| FIRST HORIZON PHARMACEUTICAL CORP ITEM 1A RISK FACTORS An investment in our common stock involves a high degree of risk |
| You should carefully consider the following risk factors and all other information contained in this Annual Report |
| The risks and uncertainties described below are not the only ones we are facing risks and uncertainties may become important factors that affect us |
| 18 ______________________________________________________________________ If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected |
| In that case, the trading price of our common stock could decline |
| Risks Related to Our Business Our operating results are substantially dependent upon the contribution of Sular, which has been below our acquisition expectations since we acquired the product and which has adversely affected our operating results |
| We acquired Sular in March 2002 and have not realized the sales growth for Sular that we anticipated when we acquired it |
| According to IMS Health’s National Prescription Audit Plus™ data, total Sular prescriptions increased 16dtta1prca for the year ended December 31, 2005 compared to the year ended December 31, 2004 |
| Although we have revised our operational plan to focus on maximizing sales of our existing products, particularly Sular, we may not be able to increase Sular prescriptions |
| The potential growth rate for Sular may be limited by the contraction of the market for the class of drugs to which Sular belongs |
| The calcium channel blocker products market is contracting |
| This contraction may be due to the following, all or any of which may have an adverse effect on the sales of Sular: · published studies showing that other classes of drugs treating hypertension have health benefits in addition to controlling blood pressure; · the introduction of new classes of drugs treating hypertension; and · a reduction in the number of companies actively promoting calcium channel blockers, which, in turn, has led to there being less available information regarding calcium channel blockers |
| Competitors could offer a product competitive with Sular and our other products |
| A patent addressing the composition of the active ingredient in Sular expired in 1998 and a patent covering the manufacturing process expired in 2004 |
| Therefore, a competitor could introduce a product competitive with Sular containing its same active ingredient, although Sular remains protected under a patent addressing its coat core tablet |
| Any such competing product may reduce our potential sales of Sular |
| Further, if, and as the patent protection for our other products expires, competitors could introduce competitive products which may reduce our sales of such products |
| Sales of our Robinul products have been adversely affected by the introduction of generic products |
| In December 2004, generics to our Robinul and Robinul Forte products were introduced into the marketplace |
| These products are expected to have an adverse effect on future revenues of our Robinul products |
| We may not be able to successfully integrate Fortamet, Altoprev and Triglide into our existing operations |
| In March 2005, we acquired from Andrx Laboratories certain rights related to the drug products Fortamet and Altoprev and engaged Andrx to manufacture and supply us with Fortamet and Altoprev |
| We also received FDA approval for Triglide, a fenofibrate formulation for which we obtained exclusive rights from SkyePharma in 2004 |
| Our ability to successfully integrate Fortamet, Altoprev and Triglide into our existing operations and to achieve our expected level of return from sales thereof depends on numerous factors |
| The integration of these products into our existing operations requires that we make adjustments to our sales and administrative functions |
| For example, we have hired and may continue to hire additional sales representatives and adjusted our marketing strategy to include these newly launched products |
| Furthermore, we have adjusted our administrative processes to facilitate the sales of these products, 19 ______________________________________________________________________ including hiring additional administrative support personnel at our headquarters |
| If our integration of the products into our existing operations is unsuccessful or delayed, then we may not achieve the expected level of return from our sales of these products |
| This could result in a material adverse effect on our results from operations |
| Further, to the extent we become unable to timely hire additional sales representatives to sell these products, we may not achieve expected sales |
| While we expect to extend our existing product lines and to increase our sales of existing products by offering a more complete line of treatment alternatives through our acquisition of certain rights to the Fortamet, Altoprev and Triglide products, there can be no assurance that these expected synergies can be achieved |
| In addition, if we experience difficulty in integrating the products into our existing operations or marketing them through our existing sales channels or as part of our existing product lines, we may incur significant unplanned costs to complete the integration of the products |
| If we do not realize the expected synergies from acquiring the products or we incur unexpected costs to integrate them into our existing operations, then we may experience a material adverse effect to our results of operations |
| Further, there can be no assurance that either Andrx or SkyePharma will supply us with a sufficient quantity of products to meet our demand for finished goods, products and samples or that the products provided will meet our specifications |
