ITEM 1. BUSINESS.
GENERAL
The Company develops, manufactures and markets generic prescription drugs in
solid dosage form (tablets and capsules). Tablets and capsules comprise the
largest portion of the prescription pharmaceutical market. At present, the
Company manufactures and markets 16 generic prescription drugs in 36 dosage
strengths and has received approval on an additional drug in 3 dosage strengths
which it has not yet commenced manufacturing and marketing. Additionally, the
Company has, at present, abbreviated new drug applications ("ANDAs") pending
with the Food and Drug Administration ("FDA") for 10 new products in 16 dosage
strengths.
The Company's objective is to increase the number of products offered while
being an efficient, low cost manufacturer of generic pharmaceuticals. The
Company's product development strategy is to focus on selected niche or
overlooked products and on products whose brand name equivalents have U.S. sales
of over $100 million. The Company has identified a number of products that it
believes offer growth opportunities, such as drugs having a controlled substance
as one of their active ingredients and used in pain management, and selected
drugs with difficult-to-develop formulations. The Company sells its products,
manufactured under its own or a customer's private label, primarily to drug
wholesalers, generic drug distributors, retail buying groups, managed care
organizations and drug chains. The Company also manufactures products for
private label customers.
GENERIC DRUG MARKET
Based on industry sources, the Company estimates that the total generic
pharmaceutical prescription sales in drug stores in the United States increased
to over $6.0 billion in 1995 from 1994 sales of $5.3 billion. The Company
believes that the passage of the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Hatch-Waxman Act"), which became effective in
September 1984 and established streamlined procedures for the approval of
generic drugs, is one of the primary factors leading to increased sales of
prescription generic drugs. Between 1995 and 2001 it is estimated that patents
will expire for brand-name drugs representing more than $11 billion in 1993
annual sales in the U.S. Reforms and cost containment efforts in the health care
industry, such as the transition from traditional insurance-based health care
cost reimbursement to controlled cost managed care programs that encourage or
require the use of all available generic drugs, the widespread passage of state
legislation that permits or encourages pharmacists to substitute generic drugs
in filling prescriptions and the proliferation of large-volume drug purchasers
(e.g., HMOs, preferred provider networks and mail order distributors) that are
financially motivated to use generic drugs where available, have all contributed
to higher sales of generic drugs. In addition, there is increased awareness and
acceptance by consumers, physicians and pharmacists that generic drugs are the
therapeutic equivalents of brand-name drugs.
The Company believes that the market for generic drugs will continue to grow
because demographic changes are increasing the volume of drugs sold and the
pressure to contain health care costs is continuing. The elderly consume
significantly more drugs than younger people, and the Company believes that the
market for all drugs will continue to grow as the average age of the United
States population increases. Health care costs continue to escalate and
insurance companies, self-insured employers, governmental agencies and other
health care managers and payors continue to seek ways to contain costs.
According to industry sources, it is estimated that 40% of the U.S. population,
or 104 million people, are enrolled today in a managed care plan. In addition,
more than half of all physicians are affiliated with at least one managed care
plan. The Company believes that because of these factors, generic drugs are
likely to become an increasingly significant element of health care cost
containment effort in the coming years.
