<![CDATA[UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2008
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 NUMBER 1-9601
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K-V PHARMACEUTICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 43-0618919
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2503 SOUTH HANLEY ROAD, ST. LOUIS, MISSOURI 63144
(Address of principal executive offices, including ZIP code)
Registrant's telephone number, including area code: (314) 645-6600
Securities Registered Pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act:
7% CUMULATIVE CONVERTIBLE PREFERRED, PAR VALUE $.01 PER SHARE
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Indicate by check mark whether the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark whether the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the shares of Class A and Class B Common Stock
held by non-affiliates of the registrant as of September 28, 2007, the last
business day of the registrant's most recently completed second fiscal
quarter, was $887,560,274 and $37,278,549, respectively. As of June 6, 2008,
the registrant had outstanding 37,755,099 and 12,256,159 shares of Class A
Common Stock and Class B Common Stock, respectively. Documents incorporated by
reference: Portions of the Company's Definitive Proxy Statement for its 2008
Annual Meeting of Shareholders are incorporated by reference in Part III of
this Annual Report on Form 10-K.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-K, including the documents that we incorporate herein by
reference, contains various forward-looking statements within the meaning of
the U.S. Private Securities Litigation Reform Act of 1995, and which may be
based on or include assumptions concerning our operations, future results and
prospects. Such statements may be identified by the use of words like "plans,"
"expects," "aims," "believes," "projects," "anticipates," "commits,"
"intends," "estimate," "will," "should," "could," and other expressions that
indicate future events and trends.
All statements that address expectations or projections about the future,
including without limitation, statements about our strategy for growth,
product development, product launches, regulatory approvals, governmental and
regulatory actions and proceedings, market position, market share increases,
acquisitions, revenues, expenditures and other financial results, are
forward-looking statements.
All forward-looking statements are based on current expectations and are
subject to risk and uncertainties. In connection with the "safe harbor"
provisions, we provide the following cautionary statements identifying
important economic, competitive, political, regulatory and technological
factors which, among others, could cause actual results or events to differ
materially from those set forth or implied by the forward-looking statements
and related assumptions.
Such factors include (but are not limited to) the following: (1) changes in
the current and future business environment, including interest rates and
capital and consumer spending; (2) the difficulty of predicting FDA approvals,
including timing, and that any period of exclusivity may not be realized; (3)
acceptance and demand for new pharmaceutical products; (4) the impact of
competitive products and pricing, including as a result of so-called
authorized-generic drugs; (5) new product development and launch, including
the possibility that any product launch may be delayed or that product
acceptance may be less than anticipated; (6) reliance on key strategic
alliances; (7) the availability of raw materials and/or products manufactured
for us under contract manufacturing arrangements with third parties; (8) the
regulatory environment, including regulatory agency and judicial actions and
changes in applicable law or regulations; (9) fluctuations in operating
results; (10) the difficulty of predicting international regulatory approval,
including timing; (11) the difficulty of predicting the pattern of inventory
movements by our customers; (12) the impact of competitive response to our
sales, marketing and strategic efforts; (13) risks that we may not ultimately
prevail in our litigation; (14) actions by the Securities and Exchange
Commission and the Internal Revenue Service with respect to our stock option
grants and accounting practices; (15) the impact of credit market disruptions
on the fair value of auction rate securities that we acquired as
short-term investments and have now become illiquid; (16) whether any recalled
products will have any material financial impact or result in litigation,
agency actions or material damages; and (17) the risks detailed from time to
time in our filings with the Securities and Exchange Commission.
This discussion is not exhaustive, but is designed to highlight important
factors that may impact the Company's outlook.
Because the factors referred to above, as well as the statements included
under the captions "Narrative Description of Business," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Form 10-K, could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on our behalf, you should not place undue reliance on
any forward-looking statements. Further, any forward-looking statement speaks
only as of the date on which it is made and, unless applicable law requires to
the contrary, we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which the
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us to predict
which factors will arise, when they will arise and/or their effects. In
addition, we cannot assess the impact of each factor on our future business or
financial condition or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
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ITEM 1. BUSINESS
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(a) GENERAL DEVELOPMENT OF BUSINESS
-------------------------------
Unless the context otherwise indicates, when we use the words "we,"
"our," "us," "our company" or "KV" we are referring to K-V
Pharmaceutical Company and its wholly-owned subsidiaries, including
Ther-Rx Corporation, ETHEX Corporation and Particle Dynamics, Inc.
We were incorporated under the laws of Delaware in 1971 as a
successor to a business originally founded in 1942. Victor M.
Hermelin, our Founder and Chairman Emeritus, invented and obtained
initial patents for early controlled release and enteric coating
which became part of our core business in the 1950's to 1970's and a
platform for later drug delivery emphasis in the 1980's to the
present.
Today, we believe we are a leader in the development of proprietary
drug delivery systems and formulation technologies which enhance the
effectiveness of new therapeutic agents, existing pharmaceutical
products and nutritional supplements. We have developed and patented
a wide variety of drug delivery and formulation technologies which
are primarily focused in four principal areas: SITE RELEASE(R);
tastemasking; oral controlled release; and oral quick dissolving
tablets. We incorporate these technologies in the products we market
to control and improve the absorption and utilization of active
pharmaceutical compounds. In 1990, we established a generic,
non-branded marketing capability through a wholly-owned subsidiary,
ETHEX Corporation ("ETHEX"), which we believe makes us one of the
only drug delivery research and development companies that also
markets its own "technologically distinguished" generic products. In
1999, we established a wholly-owned subsidiary, Ther-Rx Corporation
("Ther-Rx"), to market branded pharmaceuticals directly to physician
specialists. Today, we believe we are a leading, vertically
integrated specialty pharmaceutical marketer.
Our wholly-owned subsidiary, Particle Dynamics, Inc. ("PDI"), was
acquired in 1972. Through PDI, we develop and market specialty
value-added raw materials, including drugs, directly compressible and
microencapsulated products, and other products used in the
pharmaceutical, nutritional, food, personal care and other markets.
(b) SIGNIFICANT BUSINESS DEVELOPMENTS
---------------------------------
In May 2007, we acquired the U.S. marketing rights to Evamist(TM), a
new estrogen replacement therapy product delivered with a patented
metered-dose transdermal spray system, from VIVUS, Inc. Under the
terms of the asset purchase agreement, we paid $10.0 million in cash
at closing and agreed to make an additional cash payment of $141.5
million upon final approval of the product by the U.S. Food and Drug
Administration ("FDA"). The agreement also provides for two future
payments upon achievement of certain net sales milestones. If
Evamist(TM) achieves $100.0 million of net sales in a fiscal year, a
one-time payment of $10.0 million will be made, and if net sales
levels reach $200.0 million in a fiscal year, a one-time payment of
up to $20.0 million will be made. Because the product had not
obtained FDA approval when the initial payment was made at closing,
we recorded the $10.0 million payment made during the first quarter
of fiscal 2008 as in-process research and development expense. In
July 2007, FDA approval for Evamist(TM) was received and a payment of
$141.5 million was made to VIVUS, Inc. The preliminary purchase price
allocation, which is subject to change based on the final fair value
assessment, resulted in estimated identifiable intangible assets of
$52.4 million to product rights; $15.2 million to trademark rights;
$66.4 million to rights under a sublicense agreement; and, $7.5
million to a covenant not to compete. This product was purchased
using $91.5 million in cash and $50 million of our revolving line of
credit. Upon FDA approval in July 2007, we began amortizing the
product rights, trademark rights and rights under the sublicense
agreement over 15 years and the covenant not to compete over nine
years.
In May 2007, we received FDA approval to market the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets, the
generic version of Toprol-XL(R) (marketed by AstraZeneca). In fiscal
2006, we received a favorable court ruling in a Paragraph IV patent
infringement action filed against us by AstraZeneca based on our ANDA
submissions to market these generic formulations. Since we were the
first company to file with the FDA for generic approval of the 100 mg
and 200 mg dosage strengths, we were accorded the opportunity for a
180-day exclusivity period for marketing these two dosage strengths.
The 180-day exclusivity period has allowed us to realize higher
margins on these products compared to our other generic/non-branded
products. We
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began shipping these two products in July 2007, and along with the 25
mg strength approved in March 2008, they generated net revenues in
fiscal 2008 of $120.0 million.
We received FDA approval to market the 25 mg and 50 mg strengths of
metoprolol succinate extended-release tablets in March 2008 and May
2008, respectively. As a result of the recent 50 mg approval, KV now
offers the complete line of all four dosage strengths of metoprolol
succinate extended-release tablets - 200 mg, 100 mg, 50 mg and 25 mg.
As of March 31, 2008, KV had a 69.1% and 72.5% share of the generic
market place according to IMS Inc. for the 200 mg and 100 mg
strengths, respectively.
In July 2007, we entered into an additional licensing arrangement to
market Clindesse(R) in the People's Republic of China. We have
previously entered into licensing arrangements for the right to
market Clindesse(R) in Spain, Portugal, Andorra, Brazil, Mexico, five
Scandinavian markets and 18 Eastern European countries.
In January 2008, we entered into a definitive asset purchase
agreement with CYTYC Prenatal Products and Hologic, Inc. ("CYTYC") to
acquire the U.S. and worldwide rights to Gestiva(TM) (17-alpha
hydroxyprogesterone caproate). The New Drug Application ("NDA") for
Gestiva(TM) is currently before the FDA, pending approval for use in
the prevention of preterm birth in certain categories of pregnant
women. The proposed indication is for women with a history of at
least one spontaneous preterm delivery (i.e., less than 37 weeks),
who are pregnant with a single fetus. Under the terms of the asset
purchase agreement, we agreed to pay $82.0 million for Gestiva(TM),
$7.5 million of which was paid at closing. Because the product had
not obtained FDA approval when the initial payment was made at
closing, we recorded the $7.5 million payment as in-process research
and development expense in the fourth quarter of fiscal 2008. The
remainder of the purchase price is payable on the completion of two
milestones: (1) $2.0 million on the earlier to occur of CYTYC's
receipt of acknowledgement from the FDA that their response to the
FDA's October 20, 2006 "approvable" letter is sufficient for the FDA
to proceed with their review of the NDA or the receipt of FDA's
approval of the Gestiva(TM) NDA and (2) $72.5 million on FDA approval
of a Gestiva(TM) NDA, transfer of all rights in the NDA to us and
receipt by us of defined launch quantities of finished Gestiva(TM)
suitable for commercial sale.
(c) INDUSTRY SEGMENTS
-----------------
We operate principally in three industry segments, consisting of
branded products marketing, specialty generics marketing and
specialty raw materials marketing. We derive revenues primarily from
directly marketing our own technologically distinguished brand-name
and generic/non-branded products and products marketed under joint
development agreement with other companies. Revenues may also be
received in the form of licensing revenues and/or royalty payments
based upon a percentage of the licensee's sales of the product, in
addition to manufacturing revenues, when marketing rights to products
using our advanced drug delivery technologies are licensed. See Note
21 of the Notes to the Consolidated Financial Statements.
