pharmaceutical products on our own should be lower than the cost of having these
products manufactured by third parties. As discussed above, we anticipate
beginning the manufacturing of Altace(R) in our Bristol facility prior to
December 31, 2001.
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We manufacture pharmaceutical products for a variety of pharmaceutical
and biotechnology companies under contracts expiring at various times within the
next four years. We intend to enter into additional manufacturing contracts in
cases where we identify contracts that offer significant volumes and attractive
revenues. We have not accepted or renewed manufacturing contracts for third
parties where we perceived insignificant volumes or revenues. In accordance with
our focus on branded pharmaceutical products, we expect that, over time, our
contract manufacturing will continue to be a smaller percentage of revenues.
The following summarizes approximate net revenues by operating segment
(in thousands).
<TABLE>
<CAPTION>
For the Six Months
For the Years Ended December 31, Ended June 30,
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Branded pharmaceuticals $121,961 $228,493 $434,896 $172,798 $241,654
Licensed products 20,000 27,544 31,650 16,503 22,871
Contract manufacturing 11,714 31,931 36,408 17,490 22,171
Other 3,015 6,453 9,511 6,479 5,255
-------- -------- -------- -------- --------
Total $156,690 $294,421 $512,465 $213,270 $291,951
======== ======== ======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES
Net revenues increased $78.7 million, or 36.9%, to $292.0 in 2000 from
$213.3 million in 1999, due primarily to the acquisition and growth of branded
pharmaceutical products. The increase in revenues is primarily from Altace(R),
the acquisitions of Lorabid(R) and Nordette(R), and revenue growth of royalties
and certain branded pharmaceutical products.
Net sales from branded pharmaceutical products increased $68.9 million,
or 39.8%, to $241.7 in 2000 from $172.8 in 1999. The acquisition of Lorabid(R)
and revenue gains by Altace(R), Thrombin-JMI(R), and Levoxyl(R) accounted for
most of the sales increases. In addition, we also received revenue from sales of
Nordette(R), Wycillin(R), and Bicillin(R) as a result of an agreement with
American Home Products on June 22, 2000 before our acquisition of the products
on July 7, 2000.
As a result of the Company's discontinuance of Fluogen(R) as announced
in September 2000, the Company will not recognize any revenue from Fluogen(R)
during 2000. The Company typically recognizes sales from this product during the
third and fourth quarters.
Revenues from licensed products increased $6.4 million, of 38.6%, to
$22.9 million in 2000 from $16.5 million in 1999 due to continued increases in
unit sales of Adenoscan(R) by Fujisawa, our North American licensee.
Revenues from contract manufacturing increased $4.7 million, or 26.8%,
to $22.2 million in 2000 from $17.5 million in 1999. Contract sales increased
primarily from the increased contract sales of Thrombin-JMI(R) to Ethicon Inc.
Net sales from generic and other sources decreased $1.2 million, or
18.9%, to $5.3 million in 2000 from $6.5 million in 1999. The decrease in
revenues is primarily attributable to discontinued generic product lines.
GROSS PROFIT
Total gross profit increased $61.3 million, or 38.4%, to $221.0 million
in 2000 from $159.7 million in 1999. The increase was primarily due to increased
gross profit from branded pharmaceutical products.
The gross profit from branded pharmaceutical products increased $52.3
million, or 36.7%, to $195.0 million in 2000 from $142.7 million in 1999. This
increase was primarily due to increases in gross profit from the sales of
Altace(R), Lorabid(R), Thrombin-JMI(R), and Levoxyl(R), and our distribution of
Nordette(R), Wycillin(R) and Bicillin(R) which began on June 22, 2000 before the
consummation of our acquisition of the marketing rights to these products on
July 7, 2000.
Gross profit from licensed products increased $5.8 million, or 42.6%,
to $19.4 million in 2000 from $13.6 million in 1999, due to the continuing shift
in the product sales mix to Adenoscan(R) from which we receive a higher net
royalty than from Adenocard(R) sales. Royalty expense from adenosine sales
increased $0.6 million, or 20.7%, to $3.5 million in 2000 from $2.9 million in
1999, due to increased net sales of Adenoscan(R), a product for which we pay a
royalty of 3% of net sales to a third party.
