<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 September 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 November 8, 2000 26,317,661
Page 1 of 24
<PAGE> 2
DURAMED PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
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 (Deficit)............................... 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 4. Submission of Matters to a Vote of Security Holders..................................... 23
ITEM 6. Exhibits and Reports on Form 8-K........................................................ 23
SIGNATURES............................................................................................... 24
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 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:
$1,179,000 and $951,000,
in 2000 and 1999 respectively 14,482,427 9,610,307
Inventories 28,218,064 32,910,493
Prepaid expenses and other assets 4,915,750 6,681,892
----------- -----------
Total current assets 47,620,241 49,206,692
----------- -----------
Property, plant and equipment:
Land 1,000,000 1,000,000
Buildings 21,275,423 21,204,228
Equipment, furniture and fixtures 29,574,318 28,597,309
----------- -----------
51,849,741 50,801,537
Less accumulated depreciation
and amortization 23,018,934 20,861,935
----------- -----------
Property, plant and equipment - net 28,830,807 29,939,602
Deposits and other assets 2,398,025 1,627,123
----------- -----------
Total assets $78,849,073 $80,773,417
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY/CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,277,286 $ 11,391,954
Accrued liabilities 16,403,793 28,459,817
Current portion of long-term
debt and other liabilities 5,365,655 5,783,232
Current portion of capital lease obligations 900,939 992,531
------------- -------------
Total current liabilities 27,947,673 46,627,534
------------- -------------
Long-term debt, less current portion 35,908,383 29,720,761
Long-term capital leases, less current portion 1,803,362 1,835,023
------------- -------------
Total liabilities 65,659,418 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 and 26,302,959
24,808,591 shares in 2000 and 1999 respectively 263,029 248,085
Additional paid-in capital 133,531,738 126,882,751
Accumulated deficit (130,605,112) (129,440,737)
------------- -------------
Total stockholders' equity/capital deficiency 3,189,655 (2,309,901)
------------- -------------
Total liabilities and stockholders' equity/capital deficiency $ 78,849,073 $ 80,773,417
============= =============
</TABLE>
See accompanying notes.
4
<PAGE> 5
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 22,444,636 $ 11,137,590 $ 59,705,532 $ 34,353,873
Cost of goods sold 12,371,748 9,262,564 34,845,145 29,172,286
------------ ------------ ------------ ------------
Gross profit 10,072,888 1,875,026 24,860,387 5,181,587
------------ ------------ ------------ ------------
Operating expenses:
Product development 1,002,935 1,915,601 2,855,338 5,526,900
Brand marketing 2,773,858 -- 7,355,478 --
Selling 1,075,773 7,404,079 3,385,091 12,659,125
General and administrative 2,745,314 3,417,939 8,305,428 8,350,738
Litigation settlement -- 15,000,000 -- 15,000,000
------------ ------------ ------------ ------------
7,597,880 27,737,619 21,901,335 41,536,763
------------ ------------ ------------ ------------
Operating income (loss) 2,475,008 (25,862,593) 2,959,052 (36,355,176)
Net interest expense 1,273,477 985,839 4,092,788 2,400,640
------------ ------------ ------------ ------------
Income (loss) before income tax
and preferred stock dividends 1,201,531 (26,848,432) (1,133,736) (38,755,816)
Income tax provision 23,789 -- 30,639 --
------------ ------------ ------------ ------------
Net income (loss) 1,177,742 (26,848,432) (1,164,375) (38,755,816)
Preferred stock dividends 127,779 62,611 214,127 192,834
------------ ------------ ------------ ------------
Net income (loss) applicable
to common stockholders $ 1,049,963 $(26,911,043) $ (1,378,502) $(38,948,650)
============ ============ ============ ============
Net income (loss) per average
common and common
equivalent shares
(basic and diluted) $ 0.04 $ (1.24) $ (0.05) $ (1.83)
============ ============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,164,375) $(38,755,816)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,576,120 2,203,565
Provision for doubtful accounts 186,243 136,671
Common stock issued in connection with
employee compensation plans 277,540 240,436
Changes in assets and liabilities:
Trade accounts receivable (5,058,363) 238,015
Inventories 4,692,429 (7,144,263)
Prepaid expenses and other assets 1,700,313 (1,656,254)
Accounts payable (6,114,668) 6,570,770
Accrued liabilities (12,051,229) 25,988,267
Other (244,683) (157,592)
------------ ------------
Net cash provided by (used in) operating activities (15,200,673) (12,336,201)
------------ ------------
Investing activities:
Capital expenditures (1,114,264) (4,232,521)
Deposits on capital equipment (49,530) (109,045)
------------ ------------
Net cash (used for) investing activities (1,163,794) (4,341,566)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt, including current maturities (13,290,528) (2,488,011)
Net increase (decrease) in revolving credit facility (1,846,334) 6,539,025
Long-term borrowings 30,712,179 10,542,768
Issuance of common stock 918,615 2,293,404
Dividends paid on preferred stock (129,465) (208,919)
------------ ------------
Net cash provided by financing activities 16,364,467 16,678,267
------------ ------------
Net change in cash -- 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 $ 3,383,904 $ 2,045,561
</TABLE>
See accompanying notes.
6
<PAGE> 7
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK 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 42,773 428 277,112 -- 277,540
Issuance of stock in connection
with stock options 157,675 1,577 1,682,038 -- 1,683,615
Conversion of Series F
Preferred Stock 1,293,920 12,939 4,903,964 -- 4,916,903
Net loss for 2000 -- -- -- (1,164,375) (1,164,375)
Dividend on preferred stock -- -- (214,127) -- (214,127)
---------- --------- ------------- ------------- -------------
BALANCE - SEPTEMBER 30, 2000 26,302,959 $ 263,029 $ 133,531,738 $(130,605,112) $ 3,189,655
========== ========= ============= ============= =============
</TABLE>
See accompanying notes.
7
<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 nine month period ended September 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 Nine Months Ended
September 30 September 30
2000 1999 2000 1999
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 1,177,742 $(26,848,432) $ (1,164,375) $(38,755,816)
Dividends on preferred stock 127,779 62,611 213,999 192,834
------------ ------------ ------------ ------------
Numerator for basic and diluted
income (loss) per share -
income (loss) available to
common stockholders $ 1,049,963 $(26,911,043) $ (1,378,374) $(38,948,650)
============ ============ ============ ============
Denominator:
Denominator for basic income
(loss) per share - weighted
average shares 26,288,414 21,735,515 26,124,112 21,278,715
Effect of dilutive securities:
Stock options and warrants 679,099 -- -- --
------------ ------------ ------------ ------------
Denominator for diluted
income (loss) per share -
adjusted weighted-average shares
and assumed conversions 26,967,513 21,735,515 26,124,112 21,278,715
============ ============ ============ ============
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Income (loss) per share,
basic and diluted $ 0.04 $ (1.24) $ (0.05) $ (1.83)
========== ========== ========== ==========
Not included in the calculation
of diluted income (loss) per
share because their
impact is antidilutive:
Stock options outstanding 1,172,514 3,187,786 3,782,246 3,187,786
Warrants outstanding 544,033 1,231,357 1,837,218 1,231,357
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:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials $ 15,073,368 $ 17,239,214
Work-in-process 407,567 249,211
Finished goods 19,847,971 23,870,296
Obsolescence reserve (7,110,842) (8,448,228)
------------ ------------
Net inventory $ 28,218,064 $ 32,910,493
============ ============
</TABLE>
9
<PAGE> 10
Note 4. Accrued Liabilities
The Company's accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Litigation settlement $ -- $ 7,500,000
Brand marketing expenses 6,959,514 --
Profit sharing 2,764,751 2,256,605
Wages and other compensation 2,292,287 1,991,129
Marketing expenses 1,335,928 5,876,198
Taxes, other than income taxes 607,051 694,860
Bio-studies 248,890 908,658
Deferred revenue 131,155 5,836,737
Other 2,064,217 3,395,630
----------- -----------
$16,403,793 $28,459,817
=========== ===========
</TABLE>
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. ("Solvay Pharmaceuticals") for marketing expenses
associated with the Company's promotion of Cenestin(R) (synthetic conjugated
estrogens, A) Tablets ("Cenestin"). See the "Outlook" portion of Management's
Discussion and Analysis for further discussion.
