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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________.
COPLEY PHARMACEUTICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2514637
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 John Road
Canton, Massachusetts 02021
(Address of principal executive offices) (Zip Code)
Commission file number: 0-20126
Registrant's telephone number, including area code: (617) 821-6111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of the registrant's only class of common
stock as of October 31, 1997 was 19,134,767 shares.
<PAGE 2>
COPLEY PHARMACEUTICAL, INC.
INDEX
For the Nine Months Ended September 30, 1997
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30,
1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of Results of
Operations and Changes in Financial Condition 12 - 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
<PAGE 3>
PART 1. Item 1. Condensed Consolidated Financial Statements
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Unaudited
(In thousands, except share data) SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,978 $ 15,974
Available-for-sale securities 16,366 13,757
Accounts receivable, trade, net 34,642 27,024
Inventories:
Raw materials 8,937 12,580
Work in process 5,553 4,390
Finished goods 11,488 10,161
------- -------
Total inventories 25,978 27,131
Prepaid income taxes 1,134 ---
Current deferred tax assets 4,930 6,548
Other current assets 3,081 4,241
------- -------
Total current assets 96,109 94,675
Property, plant and equipment, net 47,784 52,355
Deferred tax assets --- 215
Other assets 3,124 4,482
------- -------
Total assets $147,017 $151,727
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 3,100 $ 6,360
Accounts payable, related party 16,952 10,948
Current portion of long-term debt 300 300
Accrued compensation and benefits 814 1,398
Accrued rebates 9,132 6,908
Accrued income taxes --- 883
Current portion of accrued recall and litigation 6,664 17,839
Accrued expenses 1,258 1,860
------- -------
Total current liabilities 38,220 46,496
Accrued recall related and litigation 3,603 ---
Deferred tax liabilities 192 ---
Long-term debt 4,800 5,100
------ ------
Total liabilities 46,815 51,596
Shareholders' equity:
Preferred stock, $.01 par value; authorized
3,000,000 shares; none issued --- ---
Common stock, $.01 par value; authorized
60,000,000 shares; issued 25,370,745 shares 254 254
Additional paid-in capital 78,064 77,875
Unrealized holding loss on available-
for-sale securities (9) ---
Retained earnings 34,446 34,569
Treasury stock, at cost, 6,235,978 and
6,266,258 shares outstanding, at September
30, 1997 and December 31, 1996,respectively (12,553) (12,567)
------- -------
Total shareholders' equity 100,202 100,131
------- -------
Total liabilities and shareholders' equity $147,017 $151,727
======= =======
</TABLE>
[FN]
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE 4>
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the three For the nine
months ended months ended
September 30, (Unaudited) September 30,
1997 1996 (In thousands, except per share data) 1997 1996
- ------- ------- -------- --------
<C> <C> <S> <C> <C>
Net sales:
$19,665 $19,558 Manufactured products $52,478 $ 59,607
16,810 13,031 Distributed products 35,313 32,640
------ ------ ------ -------
36,475 32,589 Net sales 87,791 92,247
Cost of goods sold:
13,864 15,998 Manufactured products 39,331 48,134
12,270 8,671 Distributed products 26,442 21,543
------ ------ ------ -------
26,134 24,669 Cost of goods sold 65,773 69,677
------ ------ ------ -------
10,341 7,920 Gross profit 22,018 22,570
Operating expenses:
2,831 3,003 Research and development 9,080 10,205
Selling, marketing and
1,160 1,416 distribution 3,478 5,087
2,068 3,270 General and administrative 5,535 8,301
227 175 Recall related and litigation, net 2,593 111
(142) --- Restructuring 170 ---
------ ------ ------ -------
4,197 56 Income (loss) from operations 1,162 (1,134)
360 71 Interest and investment income 1,013 452
(340) (63) Interest expense (434) (182)
(59) 1,008 Other income (expense), net (1,559) (311)
------ ------ ------ -------
4,194 1,072 Income (loss) before income taxes 182 (1,175)
2,440 458 Provision (benefit) for income taxes 305 (462)
------ ------ ------ -------
$ 1,754 $ 614 Net income (loss) $ (123) $ (713)
====== ====== ====== =======
Weighted average common
shares outstanding:
19,231 19,225 Primary 19,124 19,075
19,231 19,261 Fully diluted 19,124 19,075
Earnings (loss) per share:
$0.09 $0.03 Primary $(0.01) $(0.04)
$0.09 $0.03 Fully diluted $(0.01) $(0.04)
</TABLE>
[FN]
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE 5>
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the nine
months ended
(Unaudited) September 30,
(In thousands) 1997 1996
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (123) $ (713)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 5,411 5,324
Realized losses (gains) on sales of assets (183) 952
Change in deferred taxes 2,025 (189)
Changes in operating assets and liabilities:
Decreases (increases) in assets:
Accounts receivable (7,618) 5,953
Inventories 1,153 (598)
Prepaid income taxes (2,017) ---
Other current assets 1,161 34
Other assets, net of amortization 1,253 (2,046)