Gross profit from contract manufacturing increased $4.9 million, or
559.2%, to $4.0 million in 2000 from a loss of $0.9 million in 1999. This
increase is primarily due to the gross profit associated with the increased
sales of Thrombin-JMI(R) to Ethicon Inc.
Gross profit from generic and other sources decreased $1.7 million, or
39.8%, to $2.6 million in 2000 from $4.3 million in 1999.
OPERATING COSTS AND EXPENSES
Total operating costs and expenses increased $64.5 million, or 53.2%,
to $185.8 million in 2000 from $121.3 million in 1999. The increase was due to
increases in the costs associated with our growth, particularly increases in our
sales force due primarily to the acquisitions of Altace(R), Lorabid(R) and
Medco.
Cost of revenues increased $17.3 million, or 32.3%, to $70.9 million in
2000 from $53.6 million in 1999. The increase was due primarily to the costs
associated with the acquisition of Lorabid(R) and our distribution of
Nordette(R), Wycillin(R) and Bicillin(R) which began on June 22, 2000 before the
consummation of our acquisition of the marketing rights to those products on
July 7, 2000. As a percentage of total revenues, cost of revenues increased to
24.8% in 2000 from 23.9% in 1999.
Selling, general and administrative expenses increased $21.6 million,
or 49.2%, to $65.6 million in 2000 from $44.0 million in 1999. The increase was
primarily attributable to the hiring of additional sales representatives during
the second half of 1999 and first part of 2000, as well as other personnel
costs, marketing and sampling costs associated with the new branded product
lines. As a percentage of total revenues, selling, general and administrative
expenses increased to 22.5% in 2000 from 20.6% in 1999.
Research and development costs increased $1.8 million, or 22.7%, to
$9.7 million in 2000 from $7.9 million in 1999 due to increased research and
development activities.
Merger and restructuring costs of $20.8 million in 2000 were one-time
charges incurred in connection with the acquisition of Medco.
Depreciation and amortization expense increased $3.0 million, or 18.8%,
to $18.8 million in 2000 from $15.8 million in 1999. This increase was primarily
attributable to the amortization of the fixed assets and the intangible asset
acquired in the acquisition of Lorabid(R).
OPERATING INCOME
Operating income increased $14.1 million, or 15.4%, to $106.2 million
in 2000 from $92.0 million in 1999. This increase was primarily due to increased
revenues from the acquisition of branded products and revenue growth of certain
branded pharmaceutical products offset by merger and restructuring charges and
other increased expenses described above. As a percentage of total revenues,
operating income decreased to 36.4% in 2000 from 43.1% in 1999.
OTHER INCOME (EXPENSE)
Interest income increased $2.4 million, or 52.0% to $7.0 million in
2000 from $4.6 million in 1999. This increase was primarily due to higher
investment income in 2000 as investment balances were higher.
Interest expense decreased $1.9 million, or 7.3%, to $24.2 million in
2000 from $26.1 million in 1999, as a result of paying down the term loans used
to finance, in part, the acquisitions of Altace(R) and Lorabid(R).
INCOME TAX EXPENSE
The effective tax rate in 2000 of 46.8% and 1999 of 37.5% was higher
than the federal statutory rate of 35%. The effective tax rate for 2000 is
primarily due to the non-deductible merger and restructuring costs related to
our merger with Medco.
EXTRAORDINARY ITEM
During the second quarter of 2000, we repaid outstanding debt under our
senior credit facility prior to maturity. The early repayment caused us to
recognize an extraordinary loss of $4.7 million, net of related tax benefits of
$2.8 million, from the write-off of certain deferred financing costs. During the
first quarter of 1999, we repaid $75.0 million of Senior Subordinated Notes
prior to maturity. The early repayment of the notes caused us to recognize an
extraordinary loss of $705,000, net of related tax benefits of $445,000, from
the write-off of certain deferred financing costs.
INCOME FROM CONTINUING OPERATIONS
Due to the factors set forth above, income from continuing operations
increased $3.2 million, or 7.2%, to $47.3 million in 2000 from $44.1 million in
1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Total net revenue increased $218.0 million, or 74.1%, to $512.5 million
in 1999 from $294.4 million in 1998, due primarily to the acquisition and growth
of branded pharmaceutical products. The increase in revenues is primarily
attributable to the Altace Acquisition, the acquisition of Lorabid(R), and
revenue growth of certain branded pharmaceutical products.
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Net sales from branded pharmaceutical products increased $206.4
million, or 90.3%, to $434.9 million in 1999 from $228.5 million in 1998. The
Altace Acquisition, the acquisition of Lorabid(R), increases in net pricing
arising from contract renegotiation of Thrombin-JMI(R), and revenue gains by
Fluogen(R) and the Cortisporin(R) and Neosporin(R) product lines accounted for
most of the sales increase. From time to time we announce price increases on
some of our pharmaceutical products. In advance of a price increase, many of our
customers may order pharmaceutical products in larger than normal quantities. We
cannot determine the exact quantity of additional inventory that our customers
may order in anticipation of a price increase. The ordering of excess quantities
in any quarter could cause sales of some of our branded pharmaceutical products
to be lower in the subsequent quarter than they would have been otherwise. Net
revenues from Fluogen(R) increased from $17.7 million in 1998 to $28.7 million
in 1999. As a result of the Company's discontinuance of the product as announced
in September 2000, the Company will not recognize any revenue from Fluogen(R)
during 2000.
Revenues from licensed products increased $4.1 million or 14.9% to
$31.7 million in 1999 from $27.5 million in 1998. The increase was primarily due
to continued year-over-year increases in unit sales of Adenoscan(R) by Fujisawa,
our North American licensee. Fujisawa is the source of substantially all of our
royalties.
Revenues from contract manufacturing increased $4.5 million, or 14.0%,
to $36.4 million in 1999 from $31.9 million in 1998. Contract manufacturing
revenues increased because we had a full year of contract revenue from the
Sterile Products Acquisition that closed in February 1998 and due to increased
contract sales of Thrombin-JMI(R).
Net sales from generic and other sources increased $3.1 million, or
47.4%, to $9.5 million in 1999 from $6.5 in 1998. The increase in revenues is
primarily attributable to increased sales of a generic product line, offset by a
decrease in development revenue. We have recognized no development revenues in
1999. In 1998, we recognized $5.0 million in development revenues as a result of
the FDA approval and our validation of the process of two additional Abbreviated
New Drug Applications pursuant to an agreement with Mallinckrodt. Currently, we
have no ongoing agreements that will result in future development revenue
recognition.
GROSS PROFIT
Total gross profit increased $167.1 million or 83.0% to $368.6 million
in 1999 from $201.5 million in 1998. The increase was primarily due to increased
gross profit from branded pharmaceutical products, offset by a decrease in
contract manufacturing gross profit contribution.
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The gross profit from branded pharmaceutical products increased $167.1
million or 96.3% to $340.7 million in 1999 from $173.6 million in 1998. This
increase was primarily due to increases in gross profit from the Altace product
line acquired in December 1998, increases in net pricing arising from contract
renegotiation of Thrombin-JMI(R), and the Lorabid product acquired in August
1999.
The gross profit from licensed products increased $3.3 million or 14.6%
to $26.0 million in 1999 from $22.7 million in 1998. The increase is primarily
due to the continued year-over-year increases in unit sales of Adenoscan(R), a
drug for which we pay a royalty of 3% of net sales to a third party and
Adenocard(R), a drug for which we pay a royalty of 12.5% of net sales to the
University of Virginia Alumni Patents Foundation.
Gross profit associated with contract manufacturing decreased $3.4
million to $(3.7) million in 1999 from $(300,000) in 1998.
The gross profit from generic and other increased $109,000 or 2.0% to
$5.6 million from $5.5 million.
OPERATING COSTS AND EXPENSES
Total operating costs and expenses increased $113.3 million, or 59.8%,
to $302.6 million in 1999 from $189.3 million in 1998. The increase was due to
increases in the costs associated with our growth, particularly the Sterile
Products Acquisition and the Altace Acquisition.
Cost of revenues increased $50.9 million, or 54.7%, to $143.8 million
in 1999 from $92.9 million in 1998. The increase was due primarily to the costs
associated with the newly acquired branded product lines and increases in the
production of Fluogen(R).
Selling, general and administrative expenses increased $47.8 million,
or 80.4% to $107.2 million in 1999 from $59.4 million in 1998. The increase was
primarily attributable to the hiring of additional sales representatives during
the second half of 1998 and first part of 1999, sales commissions, other
personnel costs, marketing, and sampling costs associated with the new branded
product lines. As a percentage of total revenues, selling, general and
administrative expenses increased to 20.9% in 1999 from 20.2% in 1998.
