| HI TECH PHARMACAL CO INC Item 1A Risk Factors The following risk factors could have a material adverse effect on the Company’s business, financial position or results of operations |
| These risk factors may not include all of the important factors that could affect our business or our industry or that could cause our future financial results to differ materially from historic or expected results or cause the market price of our common stock to fluctuate or decline |
| Delays in New Product Introductions Our future revenue growth and profitability are dependent upon our ability to develop and introduce new products on a timely basis in relation to our competitors’ product introductions |
| Our failure to do so successfully could have a material adverse effect on our financial position and results of operations |
| Many products require FDA approval prior to being marketed |
| The process of obtaining FDA approval to manufacture and market new and generic pharmaceutical products is rigorous, time-consuming, costly and largely unpredictable |
| We may be unable to obtain requisite FDA approvals on a timely basis for new generic products that we may develop |
| The timing and cost of obtaining FDA approvals could adversely affect our product introduction plans, financial position and results of operations |
| The ANDA process often results in the FDA granting final approval to a number of ANDAs for a given product |
| We may face immediate competition when we introduce a generic product into the market |
| These circumstances could result in significantly lower prices, as well as reduced margins, for generic products compared to brand products |
| New generic market entrants generally cause continued price and margin erosion over the generic product life cycle |
| Approved Products May Not Achieve Expected Levels of Market Acceptance Our approved products may not achieve expected levels of market acceptance, which could have a material adverse effect on our profitability, financial position and results of operations |
| Even if we were able to obtain regulatory approvals of our new pharmaceutical products, generic or brand, the success of those products is dependent upon market acceptance |
| Levels of market acceptance for new products could be impacted by several factors, including: • the availability of alternative products from our competitors • the price of our products relative to that of our competitors • the timing of our market entry • the ability of our customers to market our products effectively to the retail level • the acceptance of our products by government and private formularies Some of these factors are not within our control |
| New products may not achieve expected levels of market acceptance |
| Additionally, continuing studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the industry, government agencies and others |
| Such studies, which increasingly employ sophisticated methods and techniques, can call into question the utilization, safety and efficacy of previously marketed products |
| In some cases, these studies have resulted, and may in the future result, in the discontinuance of product marketing |
| These situations, should they occur, could have a material adverse effect on our profitability, financial position and results of operations |
| Industry is Highly Competitive We face competition from other pharmaceutical manufacturers that threatens the commercial acceptance and pricing of our products, which could have a material adverse effect on our business, financial position and results of operations |
| 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 delivery systems • larger research and development staffs 10 ______________________________________________________________________ • larger sales and marketing staffs • larger production capabilities • more products • more experience in developing new drugs and greater financial resources Each of these factors and others could have a material adverse effect on our business, financial position and results of operations |
| Government Regulation Because the pharmaceutical industry is heavily regulated, we face significant costs and uncertainties associated with our efforts to comply with applicable regulations |
| Should we fail to comply, we could experience material adverse effects on our business, financial position and results of operations |
| The pharmaceutical industry is subject to regulation by various federal and state governmental authorities |
| For instance, we must comply with FDA requirements with respect to the manufacture, labeling, sale, distribution, marketing, advertising, promotion and development of pharmaceutical products |
| Failure to comply with FDA and other governmental regulations can result in fines, disgorgement, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production and/or distribution, suspension of FDA’s review of ANDAs, enforcement actions, injunctions and criminal prosecution |
| Under certain circumstances, the FDA also has the authority to revoke previously granted drug approvals |
| Although we have internal regulatory compliance programs and policies and have had a favorable compliance history, there is no guarantee that we may not be deemed to be deficient in some manner in the future |
| If we were deemed to be deficient in any significant way, it could have a material adverse effect on our business, financial position and results of operations |
| In addition to the new drug approval process, the FDA also regulates the facilities and operational procedures that we use to manufacture our products |
| We must register our facilities with the FDA All products manufactured in those facilities must be made in a manner consistent with current Good Manufacturing Practices (“cGMP”) |
| Compliance with cGMP regulations requires substantial expenditures of time, money and effort in such areas as production and quality control to ensure full technical compliance |
| Failure to comply with cGMP regulations could result in an enforcement action brought by the FDA, which periodically inspects our manufacturing facilities for compliance, which could include withholding the approval of ANDAs or other product applications of a facility if deficiencies are found at that facility |