Increases (decreases) in liabilities:
Accounts payable, trade 2,744 (6,212)
Accrued expenses (6,533) 1,797
------ ------
Net cash provided by (used in) operating
activities (2,727) 4,302
------ ------
Cash flows from investing activities:
Capital expenditures (868) (7,921)
Purchases of available-for-sale securities (13,754) (7,606)
Proceeds from sale of available-for-sale securities --- 715
Proceeds from maturities of availiable-for-sale securities11,250 5,000
Proceeds from sales of property, plant and equipment 201 10
------ ------
Net cash provided by (used in) investing activities (3,171) (9,802)
------ ------
Cash flows from financing activities:
Issuance of common stock to Employee Stock Purchase Plan 202 306
Payments of long-term debt (300) (300)
------ ------
Net cash provided by (used in)financing activities (98) 6
------ ------
Net (decrease) increase in cash and cash equivalents (5,996) (5,494)
Cash and cash equivalents at beginning of period 15,974 18,950
------ ------
Cash and cash equivalents at end of period $ 9,978 $13,456
====== ======
</TABLE>
[FN]
The accompanying notes are an integral part of the Condensed Consolidated
Financial Statements.
<PAGE 6>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1997
Note A - General
In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all normal and recurring adjustments necessary to
present fairly the financial position of the Company as of September 30, 1997
and December 31, 1996 and the results of its operations for the three and nine
months ended September 30, 1997 and 1996, and its cash flows for the nine
months ended September 30, 1997 and 1996. While the Company believes that the
disclosures presented are adequate to make the information not misleading,
these financial statements should be read in conjunction with the Notes
included in the Company's Form 10-K for the year ended December 31, 1996. The
results for the three-month and nine-month period ended September 30, 1997 are
not necessarily indicative of the results that may be expected for any future
period.
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could have a material adverse effect on the Company's
business, financial condition, results of operations and stock price.
Statements in this Report on Form 10-Q which are not historical facts, so-
called "forward-looking statements", are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties, including those detailed in the Company's filings with the
Securities and Exchange Commission. See, for example, "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Risk Factors and Future Trends" contained in the Company's Form 10-K for the
year ended December 31, 1996.
Note B - Related Party Transactions
On July 18, 1995, Hoechst Corporation ("HC"), the Company's 51% shareholder,
completed its purchase of Marion Merrell Dow, Inc. ("MMD") and changed MMD's
name to Hoechst Marion Roussel, Inc. ("HMRI"). This transaction resulted in a
related party relationship between the Company and its customer Rugby
Laboratories ("Rugby"), which was a subsidiary of MMD and is now a subsidiary
of HMRI. Net sales to Rugby totaled approximately $38,000 and $969,000 for
the nine months ended September 30, 1997 and 1996, respectively. Total amounts
due from Rugby at September 30, 1997 and December 31, 1996, were approximately
$6,000 and $61,000, respectively. In connection with HC's acquisition of its
majority interest in the Company, the Company is a party to a Product
Agreement with HC pursuant to which the Company is afforded the opportunity
under specified conditions to distribute and market the generic version of
products sold by Hoechst-Roussel Pharmaceuticals, Inc. ("HRPI"), which was an
indirect majority-owned subsidiary of HC. This Product Agreement has an
initial term of five years, until November 11, 1998, and continues unless
terminated by either party giving one year's notice. On January 1, 1996, HRPI
was merged into HMRI. HMRI has agreed to be bound by the Product Agreement to
the extent that HRPI was bound; that is, the Product Agreement continues to be
in effect for products manufactured by the former HRPI but not for products
manufactured by HMRI prior to the merger with HRPI nor for products developed
by HMRI after January 1, 1996. In furtherance of the Product Agreement, the
Company and HMRI enter into separate contracts relating to specific products
as these products become available for generic distribution. In order to
assure continuity of supply under a variety of circumstances and to provide
other competitive benefits, the Company agreed to renegotiate the existing
distribution contracts relating to glyburide and micronized glyburide and
signed new agreements in July 1997. Also in July 1997, the Company signed a
separate agreement for the distribution of pentoxifylline. As a result of
these new distribution contracts, the Company has incurred increased royalty
costs which have been reflected in the current quarter and year-to-date gross
profit results. For the nine months ended September 30, 1997 and 1996,
approximately $26.4 million and $21.5 million, respectively, of generic
versions of products were purchased from HMRI under this Product Agreement.