Depreciation and amortization expense increased $18.3 million, or
117.6%, to $33.9 million in 1999 from $15.6 million in 1998. This increase was
primarily attributable to the amortization of the fixed assets and intangible
assets acquired in the Sterile Products Acquisition, the Altace Acquisition and
the acquisition of Lorabid(R).
Royalty expense increased $738,000 or 11.2% to $7.4 million in 1999
from $6.6 million in 1998. The increase was associated with the increased
royalty revenue for Adenocard(R) and Adenoscan(R).
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Research and development expenses increased $6.8 million or 62.5% to
$17.7 million in 1999 from $10.9 million in 1998. Research and development
expenditures were higher during 1999 primarily due to a phase II study to
further investigate the safety and efficacy of Pallacor(TM), non-capitalized
expenditures associated with the Levoxyl(R) NDA and other improvement projects,
as well as the completion of a phase I study and the initiation of a phase II
study of MRE0470.
A nonrecurring charge of $10.5 million was taken in 1998 related to an
impairment of certain under-performing long-lived assets. As a result of our
strategic review process of the Company's product lines and related intangible
assets, we determined that a portion of the goodwill associated with certain
lower-margin pharmaceutical products had been impaired.
OTHER INCOME (EXPENSE)
Interest income from investing activities increased $2.8 million, or
35.6% to $10.5 million in 1999 from $7.7 million in 1998. This increase was
primarily due to higher investment income in 1999 as investment balances were
higher.
Interest expense increased $40.5 million, or 272.5%, to $55.4 million
in 1999 from $14.9 million in 1998, as a result of additional term loans used to
finance, in part, the Sterile Products Acquisition, the Altace Acquisition and
the acquisition of Lorabid(R).
Other income (expense) decreased $7.3 million, or 180.7% to a $3.2
million expense in 1999 from a $4.0 million income in 1998. This decrease was
due to the receipt of $4.0 million in 1998 for assistance provided in connection
with the contract manufacturing of Adenoscan(R) and Adenocard(R) by a third
party and the transfer of Adenoscan(R) and Adenocard(R) NDAs to Fujisawa. In
addition, we incurred expenses of $3.3 million for a legal settlement and fees
related to a patent protection.
INCOME TAX EXPENSE
The effective tax rate in 1999 of 37.8% and 1998 of 36.2% was higher
than the federal statutory rate of 35.0% primarily due to state income taxes.
EXTRAORDINARY ITEM
During the first quarter of 1999, we repaid $75.0 million of senior
subordinated seller notes prior to maturity. The early repayment of the notes
resulted in an extraordinary loss of $705,000, net of related tax benefits of
$445,000, from the write-off of certain deferred financing costs. During 1998,
we repaid other long-term debt prior to maturity. The repayment resulted in
extraordinary charges of $4.4 million, net of related tax benefits of $2.8
million, from the write off of certain deferred financing costs.
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INCOME FROM CONTINUING OPERATIONS
Due to the factors set forth above, income from continuing operations
increased 54.5% or $35.6 million to $100.6 million in 1999 from $65.1 million in
1998.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations in 1998 reflects an approximate $12
million gain (net of tax) from the sales of our nutritional supplements product
line and contract manufacturing operations in April 1998. In addition, income
from discontinued operations includes the after-tax operating results of our
nutritional supplements product line and contract manufacturing operations prior
to the sale.
NET INCOME
Due to the factors set forth above, net income increased $20.4 million,
or 25.7%, to $99.9 million in 1999 from $79.5 million in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Net revenues increased $137.7 million, or 87.9%, to $294.4 million in
1998 from $156.7 million in 1997, due primarily to the acquisition of branded
products in 1998 and late 1997 and increased contract manufacturing related to
the Sterile Products Acquisition.
Net sales from branded pharmaceuticals increased $106.5 million, or
87.3%, to $228.5 million in 1998 from $122.0 million in 1997. The Glaxo
Acquisition, Sterile Products Acquisition, Menest(R), and the Altace Acquisition
accounted for most of the sales increase. Sales of existing branded products
also attributed to the increased sales in 1998.
