| CARACO PHARMACEUTICAL LABORATORIES LTD Item 1A Risk Factors: Risks Related to Our Business The following discussion highlights some of the risks related to our business and others are discussed elsewhere in this report |
| These and other risks could materially and adversely affect our business, financial condition, operating results or cash flows and the market value of our common stock |
| If we are unable to successfully develop or commercialize new products, our operating results will suffer |
| Our future results of operations depend to a significant extent upon our ability to successfully commercialize new products in a timely manner |
| There are numerous difficulties in developing and commercializing new products, including: • developing, testing and manufacturing products in compliance with regulatory standards in a timely fashion; • receiving the requisite regulatory approvals for such products in a timely manner; • the availability of raw materials at a competitive cost, including active pharmaceutical ingredients and other key ingredients; • development and commercializing a new products is time consuming, costly and subject to various factors, including litigation brought by our competitors, that may delay or prevent the development and commercialization of new products expected to market; Our gross profit may fluctuate from period to period depending upon our product sales mix including new launches, our product pricing, customer class of trade, and our costs for active ingredients |
| Some specific issues that could result in a fluctuation could include any or all of the following; • the amount of new product introductions; 10 ______________________________________________________________________ • the level of competition and associated pricing pressure in the marketplace for certain products; • the availability of raw materials; The profitability of our product sales is also dependent upon the prices we are able to charge for all our products, the costs of excipients purchased from third parties, and our ability to manufacture our products in a cost effective manner |
| An unaffiliated third party may make a claim for royalties which could have a material adverse effect on our results of operations |
| In 1993, we entered into a products agreement with an unaffiliated generic drug company (the “Non-Affiliate”) |
| Under the agreement, two products were to be delivered to us in exchange for royalties and options |
| Pursuant to the agreement, we received a formulation for one product (“the Product”) from the Non-Affiliate |
| However, we have determined that the formula provided to us by the Non-Affiliate with respect to the Product is different than the formula approved by the FDA and manufactured and introduced by us |
| Accordingly, since April 2003, we have discontinued to accrue royalties |
| The Product has been one of our top selling products |
| There is no assurance that the Non-Affiliate will not challenge our determination and make a claim that royalties and/or options are owed |
| If successful, such a claim could have a material adverse effect on our results of operations |
| If brand pharmaceutical companies are successful in limiting the use of generics through litigation, legislature and regulatory efforts, our sales of generic products may suffer |
| Many brand pharmaceutical companies increasingly have used state and federal legislative and regulatory and other litigation as means to delay generic competition |
| These efforts have included: • pursuing new patents for existing products which may be granted just before the expiration of one patent, which could extend patent protection for additional years or otherwise delay the launch of our generic product; • submitting for changes in U S Pharmacopoeia which is an organization that publishes industry wide compendia of drug standards; • using the Citizen’s Petition process to request amendments to FDA standards; • attaching patent extension amendments to non-related federal legislation; • engage in state-by-state initiative to enact legislation that restricts substitution of certain generic drugs which could possibly impact products that we are developing |
| Third parties may claim that we infringe their proprietary rights and may prevent us from manufacturing and selling some of our products |
| The manufacture, use and sale of new products that are the subject of conflicting patent rights have been the subject of substantial litigation in the pharmaceutical industry |
| These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties |
| We may have to defend against charges that we violated patents or proprietary rights of third parties |
| Litigation may be costly and time-consuming, and could divert the attention of our management and technical personnel |
| If it is found that we infringe on the rights of others, we could lose our right to develop or manufacture products or could be required to pay monetary damages or royalties to license proprietary rights from third parties |
| As a result, an adverse determination in a judicial or administrative proceeding could prevent us from manufacturing and selling a product(s), which could negatively affect our financial condition and results of operations |
| Our policies regarding returns and chargebacks by wholesalers may reduce our revenues in future fiscal periods |
| Based on industry practice, generic product manufacturers including Caraco have liberal return policies and make decisions whether or not to provide shelf stock allowances (or credits) for inventories on hand on product that has already been sold to the customer |
| If a new competitor enters the marketplace and significantly lowers the price of any of its competing products, it is possible that we would make a decision to reduce the price of our product |
| As a result, we would be obligated to provide significant credits to our customers who are then holding inventories of such products, which could reduce sales revenue and gross margin for the period the credit is provided |
| Like our competitors, we also give credits for chargebacks to wholesale customers that have contracts with us for their sales to chain drug retail, group purchasing organizations, or other retail customers |
| A chargeback represents an amount payable in the future to a wholesaler for the 11 ______________________________________________________________________ difference between the invoice price paid to us by our wholesale customer for a particular product and the negotiated contract price that the wholesaler’s customer pays for that product |
| Although we establish reserves based on our historical experience and our best estimates of the potential impact that these policies may have, we cannot ensure that our reserves are adequate or that actual product returns, allowances and chargebacks will not exceed our estimates, which could adversely affect our financial condition, cash flows and market price of our stock |
| The loss of our key personnel could cause our business to suffer |
| The success of our present and future operations will depend, to a significant extent, upon the experience, abilities and continued services of key personnel |
| We cannot assure you that we will be able to attract and retain key personnel |
| Extensive industry regulation has had, and will continue to have, a significant impact on our business, especially our product development, manufacturing and distribution capabilities |
| All pharmaceutical companies, are subject to complex, costly regulations that continue to evolve as set forth by the federal government, principally the FDA and to a lesser extent by the DEA and state government agencies |
| The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other federal statutes and regulations govern the testing, manufacturing, storage, packing, labeling, record keeping, safety, sales and marketing, promotion, and distribution of our products |
