| PERRIGO CO Item 1A Risk Factors 18 Item 1A Risk Factors |
| Fluctuation in Quarterly Results The Companyapstas quarterly operating results depend on a variety of factors including, but not limited to, the severity, length and timing of the cough/cold/flu season, the timing of new product approvals and introductions by the Company and its competitors, price competition, the magnitude and timing of research and development investments, changes in the levels of inventories maintained by the Companyapstas customers and the timing of retailer promotional programs |
| Restrictions on the sale of pseudoephedrine containing products are likely to have an adverse impact on sales of the Companyapstas cough/cold/flu and allergy products in fiscal 2007, which may affect the typical seasonal sales patterns of these products |
| Accordingly, the Company may be subject to significant and unanticipated quarter-to-quarter fluctuations |
| Potential Volatility of Stock Price The market price of the Companyapstas common stock has been, and could be, subject to wide fluctuations in response to, among other things, quarterly fluctuations in operating results, adverse circumstances affecting the introduction or market acceptance of new products, failure to meet published estimates of or changes in earnings estimates by securities analysts, announcements of new products or enhancements by competitors, receipt of regulatory approvals by competitors, sales of common stock by existing holders, loss of key personnel, market conditions in the industry, shortages of key product inventory components and general economic conditions |
| Commercialization of New Products / Research and Development The Companyapstas future results of operations depend, to a significant degree, upon its ability to successfully commercialize additional generic drugs and/or innovative pharmaceuticals and API The Company must develop, test and manufacture generic prescription products as well as prove that its generic prescription products are the bioequivalent of their branded counterparts, which requires bioequivalency studies or even more expensive clinical trials in the case of topical products |
| OTC drugs may require bioequivalency studies as well |
| All major products must meet regulatory standards and receive regulatory approvals |
| The development and commercialization process, particularly with respect to innovative products, is both time consuming and costly and involves a high degree of business risk |
| Products currently under development, if and when fully developed and tested, may not perform as expected, necessary regulatory approvals may not be obtained in a timely manner, if at all, and the Company may not be able to successfully and profitably produce and market such products |
| Delays in any part of the process or the Companyapstas inability to obtain regulatory approval of its products (including products developed by others to which the Company has exclusive marketing rights) could adversely affect operating results by restricting or delaying its introduction of new products |
| Even upon the successful development of a product, the Companyapstas customerapstas failure to launch a product could adversely affect operating results |
| Continuous introductions of new products and product categories are critical to the Companyapstas business |
| Product margins may decline over time - 18 - due to the productapstas aging life cycle, changes in consumer choice or developments in drug delivery technology |
| Therefore, new product introductions are necessary for maintenance of the Companyapstas current financial condition and introductions of products not previously marketed by the Company provide opportunities for financial growth |
| The Companyapstas investment in research and development is expected to be at or above historical levels due to the Companyapstas ongoing expansion into the manufacture and sale of generic prescription drugs as well as the high cost of developing and becoming a qualified manufacturer of new products that are switching from prescription to OTC status |
| The ability to attract scientists proficient in emerging delivery forms and/or contracting with a third party innovator in order to generate new products of this type is a critical element of the Companyapstas long-term plans |
| Should the Company fail to attract qualified employees or enter into reasonable agreements with third party innovators, long-term sales growth and profit would be adversely impacted |
| Manufacturing Facilities The Companyapstas US operations are concentrated in Allegan, Michigan; Greenville, South Carolina and the Bronx, New York |
| Approximately 65prca of the Companyapstas revenues are related to these manufacturing facilities |
| The Company has concentrated manufacturing facilities in Israel which comprise approximately 13prca of the Companyapstas revenues |
| A significant disruption resulting from, but not limited to, fire, tornado, storm, material supply, insufficient quality, or flu pandemic at any of the Companyapstas facilities could impair its ability to develop, produce and/or ship products on a timely basis, which could have a material adverse effect on the Companyapstas business, financial position and operating results |
| Regulatory Environment Several US and foreign agencies regulate the manufacturing, processing, formulation, packaging, labeling, testing, storing, distribution, advertising and sale of the Companyapstas products |