(d) NARRATIVE DESCRIPTION OF BUSINESS
---------------------------------
OVERVIEW
We are a fully integrated specialty pharmaceutical company that
develops, manufactures, acquires and markets technologically
distinguished branded and generic/non-branded prescription
pharmaceutical products. We have a broad range of dosage form
capabilities including tablets, capsules, creams, liquids and
ointments. We conduct our branded pharmaceutical operations through
Ther-Rx and our generic/non-branded pharmaceutical operations through
ETHEX. Through PDI, we also develop, manufacture and market
technologically advanced, value-added raw material products for the
pharmaceutical, nutritional, personal care, food and other markets.
We have developed a diverse portfolio of drug delivery technologies
which we leverage to create technologically distinguished brand name
and specialty generic/non-branded products. We have patented 15 drug
delivery and formulation technologies primarily in four principal
areas: SITE RELEASE(R), oral controlled release, tastemasking and
oral quick dissolving tablets. We incorporate these technologies in
the products we market to control and improve the absorption and
utilization of active pharmaceutical compounds. These technologies
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provide a number of benefits, including reduced frequency of
administration, reduced side effects, improved drug efficacy,
enhanced patient compliance and improved taste.
We have a long history of developing drug delivery technologies. In
the 1950's, we received what we believe to be the first patents for
sustained release delivery systems which enhance the convenience and
effectiveness of pharmaceutical products. In our early years, we used
our technologies to develop products for other drug marketers. Our
technologies have been used in several well known products, including
Actifed(R) 12-hour, Sudafed(R) SA, Centrum Jr.(R) and Kaopectate(R)
Chewable. Since the 1990's, we have chosen to focus our drug
development expertise on internally developed products for our
branded and generic/non-branded pharmaceutical businesses.
For example, since its inception in 1999, Ther-Rx has successfully
launched 11 internally developed branded pharmaceutical products, all
of which incorporate our drug delivery technologies. We have also
introduced several technology-improved versions of the four product
franchises acquired by us. Furthermore, most of the internally
developed generic/non-branded products marketed by ETHEX incorporate
one or more of our drug delivery technologies.
Our drug delivery technologies play a vital role in our ability to
offer improved and differentiated products in our branded products
portfolio and allow us to develop hard to replicate products that are
marketed through our generic/non-branded products business. We
believe that this differentiation provides substantial competitive
advantages for our products, which has allowed us to establish a
strong record of growth and profitability and a leadership position
in certain segments of our industry. As a result, we have grown
consolidated net revenues at a compounded annual growth rate of 19.4%
over the five fiscal years in the period ended March 31, 2008 marking
the Company's 13th consecutive year of record revenues. Ther-Rx has
grown substantially since its inception in 1999 and continues to gain
market share in its women's healthcare and hematinic family of
products. Also, by focusing on the development and marketing of
technology-distinguished, multisource drugs, ETHEX has been able to
identify and bring to market niche products that leverage our
portfolio of drug delivery technologies in a way that produces
relatively high gross margin generic/non-branded products.
THER-RX -- OUR BRAND NAME PHARMACEUTICAL BUSINESS
We established Ther-Rx in 1999 to market brand name pharmaceutical
products which incorporate our proprietary technologies. Since its
inception, Ther-Rx has introduced 11 products into two principal
therapeutic categories - women's health and oral hematinics - where
physician specialists can be reached using a highly focused sales
force. By targeting physician specialists, we believe Ther-Rx can
compete successfully without the need for a sales force as large as
pharmaceutical companies with less specialized product lines.
Ther-Rx's net revenues grew from $188.7 million in fiscal 2007 to
$214.9 million in fiscal 2008 and represented 35.7% of our fiscal
2008 total net revenues.
We established our women's healthcare franchise through our 1999
acquisition of PreCare(R), a prescription prenatal vitamin, from UCB
Pharma, Inc. Since the acquisition, Ther-Rx has reformulated the
original product using proprietary technologies, and subsequently has
launched six internally developed products as extensions to the
PreCare(R) product line. Building upon the PreCare(R) acquisition, we
have developed a line of proprietary products which makes Ther-Rx the
leading provider of branded prescription prenatal vitamins in the
United States.
The first of our internally developed, patented line extensions to
PreCare(R) was PreCare(R) Chewables, the world's first prescription
chewable prenatal vitamin. Ther-Rx's second internally developed
product, PremesisRx(R), is an innovative prenatal prescription
product that incorporates our controlled release Vitamin B6. This
product is designed for use in conjunction with a
physician-supervised program to reduce pregnancy-related nausea and
vomiting, which is experienced by 50% to 90% of women who become
pregnant. The third product, PreCare Conceive(R), is the first
product designed as a prescription nutritional pre-conception
supplement. The fourth product, PrimaCare(R), is the first
prescription prenatal/postnatal nutritional supplement with essential
fatty acids specially designed to help provide nutritional support
for women during pregnancy, postpartum recovery and throughout the
childbearing years. The fifth product, PrimaCare ONE(R), was launched
in fiscal 2005 as a
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proprietary line extension to PrimaCare(R) and is the first prenatal
product to contain essential fatty acids in a one-dose-per-day dosage
form. During June 2008, a third party company introduced a product
purporting to be a substitute for PrimaCare ONE(R), and we are
currently engaged in litigation with this company with respect to
patent and trademark infringement and other claims. See Note 12 of
the Notes to Consolidated Financial Statements. The PrimaCare(R)
franchise has grown to be the number one branded prenatal
prescription vitamin in the U.S. Our sixth product line extension,
PreCare Premier(R), provides a wide range of vitamins and minerals,
plus a stool softener, in a small, easy-to-swallow, once-daily
caplet. Sales of our branded prescription prenatal vitamins increased
13.7% in fiscal 2008 to $82.5 million. In fiscal 2006, we expanded
our prescription nutritional franchise when Ther-Rx introduced
Encora(R), a twice-daily prescription nutritional supplement designed
to meet the key nutritional and preventative health needs of women
past their childbearing years. Sales of Encora(R) increased 45.0% in
fiscal 2008 to $4.5 million.
In 2000, Ther-Rx launched its first NDA approved product,
Gynazole-1(R), the only one-dose prescription cream treatment for
vaginal yeast infections. Gynazole-1(R) incorporates our patented
drug delivery technology, VagiSite(TM), which we believe is the only
clinically proven and FDA approved controlled release bioadhesive
system. Sales of Gynazole-1(R) were $24.0 million in fiscal 2008. We
have also entered into licensing agreements for the right to market
Gynazole-1(R) in over 50 markets in Europe, Latin America, the Middle
East, Asia, Indonesia, the People's Republic of China, Australia, New
Zealand, Mexico and Scandinavia.
In January 2005, Ther-Rx introduced its second NDA approved product,
Clindesse(R), the first approved single-dose therapy for bacterial
vaginosis. Similar to Gynazole-1(R), Clindesse(R) incorporates our
proprietary VagiSite(TM) bioadhesive drug delivery technology. Since
its launch, Clindesse(R) has gained 28.0% of the intravaginal
bacterial vaginosis market in the United States. Clindesse(R)
generated a 27.4% increase in sales to $40.5 million in fiscal 2008.
We have also entered into licensing agreements for the right to
market Clindesse(R) in Spain, Portugal, Andorra, Brazil, Mexico, five
Scandinavian markets, 18 Eastern European countries and the People's
Republic of China.
We established our hematinic product line by acquiring two leading
hematinic brands, Chromagen(R) and Niferex(R), in 2003. We
re-launched technology-improved versions of these products mid-way
through fiscal 2004. In fiscal 2006, we introduced two new hematinic
products -- Repliva 21/7(R) and Niferex Gold(R). We believe Repliva
21/7(R) is a product offering that represents a revolutionary
advancement in iron therapy. Repliva 21/7(R) has been uniquely
formulated to promote maximum red blood cell regeneration while
minimizing uncomfortable side effects that patients have typically
endured with traditional iron supplements. With Repliva 21/7(R)
becoming the number one branded oral iron product in the United
States and Ther-Rx being the number one provider of branded
prescription oral iron supplements in the United States, sales of our
hematinic product line grew to $53.8 million in fiscal 2008, an 11.6%
increase over fiscal 2007.
In May 2007, we acquired from VIVUS, Inc. the U.S. marketing rights
to Evamist(TM), a unique transdermal estrogen therapy delivering a
low dose of estradiol in a once-daily spray. Under terms of the asset
purchase agreement, we paid $10.0 million in cash at closing and made
an additional cash payment of $141.5 million upon final approval of
the product by the FDA in July 2007. Evamist(TM) is indicated for the
treatment of moderate-to-severe vasomotor symptoms due to menopause
and targets the estrogen replacement market where physicians and
patients are seeking an effective and safe, low-dose estrogen
product. We believe Evamist(TM) will significantly augment the
women's health offerings of our branded segment as we leverage the
promotion of this product through our expanded branded sales force.
We began shipping this product at the end of fiscal 2008.
In January 2008, we entered into a definitive asset purchase
agreement with CYTYC to acquire the U.S. and worldwide rights to
Gestiva(TM) (17-alpha hydroxyprogesterone caproate). Under the terms
of the asset purchase agreement, we agreed to pay $82.0 million for
Gestiva(TM), $7.5 million of which was paid at closing. The NDA for
Gestiva(TM) is currently before the FDA, pending approval for use in
the prevention of preterm birth in certain categories of pregnant
women. The proposed indication is for women with a history of at
least one spontaneous preterm delivery (i.e., less than 37 weeks),
who are pregnant with a single fetus. The FDA issued an "approvable"
letter for Gestiva(TM) in October 2006, and a final approval is
anticipated in fiscal 2009. The FDA has granted an Orphan Drug
Designation for Gestiva(TM). The acquisition of Gestiva(TM) is
intended to allow Ther-
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Rx to capitalize on the already strong relationships built over the
past seven years between Ther-Rx's 330-member sales force and
Obstetrician/Gynecologists.
To capitalize on Ther-Rx's success in marketing women's health
products, we continue to look for opportunities to expand our Ther-Rx
product portfolio. As part of the May 2005 acquisition of
FemmePharma, we assumed development responsibility and secured full
worldwide marketing rights to an endometriosis product that had
successfully completed Phase II clinical trials. We are now testing
an alternative formula in a Phase II study to determine which
alternative to take into Phase III clinicals. The Company expects to
start Phase III clinicals in fiscal 2010.
Based on the addition and development of new products and our
expectation of continued growth in our branded business, Ther-Rx has
expanded its branded sales force to approximately 330 specialty sales
representatives. Ther-Rx's sales force focuses on physician
specialists who are identified through available market research as
frequent prescribers of our prescription products. Ther-Rx also has a
corporate sales and marketing management team dedicated to planning
and managing Ther-Rx's sales and marketing efforts.
