Hi-Tech Pharmacal Co., Inc. (the "Company") a Delaware corporation, incorporated in April 1983, is a growing specialty manufacturer and marketer of prescription, over-the-counter and nutritional products.
The Company manufactures and distributes its products from facilities at Amityville N.Y. The Company sells its products in three similar markets: 1) Generic pharmaceuticals, 2) Branded products and 3) Contract manufacturing. The Company markets its generic pharmaceuticals under the brand names H-T/TM/ and RX Choice/TM/. The Company markets a line of branded products primarily for people with Diabetes, including Diabetic Tussin/R/, DiabetiDerm/R/, DiabetiSweet/TM/, DiabetiGest/TM/ and DiabetiRinse/TM/. In addition, the Company markets other niche over the counter brands to the general healthcare marketplace under such brands as Kosher Care/TM/, Nasal Ease/TM/, and Soothing Comfort/TM/.
The Company specializes in the manufacture of liquid, cream and ointment formulations. The Company also manufactures products in a state of the art sterile facility capable of producing ophthalmic, otic and inhalation products.
The Company's customers include chain drug stores, drug wholesalers, generic distributors, mass merchandisers, mail-order pharmacies and certain Federal government agencies. Some of the Company's key customers include Bergen- Brunswig, CVS, Eckerds, K-Mart, McKesson, Rite-Aid, Rugby Labs/Div of Watson, Walgreen's, Wal-Mart and Zenith-Goldline-Ivax. The Company produces a wide range of products for various disease states including cough and cold, allergies, pain, stomach and neurological disorders and others.
The Company currently markets more than 70 products to approximately 100 customers. For the fiscal year ended April 30, 2000 the Company's sales breakdown was as follows: 75% generic and contract manufacturing and 25% branded products. The Steri-Med Division contributed approximately $1.8 million of which 80% was from the sales of two Albuterol Inhalation products.
The Company's Health Care Products Division markets branded products that include over-the-counter, as well as prescription products primarily to people with diabetes. These products include the Company's flagship brand Diabetic Tussin/R/ which is available in several formulations, including DM, Max Strength, EX, and Allergy. The Company has recently launched its first branded prescription item Diabetic Tussin-C for severe coughs.
The Company's division also markets the following brands: DiabetiDerm/TM/ Cream and Lotion for severe dry skin; DiabetSweet/TM/ - a sugar substitute which is aspartane free and heat stable for baking and cooking; DiabetiGest/TM/ - an antacid calcium supplement; and DiabetiRinse/TM/ - a mouthrinse for people with diabetes. The Company will continue to aggressively develop and market new items for the diabetic market. There are estimated to be more than 16 million diabetics in the United States alone; 10 million diagnosed and 800,000 new cases per year. There are more than 100 million cases worldwide. The Company is confident that it can maintain its leadership position in the area of improving the lifestyle of people with diabetes and will devote a significant portion of its resources to continuing its penetration of this market. The Company also recently launched its Kosher Care/TM/ brand of over-the-counter products, designed for the rapidly growing kosher consumer market. The Company has received Abbreviated New Drug Application ("ANDA") approvals for 22 products.
All of the products listed below are marketed under the Company's brand names H-T/TM/ or RX Choice/TM/ and in certain cases under private label. The following table sets forth the principal products marketed by the Company and the names of certain national brands with which these products compete.
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Research and Product Development
The Company's research and development activities consist of new generic drug product development efforts and manufacturing process improvements. New product activities are primarily directed at conducting research studies to develop generic drug formulations, reviewing and testing such formulations for therapeutic equivalence to brand name products and development of brand name products for its Health Care Products Division.
The Company's product development strategies depend upon its ability to formulate and develop generic drug products equivalent to brand name drugs for which, in some cases, patent protection is expiring or has already expired and to obtain FDA approval using the ANDA procedure for the manufacture and sale of such products.
The completion of a prospective product's formulation, testing and FDA approval generally takes up to several years. Development activities for each generic product could begin several years in advance of the patent expiration date, which may include bioequivalency studies which are a significant cost of such ANDA submissions. Consequently, the Company is presently selecting and will continue to select and develop drugs it expects to market several years in the future.
In February 1999, the Company received ANDA approval from the FDA to manufacture and market Albuterol Sulfate Solution for Inh., 0.083%.
In December 1998, the Company received ANDA approvals from the FDA to manufacture and market Albuterol Sulfate Syrup, 2mg (base/5mL, equivalent to Ventolin/R/ Syrup, manufactured by Glaxo Wellcome, Inc., and Albuterol Sulfate Inhalation 0.5, equivalent to Proventil/R/ Inhalation Solution, manufactured by Schering Corp., each used in the treatment of asthma.
For the fiscal years ended April 30, 2000 and 1999, total R&D expenditures were $1,367,000 and $1,124,000. As of May 1, 2000, the Company hired Pudpong Poolsuk as Senior Director of Science. She brings 20 years of experience to the R&D staff. The Company currently has several products in various stages of development, which belong to different therapeutic categories and when approved by the FDA, may represent a large potential market for the Company. The Company expects to place increasing emphasis on its R&D activities and increase its R&D budget in the next several years.
The Company has the approval of the DEA to sell certain generic pharmaceutical products containing narcotics. The Company is currently manufacturing six preparations containing narcotics. In order to manufacture and sell products containing narcotics, the Company has implemented stringent security
precautions to insure that the narcotics are accounted for and properly stored. The Company is currently developing other products which contain narcotics.
The Company's Steri-Med Facilities is currently manufacturing ophthalmic, otic and inhalation products. The manufacture of ophthalmic, otic and other products requires a sterile environment, validation of the manufacturing process and special equipment and trained personnel. The Company has executed contract manufacturing agreements to develop and manufacture ANDA and other pharmaceutical products in its sterile facility. The Company has produced nine different products in its sterile facility. The Company intends to use the ANDA procedure to obtain FDA approval for the manufacture of certain other products in this facility. The Company currently manufactures over-the- counter eye drops, eye wash and artificial tears and two sterile Albuterol inhalation products previously approved by the FDA.
The Company and Reuben Seltzer, a director of the Company, each has a 21.25% interest in Marco Hi-Tech JV Ltd. ("Marco Hi-Tech"), a New York corporation, which markets raw materials for nutraceutical products and has licensed the patent rights to Huperzine and analogues from the Mayo Clinic. Huperzine is a naturally derived compound belonging to a class known as acetylcholinesterase inhibitors. Huperzine has been shown to inhibit the enzyme responsible for the breakdown of acetylcholine, a neurotransmitter or brain chemical, which is believed to be critical in learning and memory. Marco Hi-Tech is currently distributing Huperzine as a dietary supplement under the Dietary Supplement Health and Education Act of 1994 and developing analogues and derivatives to Huperzine. Marco Hi-Tech has entered into a supply arrangement for its Huperzine product with a multi-national leader in the nutraceutical market. It is also developing other products for the nutraceutical market.
Customers and Marketing
The Company markets its products primarily to chain drug stores, drug wholesalers, generic distributors, mass merchandise chains, mail order pharmacies, managed care providers, and local, state and Federal government agencies. The Company sells its generic products to over 100 active accounts located throughout the United States. For the fiscal year ended April 30, 2000, one customer, Rugby Laboratories, a division of Watson Laboratories, accounted for approximately 14% of the Company's sales. For the fiscal year ended April 30, 1999, Rugby Laboratories accounted for approximately 11% of the Company's sales. Each of the Company's other major customers accounted for less than 10% of the Company's total revenues for such periods. The Company's top ten customers accounted for approximately 61% and 54% of the Company's total sales for each of the fiscal years ended April 30, 2000 and 1999, respectively. If any of the Company's top five customers discontinues or substantially reduces its purchases from the Company, it may have a material adverse effect on the Company's business and financial condition. The Company believes, however, that it has good relationships with its customers.
The Company utilizes its state of the art facilities and laboratories to offer contract manufacturing which includes research and development programs, to its existing as well as potential customers.