| If we are unable to obtain a sufficient quantity or the products provided do not meet our specifications, then our ability to fulfill orders for the products could be adversely effected |
| The 60 mg Altoprev product has experienced manufacturing issues |
| If the issues recur and cannot be resolved, our ability to acquire the product for sale and sampling will be adversely affected |
| In addition, the FDA is currently investigating Andrx, the manufacturer of Altoprev and Fortamet, for potential good manufacturing practice violations |
| Our ability to acquire and sell Altoprev and Fortamet could be adversely impacted by this investigation |
| At this time, we do not know when the FDA will conclude its investigation |
| Our ability to engage a third party to manufacture and supply us with Fortamet and Altoprev is restricted to a very limited set of circumstances under our current agreement with Andrx, and we do not have the right to engage a third party to manufacture Triglide under our agreement with SkyePharma |
| If we are unable to provide customers with the quantity of products ordered or to provide customers with high quality products on a consistent basis, then our relationships with our customers could be adversely affected |
| This could result in a material adverse effect on our results from operations |
| Pohl-Boskamp can terminate our rights to Nitrolingual Pumpspray |
| Nitrolingual Pumpspray is one of our key products |
| Pohl-Boskamp can terminate our distribution agreement for Nitrolingual Pumpspray if a company with a product competitive with Nitrolingual Pumpspray acquires direct or indirect influence or control over us |
| Pohl-Boskamp’s termination of our distribution agreement could have a material adverse impact on our financial results |
| In the future, we may not be able to increase our sales of promoted products sufficiently to compensate for the decrease in sales of our non-promoted products |
| We have suffered declining sales of our non-promoted products, including our Robinul and Tanafed lines, which accounted for 26prca of our total sales, or dlra38dtta8 million, for the year ended December 31, 2004 and 2prca of our total sales, or dlra5dtta2 million, for the year ended December 31, 2005 |
| We plan to compensate for this decline in revenues by increasing sales of our existing actively promoted products and acquiring new products |
| However, we may not be able to increase sales of actively promoted products or locate attractive acquisition candidates and successfully complete an acquisition to offset the declining sales of non-promoted products |
| If we are unable to introduce line extensions of our existing products, we may not achieve our sales plan |
| Part of our operating plan includes the introduction of line extensions of our existing products to create marketing advantages and extend the life cycles of our products |
| If we are unable to introduce line 20 ______________________________________________________________________ extensions for any reason, including our, or our third party developers’, inability to obtain necessary FDA approval, we may not achieve our sales plan and/or revenue growth |
| Introductions of line extensions of our existing products may require that we make unexpected changes in our estimates for future product returns and reserves for obsolete inventory which would adversely affect our operating results |
| From time-to-time we may seek to introduce line extensions on an unexpected and expedited basis before we are able to reduce the levels of inventories of product which may be rendered obsolete or otherwise adversely affected by the line extension |
| This may require us to increase our estimate for returns of product on hand at wholesalers, which is recorded as a reduction of our net revenues, and increase our reserve for obsolete inventory in our warehouse which is recorded as a cost of revenues |
| Accordingly, the introduction of line extensions may adversely affect our operating results |
| Our ability to grow will suffer if we do not acquire or license rights to new products and integrate them successfully |
| We depend on acquisitions of rights to products from others as our primary source for new products |
| Risks in acquiring and integrating new products include the following: · we may not be able to locate new products that we find attractive and complementary to our business; · the price to acquire or obtain a license for these products may be too costly to justify the acquisition; · we may not be able to successfully integrate newly acquired products into our existing operations or the cost of integration may exceed our expectations; and · we may not realize our anticipated return on investment from our sales of any such newly acquired products |
| We often face significant competition from other pharmaceutical companies in acquiring rights to products, which makes it more difficult to find attractive products on acceptable terms |
| In addition, integration of new products into our existing structure may require unanticipated investments of time and resources or an expansion of our sales force |
| If we are unable to acquire or license rights to new products or are unsuccessful in integrating such products, our ability to grow will suffer and our operating results may be adversely affected |
| As part of our growth strategy, we may acquire businesses, which will subject us to additional risks |
| As an element of our growth strategy, we may acquire businesses with products that complement our current products, and we have evaluated and discussed such opportunities with interested parties in the past |