| Under these regulations, we are subject to periodic routine inspection of our facilities, procedures, operations and the testing of our products by the FDA, the DEA and other authorities that regulate our business |
| These inspections are designed to confirm that we are in compliance with all applicable regulations |
| Following an inspection, the FDA may issue notices on Form 483 and /or warning letters that could cause us to modify certain activities identified during the inspection |
| A Form 483 notice is generally issued at the conclusion of a FDA inspection and lists conditions the FDA inspectors believe may violate cGMP or other FDA regulations |
| FDA guidelines specify that a warning letter is issued only for violations of “regulatory significance” for which the failure to promptly and adequately achieve correction may be expected to result in an enforcement action |
| Possible sanctions could include among others, FDA issuance of adverse publicity, fines, product recalls, total or partial suspension of production and/or distribution, suspension of the FDA’s review of product applications, enforcement actions, injunctions, and civil or criminal prosecution |
| These sanctions, if imposed, could materially harm our operating results and financial condition |
| Under certain circumstances, the FDA also has the authority to revoke previously granted drug approvals |
| Although we have internal compliance programs in place these programs may not meet regulatory agency standards or if compliance is deemed deficient in any significant way, it could materially harm our business |
| Certain of our vendors that sell to us are also subject to similar regulation and periodic inspections |
| Sales of our products may continue to be adversely affected by the continuing consolidation of the distribution network and the concentration of customers |
| Our principal customers are wholesale drug distributors, major retail drug store chains and managed care |
| These customers comprise a significant part of the distribution network for pharmaceutical products in the US 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 and managed care companies |
| As a result, a small number of large wholesale distributors and large chain drug stores and managed care providers control a significant share of the market |
| We expect that consolidation of drug wholesalers, retailers and managed care providers will increase pricing and other competitive pressures on drug manufacturers, including Caraco |
| Even if we are able to obtain regulatory approvals for our new pharmaceutical products, the success of those products is dependent upon market acceptance |
| Levels of market acceptance for our new products could be impacted by several factors, including: • availability of alternate product from our competitors; • the timing of our market entry; • acceptance of our product on government and private formularies; 12 ______________________________________________________________________ • and the prices that we sell our products at versus our competitors’ prices |
| These factors amongst others are beyond our control and could materially have a negative effect on operations and the market value of our common stock |
| From time to time a relatively small group of products could represent a significant portion of our sales and if the products sales of these product decline unexpectedly it could have a negative material effect on our business and could cause our market value of our common stock to decline |
| Sales of a limited number of our products often represent a significant portion of our net revenues and net earnings |
| If the volume or pricing of our largest selling products declines in the future, our business, financial position and results of operations could be materially adversely affected, and the market value of our common stock could decline |
| Our competitors may be able to develop products and processes competitive with or superior to our own for many reasons, including that they may have: • proprietary processes or product delivery systems; • larger research and development and marketing staffs; • larger production capacity in general or for a given product; • more financial resources than Caraco; • more experience in developing new drugs; Our reporting and payment obligations under Medicaid and other governmental programs are complex and may change periodically based upon new guidelines provided those agencies |
| Although the regulations regarding reporting and payment obligations are complex, we believe we are properly and accurately calculating and reporting the amounts owed in respect of Medicaid and other governmental pricing programs |
| Our calculations are subject to review and challenge by the applicable governmental agencies, and it is possible that any such review could result in material changes |
| Any governmental agencies may initiate an investigation of the Company and could impose, based on a claim of violation of fraud and false claims laws or otherwise, civil and/or criminal sanctions, including fines, penalties and possible exclusion from federal health care programs (including Medicaid and Medicare) |
| Sun Global could determine not to assist us in our research and development and Sun Pharma could cease supplying support and raw materials Collectively Sun Global and Sun Pharma could determine that its own research and development takes precedent over the research and development it provides to Caraco |
| This could cause a gap in our research and development timelines until Caraco could increase its own capabilities |
| This gap could possibly cause future growth concerns until resolved |
| Sun Pharma which supplies us raw material could face supply issues or not be capable of supplying the raw material for certain products we manufacture |
| This could cause lower sales or possibly lower margins until we negotiate new suppliers and gain the requisite approvals to manufacture our product with a new raw material source |
| A significant portion of our net sales are from the sales of a limited number of customers |
| Should we lose a particular contract with a customer or the customer is acquired by a non-customer, our sales and operational results could face a significant decline |
| A significant portion of our net revenues are derived from sales to a limited number of customers |
| As such, a reduction in or loss of business with one customer, or if one customer were to experience difficulty in paying us on a timely basis, our business, financial position and results of operations could be materially adversely affected |
| Our product liability insurance may not be enough to mitigate risk associated with our products 13 ______________________________________________________________________ Though we believe we carry adequate product liability insurance it is possible that a lawsuit or lawsuits could exceed our insurance levels and have a negative impact on our financial results We manufacture our product line predominately from one FDA approved facility |
| There is a possibility that our production could be negatively impacted by a closure of this facility Should our facility located in Detroit incur a closure of any type it would have a negative impact on our results |
| We carry a limited amount of finished goods on hand and much of our inventory is either work in progress or is in bulk amounts |
| Should we experience an act of God that closes our facility, or production is stopped or a power outage continues for an inordinate period of time, it could have a significant negative effect on our results |
| Any of these factors and others could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline |