ITEM 1. BUSINESS
GENERAL
Biocraft Laboratories, Inc. (the "Company") manufactures and markets
various dosages of generic drugs. Generic drugs are the chemical and therapeutic
equivalents of brand name drugs which generally have gained market acceptance
while under patent protection. Although subject to strict Food and Drug
Administration ("FDA") standards, generic drugs are sold under their chemical
(generic) names, typically at prices substantially below those of their brand
name equivalents.
Sales of generic drugs have increased significantly in recent years, due in
part to greater awareness and acceptance of generic drugs by physicians,
pharmacists and the public. Among the factors which have contributed to this
increased awareness and acceptance are the modification of state laws to permit
pharmacists to substitute generic drugs for brand name drugs (where authorized
or not expressly prohibited by the prescribing physician), and the publication
by the FDA of a list of therapeutic equivalent drugs which provides
1
physicians and pharmacists with the names of generic drug alternatives. In
addition, since generic drugs are typically sold at prices significantly below
the price of brand name drugs, the prescribing of generic drugs has been
encouraged, and in many cases required, by various government agencies and by
many private health programs as a cost-saving measure in the purchase of, or
reimbursement for, prescription drugs.
PRODUCTS AND PRODUCT DEVELOPMENT
The Company presently manufactures various dosages of 23 prescription
drugs, and one prescription veterinary drug constituting an aggregate of 68
products. Governmental approvals were required and obtained for each of these
products. The Company's products are sold in various oral dosage forms,
including compressed tablets, two-piece hard-shell capsules, powders for oral
solution or suspension and liquids. As of March 31, 1995, the Company was
awaiting FDA approvals to market 14 generic drugs constituting 29 products. The
Company intends to submit to the FDA applications to approve five new generic
drugs constituting a variety of products during fiscal 1996. See "Government
Regulation."
The 24 drugs manufactured by the Company can be divided into 11 categories.
The number of products in each category is shown in parentheses.
1. Penicillin and Semi-Synthetic Penicillin Drugs (19): These antibiotic
drugs include Penicillin V Potassium and the semi-synthetic penicillin drugs
Amoxicillin, Ampicillin, Cloxacillin, Dicloxacillin and Oxacillin.
2
2. Cephalosporin Drugs (10): These antibiotic drugs are Cephradine and
Cephalexin.
3. Other Antibiotic Drugs (6): These drugs are Cinoxacin, Clindamycin,
Minocycline HCl, Neomycin and Nystatin.
4. Analgesic Drug (3): This drug is Ketoprofen.
5. Anti-Infective Drugs (5): These drugs are Trimethoprim and a combination
of Sulfamethoxazole and Trimethoprim.
6. Anti-Depressant Drugs (8): These drugs are Amitriptyline Hydrochloride
and Imipramine Hydrochloride.
7. Bronchial Dilator Drugs (5): These drugs are Albuterol and
Metaproterenol.
8. Cardiovascular Drug (2): This drug is Disopyramide Phosphate.
9. Gastrointestinal Drug (3): This drug is Metoclopramide.
10. Anti-Spasmodic Drug (2): This drug is Baclofen.
11. Veterinary Drug (5): The drug in this category is Amoxicillin, an
antibiotic sold under the registered trademark "Biomox."
In July 1994 the Company entered into an agreement with FDA resolving
outstanding regulatory issues with respect to dosage form facilities. Based on
3
the agreement, the Company suspended shipments of powder for Oral Suspension of
Amoxicillin and Nystatin Oral Suspension. Previously, on its own initiative, the
Company had stopped manufacturing the Oral Suspension of Ampicillin and
Amiloride HCl Hydrochlorothiazide Tablets. The agreement requires expert
certifications to be submitted to and approved by FDA prior to resumption of
shipments. The Company resumed shipment of the Oral Suspension of Amoxicillin in
September 1994 and FDA is currently reviewing expert certifications for
Nystatin. See Legal Proceedings.
The Company manufactures the active ingredients it uses in its
semi-synthetic penicillin drugs at its Waldwick, New Jersey facility and bulk
form Cephalexin at its Mexico, Missouri facility. In March 1994, the Company
received FDA approval to manufacture bulk form Amoxicillin and Ampicillin in its
plant in Missouri. Such active ingredients are from time to time sold in bulk
form, generally in small amounts. Chemical intermediates also manufactured in
the Company's Mexico, Missouri facility are used in the Company's production of
certain antibiotics and are also periodically sold to third parties.
The Company entered into a three-year supply agreement with Eli Lilly and
Company, effective January 1, 1995. The agreement calls for Biocraft to supply
Eli Lilly and Company with a product manufactured at Biocraft's Missouri
facility. Biocraft expects this arrangement will result in Biocraft doubling its
4
production of that product. The contract also calls for Lilly to supply Biocraft
with substantial quantities of a raw material at a fixed exchange ratio.