| In addition to the risks that we face in locating and consummating new product acquisitions, we face the following risks, the occurrence of any or all of which may adversely affect our business: · we may realize substantial acquisition-related expenses, including the amortization of long-lived assets, which would reduce our net income in future years; · our investigation of potential acquisition candidates may not reveal problems and liabilities associated with the businesses, technologies or products that we acquire; · we may assume liabilities that increase our risks; · we may not be able to fully integrate the acquired business or products into our own; and · we may underestimate the costs necessary to integrate and operate the acquired business |
| In addition, if we conduct acquisitions using convertible debt or equity securities, the increased number of shares may be dilutive to our shareholders, and may result in lower earnings per share |
| 21 ______________________________________________________________________ We may incur charges for intangible asset impairment |
| When we acquire the rights to manufacture and sell a product, we record the aggregate purchase price, along with the value of the product related liabilities we assume, as intangible assets |
| We use the assistance of valuation experts to help us allocate the purchase price to the fair value of the various intangible assets we have acquired |
| Then, we must estimate the economic useful life of each of these intangible assets in order to amortize their cost as an expense in our statement of operations over the estimated economic useful life of the related asset |
| The factors that drive the actual economic useful life of a pharmaceutical product are inherently uncertain, and include patent protection, physician loyalty and prescribing patterns, competition by products prescribed for similar indications, future introductions of competing products not yet FDA approved, the impact of promotional efforts and many other issues |
| We use all of these factors in initially estimating the economic useful lives of our products, and we also continuously monitor these factors for indications of appropriate revisions |
| In assessing the recoverability of our intangible assets, we must make assumptions regarding estimated undiscounted future cash flows and other factors |
| If the estimated undiscounted future cash flows do not exceed the carrying value of the intangible assets we must determine the fair value of the intangible assets |
| If the fair value of the intangible assets is less than its carrying value, an impairment loss will be recognized in an amount equal to the difference |
| If these estimates or their related assumptions change in the future, we may be required to record impairment changes for these assets |
| We review intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable |
| As circumstances after an acquisition can change, the value of intangible assets may not be realized by us |
| If we determine that an impairment has occurred, we would be required to write-off the impaired portion of the unamortized intangible assets, which could have a material adverse effect on our results of operations in the period in which the write-off occurs |
| In addition, in the event of a sale of any of our assets, we cannot be certain that our recorded value of such intangible assets would be recovered |
| We may encounter problems in the manufacture or supply of our products that could limit our ability to sell our products |
| We depend entirely on third parties to manufacture and supply our products |
| Third parties manufacture and supply all of our products, and we do not currently have manufacturing facilities, personnel or access to raw materials to independently manufacture our products |
| Except for any contractual rights and remedies which we may have with our manufacturers and suppliers, we have no control over the availability of our products or their quality or cost to us |
| We do not maintain alternative manufacturing sources for any of our products, and we may not be able to locate alternative manufacturers on commercially acceptable terms in the event of a manufacturing interruption or termination of an existing manufacturing agreement |
| In addition, third party intellectual property rights limit our ability to manufacture and supply our products |
| For example, due to the patent held on Nitrolingual by our supplier, Pohl-Boskamp, no alternative source for Nitrolingual exists |
| Similarly, third parties hold the patents for the composition of the coat core tablet for Sular, the patent rights for Fortamet and Altoprev, the patent rights for Triglide, the patent rights for the manufacturing process for raw materials in Tanafed DP and Tanafed DMX, and the patent rights to Metafolin® , an active ingredient in Prenate Elite and OptiNate |
| In the event that these suppliers ceased to supply product to us, we may not be able to locate another manufacturer or supplier who would be able to manufacture or supply the products without violating such patents or who could manufacture the products on commercially reasonable terms |
| 22 ______________________________________________________________________ We may encounter interruptions in our supply of Cognex |
| We are seeking a new supplier to supply us with the active ingredient in Cognex |
| Based on our current sales projections, we believe that we have adequate supplies of the active ingredient in Cognex for the foreseeable future |
| However, if sales exceed our current projections or if we are unable to locate a new supplier of the active ingredient in Cognex, our ability to sell Cognex would be limited and our profitability would be reduced |
| Our third-party manufacturing agreements for the majority of our products require that we purchase our product requirements from the manufacturers that are a party to those agreements |
| This prevents our entering into more advantageous manufacturing agreements with other manufacturers for these products, except in very limited circumstances |
| We face generic and other strong competition that could lower prices and unit sales, and competitors have recently introduced new products and therapies that could make some of our products obsolete |
| In addition, some of our products are not protected by patents and face competition from less expensive products |
| Competitors could develop new products to compete with these products or could develop generic versions of products with which our products compete |
| Third-party payors can require substitution and pharmacists can substitute generic or other competitive products for our products even if physicians prescribe them |
| Government agencies, third-party payors and pharmacies often put pressure on patients to purchase generic or other products instead of brand-name products as a way to reduce healthcare costs |
| Any further increase in the amount of generic and other competition against any one or more of our products could further lower prices and unit sales which could adversely affect our results of operations |
| In addition, our products compete against products sold over-the-counter or by prescription that in some cases are marketed by much larger pharmaceutical companies with greater financial resources for marketing and manufacturing |
| For example, Pfizer sells a hypertension product called Norvasc which, as of December 31, 2005 had a 45dtta5prca share of the calcium channel blocker market (based on prescriptions according to IMS Health’s National Prescription Audit Plus™ data), and introduced a combination of Norvasc with its popular cholesterol-reducing product Lipitor, called Caduet, which could prove to be an attractive alternative to our product Sular |
| Also, a competitor is developing a lingual nitroglycerin spray similar to our Nitrolingual product, which could divert prescriptions and reduce sales of Nitrolingual |
| Also, based on the regulatory status of our Prenate Elite, OptiNate, Robinul, Tanafed, Zebutal, and Zoto-HC products, barriers to entry for products competing with our products are low, which makes it easier for competitors to enter the market |
| Competitors may continue to develop new products and surgeons may continue to develop new surgical procedures to treat angina |
| Competitors are also developing new products to treat short term pain and have recently developed new pain therapies |
| These new products and procedures may reduce demand for our products |
| The high level of competition in our industry could force us to reduce the price at which we sell our products or require us to spend more to market our products, or both |
| A small number of customers account for a large portion of our sales and the loss of one of them, or changes in their purchasing patterns, could result in reduced sales or adversely impact our financial performance |
| For the year ended December 31, 2004, sales to McKesson Corporation represented 31prca, Cardinal Health Inc |
| represented 25prca and AmerisourceBergen Corporation represented 22prca of our total sales |
| For the year ended December 31, 2005, sales to McKesson Corporation represented 30prca, Cardinal Health Inc |
| represented 23prca and AmerisourceBergen Corporation represented 10prca of our total sales |
| The small number of wholesale drug distributors, consolidation in this industry or financial difficulties of these distributors could result in the combination or elimination of warehouses, which could temporarily increase returns of our products or, as a result of distributors reducing inventory levels, delay the purchase of our products |
| 23 ______________________________________________________________________ In late 2002, our wholesaler customers purchased excessive amounts of inventory of our products in anticipation of future price increases |
| This adversely impacted our sales in the first half of 2003 |
| In response, in the second and third quarters of 2003, we entered into inventory management agreements with our three largest wholesale customers which offer incentives to the wholesaler to maintain level amounts of inventory |
| These wholesalers may choose to forego the incentives and to maintain more inventory than contractually allowed |
| While we have instituted inventory management controls with our wholesaler customers, the controls rely upon data supplied by our wholesaler customers |
| We cannot be certain that the data supplied by our wholesaler customers will be accurate or that the controls will be effective |
| If the wholesaler information is unreliable and our controls are not effective, it could have a material adverse effect on our inventory management and financial performance |
| If our products under development fail in clinical studies, if we fail or encounter difficulties in obtaining regulatory approval for new products or new uses of existing products, or if our development agreements are terminated, we will have expended significant resources for no return |
| We rely on third parties to formulate, develop and manufacture the materials needed for clinical trials for our products under development |
| We also rely on third parties to conduct clinical trials for us |
| If our products are not successful in clinical trials or we do not obtain FDA marketing approval, we will have expended significant resources with no return |
| For example, we have filed an IND with the FDA for development product FHPC-02 and a Phase I clinical trial has been completed |
| If we cannot obtain FDA approval for this or other products which we may seek to develop in the future, our sales growth may suffer |
| We may not receive FDA approvals for products and/or ongoing clinical studies might be delayed or halted for various reasons, including: · our products are not shown to be effective; · we do not comply with requirements concerning the investigational new drug application requirements or protection of the rights and welfare of human subjects; · patients experience unacceptable side effects or die during clinical trials; · patients do not enroll in the studies at the rate we expect; and · product supplies are delayed, are not sufficient to treat the patients in the studies or are not sufficiently stable |
| If third-party payors do not adequately reimburse patients for our products, doctors may not prescribe them |
| Because our products are sold by prescription, we depend on third-party payors, such as the government, private healthcare insurers and managed care organizations, to include these products on their lists of products for which third-party payors will reimburse patients |
| Third-party payors regularly challenge the pricing of medical products and services by substituting cheaper products on their approved lists |
| Because our Zebutal, Tanafed line, Zoto, Robinul line, Ponstel and Furadantin products are susceptible to generic competition and because of products that compete with Sular, Prenate, Nitrolingual Pumpspray, Altoprev, Fortamet, Triglide and Ponstel, we face an increased risk of third-party payors substituting these products |
| If third-party payors remove any of these products from their lists or choose not to pay for our product prescriptions, patients and pharmacies may not continue to choose our products |
| 24 ______________________________________________________________________ We rely on data obtained from IMS which could be inaccurate |
| We rely on operational data obtained from IMS, an industry accepted data source |
| IMS data may not accurately reflect actual prescriptions (for instance, we believe IMS data does not capture all product prescriptions from some non-retail channels) or trade levels of inventory |
| If IMS data turns out to be inaccurate or unreliable and our controls are not effective, there could be an adverse effect on our ability to properly manage inventory and to our financial performance |
| We depend on highly trained management, and we may not be able to keep current management or hire qualified management personnel in the future |
| We currently have a limited number of key executive, regulatory, technical and management personnel |
| We may need to identify and attract new executive, operational and marketing personnel, and we may have difficulty hiring personnel at an acceptable cost |
| While we periodically address succession planning and the possibility of key employees retiring, our failure to successfully identify and attract such personnel, as and when needed, could limit our ability to continue our business at its current level and/or grow our business |
| The incurrence of debt could reduce our growth and profitability |
| In March 2004, we issued a total of dlra150 million 1dtta75prca senior subordinated contingent convertible notes due 2024 in transactions that were exempt from registration under the Securities Act |
| The notes are due March 8, 2024 and accrued interest is payable semi-annually in arrears on March 8 and September 8 of each year, commencing on September 8, 2004 |
| In addition to the interest on the notes, after March 8, 2007, we will also pay contingent interest during specified six month periods if the average trading price of the notes per dlra1cmam000 principal amount for the five day trading period ending on the third trading day immediately preceding the first day of the applicable six month period equals dlra1cmam200 or more |
| During any period when contingent interest is payable, it will be payable at a rate equal to 0dtta5prca per annum |
| In February 2003, we entered into a credit facility for a dlra20dtta0 million revolving loan with various lenders and LaSalle Bank National Association, as administrative agent |
| We may borrow under the revolving loan and incur other debt to finance acquisitions to implement our growth strategy and/or for general corporate purposes |
| Borrowings are secured by substantially all of the Company’s assets |
| We anticipate that we may amend this credit facility or replace it with a new facility primarily to increase our available borrowings so as to facilitate future product acquisition transactions |
| As of December 31, 2005, we had no outstanding borrowings under our credit facility |
| Significant debt could (1) limit our operating flexibility as a result of requirements by lenders, (2) require us to use a large portion of our cash flow from operations for debt service payments that could reduce profits and would reduce the availability of our cash flow to fund operations, product acquisitions, the expansion of our sales force and facilities and research and development efforts and (3) limit acquisitions of products or companies due to restrictive covenants under our senior secured credit facility with which we must comply as long as it is in effect |
| We expect to need additional funds to acquire or obtain licenses for new products, develop and test new products and potentially to acquire other businesses |
| We may seek funding through public and private financing and may seek to incur debt, issue shares of our stock, or both, either to finance a transaction or as consideration for a transaction |
| Adequate funds for these purposes, whether through the financial markets or from other sources, may not be available when we need them or on terms acceptable to us |