In connection with HC's acquisition of MMD, on December 5, 1995 the Federal
Trade Commission issued its Decision and Order ("Order") which, among other
things, requires either HC or MMD to divest its
<PAGE 7>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1997
assets relating to research, development, manufacture and sale of the
compounds mesalamine and rifampin. For purposes of the Order, Copley is
considered part of HC. Both these products were in the developmental stage and
the Company had not submitted an ANDA for either product. Copley has agreed
to divest its assets relating to mesalamine and rifampin. In April 1997, the
Company completed the sale of its rifampin assets to a third party and in June
1997, the Company completed the sale of its mesalamine assets to another
third party. The Company expects that it will be compensated by its majority
owner if it is determined that it did not obtain a satisfactory price for
these assets.
The Company obtains its comprehensive general liability, product liability,
excess liability and all risks property insurance coverage through an
insurance and risk-sharing arrangement with HC and its parent, Hoechst
Aktiengesellschaft ("Hoechst AG"), and its various subsidiaries. Insurance
coverage is provided by HC through its wholly-owned insurance subsidiary, as
well as by external parties. The Company's total insurance expense for these
insurance policies was approximately $3.6 million and $3.8 million,
respectively, for the nine months ended September 30, 1997 and 1996.
During the nine months ended September 30, 1997 and 1996, the Company
purchased approximately $26,000 and $92,000, respectively, of bulk raw
materials from a chemical company whose president is a member of the Company's
Board of Directors.
During the nine months ended September 30, 1997 the Company had net sales of
approximately $157,000 to Wuxi Chia Tai Copley Pharmaceutical, a Chinese
company whose majority owner is Chia Tai Copley Pharmaceutical of which the
Company is a 49% partner.
In June 1997, the Company discontinued its partnership participation in MIR
Pharmaceutical, a partnership formed to market and manufacture pharmaceutical
products in Russia, and whose senior vice president is a member of the
Company's Board of Directors. This resulted in a one-time charge which is
reflected in other expenses for the second quarter.
Note C - Litigation and Contingencies
Albuterol Class Action Lawsuits
In connection with the Company's product recall of albuterol sulfate
inhalation solution, 0.5% ("albuterol"), the Company has been served with
complaints in numerous lawsuits in federal and state court, some of which are
on behalf of numerous claimants. The plaintiffs principally seek compensatory
and punitive damages and allege that injuries and deaths were caused by
inhalation of allegedly contaminated product manufactured and distributed by
the Company.
The federal court lawsuits were consolidated in the United States District
Court for the District of Wyoming as a multi-district litigation for pre-
trial purposes under the caption In Re: Copley Pharmaceutical, Inc.
"Albuterol" Products Liability Litigation. The District Court certified a
partial class action for determination of liability only and commenced a jury
trial in June 1995. In August 1995, prior to the conclusion of the jury trial,
the Company entered into a settlement agreement with the representative
plaintiffs in the class action lawsuit. The settlement calls for the Company
to receive a general release of all non-death claims in return for
contributions by the Company and its insurers of a minimum of $65 million and
a maximum of $130 million to settle all non-death claims relating to the
Company's manufacture, sale and recall of albuterol. An additional $20 million
is allocated under the terms of the settlement as an estimate of the cost of
settling claims by persons alleging wrongful death, which claims are limited
by the settlement to compensatory damages only and are subject to nonbinding
negotiation and arbitration. Within the Company's minimum and maximum
contributions, the amount to be paid by the Company is subject to revision
based upon the number and seriousness of individual claims eventually filed.
On November 15, 1995, the District Court entered its Order giving final
approval of the settlement and that Order has become final and nonappealable.
The settlement agreement requires that the $150 million maximum contribution
be funded by an initial $50 million cash deposit and issuance of letters of
credit for the remaining balance, to be held by the Albuterol Settlement Trust
Fund as security for potential future payments. During the third quarter of
1995, the Company paid $5.1 million to the Albuterol
<PAGE 8>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1997
Settlement Trust Fund and obtained approximately $17.1 million in irrevocable
stand-by letters of credit to cover its uninsured obligation to fund the
settlement agreement. The settlement agreement required an additional $15.0
million cash deposit after the order approving the settlement became final and
nonappealable, which occurred in late December 1996. In January 1997, the
Company made an additional $2.25 million cash deposit and its stand-by letters
of credit have been reduced by a like amount. The balance was funded by one of
the Company's insurers. These cash contributions made by the Company totaling
$7.35 million are nonrefundable pursuant to the terms of the settlement
agreement. In August 1997, the Wyoming District Court ordered the Company to
make additional cash deposits totaling $3.15 million to fund the Company's
portion of payments of settlement amounts for class action cases alleging
wrongful death as well as settlements of opt-out cases, legal fees and other
related expenses. The Company's stand-by letters of credit will be reduced by
a like amount. In addition, one of the Company's insurers paid $17.85 million
and its letter of credit was released.