| FDA approval to manufacture a drug is site-specific |
| If the FDA would cause our manufacturing facilities to cease or limit production, our business could be adversely affected |
| Delay and cost in obtaining FDA approval to manufacture at a different facility also could have a material adverse effect on our business, financial position and results of operations |
| We are subject, as are generally all manufacturers, to various federal, state and local laws of general applicability, such as laws regulating working conditions, as well as environmental protection laws and regulations, including those governing the discharge of materials into the environment |
| Although we have not incurred significant costs associated with complying with such environmental provisions in the past, if changes to such environmental provisions are made in the future that require significant changes in our operations or if we engage in the development and manufacturing of new products requiring new or different environmental controls, we may be required to expend significant funds |
| Such changes could have a material adverse effect on our business, financial position and results of operations |
| Limited Number of Major Customers Our top 5 customers, based on sales, accounted for 55prca of our total sales for fiscal 2006 |
| Any significant reduction of business with any of our top 5 customers could have a material adverse effect on our business, financial position and results of operations |
| Third Party Suppliers Active pharmaceutical ingredients, packaging components, and other materials and supplies that we use in our pharmaceutical manufacturing operations, as well as certain finished products, are generally available and purchased from many different foreign and domestic suppliers |
| Additionally, we maintain sufficient raw materials inventory, and in certain cases where we have listed only one supplier in our applications with the FDA, we have received FDA approval to use 11 ______________________________________________________________________ alternative suppliers should the need arise |
| However, there is no guarantee that we will always have timely and sufficient access to a critical raw material or finished product |
| A prolonged interruption in the supply of a single-sourced active ingredient or finished product could cause our financial position and results of operations to be materially adversely affected |
| Limited Number of Manufacturing Facilities Our generic products and some of our branded products are produced at our two manufacturing facilities located at one site |
| A significant disruption at these facilities, even on a short-term basis, could impair our ability to produce and ship products to the market on a timely basis, which could have a material adverse effect on our business, financial position and results of operations |
| Consolidation of Customers A significant amount of our sales are made to a relatively small number of drug wholesalers, retail drug chains, managed care purchasing organizations, mail order pharmacies and hospitals |
| These customers represent an essential part of the distribution chain of generic pharmaceutical products |
| These customers have undergone, and are continuing to undergo, significant consolidation |
| This consolidation may result in these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures facing our business |
| Additionally, the emergence of large buying groups representing independent retail pharmacies and the prevalence and influence of managed care organizations and similar institutions potentially enable those groups to attempt to extract price discounts on our products |
| The result of these developments may have a material adverse effect on our business, financial position and results of operations |
| Indemnification Obligations In the normal course of business, we periodically enter into employment, legal settlements, and other agreements which incorporate indemnification provisions |
| We maintain insurance coverage which we believe will effectively mitigate our obligations under these indemnification provisions |
| However, should our obligation under an indemnification provision exceed our coverage or should coverage be denied, it could have a material adverse effect on our business, financial position and results of operations |
| Uncertainties of Estimates and Assumptions There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) |
| Any changes in estimates, judgments and assumptions used could have a material adverse effect on our business, financial position and results of operations |
| The financial statements included in the periodic reports we file with the Securities and Exchange Commission (“SEC”) are prepared in accordance with GAAP The preparation of financial statements in accordance with GAAP involves making estimates of expenses and income |
| This includes, but is not limited to, estimates, judgments and assumptions used in the adoption of the provisions of SFAS Nodtta 144, Accounting for the Impairment or Disposal of Long-Lived Assets and SFAS Nodtta 123, as amended, Accounting for Stock-Based Compensation |
| Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income |
| Any such changes could have a material adverse effect on our business, financial position and results of operations |
| Website Access to Filings with the Securities and Exchange Commission Additional information about the Company is available on our website at www |
| All of our electronic filings with the SEC including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available on our website free of charge as soon as reasonably practicable after they are electronically filed with and furnished to the SEC Our SEC filings are also available through the SEC’s website at www |
| Information contained on our website is not incorporated by reference in the Annual Report on Form 10-K and shall not be deemed “filed” under the Securities Exchange Act of 1934 |