<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-15242
DURAMED PHARMACEUTICALS, INC.
Incorporated Under the IRS Employer I.D.
Laws of the State No. 11-2590026
of Delaware
7155 East Kemper Road
Cincinnati, Ohio 45249
(513) 731-9900
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---
Common Stock, $.01 par value per share:
Shares Outstanding as of August 9, 2000 26,280,109
Page 1 of 23 pages
<PAGE> 2
DURAMED PHARMACEUTICALS, INC.
INDEX
PART I. Financial Information Page
------------------------------ ----
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets.................................. 3- 4
Consolidated Statements of Operations........................ 5
Consolidated Statements of Cash Flows........................ 6
Consolidated Statements of Stockholders' Equity.............. 7
Notes to Consolidated Financial Statements................... 8 - 12
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 13 - 21
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk... 21
PART II. Other Information
ITEM 1. Legal Proceedings............................................ 22
ITEM 2. Changes in Securities and Use of Proceeds.................... 22
ITEM 6. Exhibits and Reports on Form 8-K............................. 22
SIGNATURES............................................................ 23
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
Unaudited
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,000 $ 4,000
Trade accounts receivable,
less allowance for doubtful accounts:
2000 - $1,041,000 1999 - $951,000 12,991,775 9,610,307
Inventories 28,391,089 32,910,493
Prepaid expenses and other assets 5,006,709 6,681,892
----------- -----------
Total current assets 46,393,573 49,206,692
Property, plant and equipment:
Land 1,000,000 1,000,000
Building 21,280,756 21,204,228
Equipment, furniture and fixtures 29,456,473 28,597,309
----------- -----------
51,737,229 50,801,537
Less accumulated depreciation
and amortization 22,320,281 20,861,935
----------- -----------
Property, plant and equipment - net 29,416,948 29,939,602
Deposits and other assets 2,453,767 1,627,123
----------- -----------
Total assets $78,264,288 $80,773,417
=========== ===========
</TABLE>
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY/CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
Unaudited
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,259,362 $ 11,391,954
Accrued liabilities 17,128,958 28,459,817
Current portion of long-term
debt and other liabilities 5,561,194 5,783,232
Current portion of capital lease obligations 933,219 992,531
------------- -------------
Total current liabilities 28,882,733 46,627,534
------------- -------------
Long-term debt, less current portion 35,610,827 29,720,761
Long-term capital leases, less current portion 1,907,005 1,835,023
------------- -------------
Total liabilities 66,400,565 78,183,318
------------- -------------
Mandatory redeemable convertible preferred stock 10,000,000 4,900,000
------------- -------------
Stockholders' equity (capital deficiency):
Common stock - authorized 50,000,000 shares,
par value $.01; issued and outstanding
26,264,712 and 24,808,591 shares
in 2000 and 1999, respectively 262,647 248,085
Additional paid-in capital 133,383,930 126,882,751
Accumulated deficit (131,782,854) (129,440,737)
------------- -------------
Total stockholders' equity/capital deficiency 1,863,723 (2,309,901)
------------- -------------
Total liabilities and stockholders' equity/capital deficiency $ 78,264,288 $ 80,773,417
============= =============
</TABLE>
See accompanying notes.
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<PAGE> 5
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $20,667,278 $ 9,966,776 $37,260,896 $ 23,216,283
Cost of goods sold 11,498,514 9,492,185 22,473,397 19,909,722
----------- ----------- ----------- ------------
Gross profit 9,168,764 474,591 14,787,499 3,306,561
----------- ----------- ----------- ------------
Operating expenses:
Product development 587,783 2,308,576 1,852,403 3,611,299
Brand marketing 2,591,245 -- 4,581,620 --
Selling 1,339,291 4,359,060 2,309,318 5,255,046
General and administrative 2,930,652 2,606,198 5,560,114 4,932,799
----------- ----------- ----------- ------------
7,448,971 9,273,834 14,303,455 13,799,144
----------- ----------- ----------- ------------
Operating income (loss) 1,719,793 (8,799,243) 484,044 (10,492,583)
Net interest expense 1,370,412 732,002 2,819,311 1,414,801
----------- ----------- ----------- ------------
Income (loss) before income tax
and preferred stock dividends 349,381 (9,531,245) (2,335,267) (11,907,384)
Income tax provision 6,850 -- 6,850 --
----------- ----------- ----------- ------------
Net income (loss) 342,531 (9,531,245) (2,342,117) (11,907,384)
Preferred stock dividends 69,317 61,931 86,220 130,223
----------- ----------- ----------- ------------
Net income (loss) applicable
to common shareholders $ 273,214 $(9,593,176) $(2,428,337) $(12,037,607)
=========== =========== =========== ============
Income (loss) per average common
and common equivalent
shares (basic and diluted) $ 0.01 $ (0.45) $ (0.09) $ (0.57)