Approximately 5,530 proofs of claim (including approximately 540 alleging
wrongful death) have been filed with the Special Master appointed by the Court
to oversee the Albuterol Settlement Trust Fund. The Special Master has
approved approximately 3,160 non-death class action claims totaling
approximately $44 million, no awards have been made to approximately 1,800
non-death class action claims and the District Court has given these claimants
until December 31, 1997 to supplement their claims. In addition,
approximately 850 clients of Jacoby & Meyers, representing nearly all of that
firm's clients who are not alleging a death caused by albuterol, have agreed
to be treated as if they were class members and class counsel have agreed that
these claimants will be paid out of the Albuterol Settlement Trust Fund.
Recourse to the remaining letters of credit in the class action settlement
will not occur until all claims are processed and settlement amounts are
recommended by the Special Master, and is contingent on the number of claims
filed within certain categories. Although the total number of claims filed
against the Albuterol Settlement Trust Fund is less than the number of claims
for which the settling parties anticipated would be necessary to require the
maximum funding of the Albuterol Settlement Trust Fund, at this time the
Company is unable to determine how many of these claims will be awarded
damages by the Special Master and, if awarded damages, how much will be given
to various claimants. In addition, administrative fees and class action
attorney fees and expenses will be paid out of the Albuterol Settlement Trust
Fund. Accordingly, the Company cannot predict the total amount to be paid out
of the Albuterol Settlement Trust Fund.
The settlement is also subject to certain other contingencies and does not
cover certain individuals who previously opted out of the class action. The
Company continues to be a defendant in lawsuits that were brought by or on
behalf of approximately six people who properly opted out of the class action.
In May 1997, a settlement was concluded in two lawsuits involving
approximately 45 of these persons. The Company also has settled approximately
30 other lawsuits brought by people who opted-out of the class action suit.
The Settlements were previously reserved and did not have a material impact on
the current quarter's earnings.
Grand Jury Investigation
On May 28, 1997, the Company announced that it had entered into a plea
agreement pursuant to which it agreed to waive indictment and plead guilty to
a one count Information charging a violation of Title 18, United States Code,
Section 371, a conspiracy to defraud the United States and one of its
agencies, the Food and Drug Administration ("FDA"). The Information alleged
that Copley made changes in the manufacturing processes for four drugs (only
two of which, procainamide 500 mg tablets and potassium chloride tablets,
currently are being manufactured by the Company) without proper notification
to the FDA and signed false batch records with respect to two of these drugs.
As part of the plea agreement, the Company agreed to pay a fine of $10.65
million, $3.55
<PAGE 9>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1997
million of which was paid in June, 1997, with the remainder due in two equal
installments plus interest in June, 1998 and June, 1999. The plea was accepted
by the United States District Court for the District of Massachusetts on June
19, 1997.The plea agreement followed a nearly four year investigation and
grand jury subpoenas from the United States Attorney's Office in Massachusetts
for documents focusing particularly on albuterol and Brompheril(registered
trademark)products, which were recalled by the Company in December 1993 and
September 1994, respectively, but extending beyond these products. The Company
complied with the subpoenas and cooperated with federal authorities throughout
the investigation.
Also on May 28, 1997, the Company announced that it had entered into an
agreement with the FDA providing for an independent audit of 20 of Copley's
ANDAs. The Company is cooperating fully with the FDA and the independent
audit commenced in July. The FDA has agreed that during this audit it will
continue to review the company's pending ANDAs, accept new ANDAs from the
Company, and, where appropriate, approve Copley's ANDAs.
On November 3, 1997 the Company received notification that the Defense
Logistics Agency ("DLA") has proposed the Company be debarred from federal
government contracting and from directly or indirectly receiving the benefits
of certain federal assistance programs. The reason for the proposed debarment
is the Company's guilty plea described above. The Company has advised the
DLA that it believes the proposed debarment is not warranted. The Company's
possibly effected sales to the federal government are not material.
Marion Merrell Dow, Inc. Bulk Diltiazem Lawsuit
In November of 1992, a lawsuit was filed against the Company by MMD and Tanabe
Seiyaku Co., Ltd. ("Tanabe") in the United States District Court for the
District of Massachusetts captioned Marion Merrell Dow, Inc. and Tanabe
Seiyaku Co., Ltd. v. Copley Pharmaceutical, Inc. and Orion Corporation
Fermion. MMD and Tanabe allege that the Company and Orion Corporation Fermion
"Orion"), the manufacturer of the Company's bulk diltiazem, are infringing a
process patent for one method of manufacturing bulk diltiazem. MMD and Tanabe
have alleged that they are the exclusive licensee and patentee, respectively,
of such process patent. The complaint seeks a permanent injunction and trebled
unspecified monetary damages. The Company has denied all liability in its
answer to the complaint. On May 10, 1993, the Court ordered the case
administratively closed, staying the case until further notice. On June 27,
1996, the parties jointly moved the Court for an Order further staying the
action until 30 days after completion of the related International Trade
Commission proceeding discussed below.