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PRODUCTS
The Company's has received ANDA approvals for or markets the
following products:
NUMBER OF
BRAND NAME THERAPEUTIC DOSAGE
PRODUCT NAME EQUIVALENT CLASS STRENGTHS APPROVAL DATE
- ------------ ---------- ----- --------- -------------
1. Hydrocodone Bitartrate/ Lorcet(R), Lortab(R) Narcotic 6 March 1996
Acetaminophen Vicodin(R), Vicodin(R)ES analgesic
Lorcet(R) Plus
2. Captopril(1) Capoten(R) Anti-hypertensive 4 February 1996
3. Hydroxychloroquine Sulfate(2) Plaquenil(R) Anti-rheumatoid 1 November 1995
Arthritis
4. Piroxicam(1) Feldene(R) Anti-inflammatory 2 September 1995
5. Pindolol(1) Visken(R) Anti-hypertensive 2 February 1995
6. Acetaminophen and Tylenol(R) with Narcotic 3 December 1994
Codeine Phosphate(3) Codeine analgesic
7. Cyclobenzaprine Hydrochloride(1) Flexeril(R) Muscle relaxant 1 November 1994
8. Hydroxyzine Hydrochloride Atarax(R) Tranquilizer 3 March 1994
9. Baclofen Lioresal(R) Muscle relaxant 2 January 1994
10. Lorazepam Ativan(R) Tranquilizer 3 October 1991
11. Perphenazine and Amitriptyline Triavil(R) Anti-depressant 4 October 1991
Hydrochloride
12. Amiloride Hydrochloride and Moduretic(R) Anti-hypertensive 1 July 1991
Hydrochlorothiazide
13. Doxepin Hydrochloride Sinequan(R) Tranquilizer 3 March 1991
14. Chlorzoxazone Parafon Forte(R) Muscle relaxant 1 August 1989
15. Yohimbine Hydrochloride Yocon(R) Sympathicolytic 1 Not required
and mydriatic
16. Quinine Sulfate Capsules(4) None Anti-malarial 1 Not required
17. Quinine Sulfate Tablets(4) None Anti-malarial 1 Not required
- ------------------
(1) Each of these products is subject to a license agreement between the
Company and Royce Research and Development Limited Partnership (the
"Partnership"). See "Strategic Relationships."
(2) This product is subject to a license agreement between the Company and the
formulator of the drug. See "Strategic Relationships".
(3) The Company is not marketing this drug at this time, but rather is
currently evaluating the profit potential for this drug prior to
manufacturing and marketing it.
(4) In April 1995, the FDA published a proposed rule stating that Quinine
Sulfate will become a prescription drug and urging manufacturers to comply
with the prescription labeling requirements. In July 1995, the Company
converted labeling for this product to bring it into compliance with the
proposed FDA rule.
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During 1995, four of the Company's products each individually accounted for more
than 10 percent of the Company's gross sales (the largest of these products
accounts for approximately 18 percent of the Company's gross sales) and together
collectively accounted for approximately 58 percent of the Company's gross
sales. During 1994, four of the Company's products each individually accounted
for more than 10 percent of the Company's gross sales (the largest of these
products accounted for approximately 22 percent of the Company's gross sales)
and together collectively accounted for approximately 69 percent of the
Company's gross sales.
The Company believes that as new products are developed and approved, sales of
the Company's largest products relative to total sales and the Company's
dependence thereon may vary from period to period.
The Company currently has ANDA submissions pending with the FDA for 10
additional products in 16 dosage strengths. Of the products currently pending,
five are narcotic analgesics, two are tranquilizers, one is a muscle relaxant,
one is an anti-hypertensive and one is an anti-inflammatory. Patent protection
for all of the products as to which the Company has an ANDA pending has expired.
Products with a controlled substance as one of their active ingredients are
subject to extensive regulation and to a quota system which requires approval of
the Drug Enforcement Administration before controlled substance raw materials
can be purchased. Although there can be no assurance, the Company believes that
it will receive a sufficient quota of the controlled substance raw materials
required to manufacture and market its controlled substance products. See
"Government Regulation" and "Raw Materials" below.
PRODUCT DEVELOPMENT STRATEGY
The Company intends to pursue a strategy of developing a variety of generic
products, focusing primarily on selected niche or overlooked opportunities, as
well as on drugs whose brand-name equivalents have U.S. sales of over $100
million. Products are chosen for development primarily based on the patent or
marketing exclusivity expiration date, market size and potential, anticipated
competition, availability of active ingredients and manufacturing requirements.
The Company has identified a number of products that it believes offer growth
opportunities, such as drugs having a controlled substance as one of their
active ingredients which are used in pain management, certain smaller products
for which patent protection has expired and which are not being marketed by
other generic drug manufacturers and selected drugs with difficult-to-develop
formulations. The Company believes that products such as these will offer a
significant opportunity and generally face less competition in the marketplace.
The Company also intends to focus on developing generic versions of high-volume
drugs whose patent or marketing exclusivity is nearing expiration. The Company
will seek to be among the first to offer such products. While such high-volume
drugs generally face significant competition, even a small market share of a
drug generating in excess of $100 million in revenue would be significant and
would enable the Company to broaden the range of products which it offers to its
customers. Recent changes in U.S. patent terms connected with the General
Agreement on Tariffs and Trade (GATT) have resulted in extensions to the patent
terms for several products which the Company is considering for future
development.