| Various state and local agencies also regulate these activities |
| In addition, the Company manufactures and markets certain of its products in accordance with the guidelines established by voluntary standard organizations |
| Should the Company fail to adequately conform to these regulations and guidelines, there may be a significant adverse impact on the operating results of the Company |
| In particular, packaging or labeling changes mandated by the FDA can have a material adverse impact on the results of operations of the Company |
| Required changes could be related to safety or effectiveness issues |
| The Company believes that it has a good relationship with the FDA, which it intends to maintain |
| If these relationships should deteriorate, however, the Companyapstas ability to bring new and current products to market could be impeded |
| In addition, the FDAapstas policy regarding the award of a 180-day market exclusivity period to generic manufacturers who successfully challenge patents relating to specific products continues to be the subject of extensive litigation in the US The FDAapstas current interpretation of Hatch-Waxman is to award 180 days of exclusivity to the first generic manufacturer who files a successful paragraph IV certification under Hatch-Waxman challenging the patent of the branded product, regardless of whether the manufacturer was sued for patent infringement |
| Although the FDAapstas interpretation may benefit some of the products in the Companyapstas pipeline, it may adversely affect others |
| The Medicare Prescription Drug Improvement and Modernization Act of 2003 provides that the 180-day market exclusivity period provided under Hatch-Waxman is triggered by the commercial marketing of the product |
| However, the Medicare Prescription Drug Act also contains forfeiture provisions which, if met, will deprive the first paragraph IV filer of exclusivity |
| Additionally, the manufacturer of the branded product may launch a generic version of its own drug, known as an authorized generic |
| Under certain circumstances, the Company may not be able to fully exploit its 180-day exclusivity period resulting from it being the first filer |
| Store Brand Product Growth The future growth of domestic store brand products will be influenced by general economic conditions, which can influence consumers to switch to store brand products, consumer perception and acceptance of the quality of the -19- products available, the development of new products and/or product delivery forms, the market exclusivity periods awarded on prescription to OTC switch products and the Companyapstas ability to grow its store brand market share |
| The Company does not advertise like the national brand companies and thus is dependent on retailer promotional spending to drive sales volume and increase market share |
| Growth opportunities for the products in which the Company currently has a significant store brand market share (cough/cold/flu and analgesic products) will be driven by the ability to offer new products to existing domestic customers |
| Branded pharmaceutical companies may use state and federal regulatory and legislative means to limit the use of brand equivalent products |
| Should store brand growth be limited by any of these factors, there could be a significant adverse impact on the operating results of the Company |
| Competitive Issues The markets for OTC pharmaceutical, generic pharmaceutical, API and nutritional products are highly competitive |
| Competition is based primarily on price, quality and assortment of products, customer service, marketing support and availability of new products |
| Competition also comes from national brand companies and brand pharmaceutical companies |
| That competition could be intensified should those companies lower prices or manufacture their own store brand or generic equivalent products |
| Due to the high degree of price competition, the Company has not always been able to fully pass on cost increases to its customers |
| The inability to pass on future cost increases, the impact of store brand competitors and the impact of national brand companies lowering prices of their products or operating in the store brand market could have a material adverse impact on financial results |
| In addition, since the Company sells its nutritional products through retail drug, supermarket and mass merchandise chains, it may experience increased competition in its nutritional products business through alternative channels such as health food stores, direct mail and direct sales as more consumers obtain products through these channels |
| Retailer reverse auctions have added a new dimension to competition as some retailers have instituted this process to obtain competitive price quotes over the world-wide web |
| The Company has evaluated, and will continue to evaluate, the products and product categories in which it does business |
| Future product line extensions, or deletions, could have a material impact on the Companyapstas financial position or results of operations |
| Selling prices of generic drugs typically decline, sometimes dramatically, as additional companies receive approvals for a given product, brands launch authorized generics and competition intensifies |
| To the extent that the Company succeeds in being the first to market a generic version of a significant product, the Companyapstas sales and profit can be substantially increased in the period following the introduction of such product and prior to a competitorapstas introduction of the equivalent product |
| The Companyapstas ability to sustain its sales and profitability on any product over time is dependent on both the number of new competitors for such product, some of whom may be significantly larger than the Company, and the timing of their approvals |
| Certain competitors are choosing to consolidate in the generic pharmaceutical industry |
| This consolidation may create larger companies with which the Company must compete and provide further pressure to prices, development activities or customer retention |
| The impact of future consolidation in the industry could have a material impact on the Companyapstas financial position or results of operations |
| In addition, the Companyapstas API business is subject to increased competition from other manufacturers of API located in developing countries such as India and Europe |
| Such competition may result in loss of API customers and/or decreased profitability in this business segment |
| -20- Customer Issues The Companyapstas largest customer, Wal-Mart, currently comprises approximately 22prca of total net sales |
| Should Wal-Martapstas current relationship with the Company change adversely, the resulting loss of business could have a material adverse impact on the Companyapstas financial position and results of operations |
| In addition, while no other customer individually comprises more than 10prca of total net sales, the Company does have other significant customers which, if the relationship changes significantly, could have a material adverse impact on the Companyapstas financial position and results of operations |
| Maintaining the supply relationships with the Companyapstas customers is critical to its success |
| If the Company is unable to deliver to expected customer service levels, customers may choose to assess penalties, obtain alternate sources for products, withhold new product introductions and/or end the relationship with the Company |
| Customers may limit the level of product sourcing with the Company in protection of the customerapstas own interests |
| Any or all of these factors could have a material adverse impact on the Companyapstas financial position and results of operations |
| The impact of retailer consolidation could have an adverse impact on future sales growth |
| If a large customer should encounter financial difficulties, the exposure on uncollectible receivables and unusable inventory could have a material adverse impact on the Companyapstas financial position or results of operations |
| Dependence on Personnel The Companyapstas future success will depend in large part upon its ability to attract and retain highly skilled employees |
| Key functions for the Company include executive managers, operational managers, research and development scientists, information technology specialists, financial and legal specialists, regulatory professionals, quality compliance specialists and sales/marketing personnel |
| Should the Company be unable to attract or retain key qualified employees, future operating results may be adversely impacted |
| Conditions in Israel The Company has significant manufacturing and research and development facilities in Israel |
| Political, economic and military conditions in Israel directly affect the Companyapstas operations and the Company could be adversely affected by current or future hostilities involving Israel or a significant recession or downturn in the economic or financial condition of Israel |
| Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries |
| A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel |
| The level of hostilities increased significantly in July 2006 between Israel and Hezbollah in neighboring Lebanon |
| As of the date of this report, the hostile operations of these groups continue in Lebanon and northern Israel and hostilities between Israel and the Palestinians have markedly increased |
| These hostilities have adversely affected Israelapstas relationship with a number of countries in the region and elsewhere, as well as its relationship with international organizations |
| While none of the Companyapstas facilities in Israel have been directly affected by the hostile operations, there can be no assurance that a further escalation of hostilities will not impact the Companyapstas facilities |
| Furthermore, the Companyapstas employees in Israel include members of the Israeli military reserves, some of whom have been called up for active duty |
| If a significant number of the Companyapstas employees in Israel are called up for active duty in the military, the Companyapstas operations in Israel may be materially adversely affected |
| -21- The recent escalation of hostilities has had a disruptive effect on Israelapstas economy and any international economic sanctions against Israel could further harm Israelapstas economy |
| These economic developments could have an adverse effect on the Companyapstas Israel Consumer Products and Israel Pharmaceutical and Diagnostic Products businesses |
| Furthermore, certain parties with whom the Company does business may decline to travel to Israel, which would force the Company to make alternative arrangements where necessary |
| The United States Department of State has issued an advisory regarding travel to Israel |
| As a result of the State Departmentapstas advisory, the FDA has at various times curtailed or prohibited its inspectors from traveling to Israel to inspect the facilities of Israeli companies, which, should it occur with respect to the Company, could result in the FDA withholding approval for new products intended to be produced at those facilities |
| Although it has not yet occurred, the political and security situation in Israel may result in certain parties with whom the Company has contracts claiming that they are not obligated to perform their commitments pursuant to force majeure provisions of those contracts |
| The Company could experience disruption of its manufacturing and research and development facilities due to terrorist acts or military actions |
| If terrorist acts or military actions were to result in substantial damage to the Companyapstas facilities, business activities would be disrupted since, with respect to certain products, the Company would need to obtain prior FDA approval for a change in manufacturing site |
| The Companyapstas insurance may not adequately compensate it for losses that may occur and any losses or damages incurred by the Company could have a material adverse effect on its business |
| Some neighboring countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies |
| The Company is also precluded from marketing its products to certain of these countries due to US and Israeli regulatory restrictions |
| Because none of the Companyapstas revenue is currently derived from sales to these countries, the Company believes that the boycott has not had a material adverse effect on its current operations |
| However, continuation, extension of the boycott or implementation of additional restrictive laws, policies or practices directed towards Israel or Israeli businesses could have an adverse impact on the expansion of the Companyapstas business |
| Healthcare and Legal Reforms Increasing expenditures for healthcare have been the subject of considerable public attention in Israel, North America and many European countries |
| Both private and governmental entities are seeking ways to reduce or contain healthcare costs |
| In many countries in which the Company currently operates, pharmaceutical prices are subject to regulation |
| In the US, numerous proposals that would effect changes in the US healthcare system and the pharmaceutical industry have been introduced or proposed in Congress and in some state legislatures that could include, but not be limited to, intellectual property, regulatory, antitrust, drug pricing and products liability issues |
| Similar activities are taking place throughout Europe |
| As a result of governmental budgetary constraints, the Israel Ministry of Health and the major Israeli health funds have sought to further reduce healthcare costs by, among other things, applying continuous pressure to reduce pharmaceutical prices and inventory levels |
| The Company cannot predict the nature of the measures that may be adopted, how they will be interpreted by the courts or the administrative agencies charged with enforcing them or their impact on the marketing, pricing and demand for its products |
| -22- Pseudoephedrine - Retail Sales Controls The Company continued to be impacted by the legislative and market changes related to products containing pseudoephedrine, which have resulted from concerns over the diversion and misuse of pseudoephedrine in the production of methamphetamine, an illegal drug |
| Sales of these products in fiscal 2006 were approximately dlra90cmam000 lower than year-to-date fiscal 2005 |
| The Company monitors this issue continuously and, consequently, recorded an additional charge of approximately dlra8cmam800 in fiscal 2006 for estimated obsolete inventory on hand |
| Based on recent events in the retail market, legislative actions and the resulting lost sales, management believes that these issues will continue to have a significant adverse effect on the Companyapstas results of operations in fiscal 2007 |
| On March 10, 2006, Congress enacted the Patriot Act, which included the Combat Methamphetamine Epidemic Act of 2005 (the Act) |
| Among the various provisions, this national legislation places certain restrictions on the purchase and sale of all products that contain ephedrine, pseudoephedrine, or phenylpropanolamine (List I Chemical Products) |
| Effective April 7, 2006, the Act imposed quotas on manufacturers and imposed daily restrictions on the amount of List I Chemical Products a retailer may sell to a consumer (3dtta6 grams per day) and limitations on the amount of List I Chemical Products a consumer may purchase (9dtta0 grams) over a thirty-day period |
| Further, effective September 30, 2006, the Act requires that (a) retail sellers place all List I Chemical Products behind the counter and maintain a logbook that tracks the sales of List I Chemical Products to individuals, and (b) purchasers provide valid identification in order to purchase List I Chemical Products |
| Many states have also imposed statutory and regulatory restrictions on the manufacture, distribution and sale of pseudoephedrine products |
| For many of these products impacted by the above legislation, reformulation is underway to substitute pseudoephedrine with phenylephrine, an ingredient that cannot be used in the production of methamphetamine |
| The Company has launched certain substitute products |
| Other phenylephrine products are in various stages of development |