ETHEX -- OUR TECHNOLOGICALLY DISTINGUISHED GENERIC/NON-BRANDED DRUG
BUSINESS
We established ETHEX, currently our largest business segment, in 1990
to utilize our portfolio of drug delivery systems to develop and
market hard-to-copy generic/non-branded pharmaceuticals. We believe
many of our ETHEX products enjoy higher gross margins than other
generic pharmaceutical companies due to our approach of selecting
products that benefit from our proprietary drug delivery systems and
our specialty manufacturing capabilities. These advantages can
differentiate our products and reduce the rate of price erosion
typically experienced in the generic market. ETHEX's net revenues
increased 56.1% to $367.9 million for fiscal 2008, which represented
61.1% of our total net revenues.
In May 2007, we received FDA approval to market the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets, the
generic version of Toprol-XL(R) (marketed by AstraZeneca). In fiscal
2006, we received a favorable court ruling in a Paragraph IV patent
infringement action filed against us by AstraZeneca based on our ANDA
submissions to market these generic formulations. Since we were the
first company to file with the FDA for generic approval of the 100 mg
and 200 mg dosage strengths, we were accorded the opportunity for a
180-day exclusivity period for marketing these two dosage strengths.
The 180-day exclusivity period has allowed us to realize higher
margins on these products compared to our other generic/non-branded
products. We began shipping these two products in July 2007 and along
with the 25 mg approved and launched in March 2008 generated net
revenues in fiscal 2008 of $120.0 million.
We have used our proprietary drug delivery technologies in many of
our generic/non-branded pharmaceutical products. For example, we have
used METER RELEASE(R), one of our proprietary controlled release
technologies, in a variety of products including the only generic
equivalent to Norpace(R) CR, an antiarrhythmic that is taken twice
daily. Further, we have used KV/24(TM) once daily technology in the
generic equivalent to IMDUR(R), a cardiovascular drug that is taken
once per day, among others.
To capitalize on ETHEX's unique product capabilities, we continue to
expand our ETHEX product portfolio. In fiscal 2006, we launched a new
InveAmp(R) line extension to our pain management business.
InveAmp(R), a unique one unit dose ampoule, was designed to make
dispensing of narcotic pain relievers more effective. In fiscal 2007,
we received ANDA approval for six strengths of diltiazem
hydrochloride extended-release capsules. As noted above, in fiscal
2008, we received FDA approval to market the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets, the
generic version of Toprol-XL(R). We also received in fiscal 2008 ANDA
approval for ondansetron 4 mg and 8 mg orally disintegrating tablets,
the 100 mg and 200 mg strengths of morphine sulfate extended-release
tablets, the generic equivalent of MS Contin(R), and the 100 mg and
200 mg strengths of benzonatate USP capsules, the generic equivalent
to Tessalon(R). In addition, we received FDA approval to market the
25 mg and 50 mg strengths of metoprolol succinate extended-release
tablets in March 2008 and May 2008, respectively. As a result of the
recent 50 mg approval, KV now offers the complete line of all four
dosage strengths of metoprolol succinate extended-release tablets -
200 mg, 100 mg, 50 mg and 25 mg.
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In addition to our internal product development efforts, we have
entered into several long-term product development and marketing
license agreements with various generic pharmaceutical developers and
manufacturers. Under most of these arrangements, the other parties
are responsible for developing, submitting for regulatory approval
and manufacturing the products and we are responsible for exclusively
marketing these products in the territories covered by the
in-licensing agreements. We expect certain products under these
agreements to be filed and/or approved beginning in fiscal 2009. With
the majority of our internal generic/non-branded product development
efforts primarily focused on building our pipeline with products that
use one or more of our 15 drug delivery technologies, we believe
these development agreements with existing parties will further
provide an opportunity to grow our generic/non-branded business.
These new product sources have increased the scope of our
generic/non-branded product pipeline to more than 50 product
opportunities.
The Company seeks to pursue an approach of developing generic
products that are more difficult to develop or manufacture and that
will therefore have significant barriers to entry by other generic
companies, such as metoprolol succinate extended-release tablets. The
Company has a rich generic pipeline. In fiscal year 2008, between the
Company's own internal development activities and its external
development partners, the Company filed 16 ANDAs and received 5
generic product approvals from the FDA. In fiscal year 2009, the
Company anticipates that, between its external development partners
and its own internal development activities, it will file
approximately 16 generic ANDA filings and receive six product
approvals from the FDA.
On February 14, 2006, the Company announced it had entered into an
agreement with Gedeon Richter under which the Company had acquired
exclusive rights to market a group of generic products in the United
States. However, due to changes in the generic drug marketplace, the
Company and Gedeon Richter have agreed the current portfolio of
products covered by the agreement, which has now been terminated, no
longer represent market opportunities that are worth pursuing. The
two companies remain committed partners in other endeavors and are
keeping options open to explore other more meaningful joint
opportunities.
ETHEX primarily focuses on the therapeutic categories of
cardiovascular, women's health, pain management and respiratory,
leveraging our expertise in developing and manufacturing products in
these areas. In addition, we pursue opportunities outside of these
categories where we also may differentiate our products based upon
our proprietary drug delivery systems and our specialty manufacturing
expertise.
CARDIOVASCULAR. ETHEX currently markets over 70 products in its
cardiovascular line, including products to treat angina, arrhythmia
and hypertension, as well as for potassium supplementation. The
cardiovascular line accounted for $237.2 million, or 64.5%, of
ETHEX's net revenues in fiscal 2008.
PAIN MANAGEMENT. ETHEX currently markets over 30 products in its pain
management line. Included in this line are several controlled
substance drugs, such as morphine, hydromorphone and oxycodone. Pain
management products accounted for $45.7 million, or 12.4%, of ETHEX's
net revenues in fiscal 2008.
RESPIRATORY. During most of fiscal 2008, ETHEX marketed approximately
30 products in its respiratory line, which consisted primarily of
cough/cold products. The cough/cold line accounted for $38.5 million,
or 10.5% of ETHEX's net revenues in fiscal 2008. In March 2008,
representatives of the Missouri Department of Health and Senior
Services and the FDA notified us of a hold on our inventory of
certain unapproved products. Previously, we had received notices that
required us to cease the manufacture and sale of unapproved products
containing timed-release guaifenesin. As a result of these notices,
we are currently marketing one cough/cold product. We will
discontinue manufacturing and marketing all unapproved cough/cold
products subject to the hold. See Part I, Item 1A "Risk Factors" for
additional information. The regulatory status of certain of our
generic products may make them subject to increased competition or to
regulatory decisions that may require market withdrawal of one or
more of our unapproved products.
WOMEN'S HEALTH CARE. ETHEX currently markets over 20 products in its
women's healthcare line, all of which are prescription prenatal
vitamins. The women's healthcare line accounted for $14.1 million, or
3.8%, of ETHEX's net revenues in fiscal 2008.
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OTHER THERAPEUTICS. In addition to our core therapeutic lines, ETHEX
markets over 40 products in the gastrointestinal, dermatological,
anti-anxiety, digestive enzyme and dental categories. These
categories accounted for $32.2 million, or 8.8%, of ETHEX's net
revenues in fiscal 2008.
ETHEX has a dedicated sales and marketing team, which includes an
outside sales team of regional managers and national account managers
and an inside sales team. The outside sales force calls on
wholesalers, distributors and national drugstore chains, as well as
hospitals, nursing homes, independent pharmacies and mail order
firms. The inside sales force makes calls to independent pharmacies
to create demand at the wholesale level.
PDI - OUR VALUE-ADDED RAW MATERIAL BUSINESS
PDI develops and markets specialty raw material products for the
pharmaceutical, nutritional, food, personal care and other
industries. Its products include value-added active drug molecules,
vitamins, minerals and other raw material ingredients that provide
benefits such as improved taste, altered or controlled release
profiles, enhanced product stability or more efficient and other
manufacturing process advantages. PDI is also a significant supplier
of value-added raw materials for the development and manufacture of
both existing and new products at Ther-Rx and ETHEX. Net revenues for
PDI were $18.0 million in fiscal 2008, up 3.3% over net revenues of
$17.4 for fiscal 2007, which represented 3.0% of our total net
revenues.
BUSINESS STRATEGY
Our goal is to enhance our position as a leading fully integrated
specialty pharmaceutical company that utilizes its expanding drug
delivery expertise to bring technologically distinguished brand name
and generic/non-branded products to market. Our strategies
incorporate the following key elements:
INTERNALLY DEVELOP BRAND NAME PRODUCTS. We apply our existing drug
delivery technologies, research and development and manufacturing
expertise to introduce new brand name products which can expand our
existing franchises. We plan to continue to use our research and
development, manufacturing and marketing expertise to create unique
brand name products within our core therapeutic areas and, possibly,
new therapeutic areas. We believe we have in place a strong pipeline
of potential new products.
CAPITALIZE ON ACQUISITION OPPORTUNITIES. We actively seek acquisition
opportunities for both Ther-Rx and ETHEX. In May 2007, we completed
the acquisition of the U.S. marketing rights to Evamist(TM), a new
low-dose estrogen transdermal spray, from VIVUS, Inc. The NDA for
this product was approved by the FDA in July 2007 and we began
shipping Evamist(TM) during the fourth quarter of fiscal 2008.
In January 2008, we entered into a definitive purchase agreement that
gives us full U.S. and worldwide rights to Gestiva(TM) (17-alpha
hydroxyprogesterone caproate) upon approval of the pending
Gestiva(TM) NDA by FDA. Gestiva(TM) is seeking an indication for use
in the prevention of preterm birth in certain categories of pregnant
women. The FDA issued an "approvable" letter for Gestiva(TM) in
October 2006, and a final approval is anticipated in late 2008. The
FDA has granted an Orphan Drug Designation for Gestiva(TM).
Ther-Rx is also continually looking for platform acquisition
opportunities similar to PreCare(R) around which it can build
franchises. We believe that consolidation among large pharmaceutical
companies, coupled with cost-containment pressures, has increased the
level of sales necessary for an individual product to justify active
marketing and promotion. This has led large pharmaceutical companies
to focus their marketing efforts on drugs with higher volume sales,
newer or novel drugs which have the potential for high volume sales
and products which fit within core therapeutic or marketing
priorities. As a result, major pharmaceutical companies have sought
to divest small or non-strategic product lines, which can be
profitable for specialty pharmaceutical companies like us.
In making acquisitions, we apply several important criteria in our
decision-making process. We pursue products with the following
attributes:
o products which we believe have relevance for treatment of
significant clinical needs;
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o promotionally sensitive maintenance drugs which require
continual use over a long period of time, as opposed to more
limited use products for acute indications;
o products that have strong patent protection or can be protected;
o products which are predominantly prescribed by physician
specialists, which can be cost-effectively marketed by a focused
sales force; and
o products which we believe have potential for technological
enhancements and line extensions based upon our drug delivery
technologies.
FOCUS SALES EFFORTS ON HIGH-VALUE NICHE MARKETS. We focus our Ther-Rx
sales efforts on niche markets where we believe we can target a
relatively narrow physician specialist audience. Because our products
are sold to specialty physician groups that tend to be relatively
concentrated, we believe that we can address these markets cost
effectively with a focused sales force. Based on the addition and
development of new products and our expectation of continued growth
in our branded business, Ther-Rx has expanded its branded sales force
to approximately 330 specialty sales representatives. We plan to
continue to build our sales force over time as necessary to
accommodate current and future expansions of our product lines.