The Company believes that the time required for the development and approval of
the products which it plans to market should take approximately two to three
years from the time the Company identifies a drug for which it will seek an ANDA
through the date that FDA approval is obtained. This time period has, in the
past, been longer and may be longer in the future. The Company is presently
engaged in research and development with respect to more than 15 generic
prescription products. The Company expects to file ANDAs for approximately 6 to
12 products over the next twelve months. There can be no assurances as to
whether products can be developed or whether ANDAs filed will be approved. See
"Government Regulation" below for a description of the approval process for
ANDAs.
SALES AND MARKETING
The Company markets its products to drug wholesalers, generic drug distributors,
retail buying groups, drug chains, other drug manufacturers, health care
institutions and governmental agencies. The Company markets its products
primarily through direct contact by the Company's regional sales managers,
telemarketing efforts, responding to requests for proposals and bids, and
through independent sales representatives. The Company
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advertises in trade journals and uses direct mailing to independent drug stores,
among other promotional activities targeted to the pharmaceutical industry.
The Company sells its products either under its own label (approximately 42
percent of net sales for 1995) or under a customer's private label
(approximately 58 percent of net sales for 1995). The Company intends to
continue manufacturing products under a customer's private label and believes
that its willingness to offer private label products provides an additional
opportunity for growth, since many of the larger generic drug manufacturers do
not manufacture private label products.
The Company has over 250 customers, which include various divisions of large
individual wholesalers. Customer service is an integral part of the Company's
focus. Maintaining adequate inventories, making timely delivery of its products
and providing support services are emphasized by the Company in order to serve
its customers better.
During 1995, two of the Company's customers, Qualitest and Zenith-Goldline,
accounted for 13 percent and 12 percent, respectively, of the Company's net
sales. During 1994, sales to two of the Company's customers accounted for 14
percent and 10 percent, respectively, of the Company's net sales. No other
customer accounted for more than 10 percent of net sales in either 1995 or 1994.
The Company's top ten customers for these years accounted for approximately 62
percent and 60 percent, respectively, of net sales. The loss of any of these
customers may have an adverse effect on the Company's operations.
STRATEGIC RELATIONSHIPS
The Company believes that strategic marketing relationships with customers and
drug companies in the U.S. and other countries could contribute to increased
sales and gross profit. The Company has entered into several agreements with
this objective in mind.
The Company has a license agreement with Wille Laboratories, PTY. Ltd.
("Wille"), a pharmaceutical manufacturer located in Queensland, Australia. The
license permits Wille to develop, manufacture and market the licensed products
in the Pacific Rim markets, including Australia, New Zealand, Japan, Taiwan and
Hong Kong (the "Territory"). The only product licensed to Wille at this time is
Captopril. Under the agreement, the Company will receive a minimal initial fee
and additional minimal fees while Wille is pursuing regulatory approvals to
manufacture and market the licensed products in the Territory. Thereafter, if
Wille is able to obtain such requisite approvals, the Company will receive a
royalty from Wille with respect to any sales of the licensed products by Wille
in the Territory. There can be no assurance that any regulatory applications
filed by Wille with the appropriate governmental authorities in the Territory
will be approved. Although the Company and Wille have agreed that Captopril will
be licensed under the agreement, there can be no assurance that any other
products will be licensed under such agreement. The Company is not obligated
under such agreement to license any products to Wille other than Captopril, and
Wille is not obligated to accept a license for any additional product from the
Company.
The Company has an option agreement with a customer, whereby the customer was
granted a five-year option to purchase shares of the Company's common stock at
$1.875 per share, upon the satisfaction of certain purchase targets. Options
earned are determined as of June 30 of each year based on the previous 12
months' purchases by the customer. As of December 31, 1995, the maximum number
of options which the customer may earn through the end of this agreement in June
1996 is 106,666 options. If the customer earns options for the contract year
ended June 30, 1996, and at that date a spread exists whereby the fair market
value per share exceeds the option price (the "Spread"), the Company will record
a charge to earnings equal to the Spread times the number of options earned.