Accrued marketing expenses at September 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 records these shipments
as revenue as evidence of product movement through the distribution system is
obtained.
10
<PAGE> 11
Note 5: Debt and Mandatory Redeemable Convertible Preferred Stock
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
DEBT
Foothill Capital financing facilities:
Revolving credit facility $12,741,768 $14,588,102
Equipment term note 3,061,348 4,303,832
Intangible term note 4,354,167 6,416,667
Provident Bank mortgage notes 19,200,000 --
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 51,284 55,266
Other 457,408 385,934
----------- -----------
41,274,038 35,503,993
Less amount classified as current 5,365,655 5,783,232
----------- -----------
$35,908,383 $29,720,761
=========== ===========
Mandatory redeemable
convertible preferred stock $10,000,000 $ 4,900,000
=========== ===========
</TABLE>
Debt
The Company's principal lender is Foothill Capital Corporation ("Foothill"). The
initial term of the agreement with Foothill is through November 2002, with
provisions for renewals. The financing agreement provides for a revolving credit
facility, collateralized by the Company's trade receivables and inventories, and
two term notes. The Company's borrowing capacity under the revolving credit
facility fluctuates based on the dollar amount of eligible trade receivables and
inventory and bears an interest rate of prime plus 0.50% (10.00% at September
30, 2000). The equipment term note, secured by specified equipment, bears an
interest rate of prime plus 0.75% (10.25% at September 30, 2000) and requires
monthly principal payments of $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 term
of the note. The intangible term note bears an interest rate of prime plus 1.25%
(10.75% at September 30, 2000).
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 September 30, 2000) and requires monthly
payments 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 September
30, 2000) and requires monthly payments of $33,333 plus interest commencing
April 1, 2000. Principal payments for the $8.0 million note are based upon a
twenty-year amortization with a balloon payment due on March 1, 2010 of $4.0
million.
11
<PAGE> 12
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 note 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 was 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 to shares of the Company's Common
Stock 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 Preferred Stock was the
balance outstanding of the Series F Convertible Preferred Stock as of December
31, 1999. The Series F Preferred Stock was completely converted into Common
Stock in the first quarter of 2000.
12
<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 develops, manufactures and markets 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, focusing on womens' health and the hormone
replacement therapy market. The Company's product development capabilities
include modified release technologies as well as controlled substances
development.
13
<PAGE> 14
OUTLOOK
Business Strategy Outlook -- Based on assessments of the market opportunities
for hormone products and the related impact on Duramed's revenues and
profitability, management believes that, subject to business risks described
elsewhere in this document, the 1999 approvals of Cenestin and Apri will
continue to improve Duramed's long-term outlook and enhance the Company's
ability to become a leader in the women's health market, in part by expanding
the hormone product portfolio.
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 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.
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
14
<PAGE> 15
Pharmaceuticals assumed responsibility for the Cenestin physicians' office
promotion, including advertising, sales promotion and sales force expenses, in
exchange for a share of the Cenestin profits. Solvay Pharmaceuticals receives
80% of the gross profit from Cenestin, and Duramed receives 20%, until Solvay's
selling and marketing investment is recovered and Cenestin becomes an
income-producing product. The Company records the amount for reimbursement of
Solvay Pharmaceuticals' marketing expenses (80% of Cenestin gross profits) as
"brand marketing expenses" on the accompanying Consolidated Statement of
Operations.
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.
Successfully Commercialize Approved and Filed Products -- The Company's first
oral contraceptive product Apri (Desogestrel and Ethinyl Estradiol .15mg/0.03mg)
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
37.8% of new prescriptions for desogestrel products.
During 1999, the U.S. Food and Drug Administration ("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 FDA.
Four of these ANDAs are for hormone products. Approvals of these filings are
expected to begin in 2001.
15
<PAGE> 16
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 and solid oral dose pharmaceutical products containing Cenestin in
combination with a progestin. The Company intends to initiate clinical studies
of this combination when and 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 Company spending on Cenestin sales, marketing and promotion resulted in a
material improvement in the Company's operating performance in the first nine
months 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 Pfizer Inc.); and (5) the level of spending on
clinical and bioequivalency studies.
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<PAGE> 17
RESULTS OF OPERATIONS
NET SALES
Net sales increased $11.3 million (101.5%) and $25.4 million (73.8%) for the
three and nine month periods ended September 30, 2000 compared with the same
periods in 1999 due primarily to increased volumes. Duramed's hormone products
accounted for $12.4 million (55.5%) and $28.7 million (48.0%) of net sales for
the three and nine month periods ended September 30, 2000, compared with $0.9
million (8.5%) and $2.2 million (6.4%) for the same periods in 1999. For the
three and nine month periods ended September 30, 2000, the percentage of the
Company's sales comprised of products manufactured by Duramed was 87% and 83% as
compared to 70% and 61% for the same periods in 1999.
GROSS MARGIN
Gross margin, and the corresponding percentage of net sales, were $10.1 million
(44.9%) and $24.9 million (41.6%) for the three and nine months ended September
30, 2000 compared to $1.9 million (16.8%) and $5.2 million (15.1%) for the same
periods in 1999. The improved gross margin percentages in the third quarter and
first nine months of 2000 compared to the same periods in 1999 reflects the
Company's improved sales performance of higher margin products, principally
Duramed's hormone products, and improved operating efficiency due to increased
manufacturing volumes.
Various factors are expected to impact the Company's gross margin in 2000 and
beyond, including the rate at which Cenestin penetrates the ERT market.
Additionally, the Company's gross margin could be favorably impacted by
increased sales performance of existing 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 products, especially in a multi-source environment, are subject
to price deterioration as market conditions change, particularly if and 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 gross margin depending on the products affected.
PRODUCT DEVELOPMENT
Product development expenditures decreased by $0.9 million (47.6%) and $2.7
million (48.3%) for the three and nine month periods ended September 30, 2000
compared to 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.
17
<PAGE> 18
BRAND MARKETING AND SELLING
The Company's brand marketing and selling expenses decreased by $3.6 million
(48.0%) and $1.9 million (15.2%) for the three and nine month periods ended
September 30, 2000 compared with the same periods in 1999. During 1999, Cenestin
marketing and selling expenses were a Duramed expense. Effective January 1, 2000
Solvay Pharmaceuticals assumed the responsibilities for the Cenestin physicians'
office promotion and payment of all related expenses, in exchange for a share of
the Cenestin profits. Under the Company's agreement with Solvay Pharmaceuticals,
Solvay Pharmaceuticals currently receives 80% of the gross profit from Cenestin
until its selling and marketing investment is recovered and Cenestin becomes an
income-producing product. Accordingly, until then the profit split to Solvay
Pharmaceuticals is classified as brand marketing expense. See "Outlook" for
additional information.
GENERAL AND ADMINISTRATIVE
Excluding a $15 million charge related to the Company's settlement with Schein
in the third quarter 1999, general and administrative expenses decreased
$673,000 (19.7%) and $45,000 (0.5%) for the three and nine month periods ended
September 30, 2000 compared with the same periods in 1999. The decline is the
result of decreased legal fees, principally fees associated with the Schein
litigation, and decreased expenses relating to the Year 2000 Compliance program
as well as other information technology needs. The reduction in the first nine
months of 2000 was partially offset by increased 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 nine month periods ended September 30, 2000 increased
$0.3 million (29.2%) and $1.7 million (70.5%) compared to the same periods 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 1.25% in the prime rate from
September 30, 1999 to September 30, 2000 increased interest expense on the
Company's variable rate debt. Based upon outstanding balances as of September
30, 1999, the increase in the prime rate accounts for an annualized increase of
$0.5 million in interest expense.
The Company has floating rate debt totaling $39.4 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 2000 represents alternative minimum tax. A provision
for regular income tax was not required due to the net loss for the nine month
periods ended September 30, 2000
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<PAGE> 19
and 1999. A provision was not required for the three month period ended
September 30, 2000 due to net operating loss carryforwards in excess of $105
million.
PREFERRED DIVIDENDS
The Series G Convertible Preferred Stock (issued in May 2000) provides a 5%
dividend on unconverted shares. Preferred dividends of $127,779 and $197,094 for
the three and nine month periods ended September 30, 2000 represented dividends
associated with the unconverted portion of the Series G Convertible Preferred
Stock.
The Series F Mandatory Redeemable Convertible 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 $192,834 in the nine
month period ended September 30, 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 nine months 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 to shares of the Company's Common
Stock 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 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 shares
of Common Stock outstanding. Based on the fixed conversion price of $5.06 per
share, the number of common shares of Common Stock expected to be issued on
conversion of the Series G 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 Stock remains outstanding, the Company must obtain
the written consent of the holders of at least two-thirds of the outstanding
shares of Series G Preferred Stock to authorize or issue any capital stock that
is of senior or equal rank to the Series G Preferred Stock.
As of November 8, 2000 the Company's borrowing capacity under its revolving
credit facility was $19.7, million of which the Company had utilized $11.9
million, leaving a net availability of $7.8 million. See "Available Funds" for a
discussion of the Company's current financial condition.
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<PAGE> 20
ANALYSIS OF CASH FLOWS
Operating Activities
In the first nine months of 2000 the Company had a net loss of $1.2 million and
cash used in operating activities of $15.2 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 expenses
and other assets represents the receipt of amounts owed to the Company under its
manufacturing services agreement and the receipt of prepaid goods. The $6.1
million decrease in accounts payable is a result of bringing trade vendors
current.
Investing Activities
In the first nine months of 2000 capital expenditures were $1.2 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 the issuance of the Series F Preferred Stock. As of December 31,
1999, $7.1 million of Series F Preferred Stock had been converted into Common
Stock. In the first quarter of 2000 the remaining $4.9 million of Series F
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
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 Foothill commenced
November 1998 with provisions for renewals. The financing agreement provides for
a revolving credit facility, collateralized by the Company's trade receivables
and inventory, and two term notes secured by the Company's equipment and
intangible assets. The Company's borrowing capacity under the revolving credit
facility fluctuates based on the dollar amount of eligible trade 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
Pfizer, Inc.; 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 possible 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 September 5, 2000, the Company filed an antitrust lawsuit against
Wyeth-Ayerst Laboratories, Inc., the makers of Premarin(R). The complaint,
(Duramed Pharmaceuticals, Inc. vs. Wyeth-Ayerst Laboratories, Inc. Case No.
C-1-00-735), filed in the Cincinnati Federal District Court, alleges that
Wyeth-Ayerst, a subsidiary of American Home Products Corporation, has illegally
perpetuated a monopoly in conjugated estrogens products by, among other things,
inducing managed care organizations (MCOs) into exclusive contracts for
Premarin, therefore eliminating the possibility of Cenestin being placed on
formulary with those same MCOs.
Duramed seeks actual and treble damages associated with profits lost due to
Wyeth-Ayerst's conduct in violation of antitrust laws and seeks to permanently
enjoin Wyeth-Ayerst from engaging in anti-competitive and exclusionary conduct.