The Company's Health Care Products Line, created in fiscal 1993, currently includes branded over-the-counter products marketed to the diabetic consumer. The Company's products are Diabetic Tussin/R/, its flagship brand available in several formulations, including Diabetic Tussin/R/ DM, Maximum Strength, Children's Formula and Allergy Formula. The Company's Diabetic Tussin/R/ DM is the best selling sugar free over-the-counter cough medication in the United States. The Company also markets dermatological moisturizers under the brand name DiabetiDerm/TM/, which include DiabetiDerm/TM/ Cream and Lotion. Recently, the Company introduced DiabetiSweet/TM/, an aspartane free heat stable sugar substitute formulated for use in baking, cooking and sweetening beverages; DiabetiGest/TM/ antacid formulation-calcium supplement; and DiabetiRinse/TM/ mouthwash formulation. The Company also markets several other niche over-the- counter brands, including Nasal Ease/TM/, a nasal moisturizer, which contains zinc and Kosher Care - a new line of products certified as Kosher. The Company intends to continue its focus on introducing branded over-the-counter formulations targeted to the diabetic market. The Company is in the process of introducing its first ever branded prescription product, Diabetic Tussin-C, a formulation for severe coughs by prescription only. Products sold through the Health Care Products Division accounted for approximately 25% and 20% of the Company's total sales for fiscal 2000 and fiscal 1999, respectively.
The Company markets its products using various marketing tools, which include more contemporary packaging to improve point-of-purchase impact, media, trade and consumer journal advertising, as well as coupon promotions and professional and consumer sampling programs and telemarketing efforts. The Company has expanded its marketing strategy with programs to include marketing ventures with major companies selling popular non-competing diabetic medications, pharmacy programs and via the Internet using a website. As part of its marketing strategy, the Company places increasing emphasis on the Internet which it views as a very efficient tool in educating and reaching out to millions of people with diabetes. The Company's website is registered under the domain name diabeticproducts.com. The Company has recently signed a co-marketing agreement with Diabetic.com, an Internet site designed to improve the health and lifestyle of people with diabetes. All sales efforts are conducted by Company employees and three independent commission sales representative organizations.
The Company will focus on growth and will continue to develop new branded and generic products, and also will devise new marketing strategies to aggressively penetrate the market. In order to maximize its growth and shareholder value, the Company is seeking to complement this internal effort by acquiring products for future marketing, as well as licensing rights to proprietary products and technologies for development and commercialization. The Company will place increasing emphasis on establishing co-development and co- marketing agreements with strategic partners. To facilitate the implementation of this aggressive growth strategy, the Company has engaged the services of an investment banker - The Nassau Group (the "Group"), Westport, CT. Based on their extensive expertise in financial and business consulting, the Group will work with the Company's management to evaluate its strategic options including potential acquisition opportunities. The goal is to work out the financial and business model for the Company that would enhance its visibility and ultimately increase its shareholder value.
Manufacturing
The Company's manufacturing capabilities are designed to be flexible in order to allow the low cost production of a variety of products of different dosages, sizes, packagings and quantities while maintaining a high level of quality and customer service. This flexible production capability allows the Company to adjust on-line production in order to meet customer requirements.
Manufacturing and Facilities
The Company is operating from four buildings on one site in Amityville, New York totaling approximately 133,000 square feet.
Building 1 - This 40,000 sq. ft. facility is dedicated to liquid and semi-solid production which consists of a compounding facility, 5 high speed filling lines and raw material warehousing space and pharmacy.
Building 2 - This 21,500 sq. ft. facility consists of narcotic manufacturing and cream and ointment filling, quality control and microbiology laboratories and the Company's Steri-Med Unit for sterile manufacturing and filling.
Building 3 - This 21,500 sq. ft. facility is used for research and development laboratories and warehousing of components.
Building 4 - This 50,000 sq. ft. facility is used for warehousing space and distribution center.
The Company owns all of its' buildings except for its' 50,000 square foot warehouse for which it has a lease purchase agreement in place on favorable terms.
The Company is constructing a brand new 8,000 square foot office building to be occupied by the middle of September. The Company believes the current facilities will be adequate for the next several years.
Raw Materials
The Company's raw materials are readily available from multiple suppliers, and the Company is not dependent upon any single supplier for its needs, with the exception of certain ANDA products. The Company believes it has good, cooperative working relationships with its suppliers and has not experienced any difficulty in obtaining its raw materials. If a supplier were unable to supply the Company, the Company believes it could locate an alternative supplier. However, any change in suppliers of a raw material could cause significant delays in the manufacture of such product.