Licensed products revenue increased $7.5 million, or 37.5% to $27.5
million in 1998 from $20.0 million in 1997. The increase was primarily due to
continued year-over-year increases in unit sales of Adenoscan(R) by Fujisawa,
our North American licensee, and a 4% increase in the royalty revenue rate which
began midway through fourth quarter 1997. Fujisawa is the source of
substantially all of our royalty revenues.
Revenues from contract manufacturing increased $20.2 million, or
172.6%, to $31.9 million in 1998 from $11.7 million in 1997, due primarily to
the increased contract manufacturing related to the Sterile Products
Acquisition.
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Additionally, we recognized other revenues in 1998 of $5.0 million for
the development and related FDA approval of two ANDAs filed in connection with
our agreement with Mallinckrodt.
GROSS PROFIT
Total gross profit increased $85.7 million, or 74.0%, to $201.5 million
in 1998 from $115.8 million in 1997. The increase was primarily due to the
increase in gross profit associated with branded pharmaceutical products of
$80.0 million and the gross profit of royalty revenues on licensed products of
$5.7 million.
The gross profit of branded pharmaceutical products increased $80.0
million to $173.6 million in 1998 from $93.6 million in 1997. This increase was
primarily due to increases in revenues from certain products acquired in the
Sterile Products Acquisitions, The Cortisporin Acquisition, the Glaxo
Acquisition, and the Altace transaction in December 1998.
The gross profit associated with licensed products increased $5.7
million, or 33.5% to $22.7 million in 1998 from $17.0 million in 1997. This
increase was primarily due to the continued shift in the product sales mix to
Adenoscan(R) and continued year-over-year increases in unit sales of
Adenoscan(R), a drug for which we pay a royalty of 3% of net sales to a third
party and Adenocard(R), a drug for which we pay a royalty of 12.5% of net sales
to the University of Virginia Alumni Patents Foundation.
The gross profit associated with contract development revenue, and
generic pharmaceutical sales increased by $22,000 to $5.2 million in 1998 from
$5.2 million in 1997.
OPERATING COSTS AND EXPENSES
Total operating costs and expenses increased $91.8 million, or 94.1%,
to $189.3 million in 1998 from $97.5 million in 1997. The increase was primarily
due to increases in the costs associated with our growth, particularly the
Sterile Products Acquisition and the Glaxo Acquisition.
Cost of revenues increased $52.0 million, or 127.1%, to $92.9 million
in 1998 from $40.9 million in 1997. The increase was due primarily to the costs
associated with the newly acquired branded product lines.
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Selling, general and administrative expenses increased $19.1 million,
or 47.7%, to $59.4 million in 1998 from $40.3 million in 1997. This increase was
primarily attributable to the hiring of additional sales representatives in 1998
and during the second half of 1997, as well as other personnel costs and
marketing, promotion, and sampling costs associated with the newly acquired
branded product lines. As a percentage of net sales, selling, general and
administrative expenses decreased to 20.2% in 1998 from 25.7% in 1997.
Royalty expense increased $2.3 million, or 52.4% to $6.6 million in
1998 from $4.3 million in 1997. The increase was primarily due to the payment of
a royalty of 3% of net sales of Adenoscan(R) to a third party beginning January
1, 1998 relating to the procurement of additional intellectual property rights
for intravenous adenosine from such third party.
Research and development expenses increased $3.1 million, or 39.5% to
$10.9 million in 1998 from $7.8 million in 1997. Research and development
expenditures were higher during 1998 primarily due to a one-time charge of $2.4
million in the second quarter of 1998 pertaining to the purchase of Fujisawa's
commercialization rights and related intellectual properties for the
cardioprotection application of intravenous adenosine. Also, research and
development expenditures were higher during 1998 due to a $1.0 million charge in
the fourth quarter of 1998 for a milestone payment to Discovery Therapeutics,
Inc. related to the December filing of the IND for MRE0470.
Depreciation and amortization expense increased $7.0 million, or 81.5%,
to $15.6 million in 1998 from $8.6 million in 1997. This increase was primarily
attributable to the depreciation and amortization of the fixed assets and
intangibles assets acquired with the branded product acquisitions in 1997 and
the Sterile Products and Altace Acquisitions in 1998. This increase was offset
by the reduction in amortization expense associated with the $10.5 million
goodwill impairment write-off discussed above. As a percentage of sales,
depreciation and amortization expense decreased from 5.5% in 1997 to 5.3% in
1998.
A nonrecurring charge of $10.5 million was taken in 1998 related to an
impairment of certain under-performing long-lived assets. As a result of our
strategic review process of the Company's product lines and related intangible
assets, we determined that a portion of the goodwill associated with certain
lower-margin pharmaceutical products had been impaired.
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OTHER INCOME (EXPENSE)
Interest income increased $3.1 million, or 65.8% to $7.7 million in
1998 from $4.7 million in 1997. This increase was primarily due to higher
investment income in 1998 as investment balances were higher.
Interest expense increased $11.9 million, or 391.4%, to $14.9 million
in 1998 from $3.0 million in 1997, as a result of additional term loans used to
finance, in part, the acquisitions in 1998.
Other income increased $3.3 million, or 496.7% to $4.0 million in 1998
from $0.7 million in 1997. This increase was due to the receipt of a $4.0
million payment in 1998 from Fujisawa for the assistance provided by us to
Fujisawa in connection with the contract manufacturing of Adenoscan(R) and
Adenocard(R) by a third party and the transfer of the Adenoscan(R) and
Adenocard(R) NDAs to Fujisawa.
INCOME TAX EXPENSE
The effective tax rate in 1998 of 36.2% was higher than the effective
tax rate in 1997 of 31.9% due to the nondeductibility of the $10.5 million
nonrecurring charge in 1998.
EXTRAORDINARY ITEM
During 1998, we repaid certain long-term debt prior to maturity. The
repayment resulted in extraordinary charges of $4.4 million, net of related tax
benefits of $2.8 million, associated with the write-off of deferred financing
costs.
INCOME FROM CONTINUING OPERATIONS
Due to the factors set forth above, income from continuing operations
increased 55.6% or $23.3 million to $65.1 million in 1998 from $41.9 million in
1997.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations in 1998 reflects an approximate $12
million gain (net of tax) from the sales of our nutritional supplements product
line and contract manufacturing operations in April 1998. In addition, income
from discontinued operations includes the after-tax operating results of our
nutritional supplements product line and contract manufacturing operations prior
to the sale.
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NET INCOME
Due to the factors set forth above, net income increased $30.7 million,
or 62.9%, to $79.5 million in 1998 from $48.8 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Our liquidity requirements arise from debt service, working capital
requirements and funding of acquisitions of branded pharmaceutical products.
As of December 31, 1999 we have available up to $55.0 million under a
revolving line of credit, which allows for total borrowing of up to $100.0
million.
SIX MONTHS ENDED JUNE 30, 2000
We generated net cash from operations of $69.3 million for the six
months ended June 30, 2000. Our net cash provided from operations was primarily
the result of $42.6 million in net income, adjusted for non-cash depreciation
and amortization of $18.8 million, amortization of deferred financing costs of
$4.7 million, an increase in accounts payable of $14.8 million, and an increase
in other long-term liabilities of $25.0 million. This was offset by increases
in accounts receivable and royalty receivable of $15.1 million and $26.7
million, respectively.
Cash flows provided by investing activities was $48.8 million
primarily due to the $112.2 million in proceeds from the maturity and sale of
investment securities offset by the purchase of $50.7 million of investment
securities.
Financing activities used $15.5 million of cash flow due to net
payments on the revolving credit facility of $45.0 million and $228.5 million
payments on other long-term debt, offset by $260.6 million in proceeds from
issuance of common shares and the exercise of stock options.
YEAR ENDED DECEMBER 31, 1999
We generated net cash from operations of $148.3 million for the year
ended December 31, 1999. Our net cash provided from operations was primarily the
result of $99.9 million in net income, adjusted for non-cash depreciation and
amortization of $33.9 million and amortization of deferred financing costs of
$2.8 million, a non-cash extraordinary charge of $1.2 million before income tax
benefit, and increases in accrued expenses of $34.5 million, accounts payable of
$13.5 million, and income taxes payable of $3.9 million. These increases were
offset by increases in accounts receivable of $27.1 million, an increase in
inventory of $10.9 million, and an increase in prepaid expenses and other assets
of $4.5 million.
Cash flows used in investing activities was $180.8 million primarily
due to the purchase of Lorabid(R) for $91.7 million, merger related costs of
$2.1 million and $13.2 million of capital expenditures. In addition, we
purchased $88.8 million of investment securities and received proceeds of $21.5
million from the maturity and sale of investment securities. In addition, $13.2
million was used to purchase capital equipment.
Financing activities provided $35.5 million of cash flow comprised
principally of $150.0 million in proceeds from senior subordinated notes and
$26.0 million in net proceeds from the revolving credit facility. These amounts
were offset by repayments of $136.0 million related to the senior subordinated
seller notes and term loans.
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YEAR ENDED DECEMBER 31, 1998
We generated net cash from operations of $42.0 million for the year
ended December 31, 1998. Our net cash provided by operating activities was
primarily the result of $79.5 million in net income resulting from sales of
recently purchased branded pharmaceutical products, adjusted for non-cash
charges for depreciation and amortization of $15.6 million, an extraordinary
loss on early retirement of existing indebtedness of $7.2 million, and a
nonrecurring charge of $10.5 million. Our net cash provided by operating
activities was impacted by an increase in receivables and inventory of $36.3
million and $15.9 million, respectively, and our pretax gain on the sale of
discontinued operations of $30.6 million.
Cash flows used in investing activities was $382.7 million due
principally to the Sterile Products and the Altace Acquisitions, the
Menest(R) acquisition, and other purchases of property and equipment. In
addition, $55.0 million was received as proceeds from the sale of our
discontinued operations to offset the above items.
Financing activities provided $416.7 million, which was a result of the
net proceeds from the initial public offering, and proceeds from long-term debt
to finance the Sterile Products and the Altace Acquisitions.
YEAR ENDED DECEMBER 31, 1997
We generated net cash from operations of $45.9 million for the year
ended December 31, 1997. Our net operating cash in 1997 was primarily the result
of $48.8 million in net income resulting from sales from recently purchased
branded pharmaceutical product, adjusted for non-cash charges of $9.2 million
for depreciation and amortization, additional income taxes of $4.0 million, and
related increases in accounts receivable, inventories, prepaid expenses and
other assets, and accrued expenses of $12.5 million, $7.4 million, $4.9 million
and $7.9 million, respectively.
Net cash used in investing activities for the year ended December 31,
1997 was $95.5 million and was the result of cash of $77.0 million paid for the
acquisition of new branded product lines as well as cash of $7.0 million paid
for purchases of property and equipment. In addition, $20.2 million was used to
purchase investment securities, and $9.0 million was received in the form of
proceeds from the maturity and sale of investment securities.
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Financing activities provided $39.7 million, which was the result of
(i) aggregate borrowing of $14.0 million to finance the acquisition of the
Cortisporin product line, other product acquisitions totaling $6.6 million, the
refinancing of all remaining acquisition term loans along with the acquisition
of six additional products for $23.0 million, and the net increase in the
revolving line of credit of $6.2 million, offset by payments on long-term debt
and capital lease obligations of $26.8 million, (ii) proceeds from issuance of
common shares of $8.7 million in connection with the acquisition of the
Cortisporin product line.
CERTAIN INDEBTEDNESS AND OTHER MATTERS
As of June 30, 2000, we had $294.4 million of long-term debt (including
current portion) and we have available up to $100.0 million under our revolving
credit facility. Of this amount, approximately $139.0 million was at variable
rates based on LIBOR and the remainder at fixed rates. We have entered into
$285.0 million of interest rate hedging transactions with a group of commercial
banks to exchange our variable LIBOR for a fixed rate of interest. We have also
entered into a $150.0 million interest rate hedging agreement to exchange our
fixed interest rate for a variable LIBOR-based interest rate, with the LIBOR
rate fixed for three years. Certain financing arrangements require us to
maintain certain minimum net worth, debt to equity, cash flow and current ratio
requirements. As of June 30, 2000, we were in compliance with these covenants.
In April 2000, we completed an offering of 6.0 million shares of common
stock at a price of $27.59 per share. We received $165.4 million in net proceeds
from the offering on April 25, 2000. On June 22, 2000, we sold American Home
Products 1.9 million shares for $75.0 million. During the quarter we utilized
$201.3 million of these proceeds as prepayments on our senior credit facility.
After application of all prepayments and normal amortization, we have repaid the
balance of the tranche A term loan and $139.4 million remains outstanding under
the tranche B loan. As a result of these prepayments, we have recorded an
extraordinary charge related to the write-off of certain deferred financing
costs.