=========== =========== =========== ============
</TABLE>
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,342,117) $(11,907,384)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,682,295 1,424,688
Provision for doubtful accounts 113,610 89,058
Common stock issued in connection with
employee compensation plans 183,148 141,277
Changes in assets and liabilities:
Trade accounts receivable (3,495,078) 3,190,855
Inventories 4,519,404 (3,644,314)
Prepaid expenses and other assets 1,659,258 (1,623,284)
Accounts payable (6,132,592) 1,420,756
Accrued liabilities (11,351,183) 462,626
Other (211,441) (26,469)
------------ ------------
Net cash used in operating activities (15,374,696) (10,472,191)
------------ ------------
Investing activities:
Capital expenditures (935,692) (1,962,500)
Deposits on capital equipment (25,677) (66,221)
------------ ------------
Net cash used for investing activities (961,369) (2,028,721)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt, including current maturities (11,627,438) (1,535,263)
Net increase (decrease) in revolving credit facility (3,280,087) 9,922,616
Long-term borrowings 30,567,960 2,204,125
Issuance of common stock 737,038 2,057,593
Preferred stock dividends paid (61,408) (147,659)
------------ ------------
Net cash provided by financing activities 16,336,065 12,501,412
------------ ------------
Net change in cash and cash equivalents -- 500
Cash and cash equivalents at beginning of period 4,000 3,500
------------ ------------
Cash and cash equivalents at end of period $ 4,000 $ 4,000
============ ============
Supplemental cash flow disclosures:
Interest paid $ 2,226,314 $ 1,201,611
</TABLE>
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital Deficit Total
---------- -------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1999 24,808,591 $248,085 $126,882,751 $(129,440,737) $(2,309,901)
Issuance of stock in connection
with benefit plans 26,265 263 182,885 -- 183,148
Issuance of stock in connection
with stock options and warrants 135,936 1,360 1,500,678 -- 1,502,038
Conversion of Series F
Preferred Stock 1,293,920 12,939 4,903,964 -- 4,916,903
Net loss for 2000 -- -- -- (2,342,117) (2,342,117)
Preferred Stock dividend -- -- (86,348) -- (86,348)
---------- -------- ------------ ------------- -----------
BALANCE - JUNE 30, 2000 26,264,712 $262,647 $133,383,930 $(131,782,854) $ 1,863,723
========== ======== ============ ============= ===========
</TABLE>
See accompanying notes.
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<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Interim Financial Data
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2000. For further information, refer to the consolidated
financial statements and notes thereto included in the Annual Report of Duramed
Pharmaceuticals, Inc. (the "Company" or "Duramed") on Form 10-K for the year
ended December 31, 1999, (the "1999 10-K").
Note 2: Income (Loss) Per Common Share
The following is a reconciliation of the numerators and denominators to
calculate income (loss) per common share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 342,531 $(9,531,245) $(2,342,117) $(11,907,384)
Preferred stock dividends 69,317 61,931 86,220 130,223
----------- ----------- ----------- ------------
Numerator for basic and diluted
income (loss) per share -
income (loss) available to
common stockholders $ 273,214 $(9,593,176) $(2,428,337) $(12,037,607)
=========== =========== =========== ============
Denominator:
Denominator for basic income
(loss) per share - weighted
average shares 26,248,852 21,476,065 26,040,449 21,046,006
Effect of dilutive securities:
Stock options and warrants 488,892 -- -- --
----------- ----------- ----------- ------------
Denominator for diluted
income (loss) per share -
adjusted weighted-average shares
and assumed conversions 26,737,744 21,476,065 26,040,449 21,046,006
=========== =========== =========== ============
</TABLE>
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<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
Income (loss) per share
basic and diluted $ 0.01 $ (0.45) $ (0.09) $ (0.57)
=========== =========== =========== ============
Not included in the calculation
of diluted income (loss) per
share because their impact is
antidilutive:
Stock options outstanding 1,119,118 2,911,062 3,147,066 2,911,062
Warrants 1,533,033 1,248,015 1,837,218 1,248,015
Preferred shares if converted 1,976,285 1,293,920 1,976,285 1,293,920
</TABLE>
Note 3: Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventories include:
June 30, December 31,
2000 1999
----------- -----------
Raw materials $14,764,801 $17,239,214
Work-in-process 228,712 249,211
Finished goods 20,324,668 23,870,296
Obsolescence reserve (6,927,092) (8,448,228)
----------- -----------
Net inventory $28,391,089 $32,910,493
=========== ===========
At June 30, 2000 and December 31, 1999, finished goods inventory includes
approximately $2.0 and $8.0 million, respectively, of invoiced Cenestin(R)
(synthetic conjugated estrogens, A) Tablets ("Cenestin") carried at cost which
has been shipped to customers for which revenue has not yet been recognized.