| Substitute products will become more available over time as new national brand products are marketed and as development is completed |
| Accordingly, these products will be phased in for sales to customers over the next several fiscal quarters |
| The Company cannot predict if all pseudoephedrine-containing products can be successfully reformulated with phenylephrine or if consumers will accept phenylephrine as an adequate substitute for pseudoephedrine |
| Dextromethorphan The Company manufactures several products that contain the active ingredient dextromethorphan, which is indicated for cough suppression |
| Dextromethorphan has come under scrutiny because of its potential to be abused |
| Some states have introduced legislation that, if passed, could require restricted access to dextromethorphan in finished dosage forms |
| Although at least one state has passed legislation restricting the bulk sale of dextromethorphan, no state legislation has yet been enacted restricting the sale of dextromethorphan in finished dosages and concentrations for use as an OTC drug |
| Similarly, on the federal level, legislation has been introduced (the Dextromethorphan Distribution Act of 2006) which, if passed, would allow the FDA to promulgate regulations on the sale of unfinished dextromethorphan and limit the distribution of the bulk ingredient only to those persons or entities which are registered with the FDA Due to the recent scrutiny of dextromethorphan, it is possible that any of the states or the federal government could introduce and pass legislation imposing restrictions on the sale of dextromethorphan in finished dosage form, including but not limited to requiring a minimum age to purchase product, limiting the amount a consumer may purchase, requiring a prescription and/or placing the product in a more controlled position of sale behind the pharmacy counter of a retailer |
| Products containing dextromethorphan generated approximately dlra76cmam000 of the Companyapstas revenues in fiscal 2006 |
| The Company cannot predict whether any of the proposed legislation will be passed, or if it is passed, its impact on future revenues attributable to these products |
| -23- Product Issues - Effect of Misuse and Publicity The Companyapstas products are safe and effective when used in accordance with label directions |
| However, certain products contain ingredients that can be, and in some cases are, used for improper purposes |
| As previously discussed, pseudoephedrine and dextromethorphan are two of these ingredients, but others may exist |
| Increasingly, various efforts are employed by federal and state governments in an effort to curb this misuse, including the consideration of additional legislation or regulation that may result in further restrictive requirements for the manufacture or sale of products containing these ingredients |
| The Company cannot predict if or when any additional legislation or regulation will be approved |
| If this type of additional legislation or regulation is approved, it could have an adverse impact on the Companyapstas results of operations |
| A broad class of pain relievers known as non-steroidal anti-inflammatory drugs (NSAID), such as ibuprofen, naproxen and others, has come under scrutiny by the FDA The FDA has requested manufacturers of NSAID provide labeling which contains a warning that the long-term, continuous use of these products may increase a consumerapstas cardiovascular risk |
| The Company has complied with the request, but cannot predict if this warning will adversely impact the future sales of these products or the Companyapstas results of operations |
| The Company believes that growth in the nutritional products business is based largely on national media attention regarding scientific research suggesting potential health benefits from regular consumption of certain vitamin and other nutritional products |
| There can be no assurance of future favorable scientific results and media attention, or the absence of unfavorable or inconsistent findings |
| In the event of future unfavorable scientific results or media attention, the Companyapstas sales of nutritional products could be materially adversely impacted |
| Patent and Trade Dress Issues The Companyapstas ability to bring new products to market is limited by certain patent and trade dress factors including, but not limited to, the existence of patents protecting brand products for the Consumer Healthcare, API and Rx Pharmaceuticals segments and the regulatory exclusivity periods awarded on products that have switched from prescription to OTC status |
| The cost and time to develop these prescription and switch products is significantly greater than the rest of the new products that the Company seeks to introduce |
| Moreover, 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 |
| The Company may have to defend against charges that it violated patents or proprietary rights of third parties |
| The Companyapstas defense against charges that it infringed third party patents or proprietary rights could require the Company to incur substantial expense and to divert significant effort of its technical and management personnel |
| If the Company infringes on the rights of others, it could lose its right to develop or manufacture some products or could be required to pay monetary damages or royalties to license proprietary rights from third parties |