| Insufficient funds could cause us to delay, scale back or abandon some or all of our product acquisitions, licensing opportunities, marketing programs, product development programs, potential business acquisitions and manufacturing opportunities |
| 25 ______________________________________________________________________ The regulatory status of some of our products makes these products subject to increased competition and other risks |
| The regulatory status of some of our products may allow third parties to more easily introduce competitive products, and may make it more difficult for us to sell certain of our products in the future |
| Currently, an FDA program allows us, in our opinion, to manufacture and market certain of our products, and permits others to manufacture and market similar products, without submitting safety or efficacy data |
| This results in increased competition because other companies can enter the market without having to submit safety and efficacy data to sell competing products |
| On several occasions, the FDA has considered changing the classification of certain single entity and combination product types of drugs from prescription to over-the-counter use, and which permit sponsors to utilize foreign over-the-counter experience data to establish a product as safe and effective for over-the-counter use in the US If the FDA does change the classification, we might have to reformulate certain of our products or submit safety and efficacy data on those products, which could be costly, or we might have to discontinue selling certain products if the FDA does not approve our marketing application |
| We could lose third-party reimbursement for these products and face increased competition |
| In addition, the FDA considers certain products to be new drugs, but has indicated its intent to exercise enforcement discretion and not pursue regulatory action unless certain conditions occur |
| If these conditions were to materialize, or the FDA disagreed with our conclusions about the regulatory status of these products, we might be required to submit an NDA and/or cease marketing until the FDA grants approval to do so |
| The FDA could also, at any time, promulgate new regulations or policies to require the submission of an NDA for each of these products |
| Our business is heavily regulated by governmental authorities, and failure to comply with such regulation or changes in such regulations could negatively affect our results |
| Many government authorities regulate our business, including, among others, the FDA, the SEC, foreign regulatory authorities, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety and Health Administration, the Centers for Medicare and Medicaid Services, the Environmental Protection Agency, the Department of Labor, state, local and foreign governments and the Internal Revenue Service |
| We may incur significant expenses to comply with regulations imposed by these authorities |
| Also, our future results could be negatively impacted by changes in governmental regulation over the pharmaceutical industry, including regulation of Medicare, Medicaid and similar programs, by reducing our revenue and profits and/or increasing our costs and expenses in order to comply with such regulation |
| In addition, all of our third-party manufacturers, third-party sample distributors and product packaging companies are subject to inspection by the FDA and, in appropriate cases, the Drug Enforcement Administration and foreign regulators |
| Some of our third-party manufacturers have received warning letters from the FDA concerning noncompliance with manufacturing requirements |
| If our third-party manufacturers and other supply and distribution chain partners do not comply with FDA regulations in the future, they may not deliver products to us or deliver samples to our representatives, or we may have to recall products |
| Even if deficiencies observed by the FDA do not relate to our products, our third-party manufacturers, third-party sample distributors and product packaging companies may be delayed in manufacturing and supplying our products to us in a timely manner until they address their compliance issues with the FDA Our warehouse facility is also subject to inspection by the FDA and the Drug Enforcement Administration |
| If we do not comply with FDA and Drug Enforcement Administration regulations, we may not be able to sell product to our customers |
| 26 ______________________________________________________________________ An adverse judgment in the securities class action litigation in which we and certain directors and executive officers are defendants could have a material adverse effect on our results of operations and liquidity |
| We, along with certain former and current officers and directors, are named defendants in a consolidated securities lawsuit initiated on August 22, 2002 in the United States District Court for the Northern District of Georgia |
| Plaintiffs in the class action litigation alleged in general terms that we violated Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, (the “Securities Act”), and that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), and Rule 10b-5 promulgated thereunder |
| In an amended complaint, plaintiffs claimed that we issued a series of materially false and misleading statements to the market in connection with our public offering on April 24, 2002 and thereafter relating to alleged “channel stuffing” activities |
| The amended complaint also alleged controlling person liability on behalf of certain of our officers under Section 15 of the Securities Act and Section 20 of the Exchange Act |
| Plaintiffs sought an unspecified amount of compensatory damages in an amount to be proven at trial |