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<PAGE> 10
Note 4. Accrued Liabilities
The Company's accrued liabilities consist of the following:
June 30, December 31,
2000 1999
----------- -----------
Litigation settlement $ -- 7,500,000
Accrued brand marketing expenses 4,581,620 --
Accrued marketing expenses 3,722,365 5,876,198
Wages and other compensation 2,167,196 1,991,129
Deferred revenue 1,784,789 5,836,737
Accrued profit sharing 1,640,343 2,256,605
Taxes, other than income taxes 911,772 694,860
Accrued bio-studies 456,274 908,658
Other 1,864,629 3,395,630
----------- -----------
$17,128,958 $28,459,817
=========== ===========
The litigation settlement represented the balance due for the $15.0 million
settlement of the litigation between the Company and Schein Pharmaceutical, Inc.
("Schein").
Accrued brand marketing expenses represent the amount due Solvay
Pharmaceuticals, Inc. for reimbursement of marketing expenses associated with
the Company's promotion of its Cenestin product. See the "Outlook" portion of
Management's Discussion and Analysis for further discussion.
Accrued marketing expenses at June 30, 2000 represent marketing expense
liabilities related to Cenestin.
Deferred revenues reflect amounts collected for shipments of Cenestin, net of
returns and allowances, not yet recognized. The Company will record these
shipments as revenue as evidence of product movement through the distribution
system is obtained.
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<PAGE> 11
Note 5: Debt and Mandatory Redeemable Convertible Preferred Stock
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------
<S> <C> <C>
Debt
Bank of America financing facilities:
Revolving credit facility $11,308,015 $14,588,102
Intangible term note 5,041,667 6,416,667
Equipment term note 3,353,783 4,303,832
Provident Bank mortgage notes 19,600,000 --
Merrill Lynch note payable -- 7,719,404
Note payable to contract sales organization 1,408,063 1,490,051
Note payable to strategic alliance partner -- 544,737
Installment notes payable 54,297 55,266
Other 406,196 385,934
----------- -----------
41,172,021 35,503,993
Less amount classified as current 5,561,194 5,783,232
----------- -----------
$35,610,827 $29,720,761
=========== ===========
Mandatory redeemable
convertible preferred stock $10,000,000 $ 4,900,000
=========== ===========
</TABLE>
During the second quarter of 2000, the Company financed its operations
principally with proceeds from the private placement of Series G Convertible
Preferred Stock.
Debt
The Company's principal lender is Bank of America Commercial Finance ("Bank of
America"). The initial term of the agreement with Bank of America is through
November 2002 with provisions for renewals. The financing agreement provides for
a revolving credit facility, collateralized by the Company's receivables and
inventories, and two term notes. The Company's borrowing capacity under the
revolving credit facility adjusts based on the change in receivables and
inventory and bears an interest rate of prime plus 0.50% (10.00% at June 30,
2000). The equipment term note, secured by specified equipment, bears an
interest rate of prime plus 0.75% (10.25% at June 30, 2000) and required monthly
principal payments of $158,342 plus interest through July 30, 2000 and $67,047
plus interest for the remaining term of the note, subject to renewal of the
financing agreement. The intangible term note is a four-year term loan
collateralized by the intangible assets of the Company. The terms of the note
require monthly principal payments of $229,166 plus interest through November
30, 2000 and $145,833 plus interest for the remaining term of the note. The term
note bears an interest rate of prime plus 1.25% (10.75% at June 30, 2000).
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<PAGE> 12
On March 1, 2000 the Company refinanced its existing note payable collateralized
by its Cincinnati, Ohio manufacturing facility with a $12.0 million note and
$8.0 million note payable to The Provident Bank ("Provident"), both of which are
guaranteed by Solvay America. Provident holds a first mortgage on the Company's
Cincinnati, Ohio manufacturing facility. The $12.0 million note bears an
interest rate of prime (9.50% at June 30, 2000) and requires a monthly payment
of $100,000 plus interest for a ten-year period commencing April 1, 2000. The
$8.0 million note bears an interest rate of prime (9.50% at June 30, 2000) and
requires a monthly payment of $33,333 plus interest commencing April 1, 2000.
Principal payments are based upon a twenty-year amortization with a balloon
payment due on March 1, 2010 of $4.0 million.