PURSUE ATTRACTIVE GROWTH OPPORTUNITIES WITHIN THE GENERIC INDUSTRY.
We plan to continue introducing generic and non-branded alternatives
to select drugs whose patents have expired, particularly where we can
use our drug delivery technologies. We believe the health care
industry will continue to support growth in the generic
pharmaceutical market and that industry trends favor generic product
expansion into the managed care, long-term care and government
contract markets. We further believe that we are uniquely positioned
to capitalize on this growing market given our large base of
proprietary drug delivery technologies and our proven ability to lead
the therapeutic categories we enter. Almost two-thirds of ETHEX'S
generic/non-branded products use the Company's proprietary drug
delivery technologies, and approximately 80% rank either first or
second in their respective generic categories by volume.
In May 2007, we received FDA approval to market the 100 mg and 200 mg
strengths of metoprolol succinate extended-release tablets, the
generic version of Toprol-XL(R) (marketed by AstraZeneca). In fiscal
2006, we received a favorable court ruling in a Paragraph IV patent
infringement action filed against us by AstraZeneca based on our ANDA
submissions to market these generic formulations. Since we were the
first company to file with the FDA for generic approval of the 100 mg
and 200 mg dosage strengths, we were accorded the opportunity for a
180-day exclusivity period for marketing these two dosage strengths.
The 180-day exclusivity period has allowed us to realize higher
margins on these products compared to our other generic/non-branded
products. We began shipping these two products in July 2007 and with
the approval and launch in March 2008 of the 25 mg strength they
generated net revenues in fiscal 2008 of $120.0 million. We received
FDA approval to market the 25 mg and 50 mg strengths of metoprolol
succinate extended-release tablets in March 2008 and May 2008,
respectively. As a result of the recent 50 mg approval, KV now offers
the complete line of all four dosage strengths of metoprolol
succinate extended-release tablets - 200 mg, 100 mg, 50 mg and 25 mg.
ADVANCE EXISTING AND DEVELOP NEW DRUG DELIVERY TECHNOLOGIES. We
believe our drug delivery platform of 15 distinguished technologies
has unique breadth and depth. These technologies have enabled us to
create innovative products, including Gynazole-1(R) and Clindesse(R),
which incorporate VagiSite(TM), our proprietary bioadhesive
controlled release system. In addition, our tastemasking and
controlled release systems are incorporated into our prenatal
vitamins, providing them with differentiated benefits over other
products on the market.
We are actively advancing our existing portfolio of drug delivery
technologies and developing or acquiring exciting new technologies
with substantial growth potential. In May 2007, we completed the
acquisition of the U.S. marketing rights to Evamist(TM), a new
low-dose estrogen transdermal spray, from VIVUS, Inc. The product was
formulated with a patented metered-dose transdermal spray system
which is designed to provide an easy, once-daily dose of estrodial
via the skin. Evamist(TM) is the first transdermal spray estrogen
replacement therapy
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product approved for use in the U.S. The NDA for this product was
approved by the FDA in July 2007 and we began shipping Evamist(TM)
during the fourth quarter of fiscal 2008.
OUR PROPRIETARY DRUG DELIVERY TECHNOLOGIES
We believe we are a leader in the development of proprietary drug
delivery systems and formulation technologies which enhance the
effectiveness of new therapeutic agents, existing pharmaceutical
products and nutritional supplements. We have used many of these
technologies to successfully commercialize technologically
distinguished branded and generic/non-branded products. Additionally,
we continue to invest our resources in the development or acquisition
of new technologies. The following describes our principal drug
delivery technologies.
SITE RELEASE(R) TECHNOLOGIES. SITE RELEASE(R) is our largest family
of technologies and includes eight systems designed specifically for
oral, topical or interorificial use. These systems rely on controlled
bioadhesive properties to optimize the delivery of drugs to either
wet mucosal tissue or the skin and are the subject of issued patents
and pending patent applications. Of the technologies developed,
products using the VagiSite(TM) and DermaSite(TM) technologies have
been successfully commercialized.
ORAL CONTROLLED RELEASE TECHNOLOGIES. The technological leadership of
our advanced drug delivery systems was established in the development
of our three oral controlled release technologies, all of which have
been commercialized. Our systems can be individually designed to
achieve the desired release profile for a given drug. The release
profile is dependent on many parameters, such as drug solubility,
protein binding and site of absorption. Some of the products
utilizing our oral controlled release systems in the market include
diltiazem extended-release capsules (an AB rated generic equivalent
to Tiazac(R)) and metoprolol succinate extended-release tablets (an
AB rated generic equivalent to Toprol-XL(R)).
TASTEMASKING TECHNOLOGIES. Our tastemasking technologies improve the
taste of unpleasant drugs. Our three patented tastemasking systems
can be applied to liquids, chewables or dry powders. We first
introduced tastemasking technologies in 1991 and have utilized them
in a number of Ther-Rx and ETHEX products, including PreCare(R)
Chewables and most of the liquid products that are sold in ETHEX's
cough/cold line.
ORAL QUICK DISSOLVING TECHNOLOGY. Our quick dissolving oral tablet
technology provides the ability to tastemask, yet dissolves in the
mouth in a matter of seconds. Most other quick-dissolving
technologies offer either quickness at the expense of poor
tastemasking or excellent tastemasking at the expense of quickness.
Our unique quick dissolving tablet can be taken without water. Its
durability avoids the need for special packaging and it supports the
incorporation of our tastemasking technologies. Our oral dissolving
tablet technology is commercialized in our hyoscyamine sulfate orally
disintegrating tablets, as well as the ondansetron orally
disintegrating tablets approved by the FDA in fiscal 2008.
SALES AND MARKETING
Ther-Rx has a national sales and marketing infrastructure which
includes approximately 330 sales representatives dedicated to
promoting and marketing our branded pharmaceutical products to
targeted physician specialists. The Ther-Rx sales force focuses on
physician specialists who are identified through available market
research as frequent prescribers of products in our therapeutic
categories. Ther-Rx also has a corporate sales and marketing
management team dedicated to planning and managing Ther-Rx's sales
and marketing efforts.
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We attempt to increase sales of our branded pharmaceutical products
through physician sales calls and promotional efforts, including
sampling, advertising and direct mail. For acquired branded products,
we generally increase the level of physician sales calls and
promotion relative to the previous owner. For example, with the
PreCare(R) prenatal sales efforts, we increased the level of
physician sales calls and sampling to the highest prescribers of
prenatal vitamins. We also have enhanced our PreCare(R) brand
franchise by launching six additional line extensions to address
unmet needs, including the launch of PreCare(R) Chewables, Premesis
Rx(R), PreCare Conceive(R), PrimaCare(R), PrimaCare ONE(R) and
PreCare Premier(R). The PreCare(R) product line enables us to deliver
a full range of nutritional products for physicians to prescribe to
women in their childbearing years. In addition, we added to our
women's health care family of products in June 2000 with the
introduction of our first NDA approved product, Gynazole-1(R), the
only one-dose prescription cream treatment for vaginal yeast
infections. In fiscal 2004, we further expanded our branded product
offerings when we launched technology improved versions of the
Chromagen(R) and Niferex(R) oral hematinic product lines that were
acquired at the end of fiscal 2003. In January 2005, we introduced
our second NDA approved product, Clindesse(R), the first approved
single-dose therapy for bacterial vaginosis. In fiscal 2006, we
introduced Encora(R), a new prescription nutritional supplement
product, and two new hematinic products, Repliva 21/7(R) and Niferex
Gold(R). In May 2007, we completed the acquisition of the U.S.
marketing rights to Evamist(TM), a new low-dose estrogen transdermal
spray, from VIVUS, Inc. The NDA for this product was approved by the
FDA in July 2007 and we began shipping Evamist(TM) during March 2008.
By offering multiple products to the same group of physician
specialists, we believe we are able to maximize the effectiveness of
our experienced sales force.
ETHEX has an experienced sales and marketing team, which includes an
outside sales team, regional account managers, national account
managers and an inside sales team. The outside sales force calls on
wholesalers, distributors and national drugstore chains, as well as
hospitals, nursing homes, mail order firms and independent
pharmacies. The inside sales team primarily calls on independent
pharmacies to create demand at the wholesale level.
We believe that industry trends favor generic product expansion into
the managed care, long-term care and government contract markets.
Further, we believe that our competitively priced,
technology-distinguished generic/non-branded products can fulfill the
increasing need of these markets to contain costs and improve patient
compliance. Accordingly, we intend to continue to devote significant
marketing resources to the penetration of those markets.
During fiscal 2008, our three largest customers accounted for 24.6%,
23.9% and 9.8% of gross revenues. These customers were Cardinal
Health, McKesson Drug Company and Amerisource Corporation,
respectively. In fiscal 2007 and 2006, these customers accounted for
gross revenues of 21.1%, 25.7% and 14.4%, and 15.7%, 26.9% and 12.7%,
respectively.
Although we sell internationally, we do not have material operations
or sales in foreign countries and our sales are not subject to
significant geographic concentration.
RESEARCH AND DEVELOPMENT
We have long recognized that development of successful new products
is critical to achieving our goal of sustainable growth over the long
term. As such, our investment in research and development, which
increased at a compounded annual growth rate of 19.5% over the past
five fiscal years, reflects our continued commitment to develop new
products and/or technologies through our internal development
programs, and with our external strategic partners.
Our research and development activities include the development of
new and next generation drug delivery technologies, the formulation
of brand name proprietary products and the development of
technologically distinguished generic/non-branded versions of
previously approved brand name pharmaceutical products. In fiscal
2008, 2007 and 2006, total research and development expenses were
$46.6 million, $31.5 million and $28.9 million, respectively,
excluding acquired in-process research and development.
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All applications for FDA approval must contain information relating
to product formulation, raw material suppliers, stability,
manufacturing processes, packaging, labeling and quality control.
Information to support the bioequivalence of generic drug products or
the safety and effectiveness of new drug products for their intended
use is also required to be submitted. There are generally two types
of applications used for obtaining FDA approval of new products:
o New Drug Application ("NDA"). An NDA is filed when approval
is sought to market a drug with active ingredients that have
not been previously approved by the FDA. NDAs are filed for
newly developed brand products and, in certain instances,
for a new dosage form, a new delivery system or a new
indication for previously approved drugs.
o Abbreviated New Drug Application ("ANDA"). An ANDA is filed
when approval is sought to market a generic equivalent of a
drug product previously approved under an NDA and listed in
the FDA's "Orange Book" or for a new dosage strength or a
new delivery system for a drug previously approved under an
ANDA.
One requirement for FDA approval of NDAs and ANDAs is that our
manufacturing procedures and operations conform to FDA requirements
and guidelines, generally referred to as current Good Manufacturing
Practices ("cGMP"). The requirements for FDA approval encompass all
aspects of the production process, including validation and
recordkeeping, and involve changing and evolving standards.