International Trade Commission Complaint
On February 25, 1993, the Company, together with a number of other off-patent
pharmaceutical manufacturers and certain chemical manufacturers, was named as
a respondent in a complaint filed by MMD and Tanabe before the United States
International Trade Commission ("the ITC") captioned Complaint of Marion
Merrell Dow, Inc. and Tanabe Seiyaku Co., Ltd. Pursuant to Section 337 of the
Tariff Act of 1930. The complaint seeks an order (i) prohibiting the
importation of, among other things, the bulk diltiazem purchased by the
Company from Orion, and (ii) requiring the Company to immediately stop selling
its current diltiazem product, which incorporates bulk diltiazem supplied by
Orion, based on the alleged infringement by Orion of a process patent for one
method of manufacturing bulk diltiazem.
On June 1, 1996, the ITC issued its Final Determination ordering the
investigation terminated with the finding of no violation of Section 337, of
no patent infringement and taking no position on the issue of patent validity
and enforceability. On July 20, 1996, MMD and Tanabe filed an appeal with the
United States Court of Appeals for the Federal Circuit seeking review of the
ITC's Final Determination.
On March 7, 1997, the United States Court of Appeals for the Federal Circuit
affirmed the ITC's decision finding no infringement. A further appeal by MMD
to the United States Supreme Court has been filed.
<PAGE 10>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1997
Orion has agreed at its expense to defend the Company in this action
and the MMD Bulk Diltiazem Lawsuit discussed previously and to indemnify the
Company for any damages that might be assessed as a result of the Company's
sale of diltiazem obtained from Orion. Although the Company believes that
these complaints are without merit, that the Company and Orion have
meritorious defenses to these actions, and that the Company should prevail in
these lawsuits, there can be no assurance that the Company will prevail or
that an adverse outcome would not have a material adverse effect on the
Company's financial condition or results of operations.
Warner-Lambert Lawsuit
On January 29, 1997, the Company was served with a complaint in an action
pending in the New Jersey Superior Court, Morris County, captioned Warner-
Lambert Company v. Copley Pharmaceutical, Inc. et ano. The plaintiff alleges
that the Company obtained access to the plaintiff's formula, process and
sustained release technology for a procainamide product through improper
means. The Company has been marketing its product since 1985. On August 5,
1997 this lawsuit was dismissed by Warner-Lambert Company. Under the
settlement agreement, Warner-Lambert's action was dismissed with prejudice and
all parties will bear their own costs. The Company's legal costs did not have
a material impact on the current quarter or year to date earnings.
Subsequent Event
In August, 1997, the Company filed an ANDA for nabumetone which certified that
Smithkline Beecham Corporation's ("SB") patent relating to nabumetone was
invalid and unenforceable and that the Company was entitled to manufacture and
sell nabumetone prior to the December 13, 2002 expiration of SB's nabumetone
patent. As a result, on October 31, 1997 the Company was served with a
summons and complaint in a patent infringement action entitled Smithkline
Beecham Corporation and Beecham Group p.l.c. v. Copley Pharmaceutical, Inc. in
the United States District Court for the District of Massachusetts. In their
action, plaintiffs allege that because the Company seeks approval of its ANDA
to engage in the commercial manufacture, use and sale of nabumetone as claimed
in their patent before the patent's expiration, the Company has infringed
their nabumetone patent. Plaintiffs seek damages and an injunction against
approval of the Company's nabumetone ANDA and its sale of nabumetone prior to
December 13, 2002. The manufacturer and supplier of the nabumetone that the
Company has designated for use in its ANDA has agreed at its expense to defend
the Company in this action and to indemnify the Company for any damages that
might be assessed as a result of the Company's sale of nabumetone obtained
from the manufacturer. Although the Company believes that this complaint is
without merit and the Company has meritorious defenses to these actions, there
can be no assurance that the Company will prevail or that an adverse outcome
would not have a material adverse effect on the Company's financial condition
or results of operation.
Other Legal Proceedings
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the results of
such proceedings will not have a material adverse effect on the Company's
financial condition or results of operations.