The Company has an agreement with another customer whereby the customer agreed
to engage the Company as its sole supplier of the Company's present and future
products for a five year period, subject to certain exceptions. In return, the
Company granted the customer stock options to purchase up to 50,000 shares of
common stock at $6.00 per share, the market price on the date of grant. Such
options vest at the rate of 9,000 per year, with 5,000 options vesting upon
entering into this agreement. In connection with this agreement, the Company has
recorded a charge to earnings of approximately $66,000 in 1995.
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The Company has a license agreement with Pharmascience, Inc. ("Pharmascience"),
a Canadian pharmaceutical company. Pursuant to the agreement, Pharmascience
licensed the right to manufacture or purchase from the Company at normal selling
prices and distribute eight of the Company's products under the Pharmascience
private label (including two products as to which the Company does not presently
have an approved ANDA). In connection with the agreement, Pharmascience is
obligated to seek regulatory approval of these products for sale in Canada.
Canada has a generic drug approval procedure similar to that of the United
States. The Company will receive a royalty of 5% on Pharmascience's net sales of
the licensed products in Canada for a period of five years starting from the
date of the first commercial sale of each licensed product by Pharmascience, if
and when the products are approved for sale in Canada.
The Company has an agreement with Duramed Pharmaceuticals, Inc. ("Duramed"),
whereby Duramed markets and distributes nine of the Company's current products
(excluding Hydroxychloroquine Sulfate, Captopril and Hydrocodone Bitartrate) on
an exclusive basis to a select group of warehousing drug chains and to other
classes of trade, on a non-exclusive basis, under the Duramed label. The
agreement is for an initial three-year term, renewable annually thereafter.
With respect to one of its products, the Company has a perpetual license
agreement with the formulator of the drug whereby the Company has agreed to pay
the formulator a sliding royalty with a maximum of 10 percent of net sales of
this product for a ten-year period. In 1994, the Company paid the formulator
certain fees (approximately $70,000) when the Company received an acceptable
bioequivalency study for this drug and charged such fees to expense. In 1995,
the Company issued 10,695 shares of unregistered common stock upon the filing of
an ANDA for this drug and accordingly charged $24,000 to expense. Additionally,
the Company expensed royalties of $38,000 for this product in 1995.
Royce Research and Development Limited Partnership I (the "Partnership")
developed five products (the "Licensed Drugs") pursuant to the terms of a
license agreement (the "License Agreement") between the Company and the
Partnership. The Partnership was funded with approximately $1.0 million. Royce
Research Group, Inc., a wholly owned subsidiary of the Company, is the general
partner of the Partnership, for which it earns an administrative fee based on
sales of the Licensed Drugs, and, owns a one percent interest in the
Partnership. Unaffiliated investors own the limited partnership interests.
Under the terms of the License Agreement, the Company granted to the Partnership
an exclusive irrevocable license to the Licensed Drugs (for a term of five years
from the date of the first commercial sale of each of the Licensed Drugs), and
received from the Partnership licensing fees for the Licensed Drugs, third party
out-of-pocket expenses for raw materials and bioequivalency studies relating to
the Licensed Drugs, and $50,000 for a one-percent royalty interest in the gross
revenues derived from the commercial sale of Piroxicam for a three-year period
from the time it is first commercially sold. After the expiration of such five
year term, all rights to the Licensed Drugs revert back to the Company. All of
the Partnership funds were expended developing the five Licensed Drugs. As of
March 1, 1996, the Company had received approvals for three of the Licensed
Drugs and had ANDAs pending for the other two Licensed Drugs. In addition, the
Company received FDA approval for Piroxicam in 1995. There can be no assurance
that the FDA will approve the pending ANDAs for the remaining Licensed Drugs.
In return for funding the development of the Licensed Drugs, the Partnership
will receive a royalty of 10 percent of the net revenues generated by sales of
the Licensed Drugs over a five-year term commencing with the first commercial
sales of these drugs. During 1995, the Company accrued royalties of $69,000 to
the Partnership.
COMPETITION
The Company competes with generic drug manufacturers, brand name pharmaceutical
companies that manufacture or market generic drugs, the original manufacturers
of brand name drugs that continue to produce such drugs after their respective
patents expire or introduce generic versions of their branded products, and
manufacturers of new drugs that may compete with the Company's generic drugs.
Many competitors have a greater number of products on the market and have
greater financial and other resources than the Company, allowing them to devote
greater resources to research and development and marketing.