| On September 29, 2004, the US District Court for the Northern District of Georgia dismissed, without prejudice, the class action lawsuit |
| Although the class action lawsuit was dismissed, the court granted the plaintiffs the opportunity to amend their complaint provided that the plaintiffs pay all of the defendants’ fees and costs associated with filing the motions to dismiss the lawsuit |
| Plaintiffs did not file a second amended complaint as permitted, but instead filed a motion asking the District Court to reconsider its September 29, 2004 order and lift the condition that they must pay defendants’ fees and costs before further amendment |
| On June 22, 2005, the District Court denied plaintiffs’ motion and gave them another opportunity to amend if they pay defendants’ fees and costs |
| Plaintiffs chose not to file a second amended complaint |
| Instead, plaintiffs filed an appeal to the United States Court of Appeals for the Eleventh Circuit |
| This appeal currently is pending |
| Although the outcome of these proceedings is not certain, an adverse judgment against us in this litigation could have a material adverse effect on our results of operations and liquidity |
| We are subject to risks associated with taxation in multiple jurisdictions |
| We are subject to taxation in the US and in certain foreign jurisdictions |
| Our effective tax rate and tax liability are determined by a number of factors, including the amount of taxable income in particular jurisdictions, the tax rates in these jurisdictions, tax treaties between jurisdictions, the extent to which we transfer funds to and repatriate funds from our subsidiaries and future changes in laws |
| An adverse interpretation or ruling by one of the taxing authorities in a jurisdiction in which we operate or a change in law could increase our tax liability or result in the imposition of penalty payments, which could adversely impact our operating results |
| If we do not secure or enforce patents and other intellectual property rights, we could encounter increased competition that would adversely affect our operating results |
| We do not hold patent rights covering all of the products we are distributing and do not in some cases have the right to enforce patents our licensors hold |
| Patent rights do not protect our Robinul, Ponstel and Furadantin products from competition |
| We obtained exclusive distribution rights in the US to distribute our Fortamet, Altoprev, Triglide, Nitrolingual, Tanafed DP and Tanafed DMX products but have no or only limited rights to enforce the patents relating to these products |
| We obtained exclusive US distribution rights to Sular from Bayer |
| Bayer holds the patent for the composition of the coat core tablet for Sular |
| Any exclusivity afforded by any of these patents or rights could cease because we have no rights or only limited rights to enforce patents or to require enforcement actions by the owners of the patents |
| Proceedings involving our rights in patents or patent applications could result in adverse decisions |
| In addition, the confidentiality agreements required of our employees and third parties may not provide adequate protection for our trade secrets, know-how and other proprietary information which we rely on 27 ______________________________________________________________________ to develop and sell our products |
| If any of our employees or third parties disclose any of our trade secrets or know-how, we could encounter increased competition |
| Our products could infringe the intellectual property rights of third parties, which could require us to pay license fees or defend litigation that would be expensive or prevent us from selling products |
| The manufacture, use or sale of our products may infringe on the patent, trademark and other intellectual property rights of others |
| Patent and trademark infringement problems occur frequently in connection with the sale and marketing of pharmaceutical products |
| If we do not avoid alleged infringement of the intellectual property rights of others, we may need to seek a license to sell our products, defend an infringement action or challenge the validity of the intellectual property in court, all of which could be expensive and time consuming |
| In addition, if we are found liable for infringing a patent, we may have to stop selling one or more of our products and pay damages |
| It could be very costly if we have to defend the patents or trademarks covering our products or if we were found liable for infringement which could increase our costs and reduce our margins and net income |
| Product liability claims and product recalls could limit sales and increase costs |
| Side effects could occur from the use of our products |
| Side effects or marketing or manufacturing problems pertaining to any of our products could result in material product liability claims or adverse publicity |
| These problems often occur with little or no notice in connection with the sale of pharmaceutical products |
| We face an exchange risk on foreign currency |
| Our purchases of Nitrolingual from Pohl-Boskamp, our purchases of Triglide from Skyepharma and our purchases of Sular from Bayer are made in Euros or are otherwise impacted by fluctuations in the US dollar—Euro exchange rate |
| Although we did not enter into any forward contracts in 2005, we may seek to eliminate risks from foreign currency fluctuations after the time of shipment of product by entering into forward contracts for these purchases of inventory at the time of product shipments |
| The Company’s earnings and cash flows could be adversely affected in the future by the relationship of the US dollar with foreign currencies and there can be no assurance that any hedging activity will be successful in protecting us from exchange risk |
