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 MARCH 31, 1998
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 02021
CANTON, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
COMMISSION FILE NUMBER: 0-20126
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 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 APRIL 30, 1998 WAS 19,153,518 SHARES.
<PAGE>
COPLEY PHARMACEUTICAL, INC.
INDEX
FOR THE THREE MONTHS ENDED MARCH 31, 1998
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31,
1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
and Comprehensive Income for the three months ended
March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Changes in Financial Condition 11 - 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 1998 1997
---------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 11,100 $ 13,847
Available-for-sale securities ................................ 22,197 19,498
Accounts receivable, trade, net .............................. 28,082 30,170
Inventories:
Raw materials ............................................ 8,051 7,282
Work in process .......................................... 5,302 5,207
Finished goods ........................................... 13,217 10,797
--------- ---------
Total inventories ............................................ 26,570 23,286
Current deferred tax assets .................................. 5,301 5,239
Other current assets ......................................... 7,942 4,189
--------- ---------
Total current assets ..................................... 101,192 96,229
Property, plant and equipment, net ............................... 45,652 46,450
Other assets ..................................................... 3,047 3,065
--------- ---------
TOTAL ASSETS ..................................................... $ 149,891 $ 145,744
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade ...................................... $ 4,624 $ 2,583
Accounts payable, related party .............................. 16,787 13,668
Current portion of long-term debt ............................ 300 300
Accrued compensation and benefits ............................ 862 1,275
Accrued rebates .............................................. 5,882 9,071
Accrued income taxes ......................................... 1,473 374
Current portion of accrued recall related and litigation
expenses...................................................... 8,143 8,048
Accrued expenses ............................................. 848 830
--------- ---------
Total current liabilities ................................ 38,919 36,149
Accrued recall related and litigation expenses ................... 3,692 3,645
Deferred tax liabilities ......................................... 1,102 269
Long-term debt ................................................... 4,800 4,800
--------- ---------
TOTAL LIABILITIES ................................................ 48,513 44,863
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 .................................. 78,144 78,063
Unrealized holding loss on available-for-sale securities .... (12) (16)
Retained earnings ........................................... 35,536 35,133
Treasury stock, at cost, 6,217,228 and 6,235,978 shares
outstanding, respectively ............................... (12,544) (12,553)
--------- ---------
Total shareholders' equity .............................. 101,378 100,881
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $ 149,891 $ 145,744
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
--------- ---------
Net sales:
Manufactured products ....................... $ 16,194 $ 15,534
Distributed products ........................ 12,014 10,282
-------- --------
Net sales ............................... 28,208 25,816
Cost of goods sold:
Manufactured products ....................... 13,028 12,970
Distributed products ........................ 9,439 8,017
-------- --------
Cost of goods sold ...................... 22,467 20,987
Gross profit ........................ 5,741 4,829
Operating expenses:
Research and development ..................... 2,622 2,683
Selling, marketing and distribution .......... 1,261 1,268
General and administrative ................... 1,283 1,478
Recall related and litigation ................ 179 199
-------- --------
Income (loss) from operations .......... 396 (799)
Interest and other investment income ............ 430 303
Interest expense ................................ (162) (62)
Other income (expenses), net .................... (91) 40
-------- --------
Income (loss) before income taxes ....... 573 (518)
Provision (benefit) for income taxes ............ 170 (155)
-------- --------
NET INCOME (LOSS) ............................... $ 403 $ (363)
======== =========
Other comprehensive income, net of taxes
Unrealized gains on securities ............ 6 (28)
Less: reclassification adjustment for gains
included in net income ........... (2) --
-------- --------
COMPREHENSIVE INCOME (LOSS)...................... $ 407 $ (391)
======== ========
Weighted average common shares outstanding:
Basic ..................................... 19,153 19,119
Diluted ................................... 19,251 19,119
Earnings (loss) per share:
Basic ..................................... $ 0.02 $ (0.02)
Diluted ................................... $ 0.02 $ (0.02)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE>
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS) 1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................... $ 403 $ (363)
-------- --------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization .......................... 1,755 1,824
Realized losses (gains) on sales of assets ............. (2) (141)
Change in deferred taxes ............................... 771 (249)
Changes in operating assets and liabilities:
Decreases (increases) in assets:
Accounts receivable .................................. 2,088 3,757
Inventories .......................................... (3,284) 1,042
Other current assets ................................. (3,753) (3,303)
Other assets, net of amortization .................... (17) 106
Increases (decreases) in liabilities:
Accounts payable ..................................... 5,160 (5,058)
Accrued income taxes ................................. 1,099 95
Accrued expenses ..................................... (3,442) (1,348)
-------- --------
Net cash provided by (used in) operating activities 778 (3,638)
-------- --------
Cash flows from investing activities:
Capital expenditures ....................................... (931) (286)
Purchases of available-for-sale securities ................. (6,784) (2,470)
Proceeds from sales of available-for-sale securities ....... 1,910 --
Proceeds from maturities of available-for-sale securities .. 2,190 500
Proceeds from sales of property, plant and equipment ....... -- 141
-------- --------
Net cash provided by (used in) investing activities (3,615) (2,115)
-------- --------
Cash flows from financing activities:
Issuance of common stock to Employee Stock Purchase Plan ... 90 113
-------- --------
Net cash provided by (used in) financing activities 90 113
-------- --------
Net increase (decrease) in cash and cash equivalents ........... (2,747) (5,640
Cash and cash equivalents at beginning of period ............... 13,847 15,974
-------- --------
Cash and cash equivalents at end of period ..................... $ 11,100 $ 10,334
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
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 March 31, 1998 and December
31, 1997 and the results of its operations and its cash flows for the three
months ended March 31, 1998 and 1997. 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, 1997. The results for
the three-month period ended March 31, 1998 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, 1997.
NOTE B - RELATED PARTY TRANSACTIONS
On July 18, 1995, Hoechst Corporation ("HC"), the Company's indirect 51% fully
diluted 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
subsequently a subsidiary of HMRI. Effective February 27, 1998, Rugby was sold
by HMRI to an unrelated third party.
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 entered into separate contracts relating to
specific products as these products became available for generic distribution.
These separate contracts now continue in effect beyond the expiration of the
Product Agreement. In order to assure continuity of supply and to provide other
competitive benefits, the Company, in 1997, renegotiated the distribution
contracts relating to glyburide and micronized glyburide; as a result, the
profit contribution of these products has decreased. In 1997 the Company entered
into an agreement to distribute HMRI's pentoxifylline product. As a result of
these new distribution contracts, the Company has incurred increased royalty
costs. For the three months ended March 31, 1998 and 1997, approximately $9.0
million and $8.2 million, respectively, of generic versions of products were
purchased from HMRI under this Product Agreement.
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
6
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COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
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 $1.1 million and $1.2 million, respectively, for the three months
ended March 31, 1998 and 1997.
During the three months ended March 31, 1998 and 1997 the Company had net sales
of approximately $0 and $30,000, respectively, 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. The Company will continue to sell product through the MIR
Pharmaceutical partnership.
NOTE C - LITIGATION AND CONTINGENCIES
ALBUTEROL CLASS ACTION LAWSUITS
In connection with the Company's December 1993 and January 1994 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 non-binding negotiation and arbitration. Within
the Company's minimum and maximum contributions, the amount to be paid by the
Company is subject to 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. This Order has become final and nonappealable.
The settlement agreement requires the $150 million maximum contribution to
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. The Company negotiated
agreements with its insurers pursuant to which the Company and its insurers have
agreed to pay defined percentages of required settlement payments and related
expenses. During the third quarter of 1995, the Company paid $5.1 million to the
Albuterol 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
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 were 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 agreements.
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 the settlement of opt-out cases, legal fees and other related expenses.
7
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
The Company's stand-by letters of credit were reduced by a like amount in
February 1998. In addition, one of the Company's insurers paid $17.85 million
and its letter of credit was released.
Approximately 5,540 proofs of claim (including approximately 560 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 3,800 class action claims totaling approximately $55 million. No
awards have been made to approximately 1,500 non-death class action claims and
the District Court has given these claimants additional time to supplement their
claims. In addition, approximately 820 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
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. On April 30,
1998 the Wyoming District Court awarded plaintiffs' attorney $19.5 million in
attorney's fees and $1.6 million in expense reimbursement, to be paid by
claimants and the Company. The attorney's fees and expenses were previously
reserved as part of the Company's recall and litigation accrual and will not
have a material impact on the current year's earnings. The Company cannot
predict the total amount to be paid out of the Albuterol Settlement Trust Fund.
The settlement also is 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 less than five people who properly opted out of the class action.
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 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 three-year investigation and grand
jury subpoenas from the United States Attorney's Office in Massachusetts for
documents focusing particularly on albuterol and Brompheril(R) 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. The
investigation continues with respect to individuals, some of whom are
indemnified by the Company for legal fees and related expenses.
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, 1997 has been substantially completed. 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.
8
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
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 agreed to enter into
an administrative agreement with DLA, effective May 1, 1998, in lieu of
debarment.
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, 1995, the parties jointly
moved the Court for an Order further staying the action until 30 days after
notification of 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, 1995, 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, 1995, 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 was filed and, in
December 1997, the Supreme Court refused to grant MMD's application to appeal.
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
consolidated financial condition or results of operations.
SMITHKLINE BEECHAM LAWSUIT
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
9
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
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 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 consolidated financial condition or results of
operation.
OTHER LEGAL PROCEEDINGS
The Company has $11.8 million of estimated recall related and legal contingency
reserves accrued at March 31, 1998. These reserves reflect the Company's
estimates of its exposure at March 31, 1998 in its various legal proceedings
described above. Actual settlements amounts may differ from amounts estimated.
In addition, the Company from time to time is subject to claims arising in the
ordinary course of business. While the outcome of the claims cannot be predicted
with certainty, management does not expect these matters to have a material
adverse effect on the results of operations and financial condition of the
Company.
NOTE D - DEBT
At March 31, 1998, the Company had $11.7 million in stand-by letters of credit
related to the Albuterol Settlement Trust Fund outstanding under this working
capital line of credit agreement. Refer to Note C of the Notes to Condensed
Consolidated Financial Statements for further discussion of the Settlement
Agreement.
10
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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
NET SALES
- -------------------------------------------------------------
Quarter ended
March 31,
IN THOUSANDS 1998 1997 Change
- -------------------------------------------------------------
Manufactured products $16,194 $15,534 4.2%
Distributed products 12,014 10,282 16.8%
----------- -----------
Net sales $28,208 $25,816 9.3%
- -------------------------------------------------------------
Net sales for the first quarter of 1998 were $28.2 million, an increase of $2.4
million, or 9.3%, from the same period in 1997. Increased unit sales volumes and
new product introductions more than offset the impact of price reductions.
GROSS PROFIT
- -------------------------------------------------------------
Quarter ended
March 31,
IN THOUSANDS 1998 1997 Change
- -------------------------------------------------------------
Manufactured products $3,166 $2,564 23.5%
As a % of manufactured
products net sales 19.6% 16.5%
Distributed products $2,575 $2,265 13.7%
As a % of distributed
products net sales 21.4% 22.0%
Gross profit $5,741 $4,829 18.9%
As a % of net sales 20.4% 18.7%
- -------------------------------------------------------------
The Company's gross profit was $5.7 million or 20.4% of net sales for the first
quarter of 1998 compared to $4.8 million or 18.7% of net sales for the same
period of 1997. The higher 1998 manufacturing gross margin resulted from
improvements in manufacturing processes and facility utilization. These
improvements occurred despite the impact of falling prices.
OPERATING EXPENSES
- -------------------------------------------------------------
Quarter ended
March 31,
IN THOUSANDS 1998 1997 Change
- -------------------------------------------------------------
Research and
development $2,622 $2,683 (2.3)%
As a % of manufactured
products net sales 16.2% 17.3%
Selling, marketing and
distribution $1,261 $1,268 (0.6)%
As a % of net sales 4.5% 4.9%
General and
administrative $1,283 $1,478 (13.2)%
As a % of net sales 4.5% 5.7%
Recall related and
litigation $ 179 $ 199 (10.1)%
As a % of net sales 0.6% 0.8%
- -------------------------------------------------------------
Research and development expenses decreased 2.3% to $2.6 million for the first
quarter of 1998 as compared to $2.7 million for the same period of 1997. Prior
year cost reduction initiatives were offset by increased biostudy expenses in
the current quarter.
Overall cost reductions and efficiency improvements also caused the 13.2%
decrease in general and administrative expenses. Most notable was a decrease in
directors and officer insurance premiums.
11
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (CONTINUED)
Recall related and litigation expenses for the first quarter of 1998 and 1997
were primarily comprised of uninsured legal expenses incurred by the Company for
representation in its various legal proceedings.
INTEREST AND OTHER INCOME (EXPENSES)
- ------------------------------------------------------------
Quarter ended
March 31,
IN THOUSANDS 1998 1997 Change
- ------------------------------------------------------------
Interest and other
investment income $430 $303 41.9%
Interest expense (162) (62) 161.3%
Other income (expenses) (91) 40 (327.5)%
- -------------------------------------------------------------
Interest and other investment income increased to $430,000 for the first
quarter of 1998 as compared to $303,000 for the same period of 1997 due to
increased average investment holdings.
Interest expense increased primarily due to the accrual of interest relating to
installments payable under the Company's plea agreement. Refer to Note C of the
Notes to Condensed Consolidated Financial Statements for details relating to
Grand Jury settlement.
TAXES (BENEFIT) AND NET INCOME (LOSS)
- ------------------------------------------------------------
Quarter ended
March 31,
IN THOUSANDS 1998 1997
- ------------------------------------------------------------
Income tax expense
(benefit) $170 $(155)
Effective tax rate 29.7% (29.9)%
Net income (loss) $403 $(363)
- ------------------------------------------------------------
The net income for the quarter was $0.4 million or $0.02 per share compared to a
net loss of $0.4 million or $0.02 per share for the first quarter of 1997
primarily due to increased sales and overall cost reductions and efficiency
improvements across all departments.
CHANGES IN FINANCIAL CONDITION
CAPITAL RESOURCES AND LIQUIDITY
- ----------------------------------------------------------
March 31, December 31,
IN THOUSANDS 1998 1997
- ----------------------------------------------------------
Cash and short-term
investments $33,297 $33,345
Working capital 62,273 60,080
Long-term debt 4,800 4,800
Shareholders' equity 101,378 100,881
- ----------------------------------------------------------
Working capital increased $2.2 million from December 31, 1997 to $62.3
million at March 31, 1998 primarily due to net income from operations adjusted
for non-cash expenditures.
The Company has a working capital line of credit agreement that provides a
maximum borrowing capacity of $30.0 million. At March 31, 1998, the Company had
$11.7 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.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See descriptions of legal proceedings in Note C of the 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 reports on Form 8-K were filed during the three months
ended March 31, 1998.
13
<PAGE>
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, Chief May 15, 1998
- --------------------------- Financial Officer and Treasurer
Ken E. Starkweather (principal financial and principal
accounting officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000829987
<NAME> COPLEY PHARMACEUTICAL, INC.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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