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The generic drug industry is highly competitive. Most generic drugs enjoy
relatively short periods of limited competition. The introduction of a new
generic drug typically is followed by the introduction of other competitive
generic products into the marketplace, which results in significant declines in
prices and profit margins. Generic drug manufacturers must frequently introduce
new products in order to retain their profitability and sales volume. Approvals
for new products may have a synergistic effect on a company's entire product
line, since orders for new products are frequently accompanied by, or bring
about, orders for other products available from such company. The Company
believes that price is a significant competitive factor, particularly as the
number of generic manufacturers which produce a particular product increases.
The Company's current product line consists mainly of mature generic
pharmaceutical products. The Company faces competition with respect to these
products. The Company's product development strategy is, in part, intended to
attempt to market products subject to lower levels of competition.
The principal competitive factors in the generic pharmaceutical market are the
ability to be one of the first to introduce a product after a patent expires,
product price, product quality, methods of distribution, reputation, customer
service and breadth of product line. The Company believes that its commitment to
service and quality and its willingness to produce private label products for
its customers will enhance its ability to compete with other drug manufacturers.
The Company's brand-name competitors may, in the future, attempt to prevent or
discourage the use of generic equivalents through litigation and negative public
relations campaigns. Some brand-name competitors also have introduced generic
versions of their own branded products prior to the expiration of the patents
for such drugs, which may result in a retention of a larger portion of the
market share available to generic products by these companies following
expiration of the applicable patents.
GOVERNMENT REGULATION
GENERAL
The research and development, manufacture and marketing of the Company's
products are subject to regulation by the FDA and the Drug Enforcement
Administration ("DEA") in the United States and by comparable authorities in
other countries. These national authorities and other federal, state and local
entities regulate, among other things, research and development activities and
the testing, manufacture, labeling, storage, record keeping, advertising and
promotion of the Company's products.
Almost every state and the District of Columbia has drug product selection
legislation that repeals, in part or in whole, previous laws prohibiting the
substitution of generic drugs in prescriptions for their brand-name
counterparts. Drug product selection legislation generally permits or encourages
pharmacists to substitute equivalent generic prescription drug products for
brand-name pharmaceutical products prescribed by physicians, usually where such
substitution has been either authorized or not prohibited by the prescribing
physician.
The Federal Food, Drug, and Cosmetic ("FDC") Act, the Controlled Substances Act
("CSA"), and other federal statutes and regulations govern or influence all
aspects of the Company's business. Noncompliance with applicable requirements
can result in fines and other judicially imposed sanctions, including product
seizures, injunction actions and criminal prosecutions. In addition,
administrative remedies can involve the recall of products, as well as the
refusal by the FDA to approve pending applications or supplements to approved
applications. The FDA also has the authority to withdraw approval of drugs in
accordance with statutory due process procedures and has significant additional
authority under the Generic Drug Enforcement Act of 1992.
FOOD AND DRUG ADMINISTRATION
Except in limited circumstances, FDA approval is required before any dosage form
of any new drug, including generic equivalents of a previously approved drug,
can be marketed. A drug that is not generally recognized by qualified experts as
safe and effective for its intended use, or that is a generic equivalent of a
previously approved prescription drug, is deemed to be a "new" drug requiring
FDA approval. There are two primary types of applications currently needed to
obtain FDA approval of a new drug, a full new drug application ("NDA") and an
ANDA.
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The full NDA typically applies to any drug with active ingredients not
previously approved by the FDA. For the NDA, a prospective manufacturer must
conduct and submit to the FDA complete pre-clinical and clinical studies to
prove that drug's safety and efficacy. The FDA usually requires two adequate and
well-controlled clinical studies to support approval, as well as pre-clinical
animal toxicology studies for supporting safety. An NDA may also be submitted
for a drug with a previously approved active ingredient if the abbreviated
procedure discussed below is not available. If a company obtains approval of a
full NDA for a drug with an active ingredient that has not been previously
approved by the FDA, the company is generally entitled to five years of
marketing exclusivity during which period ANDAs may not be filed for FDA
approval. None of the Company's products currently in development is believed to
require a full NDA.
An ANDA is similar to an NDA except that the FDA waives the requirement to
conduct complete pre-clinical and clinical studies to prove safety and efficacy.