The Company has $10.3 million of estimated recall related and legal ontingency
reserves accrued at September 30, 1997. These reserves reflect the Company's
estimates of its exposure at September 30, 1997 in its various legal
proceedings described above. Actual settlements amounts may differ from
amounts estimated.
Note D - Debt
On August 7, 1997, the Company amended its working capital line of credit
agreement to replace one of its financial covenants related to profitability
with a working capital covenant effective June 30, 1997. At June 30, 1997, the
Company had $14.85 million in stand-by letters of credit related to the
Albuterol Settlement Trust Fund outstanding under this working capital line of
credit agreement. The Company is in the process of reducing its stand-by
letters of credit by
<PAGE 11>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1997
$3.15 million to reflect its additional cash
deposits made pursuant to the August 1997 Court order. Refer to Note C for
further discussion of the Albuterol Settlement Trust Fund.
<PAGE 12>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION
Item 2. Management's Discussion and Analysis of Results of Operations and
Changes in Financial Condition
Results of Operations
<TABLE>
Net Sales
- ------------------------------------------------------------------------------
<CAPTION>
For the quarter For the nine
ended (In thousands) months ended
September 30, Increase September 30, Increase
1997 1996 (Decrease) (Unaudited) 1997 1996 (Decrease)
- ------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$19,665 $19,558 0.5 % Manufactured products $52,478 $ 59,607 (12.0)%
16,810 13,031 29.0 % Distributed products 35,313 32,640 8.2 %
------ ------ ------ ------
$36,475 $32,589 11.9 % Net sales $87,791 $ 92,247 (4.8)%
==============================================================================
</TABLE>
Net sales for the third quarter of 1997 increased 11.9% to $36.5 million,
compared to $32.6 million for the same period in 1996. This increase was due
primarily to the launch of a new distributed product, pentoxifylline.
The Company's net sales were $87.8 million for the nine-month period ended
September 30, 1997 as compared to $92.2 million for the same period in 1996.
The increase derived from sales of new products and the volume impact from
distributed sales was offset by pricing concessions of both manufactured and
distributed products accounting for the year-to-date decrease in net sales.
In July 1997, the Company launched two new products: pentoxifylline, the
generic alternative to Hoechst Marion Roussel's Trental(registered trademark),
and diclofenac sodium delayed-release tablets, the off-patent version of Ciba-
Geigy's Voltaren(registered trademark)delayed-release tablets. Pentoxifylline
is being marketed under the Company's distribution agreement with Hoechst
Marion Roussel, Inc.
<TABLE>
Gross Profit
- ------------------------------------------------------------------------------
<CAPTION>
For the quarter For the nine
ended (In thousands) months ended
September 30, Increase September 30, Increase
1997 1996 (Decrease) (Unaudited) 1997 1996 (Decrease)
- ------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$ 5,801 $ 3,560 63.0 % Manufactured products $13,147 $11,473 14.6 %
As a % of manufactured
29.5% 18.2% products net sales 25.0% 19.3%
- ------------------------------------------------------------------------------
$ 4,540 $ 4,360 4.1 % Distributed products $ 8,871 $11,097 (20.1)%
As a % of distributed
27.0% 33.5% products net sales 25.1% 34.0%
- ------------------------------------------------------------------------------
$10,341 $ 7,920 30.6 % Gross profit $22,018 $22,570 (2.4)%
28.4% 24.3% As a % of net sales 25.1% 24.5%
==============================================================================
</TABLE>
The Company's gross profit was $10.3 million, or 28.4% of net sales, for the
third quarter of 1997 as compared to $7.9 million, or 24.3% of net sales, for
the same period in 1996. A favorable fluctuation in product mix of
manufactured products sold together with the one time purchase price
adjustment for distributed products helped improve gross profit for the
quarter. Refer to Note B for further discussion of the renegotiation of
product supply agreements with Hoechst Marion Roussel, Inc.
For the nine-month period ended September 30, 1997, the Company's gross profit
was $22.0 million, or 25.1% of net sales, as compared to $22.6 million or
<PAGE 13>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (Continued)
24.5% of net sales a year earlier.