| Although the parties to patent and intellectual property disputes in the pharmaceutical industry have often settled their disputes through licensing or similar arrangements, the costs associated with these arrangements may be substantial and could include ongoing royalties |
| Furthermore, the Company cannot be certain that the necessary licenses would be available to it on terms it believes to be acceptable |
| As a result, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing and selling a number of its products |
| At times, the Company may seek approval to market generic prescription products before the expiration of patents for those products, based upon its belief that such patents are invalid, unenforceable or would not be infringed by its -24- products |
| As a result, the Company may face significant patent litigation |
| Depending upon a complex analysis of a variety of legal and commercial factors, the Company may, in certain circumstances, elect to market a generic prescription product while litigation is pending, before any court decision or while an appeal of a lower court decision is pending |
| Should the Company elect to proceed in this manner, the Company could face substantial patent liability damages if the final court decision is adverse to it |
| Protection of Intellectual Property Rights The Companyapstas success with certain of its products depends, in part, on its ability to protect its current and future products and to defend its intellectual property rights |
| If the Company fails to adequately protect its intellectual property, competitors may manufacture and market similar products |
| The Company has been issued patents covering certain of its products, and has filed, and expects to continue to file, patent applications seeking to protect newly developed technologies and products in various countries, including the US Any existing or future patents issued to or licensed by the Company may not provide it with any significant competitive advantages for its products or may even be challenged, invalidated or circumvented by competitors |
| In addition, such patent rights may not prevent the Companyapstas competitors from developing, using or commercializing non-infringing products that are similar or functionally equivalent to its products |
| The Company also relies on trade secrets, unpatented proprietary know-how and continuing technological innovation that it seeks to protect, in part by confidentiality agreements with licensees, suppliers, employees and consultants |
| Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements |
| Furthermore, trade secrets and proprietary technology may otherwise become known or be independently developed by competitors or, if patents are not issued with respect to products arising from research, the Company may not be able to maintain the value of such intellectual property rights |
| Legal Exposure From time to time, the Company and/or its subsidiaries become involved in lawsuits arising from various commercial matters, including, but not limited to, competitive issues, contract issues, intellectual property matters, workers &apos compensation, product liability and state or federal regulatory issues |
| See Item 3 |
| Legal Proceedings |
| Litigation tends to be unpredictable and costly |
| No assurance can be made that litigation will not have a material adverse effect on the Companyapstas financial position or results of operations in the future |
| Similarly, judicial decisions in proceedings to which the Company is not a party may result in the setting of legal precedent that could affect the future operation of the Companyapstas business |
| -25- Availability of Raw Materials and Supplies High quality raw materials and packaging components are essential to all of the Companyapstas business units due to the nature of the products it manufactures |
| Raw materials and packaging components are generally available from multiple suppliers |
| Supplies of certain raw materials, bulk tablets and finished goods purchased by the Company are limited, or are available from one or only a few suppliers |
| In response to these problems the Company tries to identify alternative materials or suppliers for such raw materials, bulk tablets and finished goods |
| Certain material shortages and approval of alternate sources could adversely affect financial results |
| The Company continues to increase its revenues outside the US The Companyapstas primary markets for the sale of its products outside the US are Canada, Germany, Israel, Mexico and the UK The Company may have difficulty in international markets due, for example, to regulatory barriers, the necessity of adapting to new regulatory systems and problems related to markets with different cultural bases and political systems |
| Sales to customers outside the US and foreign raw material purchases expose the Company to a number of risks including unexpected changes in regulatory requirements, possible difficulties in enforcing agreements, longer payment cycles, longer shipping lead-times, inefficient port operations, exchange rate fluctuations, difficulties obtaining export or import licenses, the imposition of withholding or other taxes, economic or political instability, embargoes, military hostilities or exchange controls |
| Should any of these risks occur, they may have a material adverse impact on the operating results of the Company |
| Customs and Trade Regulation The Company imports and exports products and raw materials from several jurisdictions around the world |
| This process involves Company subsidiaries and third parties operating in a number of jurisdictions with different customs and import/export regulations |
| The regulations are subject to change from time to time and the Company cannot predict the nature, scope or impact upon the Companyapstas operations of these changes |
| The Company is subject to periodic reviews and audits by US and foreign authorities responsible for administering these regulations |
| To the extent that the Company is unable to successfully defend itself against an audit or review, the Company may be required to pay assessments and penalties and increased duties, which may, individually or in the aggregate, negatively impact the Companyapstas gross margins and operating results |
| Certain of the Companyapstas facilities operate in a special purpose subzone established by the US Department of Commerce Foreign Trade Zone Board, which allows the Company certain tax advantages on products and raw materials shipped through these facilities |
| Entry into new tax jurisdictions, whether domestic or international, increases the likelihood of fluctuation |
| To continue to be eligible for these grants, the Companyapstas development projects must be approved by the Chief Scientist on a case-by-case basis |
| If the Companyapstas development projects are not approved by the Chief Scientist, the Company will not receive grants to fund these projects, which would increase research and development costs |
| The receipt of such grants subjects the Company to certain restrictions and pre-approval requirements which may be conditioned by additional royalty payments with rights to transfer of intellectual property and/or production abroad |
| The Company also receives tax benefits, in particular exemptions and reductions as a result of the approved enterprise status of certain existing operations in Israel |
| To be eligible for these tax benefits, the Company must maintain its approved enterprise status by meeting conditions, including making specified investments in fixed assets located in Israel and investing additional equity in itself and its Israeli subsidiaries and by meeting projections provided to the regulatory agencies |
| If the Company fails to meet these conditions in the future, the tax benefits would be canceled and the Company could be required to refund the tax benefits already received |
| These tax benefits may not be continued in the future at their current levels or at any level |
| If such benefits are reduced or eliminated in the future, the Companyapstas results of operations will be negatively impacted |
| Goodwill and Other Intangibles The Company tests goodwill for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest impairment exists |
| The test for impairment requires the Company to make several estimates about fair value, most of which are based on projected future cash flows |
| Changes in these estimates may result in the recognition of an impairment loss |
| The Companyapstas testing in the 2006 fiscal year resulted in no impairment charges related to goodwill |
| The testing performed on the Companyapstas UK component within the Consumer Healthcare segment, however, indicated that while the estimated fair value exceeded the carrying value, these values were closer than they had been in previous years |
| The narrowing of the difference in these values increases the possibility that unfavorable changes in the future financial results of this business could result in an impairment charge in future periods |
| Other intangible assets subject to amortization consist of developed product technology, distribution and license agreements, customer relationships and trademarks |
| For intangible assets subject to amortization, an impairment analysis is performed whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable |
| An impairment loss is recognized if the carrying amount of the asset is not recoverable and its carrying amount exceeds its fair value |
| Any significant change in market conditions and estimates or judgments used to determine expected future cash flows that indicate a reduction in carrying value may give rise to impairment in the period that the change becomes known |
| Insurance Costs The Company maintains insurance, including property, general and product liability, and directors &apos and officers &apos liability, to protect itself against potential loss exposures |
| To the extent that losses occur, there could be an adverse effect on the Companyapstas financial results depending on the nature of the loss and the level of insurance coverage maintained by the Company |
| The Company cannot predict whether deductible or retention amounts will increase or whether coverage will be reduced in the future |
| From time to time, the Company may reevaluate and change the types and levels of insurance coverage that it purchases |
| -27- Exposure to Product Liability Claims The Company, like other retailers, distributors and manufacturers of products that are ingested, is exposed to product liability claims in the event that, among other things, the use of its products results in injury |
| There is no assurance that product liability insurance will continue to be available to the Company at an economically reasonable cost (or at all for certain products) or that the Companyapstas insurance will be adequate to cover liability that the |