| We face market risk that we could be adversely affected by certain fluctuations in interest rates |
| The fair value of our investment portfolio would be negatively affected by an increase in interest rates |
| Since the majority of the Company’s investments are fixed rate interest-bearing securities and therefore subject to the market risk of loss in market value from an increase in rates or a change in the underlying risk of the issuers of the notes, the Company’s future earnings and cash flows could be affected adversely if the Company were to sell the securities prior to their maturity date |
| We had realized losses from the sale of investments for the year ended December 31, 2005 of dlra0dtta7 million |
| At December 31, 2005, the Company had total net unrealized losses from marketable securities of dlra2dtta0 million |
| In connection with borrowings incurred under the credit facility with LaSalle Bank, we could experience market risk with respect to changes in the general level of the interest rates and their effect upon our interest expense |
| Borrowings under this facility bear interest at variable rates |
| Because such rates are variable, an increase in interest rates will result in additional interest expense and a reduction in interest rates will result in reduced interest expense |
| Accordingly, our present exposure to interest rate fluctuations is primarily dependent on rate changes that may occur while borrowings under the senior secured credit facility are outstanding |
| The Company’s long-term fixed interest rate debt is comprised of the Old Notes, which are also subject to market risk |
| All other things being equal, the fair market value of the Company’s fixed rate debt 28 ______________________________________________________________________ will increase as rates decline and will decrease as rates rise |
| The fixed rate Old Notes outstanding, totaling dlra150dtta0 million at December 31, 2005, had a fair value of dlra138dtta1 million based on quoted market rates as of such date |
| Risks Related to our Common Stock Our stock price has been volatile |
| The market price for our securities has been highly volatile |
| Various factors, including factors that are not related to our operating performance, may cause significant volume and price fluctuations in the market |
| The following factors, among others, may cause fluctuations in our stock price: · failure to meet our financial estimates or expectations of securities analysts; · failure to increase prescriptions of our products; · the introduction of knock-offs or generics to our products; · fluctuations in operating results; · rates of product acceptance; · timing or delay of regulatory approvals; · volatility in the pharmaceutical and specialty pharmaceutical market and stocks; · if our third-party manufacturers experience interruptions in the supply of raw materials, encounter delays in shipping or encounter regulatory problems; · developments in or disputes regarding patent or other proprietary rights; and · general economic, market and political conditions not related to our business |
| Existing officers, directors and our principal stockholder own a substantial block of our common stock |
| Existing officers, directors and our principal stockholder own a substantial number of shares of our common stock that may allow them to elect directors and direct the outcome of matters requiring stockholder approval |
| As of December 31, 2005, our officers, directors and our principal stockholder beneficially owned approximately 22dtta4prca of our outstanding common stock |
| As of December 31, 2005, Kapoor-Pharma Investments, LP beneficially owned approximately 17dtta4prca of our outstanding common stock |
| Accordingly, Kapoor-Pharma Investments holds significant control or influence over our policies and acts |
| John N Kapoor, Ph |
| D, the Chairman of the Board of Directors, is President and sole stockholder of EJ Financial Enterprises, Inc |
| EJ Financial Enterprises is the managing general partner of Kapoor-Pharma Investments |
| Kapoor is trustee is a partner of Kapoor-Pharma Investments |
| Anti-takeover provisions could discourage a third party from making a takeover offer that could be beneficial to stockholders |
| Some of the provisions in our restated certificate of incorporation and bylaws, our shareholder protection rights plan, and the anti-takeover provisions under Delaware law could delay or prevent a third party from acquiring us or replacing members of our Board of Directors, even if the acquisition or the replacements would be beneficial to our stockholders |
| These provisions could also reduce the price that certain investors might be willing to pay for shares of our common stock and/or New Notes and result in the market price being lower than it would be without these provisions |
| Our charter and other documents contain anti-takeover devices including: · staggered director terms such that only one of the three classes of directors is elected each year; · a shareholder rights plan that is designed to protect us from coercive takeover attempts; 29 ______________________________________________________________________ · a supermajority provision requiring at least two-thirds of the shares entitled to vote to approve an amendment of our bylaws; · providing our Board of Directors with the authority to issue shares of “blank-check” preferred stock without stockholder approval under any terms, conditions, rights and preferences that the Board determines; and · an advance notice requirement for nominations of directors or proposals for consideration at stockholder meetings |