Instead, for drugs that contain the same active ingredient and are intended for
the same use as drugs already approved for use in the United States, the FDA
ordinarily requires only bioavailability data demonstrating that the generic
drug formulation is, within an acceptable range, bioequivalent to a previously
approved drug. "Bioequivalence" compares the bioavailability of one oral dosage
form of a drug product with another and, when established, indicates that the
rate of absorption and the levels of concentration of the generic drug in the
body are substantially equivalent to those of the previously approved equivalent
drug. "Bioavailability" indicates the rate of absorption and levels of
concentration of a drug in the bloodstream needed to produce a therapeutic
effect. The FDA review period can last between 12 and 30 months and the outcome
is not certain. The Company's products have been and in the future will likely
be developed pursuant to the ANDA procedure.
All applications for FDA approval of drug products must contain information
relating to product formulation, stability, manufacturing process, packaging,
labeling and quality control. The manufacturer must establish that the methods,
facilities, and controls used in connection with the production, processing,
packaging, and storage of the drug meet FDA requirements embodied in FDA
regulations and guidelines, generally referred to as the current good
manufacturing practice ("cGMP") requirements. Compliance with cGMP is required
at all times during the manufacturing and processing of drugs. Such compliance
requires considerable Company time and resources in the area of production and
quality control studies performed to establish that the drug will be safe and
effective for its intended uses. The Company believes that it is in substantial
compliance with cGMP requirements.
The FDA may not approve an ANDA if applicable regulatory criteria, including
compliance with cGMP requirements, are not satisfied. The FDA may require
additional testing, or manufacturing or quality control changes. Even if such
data are submitted and such changes are made, the FDA may ultimately decide that
the ANDA does not satisfy the criteria for approval. Following approval of an
ANDA, the FDA expects the applicant to conduct extensive in-process and finished
products testing on consecutive batches made in the initial manufacturing
campaign to validate the reliability of all critical processes during full-scale
commercial production. This is commonly referred to in the industry as the
post-approval or pre-shipment validation process. Only after all processes have
been shown through test data to produce consistent results within quality
specifications will the FDA permit commercial distribution. Accordingly,
following the approval of an ANDA, several weeks or months may be required to
complete testing and the FDA pre-shipment validation process. Product approvals
may be withdrawn by the FDA if compliance with regulatory standards is not
maintained or if new evidence demonstrating that the drug is unsafe or lacks
efficacy for its intended uses becomes known after the product reaches the
market.
In 1988, the House Subcommittee on Oversight and Investigations launched an
investigation into possible wrongdoing by FDA officials and several generic drug
manufacturers pertaining to the ANDA approval process. Concurrently, the U.S.
Department of Justice initiated a similar investigation. Both investigations
revealed instances of criminal activity by certain FDA employees and by the drug
manufacturers and their employees. Five FDA employees pleaded guilty to fraud
and the FDA was accused of being lax in its regulation of the generic drug
industry. Several generic pharmaceutical manufacturers were charged with giving
illegal gratuities to certain FDA officials, substituting branded products for
their own in studies required by the FDA, or engaging in other fraudulent or
unapproved product development practices. As a result of these investigations,
over 200 generic products were recalled, an extensive investigation of the
generic pharmaceutical business was initiated by the FDA, and there was a
dramatic slowing of the ANDA approval process.
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The Generic Drug Enforcement Act of 1992 establishes penalties for wrongdoing in
connection with the development or submission of an ANDA by authorizing the FDA
to permanently or temporarily debar companies or individuals from submitting or
assisting in the submission of an ANDA, and to temporarily deny approvals and
suspend applications to market generic drugs. The FDA must debar companies or
individuals convicted of a federal felony for conduct relating to the
development or approval of an ANDA, and may debar persons convicted of other
misconduct. In addition to debarment, the FDA may refuse to approve an ANDA if
the applicant is under active federal criminal investigation for (i) bribery, or
(ii) making material false statements in connection with any ANDA, or if a
significant question has been raised regarding the integrity of the approval
process or the reliability of the data in the ANDA. The FDA also has authority
to withdraw approval of an ANDA under certain circumstances and to seek civil
penalties. The FDA can also significantly delay the approval of any ANDAs under
the Application Integrity Policy. See "Validity Assessment Program" below.