The Company's research and development generally consists of activities
related to new generic drug product development, clinical studies for generic
and non-generic drugs and research for developing new bulk manufacturing
processes. In the fiscal years ended March 31, 1993, 1994 and 1995, total
research and development expenditures were approximately $8,662,000, $9,923,000
and $11,110,000, respectively.
The Company's primary product development strategies are to manufacture and
sell in generic form antibiotic drugs for which the Company can maintain certain
cost controls by manufacturing the chemical intermediates and/or active
ingredients in bulk. Generally, the Company also selects non-antibiotic drugs
for which the Company anticipates initially limited competition due to such
factors as extensive FDA approval requirements, complexity of manufacture or
limited availability of raw materials. In all cases, the Company seeks to obtain
FDA approval to market a new generic drug product by, or shortly after, the
patent expiration date of the equivalent brand name drug in order to be among
the first generic drug companies to offer a generic equivalent at a
substantially lower price. Since the development of a generic drug product,
5
including its formulation, testing and FDA approval, generally takes
approximately three to four years, development activities for a product may
begin several years in advance of the patent expiration date of the brand name
drug equivalent. Consequently, the Company is presently selecting drugs it
expects to market several years in the future.
The Company is developing certain drugs which the FDA has determined
require clinical studies in order to obtain approval of a generic equivalent.
Completion of these clinical studies involves larger numbers of subjects and
longer periods of time and results in greater expenditures than do
bioequivalency studies which are required for most generic drugs. The Company is
currently awaiting FDA approval of one such drug, Sucralfate, an ulcer
medication.
The Company is considering developing, manufacturing and selling drugs
which require New Drug Applications. The process of obtaining FDA approval of
these types of drugs typically requires greater expenditures by the Company than
approval of most generic drugs and often takes many years to complete. To market
these drugs, it will be necessary to familiarize physicians, pharmacists and the
public with the effects of such drugs. Since the Company has no experience in
this type of marketing, no assurance can be given that the Company will have the
ability itself, or that it will be able to make arrangements with others, to
market these drugs in such manner.
6
MARKETING AND CUSTOMERS
The Company sells its products primarily through 16 salaried employees.
Sales of drugs in dosage forms are made primarily to distributors, drug
wholesalers, drugstore chains, mass merchandisers, other drug manufacturers,
health care institutions and government agencies. More than half of the
Company's gross sales of drugs in dosage form is made under its own label and
the balance is made under customers' labels; however, in all cases the Company
is named on the label as the manufacturer.
The Company sells dosage form products to approximately 300 customers. No
single customer accounted for more than 10% of total net sales in fiscal 1993,
1994 or 1995.
In fiscal 1993, 1994 and 1995, sales of cephalosporins constituted
approximately 24%, 27% and 30%, respectively, of total gross sales. For the
fiscal years ended March 31, 1993, 1994 and 1995, penicillin and semi-synthetic
penicillin drugs accounted for approximately 33%, 36% and 36%, respectively, of
total gross sales.
A key element of the Company's marketing strategy is to attempt to maintain
sufficient inventories of products in order to meet the Company's goal of
filling customer orders within a one to four week period. This strategy requires
7
a substantial amount of working capital to maintain inventories at a level
sufficient to meet anticipated demand.
COMPETITION
The Company competes in varying degrees with numerous foreign and domestic
companies in the health care industry, including other manufacturers of generic
drugs (among which are several major pharmaceutical companies) and manufacturers
of brand name drugs. Many of the Company's competitors have greater financial
and other resources and are, therefore, able to expend more effort than the
Company in areas such as marketing and product development.
The principal competitive factors in the generic pharmaceutical market are
the ability to introduce generic versions of brand name drugs promptly after
patent expiration, price, quality and customer service.
RAW MATERIALS
The principal raw materials of the Company's business are active
ingredients for non-penicillin drugs and bulk pharmaceutical chemicals. The bulk
pharmaceutical chemicals are used to manufacture bulk form antibiotics. Both
types of raw materials are generally available from multiple sources.
8
Because the FDA requires specification of raw material suppliers in
applications for approval of drug products, if raw materials from a specified
supplier were to become unavailable, the required FDA approval of a new supplier
could cause a delay in the manufacture of the drug involved.
EMPLOYEES
As of April 1, 1995, the Company had approximately 800 full-time employees.
Approximately 150 administrative and professional personnel are engaged, at
least part of their time, in product development of bulk and finished dosage
form products, including market research, product selection and formulation,
process development, and in seeking FDA approvals of new products. Approximately
280 employees are represented by a local collective bargaining unit whose
agreement with the Company expires on June 1, 1997, with annual wage reopeners.