BRANDED PRODUCT DEVELOPMENT. The process required by the FDA before a
pharmaceutical product, with active ingredients that have not been
previously approved, may be marketed in the United States generally
involves the following:
o laboratory and preclinical tests;
o submission of an Investigational New Drug ("IND")
application, which must become effective before clinical
studies may begin;
o adequate and well-controlled human clinical studies to
establish the safety and efficacy of the proposed product
for its intended use;
o submission of an NDA containing the results of the
preclinical tests and clinical studies establishing the
safety and efficacy of the proposed product for its intended
use, as well as extensive data addressing matters such as
manufacturing and quality assurance;
o scale-up to commercial manufacturing; and
o FDA approval of an NDA.
Preclinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as toxicology and
pharmacology studies to help define the pharmacological profile of
the drug and assess the potential safety and efficacy of the product.
The results of these studies are submitted to the FDA as part of the
IND. They must demonstrate that the product delivers sufficient
quantities of the drug to the bloodstream or intended site of action
to produce the desired therapeutic results before human clinical
trials may begin. These studies must also provide the appropriate
supportive safety information necessary for the FDA to determine
whether the clinical studies proposed to be conducted under the IND
can safely proceed. The IND automatically becomes effective 30 days
after receipt by the FDA unless the FDA, during that 30-day period,
raises concerns or questions about the conduct of the proposed trials
as outlined in the IND. In such cases, the IND sponsor and the FDA
must resolve any outstanding concerns before clinical trials may
begin. In addition, an independent institutional review board must
review and approve any clinical study prior to initiation.
Human clinical studies are typically conducted in three sequential
phases, which may overlap:
o Phase I: The drug is initially introduced into a relatively
small number of healthy human subjects or patients and is
tested for safety, dosage tolerance, mechanism of action,
absorption, metabolism, distribution and excretion.
13
o Phase II: Studies are performed with a limited patient
population to identify possible adverse effects and safety
risks, to assess the efficacy of the product for specific
targeted diseases or conditions, and to determine dosage
tolerance and optimal dosage.
o Phase III: When Phase II evaluations demonstrate that a
dosage range of the product is effective and has an
acceptable safety profile, Phase III trials are undertaken
to evaluate further dosage and clinical efficacy and to test
further for safety in an expanded patient population at
geographically dispersed clinical study sites.
The results of the product development, preclinical studies and
clinical studies are then submitted to the FDA as part of the NDA.
The NDA drug development and approval process could take from three
to more than 10 years.
In fiscal 2005, we introduced our second NDA approved product,
Clindesse(R), the first approved single-dose therapy for bacterial
vaginosis. Similar to Gynazole-1(R), Clindesse(R) incorporates our
proprietary VagiSite(TM) bioadhesive drug delivery technology. In
fiscal 2006, we introduced Encora(R), a new prescription nutritional
supplement product, and two new hematinic products, Niferex Gold(R)
and Repliva 21/7(R). Ther-Rx currently has a number of products in
its research and development pipeline at various stages of
development. We believe we have the technological expertise required
to develop unique products to meet currently unmet needs in the area
of women's health, as well as other therapeutic areas.
As part of the May 2005 acquisition of FemmePharma, we assumed
development responsibility and secured full worldwide marketing
rights to an endometriosis product that had successfully completed
Phase II clinical trials. We are now testing an alternative formula
in a Phase II study to determine which alternative to take into Phase
III clinicals. The Company expects to start Phase III clinicals in
fiscal 2010.
In May 2007, we acquired from VIVUS, Inc. the U.S. marketing rights
to Evamist(TM), a unique transdermal estrogen therapy delivering a
low dose of estradiol in a once-daily spray. Under terms of the asset
purchase agreement, we paid $10.0 million in cash at closing and made
an additional cash payment of $141.5 million upon final approval of
the product by the FDA in July 2007. Evamist(TM) is indicated for the
treatment of moderate-to-severe vasomotor symptoms due to menopause
and targets the estrogen replacement market where physicians and
patients are seeking an effective and safe, low-dose estrogen
product. We began shipping this product at the end of fiscal 2008.
In January 2008, we entered into a definitive asset purchase
agreement with CYTYC to acquire the U.S. and worldwide rights to
Gestiva(TM) (17-alpha hydroxyprogesterone caproate). Under the terms
of the asset purchase agreement, we agreed to pay $82.0 million for
Gestiva(TM), $7.5 million of which was paid at closing. The NDA for
Gestiva(TM) is currently before the FDA, pending approval for use in
the prevention of preterm birth in certain categories of pregnant
women. The proposed indication is for women with a history of at
least one spontaneous preterm delivery (i.e., less than 37 weeks),
who are pregnant with a single fetus. The FDA issued an "approvable"
letter for Gestiva(TM) in October 2006, and a final approval is
anticipated in fiscal 2009. The FDA has granted an Orphan Drug
Designation for Gestiva(TM).
GENERIC/NON-BRANDED PRODUCT DEVELOPMENT. FDA approval of an ANDA is
required before marketing a generic equivalent of a drug approved
under an NDA in the United States or for a previously unapproved
dosage strength or delivery system for a drug approved under an ANDA.
The ANDA development process is generally less time consuming and
complex than the NDA development process. It typically does not
require new preclinical and clinical studies because it relies on the
studies establishing safety and efficacy conducted for the drug
previously approved through the NDA process. The ANDA process,
however, does require one or more bioequivalency studies to show that
the ANDA drug is bioequivalent to the previously approved drug.
Bioequivalence compares the bioavailability of one drug product with
that of another formulation containing the same active ingredient.
When established, bioequivalence confirms that the rate of absorption
and levels of concentration in the bloodstream of a formulation of
the previously approved drug and the generic drug are equivalent.
Bioavailability indicates the rate and extent of absorption and
levels of concentration of a drug product in the bloodstream needed
to produce the same therapeutic effect.
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Supplemental ANDAs are required for approval of various types of
changes to an approved application, and these supplements may be
under review for six months or more. In addition, certain types of
changes may be approved only once new bioequivalence studies are
conducted or other requirements are satisfied.
PATENTS AND OTHER PROPRIETARY RIGHTS
When appropriate and available, we actively seek protection for our
products and proprietary information by means of U.S. and foreign
patents, trademarks, trade secrets, copyrights and contractual
arrangements. Patent protection in the pharmaceutical field, however,
can involve complex legal and factual issues. Moreover, broad patent
protection for new formulations or new methods of use of existing
chemical compounds is sometimes difficult to obtain, primarily
because the active ingredient and many of the formulation techniques
have been known for some time. Consequently, some patents claiming
new formulations or new methods of use for old drugs may not provide
meaningful protection against competition. Nevertheless, we intend to
continue to seek patent protection when appropriate and available and
otherwise to rely on regulatory-related exclusivity and trade secrets
to protect certain of our products, technologies and other scientific
information. There can be no assurance, however, that any steps taken
to protect such proprietary information will be effective.
Our policy is to file patent applications in appropriate situations
to protect and preserve, for our own use, technology, inventions and
improvements that we consider important to the development of our
business. We currently hold domestic and foreign issued patents the
last of which expires in fiscal 2023 relating to our
controlled-release, site-specific, quick dissolve and taste-masking
technologies. We have been granted 42 U.S. patents and have 37 U.S.
patent applications pending. In addition, we have 71 foreign issued
patents and a total of 204 patent applications pending primarily in
Canada, Europe, Australia, Japan, South America, Mexico and South
Korea (see Part I, Item 1A "Risk Factors for additional information).
We depend on our patents and other proprietary rights and cannot be
certain of their confidentiality and protection.
We currently own more than 224 U.S. and foreign trademark
registrations and have also applied for trademark protection for the
names of our proprietary controlled-release, tastemasking,
site-specific and quick dissolve technologies. We intend to continue
to trademark new technology and product names as they are developed.
To protect our trademark, domain name, and related rights, we
generally rely on trademark and unfair competition laws, which are
subject to change. Some, but not all, of our trademarks are
registered in the jurisdictions where they are used. Some of our
other trademarks are the subject of pending applications in the
jurisdictions where they are used or intended to be used and others
are not.
MANUFACTURING AND FACILITIES
We believe that our research, manufacturing, distribution and
administrative facilities are an important factor in achieving our
long-term growth objectives. All facilities at March 31, 2008,
aggregating approximately 1.3 million square feet, are located in the
St. Louis, Missouri metropolitan area. We own facilities with
approximately 1.1 million square feet, with the balance under various
leases at pre-determined annual rates under agreements expiring from
fiscal 2009 through fiscal 2021, subject in most cases to renewal at
our option.
We manufacture drug products in liquid, cream, tablet, capsule and
caplet forms for distribution by Ther-Rx, ETHEX and our corporate
licensees and value-added specialty raw materials for distribution by
PDI. We believe that all of our facilities are in material compliance
with applicable regulatory requirements.
We seek to maintain inventories at sufficient levels to support
current production and sales levels. During fiscal 2008, we
encountered no serious shortage of any particular raw materials.
Although there can be no assurance that raw material supply will not
adversely affect our future operations, we do not believe that any
shortages will occur in the foreseeable future.
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COMPETITION
Competition in the development and marketing of pharmaceutical
products is intense and characterized by extensive research efforts
and rapid technological progress. Many companies, including those
with financial and marketing resources and development capabilities
substantially greater than our own, are engaged in developing,
marketing and selling products that compete with those that we offer.
Our branded pharmaceutical products may also be subject to
competition from alternate therapies during the period of patent
protection and thereafter from generic equivalents. In addition, our
generic/non-branded pharmaceutical products may be subject to
competition from pharmaceutical companies engaged in the development
of alternatives to the generic/non-branded products we offer or of
which we undertake development. Our competitors may develop generic
products before we do or may have pricing advantages over our
products. In our specialty pharmaceutical businesses, we compete
primarily on the basis of product efficacy, breadth of product line
and price. We believe that our patents, proprietary trade secrets,
technological expertise, product development and manufacturing
capabilities will enable us to maintain a leadership position in the
field of advanced drug delivery technologies and to continue to
develop products to compete effectively in the marketplace.
In addition, we compete for product acquisitions with other
pharmaceutical companies. Many of these competitors have
substantially greater financial and marketing resources than we do.
Accordingly, our competitors may succeed in product line acquisitions
that we seek to acquire.
We also compete with drug delivery companies engaged in the
development of alternative drug delivery systems. We are aware of a
number of companies currently seeking to develop new non-invasive
drug delivery systems, including oral delivery and transmucosal
systems. Many of these companies may have greater research and
development capabilities, experience, manufacturing, marketing,
financial and managerial resources than we do. Accordingly, our
competitors may succeed in developing competing technologies,
obtaining FDA approval for products or gaining market acceptance more
rapidly than we do.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation
by the federal government, principally the FDA, and, to a lesser
extent, by state, local and foreign governments. The Federal Food,
Drug and Cosmetic Act, or FDCA, and other federal statutes and
regulations govern or influence, among other things, the development,
testing, manufacture, safety, labeling, storage, recordkeeping,
approval, advertising, promotion, sale and distribution of
pharmaceutical products. Pharmaceutical manufacturers are also
subject to certain record-keeping and reporting requirements,
establishment registration and product listing, and FDA inspections.
With respect to any non-biological "new drug" product with active
ingredients not previously approved by the FDA, a prospective
manufacturer must submit a full NDA, including complete reports of
preclinical, clinical and other studies to prove the product's safety
and efficacy. (See "-Research and Development").
The Drug Price Competition and Patent Restoration Act of 1984, known
as the Hatch-Waxman Act, established ANDA procedures for obtaining
FDA approval for generic versions of many non-biological drugs for
which patent or marketing exclusivity rights have expired and which
are bioequivalent to previously approved drugs.
In addition to establishing ANDA approval mechanisms, the
Hatch-Waxman Act fosters pharmaceutical innovation through such
incentives as non-patent exclusivity and patent restoration. The Act
provides two distinct exclusivity provisions that either preclude the
submission or delay the approval of an ANDA. A five-year exclusivity
period is provided for new chemical compounds, and a three-year
marketing exclusivity period is provided for changes to previously
approved drugs which are based on new clinical investigations
essential to the approval. The three-year marketing exclusivity
period may be applicable to the approval of a novel drug delivery
system. The marketing exclusivity provisions apply equally to
patented and non-patented drug products, but do not apply to products
containing antibiotic ingredients first submitted for approval on or
before November 20, 1997. These provisions do not delay or otherwise
affect the approvability of full NDAs even when effective ANDA
approvals are not available. For drugs covered by patents, patent
extension may be provided for up to five
16
years as compensation for reduction of the effective life of the
patent resulting from time spent in conducting clinical trials and in
FDA review of a drug application.
There has been substantial litigation in the biomedical,
biotechnology and pharmaceutical industries with respect to the
manufacture, use and sale of new products that are alleged to
infringe outstanding patent rights. One or more patents cover most of
the proprietary products for which we are developing generic
versions. When we file an ANDA for such drug products, we will, in
most cases, be required to certify to the FDA that any patent which
has been listed with the FDA as covering the product is either
invalid or will not be infringed by the sale of our product.
Alternatively, we could certify that we would not market our proposed
product until the applicable patent expires. A patent holder may
challenge a notice of non-infringement or invalidity by filing suit,
which would in most cases, prevent FDA approval until the suit is
resolved or at least 30 months have elapsed (unless the patent
expires, whichever is earlier). Should any entity commence a lawsuit
with respect to any alleged patent infringement by us, the
uncertainties inherent in patent litigation would make the outcome of
such litigation difficult to predict. We are involved in various
lawsuits resulting from ANDA filings. See Note 12 of the Notes to
Consolidated Financial Statements.
In addition to marketing drugs which are subject to FDA review and
approval, we market certain drug products in the U.S. without FDA
approval under certain "grandfather" clauses and statutory and
regulatory exceptions to the pre-market approval requirement for "new
drugs" under the FDCA. A determination as to whether a particular
product does or does not require FDA pre-market review and approval
can involve consideration of numerous complex and imprecise factors.
If a determination is made by the FDA that any product marketed
without approval requires such approval, the FDA may institute
enforcement actions, including product seizure, or action seeking an
injunction or hold against further marketing and may or may not allow
sufficient time to obtain the necessary approvals before it seeks to
curtail further marketing. We are not in a position to predict
whether or when the FDA might choose to raise objections to the
marketing without NDA or ANDA approval of a category or categories of
drug products represented in our product lines. In the event such
objections are raised, we could be required or could decide to cease
distribution of affected products until pre-market approval is
obtained. In addition, we may not be able to obtain any particular
approval that may be required or such approval may not be obtained on
a timely basis.
In this regard, in June 2006, May 2007 and September 2007, the FDA
issued Notices to the pharmaceutical industry stating that
manufacture of all unapproved drug products containing carbinoxamine,
carbinoxamine labeled for children under two, timed-released
guaifenesin, hydrocodone labeled for children under six and all other
unapproved products containing hydrocodone, respectively, cease by
September 6, 2006, July 9, 2006, August 26, 2007, October 31, 2007,
and December 31, 2007, respectively. These Notices affect the
continued manufacture and sale of ETHEX's Hydro-Tussin(TM) CBX Syrup,
Tri-Vent(TM) HC Liquid, Guaifenex(R) DM ER Tablets, Guaifenex(R) PSE
60 ER Tablets, PhenaVent(TM) D Capsules, Guaifenex(R) PSE 80 ER
Tablets, Pseudovent(TM) DM Tablets, Histinex(R) PV Syrup, Hydrocodone
Bitartrate & Guaifenesin Liquid, Hydro-Tussin(TM) HC Syrup,
Histinex(R) HC Syrup and Hydro-Tussin(TM) Syrup.
In March 2008, representatives of the Missouri Department of Health
and Senior Services, accompanied by representatives of the FDA,
notified us of a hold on our inventory of certain unapproved drug
products, restricting our ability to remove or dispose of those
inventories without permission.
The hold relates to a misinterpretation about the intended scope of
recent FDA notices setting limits on the marketing of unapproved
guaifenesin products. In response to notices issued by the FDA in
2002 and 2003 with respect to single-entity timed-release guaifenesin
products, and a further notice issued in 2007 with respect to
combination timed-released guaifenesin products, we timely
discontinued a number of our guaifenesin products and believed that,
by doing so, had complied with those notices. The recent action to
place a hold on certain of our products indicates that additional
guaifenesin products should also have been discontinued. In addition,
the FDA expanded the hold to include other products that did not
contain guaifenesin but were being marketed without FDA approval
under certain "grandfather clauses" and statutory and regulatory
exceptions to the pre-market approval requirement for "new drugs"
under the FDCA. FDA policies permit the agency to initiate broad
action against the marketing of additional categories of our
unapproved products, if the FDA deems approval necessary, even if the
agency has not instituted similar actions against the marketing of
such products by other
17
parties. Pursuant to discussions with the Missouri Department of
Health and Senior Services and with the FDA, the affected Morphine
and Oxycodone products have been released from the hold. We will
discontinue manufacturing and marketing all of the other unapproved
products subject to the hold.
The FDA has not proposed, nor do we expect them to propose, that the
products subject to the hold be recalled from the distribution
channel. We have written-off the value of the products subject to the
hold in our inventory as of March 31, 2008. We also evaluated the
active pharmaceutical ingredients and excipients used in the
manufacture of the hold products and determined that they should also
be written-off since we will be discontinuing further manufacturing
and many of them cannot be returned or sold to other manufacturers.
The write-off included in the results of operations for the fourth
quarter of fiscal 2008 totaled $5.5 million.
In October 2007, the FDA issued a Notice extending the period during
which the FDA will exercise its enforcement discretion not to
challenge continued marketing and distribution of pancreatic enzyme
products, such as ETHEX's Pangestyme(TM) product. Under the
extension, FDA will continue to exercise its enforcement discretion
with respect to unapproved pancreatic enzyme products that have an
active Investigational New Drug Application ("IND") on active status
on or before April 28, 2008 and have submitted an NDA on or before
April 28, 2009. We have timely filed an IND for such products.
In addition to obtaining pre-market approval for certain of our
products, we are required to maintain all facilities in compliance
with the FDA's current Good Manufacturing Practice, or cGMP,
requirements. In addition to compliance with cGMP each pharmaceutical
manufacturer's facilities must be registered with the FDA.
Manufacturers must also be registered with the U.S. Drug Enforcement
Administration, or DEA, and similar state and local regulatory
authorities if they handle controlled substances, with the EPA and
similar state and local regulatory authorities if they generate toxic
or dangerous wastes, and must comply with other applicable DEA and
EPA requirements. Noncompliance with applicable requirements can
result in fines, recall or seizure of products, total or partial
suspension of production and distribution, refusal of the government
to enter into supply contracts or to approve NDAs, ANDAs or other
applications and criminal prosecution. The FDA also has the authority
to revoke for-cause drug approvals previously granted.
The Prescription Drug Marketing Act, or PDMA, which amended various
sections of the FDCA, requires, among other things, state licensing
of wholesale distributors of prescription drugs under federal
guidelines that include minimum standards for storage, handling and
record keeping. All of our facilities are registered with the State
of Missouri, where they are located, as required by Federal and
Missouri law. The PDMA also imposes detailed requirements on the
distribution of prescription drug samples such as those distributed
by the Ther-Rx sales force. The PDMA sets forth substantial civil and
criminal penalties for violations of these and other provisions. Many
states also require registration of out-of-state drug manufacturers
and distributors who sell products in their states, and may also
impose additional requirements or restrictions on out-of-state firms.
These requirements vary widely from state-to-state and are subject to
change with little or no direct notice to potentially affected firms.
We believe that we are currently in compliance in all material
respects with applicable state requirements. However, if we are found
to have failed to comply with applicable state requirements, we may
be subject to sanctions, including monetary penalties and potential
restrictions on our sales or other activities within particular
states.
For international markets, a pharmaceutical company is subject to
regulatory requirements, inspections and product approvals
substantially the same as those in the U.S. In connection with any
future marketing, distribution and license agreements that we may
enter into, our licensees may accept or assume responsibility for
such foreign regulatory approvals. The time and cost required to
obtain these international market approvals may be greater or less
than those required for FDA approval.
Product development and approval within this regulatory framework
take a number of years, involve the expenditure of substantial
resources and are uncertain. Many drug products ultimately do not
reach the market because they are not found to be safe or effective
or cannot meet the FDA's other regulatory requirements. In addition,
the current regulatory framework may change and additional regulatory
or approval requirements may arise at any stage of our product
development that may affect approval, delay the submission or review
of an application or require additional expenditures by us. We may
not be able to obtain necessary regulatory clearances or approvals on
a timely basis, if at all, for any of our products under development,
and delays in
18
receipt or failure to receive such clearances or approvals, the loss
of previously received clearances or approvals, or failure to comply
with existing or future regulatory requirements could have a material
adverse effect on our business.
EMPLOYEES
As of March 31, 2008, we employed a total of 1,590 employees. We were
a party to a collective bargaining agreement with the Teamsters Union
covering 133 employees that would have expired on December 31, 2009.
However, in January 2008, the employee members of the union voted to
decertify their union representation. The decertification became
effective in February 2008.
ENVIRONMENT
We do not expect that compliance with Federal, state or local
provisions regulating the discharge of materials into the environment
or otherwise relating to the protection of the environment will have
a material effect on our capital expenditures, earnings or
competitive position.
AVAILABLE INFORMATION
We make available, free of charge through our Internet website
(http://www.kvpharmaceutical.com), our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after we electronically file these
reports with, or furnish them to, the Securities and Exchange
Commission. Also, copies of our Corporate Governance Guidelines,
Audit Committee Charter, Compensation Committee Charter, Nominating
and Corporate Governance Committee Charter, Code of Ethics for Senior
Executives and Standards of Business Ethics for all Directors and
employees are available on our Internet website, and available in
print to any shareholder who requests them. The information posted on
our website is not incorporated into this annual report.