<TABLE>
Operating Expenses
- ------------------------------------------------------------------------------
<CAPTION>
For the quarter For the nine
ended (In thousands) months ended
September 30, Increase September 30, Increase
1997 1996 (Decrease) (Unaudited) 1997 1996 (Decrease)
- ------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$2,831 $ 3,003 (5.7)% Research and development $ 9,080 $10,205 (11.0)%
14.4% 15.3% As a % of net sales 17.3% 17.1%
- ------------------------------------------------------------------------------
Selling, marketing and
$1,160 $ 1,416 (18.1)% distribution $ 3,478 $ 5,087 (31.6)%
3.2% 4.3% As a % of net sales 4.0% 5.5%
- ------------------------------------------------------------------------------
$2,068 $ 3,270 (36.8)% General and administrative$ 5,535 $ 8,301(33.3)%
5.7% 10.0% As a % of net sales 6.3% 9.0%
- ------------------------------------------------------------------------------
Recall related and
$ 227 $ 175 29.7 % litigation, net $2,593 $ 111 2236.0%
0.6% 0.5% As a % of net sales 3.0% 0.1%
$ (142) ---100.0 % Restruturing $ 170 --- 100.0%
(0.4)% --- As a % of net sales 0.2% ---
==============================================================================
</TABLE>
Research and development expenses decreased to $2.8 million for the third
quarter of 1997 as compared to $3.0 million for the same period of 1996. For
the nine-month period, research and development expenses were $9.0 million as
compared to $10.2 million reported in the prior year. Significant reductions
in consulting and product validation cost were the primary causes of this
decrease.
Selling, marketing and distribution expenses decreased 18.1% to $1.2 million
for the third quarter of 1997 as compared to $1.4 million for the same period
of 1996. For the nine-month period, selling, marketing and distribution
expenses decreased 31.6% to $3.5 million compared to $5.1 million reported a
year earlier. Higher advertising and promotional expenses in the prior year
and overall cost reductions were the primary causes of these decreases.
General and administrative expenses were $2.1 million for the third quarter of
1997 as compared to $3.3 million for the same period in 1996. For the nine-
month period ended September 30, 1997, general and administrative expenses
totaled $5.5 million compared to $8.3 million a year earlier. This decrease
was primarily attributable to overall cost reductions, including significantly
lower directors' and officers' insurance premiums, and efficiency
improvements. Additionally the third quarter of 1996 includes a charge
recorded as a result of a major customer's filing for bankruptcy protection
and for severance packages for employees who resigned during the quarter.
Net recall related and litigation expenses in 1997 include an adjustment to
the Company's reserve to reflect the plea agreement with the Massachusetts
U.S. Attorney and resultant fine, and other uninsured legal expenses incurred
by the Company for representation in its various legal proceedings. Refer to
Note B for further discussion of the plea agreement and the Company's other
outstanding legal proceedings.
The restructuring charges recorded in 1997 primarily reflect a small reduction
in the Company's workforce as part of its previously announced cost reduction
initiatives which was partially offset by recoveries made on lease commitments
on vacated properties.
<PAGE14>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (Continued)
<TABLE>
Interest and Other Income, Net
- ------------------------------------------------------------------------------
<CAPTION>
For the quarter For the nine
ended (In thousands) months ended
September 30, Increase September 30, Increase
1997 1996 (Decrease) Unaudited) 1997 1996 (Decrease)
- ------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$ 360 $ 71 407 % Interest and other $1,013 $ 452 124 %
investment income
-----------------------------------------------------------------------------
(304) (63) 383 % Interest expense (434) (182) 138 %
- ------------------------------------------------------------------------------
(59) 1,008 (106)% Other income (expense)(1,559) (311) 401 %
==============================================================================
</TABLE>
Interest and other investment income increased to $360,000 for the third
quarter of 1997 as compared to $71,000 for the same period of 1996 due to
increased average investment holdings. For the nine-month period, interest and
other investment income increased to $1,013,000 as compared to $452,000
reported a year earlier.
Interest expense increased 383% for the third quarter of 1997 to $304,000.
The increase is due primarily to the charges relating to grand-jury settlement
and interest due on tax adjustment. Refer to note C above for further details
regarding the Grand Jury Investigation.
Other expenses of $1.6 million for the nine-months ended September 30, 1997
consisted primarily of a one-time charge related to the Company's decision to
discontinue its partnership participation in MIR Pharmaceutical, a company
formed to manufacture and sell pharmaceutical products in Russia, and to
discontinue funding a collaborative effort in the field of ophthalmology.
Refer to Note B for further discussion of MIR Pharmaceutical.
<TABLE>
Taxes and Net Income (Loss)
- ------------------------------------------------------------------------------
<CAPTION>
For the quarter For the nine
ended (In thousands) months ended
September 30, Increase September 30, Increase
1997 1996 (Decrease) (Unaudited) 1997 1996 (Decrease)
- ------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$2,440 $ 458 433% Income tax expense $ 305 $(462) (166) %
- ------------------------------------------------------------------------------
58.2% 42.7% Effective tax rate 168 % (39.3)%
- ------------------------------------------------------------------------------
$1,754 $ 614 186% Net income (loss) $(123) $(713) (83) %
==============================================================================
</TABLE>
The effective tax (benefit) rate for 1997 increased when compared to the same
periods in 1996 due primarily to nondeductible items.