The note payable to Merrill Lynch, which was guaranteed by the Warner-Lambert
Company ("Warner-Lambert") was paid in full by the Provident financing
agreement. Warner-Lambert held a first mortgage on the Company's Cincinnati,
Ohio manufacturing facility.
The loan payable to a contract sales organization, initially in the principal
amount of $1,650,000, represents the initial cost to establish the brand sales
force which is representing the Company's brand products (initially Cenestin) to
the physicians community. The firm with which the Company has contracted to
establish and manage the Company's dedicated sales force agreed to finance its
startup costs over the 36-month term of the agreement in exchange for a monthly
principal and interest payment by the Company of $53,240. The loan is unsecured
and carries an interest rate of 10%.
The note payable to a strategic alliance partner is an unsecured note. The note
required payment in full on April 30, 2000 and has been paid.
Other long-term debt also includes facilities of varying amounts and terms,
which are generally collateralized by the assets financed.
The carrying value of the Company's debt approximates fair market value.
Mandatory Redeemable Convertible Preferred Stock On May 12, 2000 the Company
completed a private placement of $10.0 million of Series G Convertible Preferred
Stock with an institutional investor. The preferred shares are immediately
convertible at a fixed price of $5.06 per share. The preferred stock will pay a
dividend of 5% annually, payable quarterly in arrears, on all unconverted
preferred stock. Any of the Series G Preferred Stock that remains outstanding
will be automatically redeemed on May 12, 2004. The investor also received
warrants which were valued at $765,000 to purchase 500,000 shares of Common
Stock at a price of $5.50 per share, exercisable at any time before May 12,
2005.
The $4.9 million in Mandatory Redeemable Convertible Stock was the balance
outstanding of the Series F Convertible Preferred Stock as of December 31, 1999.
The Series F Convertible Preferred Stock was completely converted into common
stock in the first quarter of 2000.
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and events, particularly relating to sales of current
products as well as the introduction of new manufactured and distributed
products. Forward-looking statements involve known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of the
Company, which could cause actual results and outcomes to differ materially from
those expressed. Factors that might affect the forward-looking statements set
forth in this Form 10-Q include, among others, (i) increased competition from
new and existing competitors and pricing practices of those competitors, (ii)
the amount of funds continuing to be available for internal research and
development and for research and development joint ventures, (iii) research and
development project delays or delays in obtaining regulatory approvals, (iv) the
ability of the Company to retain and attract personnel in key operational areas,
(v) the status of strategic alliances, and (vi) the success of brand marketing
efforts.
Duramed manufactures and distributes a line of prescription drug products in
tablet, capsule and liquid forms to customers throughout the United States.
Products sold by the Company include those of its own manufacture and those it
markets under arrangements with other drug manufacturers. The Company's results
include expenses associated with a product development program designed to
generate a stream of new product offerings. The Company's strategy has been to
focus its product development activities primarily on prescription drugs with
attractive market opportunities and potentially limited competition due to
technological barriers of entry, principally hormonal products. The Company's
product development capabilities include modified release technologies as well
as controlled substances development.
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<PAGE> 14
OUTLOOK
Business Strategy Outlook -- Based on assessments of the market opportunities
for a synthetic conjugated estrogens product, the market for oral contraceptives
and the related potential impact on Duramed's revenues and profitability,
management believes that the 1999 approvals of Cenestin and Apri change
Duramed's long-term outlook and enhance the Company's ability to become a leader
in the women's health market, in part by developing a family of hormone
products.
To achieve its goals of leadership and sustainable profitability, the Company's
business plan involves primary focus on three initiatives:
Maximize the Market Penetration of Cenestin -- Cenestin, an estrogen replacement
therapy (ERT), competes with other ERT/HRT(hormone replacement therapy) products
in a market approaching $2.0 billion in the United States alone. According to
Scrip Reports, a leading pharmaceutical market data provider, the combined
ERT/HRT market is growing at a projected annual rate of 15%. ERT/HRT therapies
are prescribed for women entering or in menopause. The average age for women
entering menopause is 51 years. Currently more than 40 million women in the U.S.
are over 50 and, therefore, candidates to take either ERT (estrogen only) or HRT
(estrogen with progestin). According to the American College of Obstetrics and
Gynecology, the first wave of "baby boomer" women (born between 1945-1960) is
now entering menopause and another 20 million will reach menopause in the next
decade.
Duramed believes that the distinctive characteristics of its product will
contribute to its ability to capture a significant share of the ERT market. To
help communicate Cenestin's availability and favorable characteristics, on March
30, 1999 Duramed entered into a marketing and distribution agreement with
Cardinal MarketFORCE, a subsidiary of Cardinal Health, to perform the necessary
direct-to-doctor sales efforts.
To expand and enhance the promotion of Cenestin, on October 6, 1999 Duramed
entered into an agreement with Solvay Pharmaceuticals, Inc. to jointly promote
three of the companies' hormone products in the United States: Duramed's
Cenestin and Solvay Pharmaceuticals' Estratest(R)/Estratest(R)H.S. and
Prometrium(R).
The agreement resulted in a combined national sales force of more than 300
Duramed and Solvay Pharmaceuticals sales representatives who promote the
alliance products to obstetricians and gynecologists across the United States.
Solvay Pharmaceuticals' resources also include teams of regional marketing
managers, district managers, medical liaison teams and a medical advisory
committee comprised of leading women's health physicians.
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<PAGE> 15
Cenestin was designated as the primary product in the Duramed/Solvay
Pharmaceuticals alliance while the Solvay Pharmaceuticals products address
additional important therapeutic requirements in women's health and complement
Cenestin in the pharmaceutical sales effort. All three products are expected to
benefit from the broadened exposure in the marketplace.
On March 1, 2000 the co-promotion agreement was expanded and extended into a
long-term arrangement when Duramed and Solvay Pharmaceuticals entered into a
10-year marketing agreement whereby the two companies will share in the profits
of Cenestin. Effective January 1, 2000, Solvay Pharmaceuticals assumed
responsibility for the Cenestin physicians' office promotion, including assuming
advertising, sales promotion and sales force expenses, in exchange for a share
of the Cenestin profits. During this initial stage, Solvay Pharmaceuticals
receives 80% of the gross profit from Cenestin, and Duramed receives 20% until
Cenestin becomes an income-producing product and Solvay Pharmaceuticals recovers
all ongoing advertising and marketing expenses. The Company records the amount
for reimbursement of Solvay Pharmaceuticals' marketing expenses (80% of Cenestin
gross profits) as "brand marketing expenses."
After the income producing level is achieved, Duramed will receive 80% of the
net profit dollars and Solvay Pharmaceuticals 20% until Duramed recovers the
$38 million the Company invested in the product during 1999. After each
company has recovered its specified investments, the net profit dollars will be
split equally for the remainder of the ten-year term of the agreement.
Duramed also granted Solvay Pharmaceuticals a worldwide exclusive license to
Cenestin outside the United States. The global rights to Cenestin include all
countries except Eastern European countries that are currently covered by other
established marketing partners and Puerto Rico. Solvay Pharmaceuticals and
Duramed will enter into mutually agreed upon license and supply agreements for
each country based on a country-by-country selection process.
Successfully Commercialize Approved and Filed Products -- In the third quarter
of 1999, the FDA approved the Company's first oral contraceptive product,
Desogestrel and Ethinyl Estradiol .15mg/0.03mg, which has been brand named
Apri(TM). Apri is the first, and currently the only, product therapeutically
interchangeable with Ortho-Cept(R) and Desogen(R) tablets for all new and refill
prescriptions. This product is the first product marketed under the Company's
agreement with Gedeon Richter, Ltd. The agreement provides for the profits
generated by products under the agreement to be split between Duramed and Gedeon
Richter. The market for these desogestrel products at brand prices is estimated
to be approximately $143 million. Apri continues to gain market share; available
data as of the end of the quarter indicates that prescriptions for Apri
accounted for 33.3% of new prescriptions for desogestrel products.
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<PAGE> 16
During 1999, the FDA approved the Cenestin NDA and eight ANDAs submitted by the
Company. In 2000, the Company has received two supplemental approvals for
additional dosage strengths of products already approved by the FDA. The Company
currently has five ANDAs on file with the Food and Drug Administration. Four of
these ANDAs are for hormone products, with three additional hormone products
expected to be filed during the second half of this year. Approvals of these
filings are expected to begin in early 2001.
Continue to Invest in Product Development Activities -- With the approval of
Cenestin, the Company intends to continue to expand its research and development
in the women's health care area. On March 13, 2000 the Company received approval
of the 1.25mg dosage strength of Cenestin, which represents a $250 million
market accounting for approximately 19% of all conjugated estrogens
prescriptions written and 23% of total conjugated estrogens revenues in the U.S.
last year. In late 1999, the Company completed a bone marker study that
demonstrated that Cenestin caused a favorable reduction in bone markers, which
indicates a bone preservation effect. In addition, in the cardiovascular
evaluation, a positive lipid profile was found. The Company anticipates
beginning a full osteoporosis clinical study of Cenestin in the future to
confirm the beneficial results indicated by the bone marker study.
On June 1, 1999 the Company was granted a formulation patent for the composition
of Cenestin(R) (synthetic conjugated estrogens, A) Tablets and solid oral dose
pharmaceutical products containing Cenestin in combination with a progestin. The
Company intends to initiate clinical studies of this combination as funds
generated from recently approved products and other resources become available.
As discussed previously, effective January 1, 2000 Solvay Pharmaceuticals became
responsible for the Cenestin physicians' office promotion, including assuming
advertising, sales promotion and sales force expenses, in exchange for a share
in the profits of Cenestin. Accordingly, sales, marketing, and promotion
expenses recorded by the Company are effectively limited to the 80% of the gross
profit of Cenestin, paid to Solvay in the form of a profit split. The reduction
in the spending on Cenestin sales, marketing and promotion, recorded by the
Company, resulted in a material improvement in the Company's operating
performance in the first half of 2000.
Management believes that the sales levels of the Company's key products will
increase, resulting in improved financial performance. The Company's ability to
maintain profitability and the potential level of such profitability, are
dependent upon a number of factors including: (1) the rate at which Cenestin
penetrates the ERT market; (2) the sales performance of Apri and other products
recently approved by the FDA; (3) the successful commercialization of products
on file with the FDA and the development of additional potential sources of
revenue; (4) the profit level generated from the Company's current business base
(including the level of revenue received under an agreement by which the Company
manufactures a product for Warner-Lambert); and (5) the level of spending on
clinical and bioequivalency studies.
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RESULTS OF OPERATIONS
NET SALES
Net sales increased $10.7 million (107.4%) and $14.0 million (60.5%) for the
three and six-month periods ended June 30, 2000 as compared with the same
periods in 1999. Net sales of $20.7 million for the three months ended June 30,
2000 include $3.8 million in Cenestin revenue, $4.1 million from Apri, $1.8
million from manufacturing contract revenues and $11.0 million for the Company's
multi-source products. For the three and six month periods ended June 30, 2000,
the percentage of the Company's sales comprised of products manufactured by
Duramed was 80% and 79% as compared with 61% and 55% in 1999, respectively.
GROSS MARGIN
The gross margin, and the corresponding percentage of net sales, was $9.2
million (44.4%) and $14.8 million (39.7%) for the three and six months ended
June 30, 2000 compared with $0.5 million (4.8%) and $3.3 million (14.2%) for the
same periods in 1999. Gross margin in the first half of 2000 was favorably
impacted by the $6.7 million revenue recognized for Cenestin and the Apri
revenue of $8.1 million as well as significant increases in sales of certain
multi-source products.
Various factors are expected to impact the Company's gross margin in 2000 and
beyond, the most significant of which will be the rate at which Cenestin
penetrates the ERT market. Additionally, the Company's gross margin could be
favorably impacted by increased sales performance of recently approved products,
additional approvals of pending applications and contributions from
manufacturing service revenues. FDA approval of the Company's pending
applications is outside the Company's control and management cannot predict
whether or when these approvals will be obtained.
The Company's multi-source products are subject to price deterioration as market
conditions change, particularly when additional competitive products are
introduced as a result of FDA approvals or changes occur in the availability of
raw materials. Market price changes can have a material impact on the gross
margin depending on the products affected.
PRODUCT DEVELOPMENT
Product development expenditures decreased $1.7 million (74.5%) and $1.8 million
(48.7%) for the three and six-month periods ended June 30, 2000 compared with
the same periods in 1999. The decrease was due to the timing of bioequivalency
and clinical studies and the Company's continuing efforts to balance product
development spending and available resources. The Company's product development
emphasis is on hormonal therapies, modified release technologies and controlled
substances.
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BRAND MARKETING AND SELLING
The Company's brand marketing and sales and marketing expenses decreased by $3.0
million (69.3%) and $2.9 million (56.1%) for the three and six month periods
ended June 30, 2000 compared with the same periods in 1999. The reduction in
selling expenses was the result of Solvay Pharmaceuticals assuming the
responsibilities for the Cenestin physicians' office promotion and payment of
all related expenses, in exchange for a share of the Cenestin profits effective
January 1, 2000. Under the Company's agreement with Solvay Pharmaceuticals,
Solvay Pharmaceuticals receives 80% of the gross profit from Cenestin until its
selling and marketing investment is recovered. Accordingly, until the selling
and marketing investment is recovered the profit split to Solvay Pharmaceuticals
is classified as brand marketing expense.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $324,000 (12.5%) and $628,000
(12.7%) for the three and six-month periods ended June 30, 2000 compared with
the same periods in 1999. The increase was due principally to additional
personnel expenses.