In addition, the SEC maintains an Internet website
(http://www.sec.gov) that contains reports, proxy and information
statements, and other information regarding registrants that file
electronically with the SEC.
ITEM 1A. RISK FACTORS
------------
We operate in a rapidly changing environment that involves a number
of risks, some of which are beyond our control. The following
discussion highlights some of these risks and others are discussed
elsewhere in this report. Additional risks presently unknown to us or
that we currently consider immaterial or unlikely to occur could also
impair our operations. These and other risks could materially and
adversely affect our business, financial condition, operating results
or cash flows.
RISKS RELATED TO OUR BUSINESS
THE MATTERS RELATING TO THE INVESTIGATION BY THE SPECIAL COMMITTEE OF
THE BOARD OF DIRECTORS AND THE RESTATEMENT IN PRIOR PERIODS OF THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS MAY RESULT IN ADDITIONAL
LITIGATION AND GOVERNMENT ENFORCEMENT ACTIONS.
In October 2006, the Board of Directors formed a Special Committee of
independent directors to conduct an investigation, with the
assistance of independent legal counsel and forensic accounting
experts, of our past stock option grant practices over the period
January 1, 1995 through October 31, 2006. The investigation concluded
that no employee, officer or director of the Company engaged in any
intentional wrongdoing or was aware that the Company's policies and
procedures for granting and accounting for stock options were
materially noncompliant with GAAP. The investigation also concluded
that there was no intentional violation of law or accounting rules
with respect to the Company's historical stock option grant
practices. The Special Committee concluded, and based on its internal
review, management agreed, that incorrect measurement dates were used
for financial accounting purposes for stock option grants made in
certain prior periods. Therefore, we recorded
19
additional non-cash stock-based compensation expense, and related tax
effects, with regard to certain past stock option grants, and we
restated certain previously filed financial statements included in
our Form 10-K for fiscal 2007.
The independent investigation and management's internal review and
related activities required us to incur substantial expenses for
legal, accounting, tax and other professional services, diverted some
of our management's attention from the Company's business, and could
have a material adverse effect on our business, financial condition,
results of operations and cash flows.
While we believe we have made appropriate judgments in determining
the correct measurement dates for our stock option grants, based upon
the Special Committee's findings and in consultation with outside
experts and our independent registered public accounting firm, the
SEC may disagree with the manner in which we have accounted for and
reported the financial impact in our consolidated financial
statements. Accordingly, there is a risk we may have to further
restate our prior financial statements, amend prior filings with the
SEC, or take other actions not currently contemplated by us.
Our past stock option grant practices and the restatement of prior
financial statements have exposed the Company to risks associated
with litigation, regulatory proceedings and government enforcement
actions. As described in Note 12 of the Notes to the Consolidated
Financial Statements, "Commitments and Contingencies," derivative
lawsuits were filed in state and federal courts against certain
current and former directors and executive officers pertaining to
allegations relating to stock option grants. The parties recently
agreed to settle these derivative lawsuits, subject to court
approval. Also, the Company was notified by the SEC in December 2007
that it had issued a formal order of investigation with respect to
the Company's stock option plans, grants, exercises and accounting
practices. If the Company is subject to adverse findings in
litigation, regulatory proceedings or government enforcement actions,
we could be required to pay damages or penalties or have other
remedies imposed, all of which could have a material adverse effect
on our financial condition, results of operations or cash flows. The
resolution of these matters could continue to be time-consuming,
expensive, and a distraction to some of our management from the
conduct of the Company's business.
WE HAVE A MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL
REPORTING AND CANNOT ASSURE YOU THAT ADDITIONAL MATERIAL WEAKNESSES
WILL NOT BE IDENTIFIED IN THE FUTURE. IF WE FAIL TO MAINTAIN AN
EFFECTIVE SYSTEM OF INTERNAL CONTROLS OR DISCOVER MATERIAL WEAKNESSES
IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING, WE MAY NOT BE ABLE
TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR TIMELY OR DETECT FRAUD,
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate
the effectiveness of our internal control over financial reporting as
of the end of each year, and to include a management report assessing
the effectiveness of our internal control over financial reporting in
each Annual Report on Form 10-K. Section 404 also requires our
independent registered public accounting firm to attest to, and
report on, the effectiveness of our internal control over financial
reporting.
Management concluded that there was a material weakness, as defined
in the Public Company Accounting Oversight Board's Auditing Standard
No. 5, in our internal control over financial reporting as of March
31, 2008. Management is implementing steps to remediate this material
weakness, however, we cannot assure you that such remediation will be
effective.
Management also concluded there were material weaknesses, as defined
in the Public Company Accounting Oversight Board's Auditing Standard
No. 2, in our internal control over financial reporting as of March
31, 2007. Management implemented steps to remediate these material
weaknesses as of March 31, 2008. See the discussion included in Part
I, Item 9A of this report for additional information regarding our
internal control over financial reporting.
Our internal control over financial reporting may not prevent all
errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance
that the control system's
20
objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
Controls can be circumvented by the individual acts of some persons,
by collusion of two or more people, or by management override of the
controls. Over time, controls may become inadequate because changes
in conditions or deterioration in the degree of compliance with
policies or procedures may occur. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
As a result, significant deficiencies or material weaknesses in our
internal control over financial reporting may be identified in the
future. Any failure to maintain or implement required new or improved
controls, or any difficulties we encounter in their implementation,
could result in significant deficiencies or material weaknesses,
cause us to fail to timely meet our periodic reporting obligations,
or result in material misstatements in our financial statements. Any
such failure could also adversely affect the results of periodic
management evaluations and annual auditor attestation reports
regarding the effectiveness of our internal control over financial
reporting required under Section 404 of the Sarbanes-Oxley Act of
2002 and the rules promulgated there under. If our internal control
over financial reporting or disclosure controls and procedures are
not effective, there may be errors in our financial statements that
could require a restatement or our filings may not be timely and
investors may lose confidence in our reported financial information,
which could lead to a decline in our stock price.
OUR FUTURE GROWTH WILL LARGELY DEPEND UPON OUR ABILITY TO DEVELOP NEW
PRODUCTS.
We need to continue to develop and commercialize new brand name
products and generic products utilizing our proprietary drug delivery
systems to maintain the growth of our business. To do this we will
need to identify, develop and commercialize technologically enhanced
branded products and identify, develop and commercialize drugs that
are off-patent and that can be produced and sold by us as generic
products using our drug delivery technologies. If we are unable to
identify, develop and commercialize new products, we may need to
obtain licenses to additional rights to branded or generic products,
assuming they would be available for licensing, which could decrease
our profitability. We may not be successful in pursuing this
strategy.
IF WE ARE UNABLE TO COMMERCIALIZE PRODUCTS UNDER DEVELOPMENT OR THAT
WE ACQUIRE, OUR FUTURE OPERATING RESULTS MAY SUFFER.
Certain products we develop or acquire will require significant
additional development and investment, including preclinical and
clinical testing, where required, prior to their commercialization.
We expect that many of these products will not be commercially
available for several years, if at all. We cannot assure you that
such products or future products will be successfully developed,
prove to be safe and effective in clinical trials (if required), meet
applicable regulatory standards, or be capable of being manufactured
in commercial quantities at reasonable cost or at all.
OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL.
We intend to continue to pursue our efforts to acquire pharmaceutical
products, novel drug delivery technologies and/or companies that fit
into our research, manufacturing, distribution or sales and marketing
operations or that could provide us with additional products,
technologies or sales and marketing capabilities. We may not be able
to successfully identify, evaluate and acquire any such products,
technologies or companies or, if acquired, we may not be able to
successfully integrate such acquisitions into our business. We
compete with many specialty and other types of pharmaceutical
companies for products and product line acquisitions. Many of these
competitors have substantially greater financial and managerial
resources than we have.
WE DEPEND ON OUR PATENTS AND OTHER PROPRIETARY RIGHTS AND CANNOT BE
CERTAIN OF THEIR CONFIDENTIALITY AND PROTECTION.
Our success depends, in large part, on our ability to protect our
current and future technologies and products, to defend our
intellectual property rights and to avoid infringing on the
proprietary rights of others. We have been issued numerous patents in
the U.S. and in certain foreign countries, which cover certain of our
technologies, and have filed, and expect to continue to file, patent
applications seeking to protect newly developed technologies and
21
products. The pharmaceutical field is crowded and a substantial
number of patents have been issued. In addition, the patent position
of pharmaceutical companies can be highly uncertain and frequently
involves complex legal and factual questions. As a result, the
breadth of claims allowed in patents relating to pharmaceutical
applications or their validity and enforceability cannot be
predicted. Patents are examined for patentability at patent offices
against bodies of prior art which by their nature may be incomplete
and imperfectly categorized. Therefore, even presuming that the
examiner has been able to identify and cite the best prior art
available to him during the examination process, any patent issued to
us could later be found by a court or a patent office during
post-issuance proceedings to be invalid in view of newly-discovered
prior art or already considered prior art or other legal reasons.
Furthermore, there are categories of "secret" prior art unavailable
to any examiner, such as the prior inventive activities of others,
which could form the basis for invalidating any patent. In addition,
there are other reasons why a patent may be found to be invalid, such
as an offer for sale or public use of the patented invention in the
U.S. more than one year before the filing date of the patent
application. Moreover, a patent may be deemed unenforceable if, for
example, the inventor or the inventor's agents failed to disclose
prior art to the PTO that they knew was material to patentability.
The coverage claimed in a patent application can be significantly
reduced before a patent is issued, either in the U.S. or abroad.
Consequently, our pending or future patent applications may not
result in the issuance of patents. Patents issued to us may be
subjected to further proceedings limiting their scope and may not
provide significant proprietary protection or competitive advantage.
Our patents also may be challenged, circumvented, invalidated or
deemed unenforceable. For example, a third party company has recently
filed a declaratory judgment complaint in federal court challenging
patents pertaining to Ther-Rx's PrimaCare ONE(R). See 12 of the Notes
to Consolidated Financial Statements. Patent applications in the U.S.
filed prior to November 29, 2000 are currently maintained in secrecy
until and unless patents issue, and patent applications in certain
other countries generally are not published until more than 18 months
after they are first filed (which generally is the case in the U.S.
for applications filed on or after November 29, 2000). In addition,
publication of discoveries in scientific or patent literature often
lags behind actual discoveries. As a result, we cannot be certain
that we or our licensors will be entitled to any rights in purported
inventions claimed in pending or future patent applications or that
we or our licensors were the first to file patent applications on
such inventions. Furthermore, patents already issued to us or our
pending applications may become subject to dispute, and any dispute
could be resolved against us. For example, we may become involved in
re-examination, reissue or interference proceedings in the PTO, or
opposition proceedings in a foreign country. The result of these
proceedings can be the invalidation or substantial narrowing of our
patent claims. We also could be subject to court proceedings that
could find our patents invalid or unenforceable or could
substantially narrow the scope of our patent claims. In addition,
statutory differences in patentable subject matter may limit the
protection we can obtain on some of our inventions outside of the
U.S. For example, methods of treating humans are not patentable in
many countries outside of the U.S.