On July 7, 2000, we completed the acquisition of marketing rights in
the United States and Puerto Rico to the Nordette(R), Bicillin(R), and
Wycillin(R) product lines from American Home Products as contemplated by the
co-promotion agreement for $200.0 million, 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
American Home Products, $37.5 million of the proceeds from the sale of stock to
American Home Products, $25.0 million received in connection with the
co-promotion agreement with American Home Products, $90.0 million from the
revolving credit facility and $12.5 million in cash from operations.
As of December 31, 1999, we have outstanding approximately $522.9
million of long-term debt (including current portion), and $45.0 million in
borrowings under our revolving credit facility. Of these amounts, approximately
$412.2 million were at variable rates based on LIBOR and the remainder at fixed
rates. We have entered into $285.0 million of interest rate hedging transactions
with a group of commercial banks to exchange our variable LIBOR for a fixed rate
of interest. We do not believe our exposure to changes in interest rates under
the remaining variable rate agreements will have a material effect on our
financial condition or results of operations. We have also entered into a $150.0
million interest rare hedging agreement to exchange our fixed interest rate for
a variable LIBOR-based interest rate. Certain financing arrangements require us
to maintain certain minimum net worth, debt to equity, cash flow and current
ratio requirements. As of December 31, 1999, we were in compliance with these
covenants.
Subsequent to the completion of the merger with Medco, we utilized
approximately $55.0 million of cash and other investments to repay portions of
our revolving credit facility and term loans.
We believe that existing credit facilities and cash generated from
operations 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, 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 acquisitions that may require the
use of substantial capital resources. There are no present agreements or
commitments with respect to any such acquisitions.
We financed the acquisition of Lorabid(R) with borrowings under our
revolving credit facility and cash generated from operations.
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CAPITAL EXPENDITURES
Capital expenditures, including capital lease obligations, were $13.2
million and $83.8 million for the years December 31, 1999 and 1998,
respectively. The principal capital expenditures included property and equipment
purchases and building and leasehold improvements, including the Sterile
Products Acquisition in 1998. We expect to increase our capital expenditures
over the next few years as a part of our acquisition and growth strategy.
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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 June 1998, the Financial Accounting Standards Board adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. In June 1999, the FASB issues SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the effective date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133," that
revises SFAS No. 133, to become effective in the first quarter of fiscal 2001.
We are evaluating the provisions of SFAS No. 133, but do not anticipate its
adoption to have a material impact on our financial position or results of
operations.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We use derivative instruments to manage our long-term interest rate
exposure, rather than for trading purposes.
As of June 30, 2000, there were no significant changes in our
qualitative or quantitative market risk since the prior reporting period.
Subsequent to June 30, 2000, we terminated a $100.0 million interest rate swap
as a result of the paydown of our variable rate debt. A gain of approximately
$1.4 million will be recognized.
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FORWARD-LOOKING STATEMENTS
This MD&A 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 "Risk Factors", "Management's Discussions and Analysis of
Financial Condition and Results of Operations", "Business", and other sections
included here and within our Annual Report filed on Form 10-K.
Such forward-looking statements include, but are not limited to: (a)
anticipated developments and expansions of our business; (b) increases in sales
of recently acquired products or royalty payments; (c) development of product
line extensions; (d) future findings and determinations of the FDA; (e) debt
service and leverage requirements; (f) the products which we expect to offer;
(g) the intent to market and distribute certain of our products internationally;
(h) the intent to manufacture certain products in our own facilities which are
currently manufactured for us by third parties; (i) the intent, belief or
current expectations, primarily with respect to our future operating
performance; (j) expectations regarding sales growth, gross margins,
manufacturing productivity, capital expenditures and effective tax rates; and
(k) expectations regarding our financial condition and liquidity as well as
future cash flows and earnings.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: changes
in general economic and business conditions; dependence on continued acquisition
of products or companies; management of growth of business and integration of
product acquisitions; changes in current pricing levels; development of new
competitive products; changes in economic conditions and federal and state
regulations; competition for acquisition of products or companies; manufacturing
capacity constraints; and the availability, terms and deployment of capital. We
also refer you to the section entitled "Risk Factors" in our registration
statement on Form S-3 filed with the SEC in January 2000.
We do not undertake to update our forward-looking statements to reflect
future events or circumstances.
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