The Company is in the process of identifying alternative sources of various tannate raw materials used in the manufacturing of a number of products. There are a limited number of such suppliers and the exclusive supplier used by the Company has recently stopped its delivery. The Company is currently negotiating with one such alternative source.
Competition
The market for generic pharmaceuticals is highly competitive. The Company's direct competition consists of numerous generic drug manufacturers, many of which have greater financial and other resources than the Company. If one or more other generic pharmaceutical manufacturers significantly reduce their prices in an effort to gain market share, the Company's profitability or market position could be adversely affected. Competition is based principally on price, quality of products, customer service, reputation and marketing support.
The Company's products also compete with those of companies marketing nationally advertised brand name products. Many of the national brand companies have resources substantially greater than those of the Company. These national brand manufacturers compete from time to time with generic pharmaceutical manufacturers and some have acquired generic pharmaceutical manufacturers which compete more directly with the Company by manufacturing private label products.
Government Regulation
The Company's products and facilities are subject to regulation by a number of Federal and state governmental agencies. The FDA, in particular, maintains oversight of the Company's manufacturing process as well as the distribution of the Company's final products. In July 1999, the Company received a warning letter from the FDA, alleging certain non-compliance issues based upon a previously conducted investigation. In response to the warning letter, the Company promptly met with the FDA, hired a highly qualified compliance consultant and prepared and submitted a corrective action plan on October 14, 1999 outlining its remediation efforts. The Company continues to voluntarily provide quarterly updates to the FDA regarding its further compliance efforts. As of the date hereof, the Company is taking corrective action in order to bring the Company into substantial compliance with applicable FDA regulations. As of July 2000, FDA is conducting a re-evaluation of the Company's compliance efforts.
Although many of the products currently manufactured and marketed by the Company do not require prior specific approval of the FDA, certain products which the Company currently markets and intends to market under its product development program will require prior FDA approval using the ANDA procedure before they can be marketed. The Company currently has pending submissions for FDA approval of five generic formulations and has 22 approved products.
An ANDA can be filed for a drug which is the equivalent of a product previously approved by the FDA. Under the ANDA procedure, applicants are required to demonstrate through studies that, among other things, the drug product is chemically equivalent to the previously approved drug, that its facilities and personnel meet FDA standards for the manufacture of such product, and that its production procedures will consistently adhere to FDA quality standards, and, in certain cases, the applicant is required to demonstrate the bioequivalency of its product (the rate and extent of absorption of a drug's active ingredient and/or its availability at the site of drug action). Use of the ANDA procedure substantially reduces the expense of securing FDA approval and may reduce the time for approval from five years or more for a New Drug Application to eighteen months to three years for an ANDA.
The FDA has extensive enforcement powers, including the power to seize noncomplying products, to seek court action to prohibit their sale and to seek criminal penalties for noncomplying manufacturers. Although it has no statutory power to force the recall of products, the FDA usually accomplishes a recall as a result of the threat of judicially imposed seizure, injunction and/or criminal penalties.
The Company is also subject to regulation by the DEA, which regulates the sale of pharmaceutical products that contain narcotics. The Company has received DEA approval and is manufacturing and selling six products containing narcotics. The DEA also has extensive enforcement powers, including the power to seize and prohibit the manufacture and sale of noncomplying products.
Product Liability
The sale of pharmaceutical products can expose the manufacturer of such products to product liability claims by consumers. A product liability claim, if successful and in excess of the Company's insurance coverage, could have a material adverse effect on the Company's financial condition. No product liability suit has ever been filed against the Company. The Company maintains a product liability insurance policy which provides coverage in the amount of $5,000,000 per claim and in the aggregate, with a $100,000 deductible.
Employees
As of April 30, 2000, the Company employed 141 full-time persons and 2 part-time persons, of whom 22 were engaged in executive, financial and administrative capacities; 9 in marketing, sales and service; 64 full-time employees and 2 part-time employees in production, warehousing and distribution; and 46 in research and development and quality control functions. The Company is not a party to a collective bargaining agreement. The management of the Company considers its relations with its employees to be satisfactory.