Duramed is the sole plaintiff for the litigation. Duramed's marketing partner
for Cenestin, Solvay Pharmaceuticals, is not associated with the lawsuit.
The suit alleges that, on or about the time of the FDA approval of Cenestin,
Wyeth-Ayerst began forming exclusive contracts with MCOs that contained language
stating that Premarin be used as "the sole and exclusive conjugated estrogens"
on the MCO's formulary. By agreeing to this contract, MCOs would be eligible for
Wyeth-Ayerst's rebates and/or administrative fees tied directly to sales of
Premarin.
Further alleged is that Wyeth-Ayerst has employed "disguised" exclusive
contracts that tie the rebates and/or administrative fees that Wyeth-Ayerst pays
to an individual MCO to that MCO's national market share of Premarin sales.
This, in effect, compels the MCO to promote Premarin and ignore Cenestin.
Duramed alleges that both types of contracts violate 15 U.S.C. Section 1 and 2,
the Sherman Act, and 15 U.S.C. Section 3, the Clayton Act.
On October 26, 2000, Wyeth-Ayerst filed a Motion to Dismiss the Complaint in its
entirety, as well as a Motion to Strike certain allegations in the Complaint.
Duramed will be filing a Memorandum in Opposition to Wyeth-Ayerst's Motion to
Dismiss and Motion to Strike.
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<PAGE> 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In the third quarter of 2000, the Company issued a total of 1,539
shares of its Common Stock to its nonemployee directors as partial
payment of their directors' fees. These shares were issued pursuant to
the Company's 1999 Nonemployee Directors Stock Plan. The issuance of
these shares was exempt from registration under the Securities Act of
1933 on the basis of the exemption from registration provided in
Section 4(2) of the Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 2000 Annual Meeting of Stockholders of Duramed Pharmaceuticals,
Inc. (the "Meeting") was held on September 12, 2000. The holders of
24,656,993 shares of the Company's 26,272,922 then outstanding shares
of common stock (approximately 93%) were present at the Meeting in
person or by proxy.
(b) At the Meeting, the following seven individuals were duly nominated and
properly elected as Director of the Company to serve until the 2001
Annual Meeting or until their successors are elected and qualified -
E. Thomas Arington, Jeffrey T. Arington, George W. Baughman, Richard R.
Frankovic, Peter R. Seaver, S. Sundararaman and Philip M. Uhrhan. The
number of votes cast for and withheld with respect of each nominee is
indicated below:
<TABLE>
<CAPTION>
Against/
For Withheld
--- --------
<S> <C> <C>
E. Thomas Arington...................... 23,579,450 1,077,543
Jeffrey T. Arington..................... 23,486,745 1,170,248
George W. Baughman...................... 23,659,220 997,773
Richard R. Frankovic.................... 23,673,575 983,418
Peter R. Seaver......................... 23,676,175 980,818
S. Sundararaman......................... 23,494,421 1,162,572
Philip M. Uhrhan........................ 23,693,135 963,858
</TABLE>
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<PAGE> 24
(c) At the Meeting, a proposal to approve the Company's 2000 Stock Option
Plan was approved as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
<S> <C> <C> <C>
21,510,375 2,975,301 171,317 -0-
</TABLE>
(d) At the Meeting, a proposal to ratify the appointment of Ernst & Young
LLP as the Company's independent auditors for fiscal 2000 was approved
as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
<S> <C> <C> <C>
24,436,008 146,230 74,755 -0-
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K for the quarter ended September 30, 2000: None
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<PAGE> 25
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: November 14, 2000 by: /s/ E. Thomas Arington
------------------------- --------------------------------
E. Thomas Arington
Chairman of the Board,
Chief Executive Officer
Dated: November 14, 2000 by: /s/ Timothy J. Holt
------------------------- --------------------------------
Timothy J. Holt
Senior Vice President
Finance and Administration,
Treasurer, Chief Financial Officer
25