These and other issues may prevent us from obtaining patent
protection outside of the U.S. Furthermore, once patented in foreign
countries, the inventions may be subjected to mandatory working
requirements and/or subject to compulsory licensing regulations.
We also rely on trade secrets, unpatented proprietary know-how and
continuing technological innovation that we seek to protect, in part
by confidentiality agreements with licensees, suppliers, employees
and consultants. These agreements may be breached by the other
parties to these agreements. We may not have adequate remedies for
any breach. Disputes may arise concerning the ownership of
intellectual property or the applicability or enforceability of our
confidentiality agreements and there can be no assurance that any
such disputes would be resolved in our favor.
Furthermore, our trade secrets and proprietary technology may become
known or be independently developed by our competitors, or patents
may not be issued with respect to products or methods arising from
our research, and we may not be able to maintain the confidentiality
of information relating to those products or methods. Furthermore,
certain unpatented technology may be subject to intervening rights.
22
WE DEPEND ON OUR TRADEMARKS AND RELATED RIGHTS.
To protect our trademarks and goodwill associated therewith, domain
name, and related rights, we generally rely on federal and state
trademark and unfair competition laws, which are subject to change.
Some, but not all, of our trademarks are registered in the
jurisdictions where they are used. Some of our other trademarks are
the subject of pending applications in the jurisdictions where they
are used or intended to be used, and others are not.
It is possible that third parties may own or could acquire rights in
trademarks or domain names in the U.S. or abroad that are confusingly
similar to or otherwise compete unfairly with our marks and domain
names, or that our use of trademarks or domain names may infringe or
otherwise violate the intellectual property rights of third parties.
The use of similar marks or domain names by third parties could
decrease the value of our trademarks or domain names and hurt our
business, for which there may be no adequate remedy.
THIRD PARTIES MAY CLAIM THAT WE INFRINGE ON THEIR PROPRIETARY RIGHTS,
OR SEEK TO CIRCUMVENT OURS.
We may be required to defend against charges of infringement of
patents, trademarks or other proprietary rights of third parties. We
are involved in defending various patent lawsuits resulting from ANDA
filings by ETHEX or an effort by a third party company to invalidate
certain of our patents. See Note 12 of the Notes to Consolidated
Financial Statements. This defense could require us to incur
substantial expense and to divert significant effort of our technical
and management personnel, and could result in our loss of rights to
develop or make certain products or require us to pay monetary
damages or royalties to license proprietary rights from third
parties. If a dispute is settled through licensing or similar
arrangements, costs associated with such arrangements may be
substantial and could include ongoing royalties. Furthermore, we
cannot be certain that the necessary licenses would be available to
us on acceptable terms, if at all. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure
to obtain necessary licenses could prevent us from manufacturing,
using, selling and/or importing in to the U.S. certain of our
products. Litigation also may be necessary to enforce our patents
against others or to protect our know-how or trade secrets. That
litigation could result in substantial expense or put our proprietary
rights at risk of loss, and we cannot assure you that any litigation
will be resolved in our favor. There currently are five patent
infringement lawsuits pending against us and one declaratory judgment
lawsuit by a third party seeking to invalidate certain of our
patents. They could have a material adverse effect on our future
business, financial condition, results of operations or cash flows.
WE MAY BE UNABLE TO MANAGE OUR GROWTH.
Over the past ten years, our businesses and product offerings have
grown substantially. This growth and expansion has posed, and is
expected to continue to pose, significant challenges for our
management, operational and financial resources. To manage our
growth, we must continue to (1) expand our operational, sales,
customer support and financial control systems and (2) hire, train
and retain qualified personnel. If we are unable to manage our growth
effectively, our business, financial condition, results of operations
or cash flows could be materially adversely affected.
OUR DEPENDENCE ON KEY EXECUTIVES AND SCIENTISTS COULD IMPACT THE
DEVELOPMENT AND MANAGEMENT OF OUR BUSINESS.
We are highly dependent upon our ability to attract and retain
qualified scientific, technical and managerial personnel. There is
intense competition for qualified personnel in the pharmaceutical and
biotechnology industries, and we cannot be sure that we will be able
to continue to attract and retain qualified personnel necessary for
the development and management of our business. Although we do not
believe the loss of one individual would materially harm our
business, our business might be harmed by the loss of services of
multiple existing personnel, as well as the failure to recruit
additional key scientific, technical and managerial personnel in a
timely manner. Much of the know-how we have developed resides in our
scientific and technical personnel and is not readily transferable to
other personnel. While we have employment agreements with our key
executives, we do not ordinarily enter into employment agreements
with our other scientific, technical and managerial employees.
23
WE MAY BE ADVERSELY AFFECTED BY THE CONTINUING CONSOLIDATION OF OUR
DISTRIBUTION NETWORK AND THE CONCENTRATION OF OUR CUSTOMER BASE.
Our principal customers are wholesale drug distributors, major retail
drug store chains, independent pharmacies and mail order firms. These
customers comprise a significant part of the distribution network for
pharmaceutical products in the U.S. This distribution network is
continuing to undergo significant consolidation marked by mergers and
acquisitions among wholesale distributors and the growth of large
retail drug store chains. As a result, a small number of large
wholesale distributors control a significant share of the market, and
the number of independent drug stores and small drug store chains has
decreased. We expect that consolidation of drug wholesalers and
retailers will increase pricing and other competitive pressures on
drug manufacturers. For the fiscal year ended March 31, 2008, our
three largest customers, which are wholesale distributors, accounted
for 24.6%, 23.9% and 9.8% of our gross sales, respectively. The loss
of any of these customers could materially and adversely affect our
business, financial condition, results of operations or cash flows.
THE REGULATORY STATUS OF CERTAIN OF OUR GENERIC PRODUCTS MAY MAKE
THEM SUBJECT TO INCREASED COMPETITION OR TO REGULATORY DECISIONS TO
REQUIRE MARKET WITHDRAWAL OF ONE OR MORE OF OUR UNAPPROVED PRODUCTS.
Many of our products are manufactured and marketed without FDA
approval. For example, our prenatal products, which contain folic
acid, are sold as prescription multiple vitamin supplements. These
types of prenatal vitamins are typically regulated by the FDA as
prescription drugs, but are not covered by an NDA or ANDA. As a
result, competitors may more easily and rapidly introduce products
competitive with our prenatal and other products that have a similar
regulatory status. For example, during June 2008, a third party
company introduced a product purporting to be substitutable for our
PrimaCare ONE(R), for which no FDA approval is required. We are
currently in litigation with this company with respect to patent and
trademark infringement and other claims. See Note 12 of the Notes to
Consolidated Financial Statements.
In other cases, we sell unapproved products that may become subject
to FDA orders to the pharmaceutical industry to remove one or more
types of such products from the marketplace. During the past year,
such FDA orders have required manufacturers and distributors of
certain unapproved products containing guaifenesin and hydrocodone to
cease manufacture or distribution, including certain ETHEX products.
In the future, FDA may issue similar orders affecting other of our
products. In addition, in the event that FDA concludes that we have
failed to comply with a notice setting deadlines for discontinuation
of the manufacture and sale of unapproved products, or decides to
take enforcement action against us on other grounds, such as for
alleged violations of current good manufacturing practice
requirements or for failure to obtain product approvals that FDA
deems to be necessary, FDA policies permit the agency to initiate
broad action against the marketing of additional categories of our
unapproved drug products, even if the agency has not instituted
similar actions against the marketing of such products by other
parties.
In March 2008, representatives of the Missouri Department of Health
and Senior Services, accompanied by representatives of the FDA,
notified us of a hold on our inventory of certain unapproved drug
products restricting our ability to remove or dispose of those
inventories without permission.
The hold relates to a misinterpretation about the intended scope of
recent FDA notices setting limits on the marketing of unapproved
guaifenesin products. In response to notices issued by the FDA in
2002 and 2003 with respect to single-entity timed-release guaifenesin
products, and a further notice issued in 2007 with respect to
combination timed-released guaifenesin products, we timely
discontinued a number of our guaifenesin products and believed that,
by doing so, had complied with those notices. The recent action to
place a hold on certain of our products indicates that additional
guaifenesin products should also have been discontinued. In addition,
the FDA expanded the hold to include other products that did not
contain guaifenesin but were being marketed without FDA approval
under certain "grandfather clauses" and statutory and regulatory
exceptions to the pre-market approval requirement for "new drugs"
under the FDCA. FDA policies permit the agency to initiate broad
action against the marketing of additional categories of our
unapproved products, if the FDA deems approval necessary, even if the
agency has not instituted similar actions against the marketing of
such products by other parties. Pursuant to discussions with the
Missouri Department of Health and Senior Services and with the FDA,
the affected Morphine and Oxycodone products have been released from
the hold. We will discontinue
24
manufacturing and marketing all of the other unapproved products
subject to the hold with the exception of most of our Hyoscyamine
products. Discussions are continuing with respect to those products.
The FDA has not proposed, nor do we expect them to propose, that the
products subject to the hold be recalled from the distribution
channel. We have written-off the value of the products subject to the
hold in our inventory as of March 31, 2008. We also evaluated the
active pharmaceutical ingredients and excipients used in the
manufacture of the hold products and determined that they should also
be written-off since we will be discontinuing further manufacturing
and many of them cannot be returned or sold to other manufacturers.
The write-off included in the results of operations for the fourth
quarter of fiscal 2008 totaled $5.5 million.
One of the key motivations for challenging patents is the reward of a
180-day period of market exclusivity. Under the Hatch-Waxman Act, the
developer of a generic version of a product which is the first to
have its ANDA accepted for filing by the FDA, and whose filing
includes a certification that the patent is invalid, unenforceable
and/or not infringed (a so-called "Paragraph IV certification"), may
be eligible to receive a 180-day period of generic market
exclusivity. This period of market exclusivity provides the patent
challenger with the opportunity to earn a risk-adjusted return on
legal and development costs associated with bringing a product to
market. In cases such as these where suit is filed by the
manufacturer of the branded product, final FDA approval of an ANDA
generally requires a favorable disposition of the suit, either by
judgment that the patents at issue are invalid and/or not infringed
or by settlement. We may not ultimately prevail in these litigations,
we may not receive final FDA approval of our ANDAs, and we may not
achieve our expectation of a period of generic exclusivity for
certain of these products when and if resolution of the litigations
and receipt of final approvals from the FDA occur.
Since enactment of the Hatch-Waxman Act in 1984, the interpretation
and implementation of the statutory provisions relating to the
180-day period of generic market exclusivity has been the subject of
controversy, court decisions, changes to FDA regulations and
guidelines, and other changes in FDA interpretation. In addition, in
2003, significant changes were enacted in the statutory provisions
themselves, some of which were retroactive and others of which apply
only prospectively or to situations where the first AND]]>