Net income for the third quarter of 1997 was $1.8 million or $0.09 per share
compared to a net profit of $0.6 million or $0.03 per share for the third
quarter of 1996.
For the nine-month period ended September 30, 1997, the Company reported a net
loss of $0.1 million or $0.01 per share as compared to net loss of $0.7
million or $0.04 per share for the same period in 1996. Excluding the recall
related, litigation items and cost reduction initiative, 1997 earnings would
have been a gain of $2.7 million, or $0.14 per share. Restated with similar
expense items excluded, 1996 earnings would have been a loss of $0.2 million
or $0.01 per share.
Although consistent downward pressures on both selling prices and manufactured
volumes continue to erode the Company's profits, the increase sales of new
products and the various cost reductions and efficiency improvements
throughout the Company provide a source of encouragement with regards to
future growth.
The Company continues to witness a consolidation of its customers, as chain
drug stores and wholesalers merge or consolidate. In addition, a number of
the
<PAGE 15>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (Continued)
Company's customers have instituted source programs which limit
the number of suppliers of generic pharmaceutical products carried by that
customer. As a result of these developments, there is a heightened
competition among generic producers for the business of this smaller and more
selective customer base.
In the past year, there have been an increasing number of attempts to use
federal legislation to extend the patent life of various drugs beyond the term
permitted under current statutes. This trend has accelerated during the third
quarter. Although the generic drug industry thus far has been successful in
defeating these attempts at extending the monopoly of brand name drugs, the
Company could be adversely impacted if future legislation is enacted which
extends the patent exclusivity of a number of drugs that are expected to come
off patent in the coming years.
Forward -looking statements (statements which are not historical facts) in
this document are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that all
forward-looking statements involve risk and uncertainties, including those
risks and uncertainties detailed in the Company's filings with the Securities
and Exchange Commission, copies of which are available from the Company.
Changes in Financial Condition
<TABLE>
<CAPTION>
Unaudited
September 30, December 31,
(In thousands) 1997 1996
------------- ------------
<S> <C> <C>
Cash and short-term investments $ 26,344 $ 29,731
Working capital 57,889 48,179
Accrued recall related and litigation
expense 3,603 ---
Long-term debt 4,800 5,100
Shareholders' equity 100,202 100,131
</TABLE>
Working capital increased $9.7 million from December 31, 1996 to $57.9 million
at September 30, 1997 primarily due to working capital generated from
operations and the reclassification to long-term liabilities of certain
accrued expenses related to the grand jury investigation.
The Company has a working capital line of credit agreement that provides a
maximum borrowing capacity of $30.0 million. At September 30, 1997, the
Company had $14.85 million of stand-by letters of credit issued under this
line of credit. These stand-by letters of credit were obtained by the Company
pursuant to the requirements of the Albuterol Settlement Trust Fund to cover
its uninsured obligation. Recourse to the letters of credit are contingent on
the number of claims filed within certain categories and will not occur until
all claims are processed and settlement amounts are recommended by the Special
Master.
In August 1997, the Company made additional cash deposits totaling $3.15
million to fund its portion of payments of settlement amounts for class action
cases alleging wrongful death as well as settlements of opt-out cases, legal
fees and other related expenses. The Company's stand-by letters of credit will
be reduced by a like amount. Refer to Note C for further discussion of the
Albuterol Settlement Trust Fund.
<PAGE 16>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See descriptions of legal proceedings in Note C of Notes to Condensed
Consolidated Financial Statements in Part I of this Form 10-Q, which are
hereby incorporated by reference herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No other reports on Form 8-K were filed during the
three months ended September 30, 1997.
<PAGE 17>
SIGNATURE
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.
Signature Title Date
/s/ Ken E. Starkweather
- ------------------------- Vice President-Finance , November 14, 1997
Ken E. Starkweather Treasurer and Chief Financial Officer
(principal financial and accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEUDLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS
AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<CIK> 0000829987
<NAME> COPLEY PHARMACEUTICAL, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 9978
<SECURITIES> 16366
<RECEIVABLES> 35142
<ALLOWANCES> (500)
<INVENTORY> 25978
<CURRENT-ASSETS> 9145
<PP&E> 72237
<DEPRECIATION> (24453)
<TOTAL-ASSETS> 147017
<CURRENT-LIABILITIES> 46815
<BONDS> 0
0
0
<COMMON> 254
<OTHER-SE> 99948
<TOTAL-LIABILITY-AND-EQUITY> 147017
<SALES> 36475
<TOTAL-REVENUES> 36475
<CGS> 26134
<TOTAL-COSTS> 26134
<OTHER-EXPENSES> 5843
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 304
<INCOME-PRETAX> (4194)
<INCOME-TAX> (2440)
<INCOME-CONTINUING> (1754)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1754)
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