NET INTEREST EXPENSE AND INTEREST RATE RISK
The Company's borrowings are primarily variable rate facilities. Net interest
expense for the three and six month periods ended June 30, 2000 increased $0.6
million (87.2%) and $1.4 million (99.3%) compared to the same period in 1999 due
to increases in the outstanding balances, principally the expanded mortgage
facility with Provident as well as the amortization of financing costs.
Additionally, the cumulative increase of 1.75% in the prime rate from June 30,
1999 to June 30, 2000 increased interest expense on the Company's variable rate
debt. Based upon outstanding balances as of June 30, 1999, the increase in the
prime rate accounts for an annualized increase of $0.6 million in interest
expense.
The Company has floating rate debt totaling $39.3 million, with interest
fluctuating based on changes in the prime rate and in commercial paper rates. As
a result, annual interest expense in 2000 will fluctuate based upon fluctuations
in those rates.
INCOME TAXES
The income tax provision in the second quarter 2000 represents alternative
minimum tax. A provision for regular income tax was not required due to the net
loss for the six month periods ended June 30, 2000 and 1999.
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PREFERRED DIVIDENDS
The Series G Convertible Preferred Stock (issued in May 2000) provides a 5%
dividend on unconverted shares. Preferred dividends of $69,317 in the second
quarter of 2000 represented dividends associated with the unconverted portion of
the Series G Convertible Preferred Stock.
The Series F Mandatory Redeemable Preferred Stock (issued in February 1998)
provided for a 5% dividend on unconverted shares. Preferred Stock dividends of
$16,905 in the first quarter of 2000, and $130,223 in the first half of 1999
represented dividends associated with the unconverted portion of Series F
Preferred Stock. The remaining outstanding balance of Series F Preferred Stock
was converted into Common Stock in the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations during the first half of 2000 principally
through expanded borrowings under a new mortgage facility with Provident and the
issuance of convertible preferred securities.
On May 12, 2000 the Company completed a private placement of $10.0 million of
Series G Convertible Preferred Stock with an institutional investor. The
preferred shares are immediately convertible at a fixed price of $5.06 per
share. The preferred stock will pay a dividend of 5% annually, payable quarterly
in arrears, on all unconverted preferred stock. Any of the Series G Convertible
Preferred Stock that remains outstanding will be automatically redeemed on May
12, 2004.
The investor also received warrants to purchase 500,000 shares of Common Stock
at a price of $5.50 per share, exercisable at any time before May 12, 2005. At
the closing of this transaction, Duramed had approximately 26.2 million common
shares outstanding. Based on the fixed conversion price of $5.06 per share, the
number of common shares expected to be issued in satisfaction of the Series G
Convertible Preferred Stock conversion would be approximately 2 million. A
portion of the proceeds from this transaction were used to address obligations
remaining from the Cenestin launch.
While the Series G Preferred Shares remain outstanding, the Company must obtain
the written consent of the holders of at least two-thirds of the outstanding
Series G Preferred Shares to authorize or issue any capital stock that is of
senior or equal rank to the Series G Preferred Shares.
As of August 10, 2000 the Company's borrowing capacity under its revolving
credit facility was $16.2 million of which the Company has utilized $12.1
million, leaving a net availability of $4.1 million. See "Available Funds" for a
discussion of the Company's current financial condition.
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ANALYSIS OF CASH FLOWS
Operating Activities
In the first half of 2000 the Company had a net operating loss of $2.3 million
and cash used in operating activities of $16.1 million. Cash used in operating
activities included the decrease in accrued liabilities relating principally to
payment of the balance of the litigation settlement with Schein and payment of
obligations relating to the launch of Cenestin. The decrease in prepaid expense
and other assets represent the receipt of amounts owed to the Company under its
manufacturing services agreement and the receipt of or amortization of prepaid
goods. The $6.1 million decrease in accounts payable is a result of bringing
trade vendors current.
Investing Activities
In the first half of 2000 capital expenditures were $1.0 million. Expenditures
were principally for manufacturing and packaging equipment.
Financing Activities
As previously discussed, on May 12, 2000 the Company raised net proceeds of $9.7
million through the issuance of Series G Convertible Preferred Stock.
On March 1, 2000, the Company entered into a $20 million financing transaction
collateralized by its Cincinnati facility and secured by a loan guaranty from
Solvay America. The proceeds from this financing were utilized to pay off the
facility's existing $7.7 million mortgage and to pay the second $7.5 million
required under the Schein settlement agreement. The $4.8 million balance was
utilized to pay down trade creditors and reduce amounts owed under the Company's
revolving line of credit.