Management believes that its relations with employees are satisfactory.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally by the FDA, and to a lesser extent by state and
local governments. The Federal Food, Drug and Cosmetic Act, the Controlled
Substances Act and other federal statutes and regulations govern or influence
the testing, manufacture, safety, labeling, storage, record keeping, approval,
9
pricing, advertising and promotion of the Company's products. Noncompliance with
applicable requirements can result in fines, recall and seizure of product,
total or partial suspension of production, delays in receiving approval of new
drug applications, refusal to enter into government supply contracts and
criminal prosecution. The FDA also has the authority to revoke approvals of
drugs.
FDA approval is required before each dosage form of any new drug can be
marketed. All applications for FDA approval must contain information relating to
bioequivalency, product formulation, stability, manufacturing processes,
packaging, labeling and quality control. Validation of manufacturing processes
is also generally required before a Company may market new products. There are
generally two types of applications currently used to obtain FDA approval of a
new drug.
1. New Drug Application ("NDA"). Generally, with respect to drugs with
active ingredients not previously approved by the FDA, a prospective
manufacturer must conduct and submit to the FDA complete clinical studies to
prove that drug's safety and efficacy. An NDA may also be submitted for a drug
with a previously approved active ingredient if the abbreviated procedure
discussed below is not available.
10
2. Abbreviated New Drug Application ("ANDA"). Under the ANDA procedure,
which applies to most previously approved drugs, the FDA waives the requirement
of conducting complete clinical studies of safety and efficacy and instead
requires data illustrating that the generic drug formulation is bioequivalent to
a previously approved drug. "Bioequivalence" indicates that the rate of
absorption and the levels of concentration of a generic drug in the body needed
to produce a therapeutic effect are substantially equivalent to those of the
previously approved drug. In certain cases, however, the FDA may require
clinical studies in order to show generic equivalence to a previously approved
drug.
Although antibiotic and veterinary drugs are classified separately for
purposes of FDA approval, the procedure for such drugs conforms substantially to
the NDA/ANDA procedures.
None of the products currently marketed by the Company, other than
veterinary drugs, have required a full NDA or the equivalent application.
11
Under the Federal Drug Price Competition and Patent Restoration Act of 1984
(the "Drug Price Act"), the effective date of approval of most generic drugs
will ordinarily be delayed until the expiration of patents covering the product
or until a court has determined the patent to be invalid or not infringed. If a
manufacturer files an ANDA certifying that it believes a patent is invalid or
not infringed and successfully defends itself in patent litigation, it may
receive exclusive marketing rights for the generic version of the product for a
period of 180 days. These provisions do not apply to antibiotics.
The Drug Price Act also created new statutory protections for brand name
drugs. Under certain circumstances the term of a product or use patent can be
extended for up to five years or provide an exclusivity period of two to ten
years.
The Generic Drug Enforcement Act of 1992 was enacted in May 1992 as a
result of findings of corruption in the FDA's process of approving generic
drugs. The law establishes procedures to bar individuals who have been convicted
of certain crimes from working for companies that manufacture or distribute such
products and delays the review and approval of ANDAs submitted by or with the
assistance of debarred individuals. The law also provides, under certain
circumstances, for debarment of corporations and "high managerial agents" as
defined in the Act, withdrawal of approvals of ANDAs and civil penalties for
both individuals and corporations. The Company does not expect the law to have a
material impact on the review or approval of the Company's ANDAs.
12
Among the requirements for new drug approvals is the requirement that the
prospective manufacturer's methods conform to the FDA's current good
manufacturing practices standards ("cGMP Regulations"). The cGMP Regulations
must be followed at all times during which the approved drug is manufactured. In
seeking to comply with the standards set forth in these regulations, the Company
must continue to expend time, money and effort in the areas of production and
quality control in order to achieve compliance. Failure to so comply risks
possible FDA action such as the suspension of manufacturing, withdrawal of ANDAs
or the seizure of drug products. See Legal Proceedings.
In November 1990, Congress passed, as part of the Omnibus Budget
Reconciliation Act of 1990, The Medicaid Prudent Purchasing Act (the "Medicaid
Rebate Act"). The Medicaid Rebate Act, with respect to generic pharmaceuticals,
requires all manufacturers whose products are covered by the Medicaid Program,
to rebate to each state a percentage (currently 11% in the case of products sold
by the Company) of the manufacturer's average net sales price, for all products
dispensed by pharmacists pursuant to Medicaid. Additional rules, which apply
with respect to non-generic pharmaceuticals, are not currently applicable to the
Company. In addition, several states, including New Jersey, New York,
California, Pennsylvania, Washington and Connecticut, have enacted supplemental
rebates and/or similar legislation with respect to programs other than Medicaid.
13
The Company also is governed by federal, state and local laws of general
applicability, such as laws regulating working conditions. In addition, the
Company is subject, as are manufacturers generally, to various federal, state
and local environmental protection laws and regulations, including those
governing the discharge of materials into the environment. Compliance with such
environmental provisions is not expected to have a material effect on the
earnings, cash requirements or competitive position of the Company in the
foreseeable future. See "Legal Proceedings" with respect to certain pending
environmental matters.