In February 1998, the Company raised $12 million ($11.4 million net of
issuance cost) through an offering of 120,000 shares of Series F Mandatory
Redeemable 5% Cumulative Convertible Preferred Stock ("Series F Convertible
Preferred Stock"). As of December 31, 1999, $7.1 million of Series F Convertible
Preferred Stock had been converted into Common Stock. In the first quarter of
2000 the remaining $4.9 million of Series F Convertible Preferred Stock was
converted into Common Stock. The Company issued 4,088,622 shares of Common Stock
in connection with the conversion of the Series F Convertible Preferred Stock,
at an average conversion price of $3.07 per share.
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<PAGE> 21
The four-year term of the Company's financing agreement with Bank of America,
commenced November 1998 with provisions for renewals. The financing agreement
provides for a revolving credit facility collateralized by the Company's
receivables and inventory and a term note secured by the Company's equipment.
The Company's borrowing capacity under the revolving credit facility adjusts
based on the change in receivables and inventory.
AVAILABLE FUNDS
The Company's ability to maintain profitability, and therefore, its operating
cash requirements is dependent upon several factors including: (1) the rate and
growth in sales and profits from its principal hormone products Cenestin and
Apri; (2) contract revenues from the Company's manufacturing agreement with
Warner Lambert; and, (3) the ability of the Company to maintain or increase the
sales of products in its current business base as well as the success of other
aspects of its business plan.
A source of capital for the Company is the proceeds from the exercise of stock
options and warrants. Exercise prices for outstanding stock options and warrants
vary. The exercise of all vested stock options and warrants would provide
approximately $15.0 million in proceeds to the Company. The decision to exercise
options and warrants is at the discretion of the holder, influenced by the
trading price of the Company's Common Stock and, therefore, is beyond the
control of the Company.
Management believes that the Company has or will be able to obtain sufficient
resources to meet its operating requirements and execute its business plan.
SEASONALITY
Certain of the Company's generic products have a degree of seasonality, the
effect of which the Company attempts to mitigate by adding complementary
products to its line.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 is included in Liquidity and Capital
Resources.
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<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 22, 1999, the Company reached a settlement with Schein
Pharmaceutical, Inc. in a litigation between Duramed and Schein pertaining to a
1992 agreement between the companies relating to the development of a generic
version of the conjugated estrogens product Premarin(R).
Under terms of the settlement agreement, Schein has given up any claim to rights
in Duramed's Cenestin and Duramed has paid $15.0 million to Schein. If Cenestin
achieves total profits (product sales less product-specific cost of goods sold,
sales and marketing and other relevant expenses) of greater than $100.0 million
over any five year or less period within the next 15 years, Duramed will pay
Schein a one-time additional payment of $15.0 million. The settlement resolves
all disputes between Duramed and Schein, and the litigation pending between them
has been dismissed with prejudice.
The Company is involved in various additional lawsuits and claims, which arise
in the ordinary course of business. Although the outcome of such lawsuits and
claims cannot be predicted with certainty, the disposition thereof will not, in
the opinion of management, result in a material adverse effect of the Company's
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2000, the Company issued $10.0 million of
Series G Convertible Preferred Stock and warrants to purchase 500,000 shares of
Common Stock to an institutional investor. Details are provided under Part I,
Item 2, of this Report. The total consideration paid by the Investor was $10.0
million and the net proceeds received by the Company after payment of a
commission of $250,000 to a placement agent was $9.7 million. The warrants are
exercisable at any time before May 12, 2005 at a price of $5.50 per share. These
issuances were exempt from registration under the Securities Act of 1933 on the
basis of the exemption provided in Section 4(2) of that Act.
In the second quarter of 2000, the Company issued a total of 1,209 shares of its
Common Stock to its non-employee directors as partial payment of their
directors' fees. These shares were issued pursuant to the Company's 1998 Stock
Plan for Non-Employee Directors. The issuance of these shares was exempt from
registration under the Securities Act of 1933 on the basis that no sale was
involved in their issuance as defined under such Act or, in the alternative, on
the basis of the exemption from registration provided in Section 4 (2) of the
Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4.4) Certificate of Designations of 5% Cumulative Convertible Preferred
Stock, Series G
(27) Financial Data Schedule
(b) Reports on Form 8-K for the quarter ended June 30, 2000: None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DURAMED PHARMACEUTICALS, INC.
Dated: August 14, 2000 by: /s/ E. Thomas Arington
----------------------- ----------------------
E. Thomas Arington
President, Chairman of the Board,
Chief Executive Officer
Dated: August 14, 2000 by: /s/ Timothy J. Holt
----------------------- -------------------
Timothy J. Holt
Senior Vice President
Finance and Administration,
Treasurer, Chief Financial Officer
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