All new drugs require FDA premarket approval. However, certain products may be
exempt from such approval if they were marketed in the United States prior to
1938 and were subject to the Food and Drugs Act of 1906 and whose labeling has
not changed since 1938. On this basis, the Company and certain other firms
currently market Yohimbine Hydrochloride and Quinine Sulfate without NDA or ANDA
approval. However, there is no assurance that the FDA will continue to agree
with this basis for marketing and will not require the products to be removed
from the market until such an application is approved.
Quinine Sulfate is currently the subject of FDA over-the-counter ("OTC") drug
review, an FDA administrative program which involves review of the safety and
efficacy of active ingredients and label claims for marketed OTC drugs.
Following expert panel review of the drug, FDA makes a determination whether to
publish a final monograph prescribing the ingredients and labeling for the OTC
drug. Publication of a final monograph means that an OTC product that complies
with the monograph may be marketed without FDA pre-market approval, whereas a
decision not to publish a final monograph means that the product cannot be sold
for that indication without pre-market approval. While the OTC drug review
proceeds, a product that contains an ingredient and bears claims that are
included in the review may continue to be marketed pending the final outcome.
In May 1993, the FDA published a final order removing Quinine Sulfate from the
market as an internal analgesic. In August 1994, the FDA published a final order
effective February 22, 1995 removing Quinine Sulfate from the market for
treating nocturnal leg muscle cramps. Quinine Sulfate is still currently
available as a prescription drug for treating chills and fever of malaria. The
FDA plans to issue a final decision regarding proper labeling for this
indication in the future. The Company believes that the FDA intends that Quinine
Sulfate will be marketed as a prescription drug in the future, and that the FDA
will not take any action which results in the removal of Quinine Sulfate from
the marketplace. If the FDA were to require an NDA approval for this product, it
might require the Company to obtain such an approval before continuing to market
this product. In such event, the Company will evaluate the economic feasibility
of developing an NDA for this product.
Sales of products are also subject to regulatory requirements governing human
clinical trials, and regulations regarding workplace safety, environmental
protection and hazardous substance controls, among others. The Company believes
that it is in substantial compliance with all such laws which are applicable to
its business.
DRUG ENFORCEMENT ADMINISTRATION
Certain products are regulated under the CSA, which requires controlled
substance distributors and controlled substance manufacturers to be registered
with the DEA. The DEA has extensive enforcement powers over controlled substance
manufacturers and distributors, including the power to seize products, enjoin
the manufacture or distribution of these products, or criminally prosecute
and/or impose fines against firms and individuals that violate the CSA or DEA
regulations.
The Company is currently subject to the CSA and DEA regulations for marketing
and distribution of three of its approved products and would be subject to such
regulations with respect to six additional products for which the Company has
ANDAs pending before the FDA. The Company believes that it has complied with all
requirements imposed on the controlled substance products sold or proposed for
sale or testing by the Company relating to the premarket development, research,
production, sale and marketing thereof, pursuant to the federal CSA and
applicable state controlled substances laws. Furthermore, the Company believes
that it has complied with all
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requirements imposed on implementing regulations promulgated by the DEA
thereunder, and any policies issued by the DEA concerning the development,
production, distribution, sale and marketing of such controlled substances,
including any conditions for approval or acknowledgments, such as issuance of
all registration and licensing applications, and/or any other requirements, such
as physical security, record keeping, reporting and filing requirements, that
are specific to such controlled substances.
VALIDITY ASSESSMENT PROGRAM
The Application Integrity Policy ("AIP") was established by the Office of
Generic Drugs of the FDA "to investigate wrongful acts by some firms submitting
ANDAs, such as committing fraud, making untrue statements of material facts,
committing bribery, or paying illegal gratuities." Under this policy, if the
agency suspects fraud in any new drug application, it may defer substantive
review of the application until the applicant has taken the appropriate
corrective actions to establish the scientific data's reliability. A company
suspected of fraudulent activity in the submission of an application may be
placed in the Validity Assessment Program.
The Validity Assessment Program was established by the FDA as part of its
Application Integrity Policy (originally called the Fraud, Untrue Statements of
Material Facts, Bribery and Illegal Gratuities Policy). The Validity Assessment
Program is intended to establish means by which a drug company or other
regulated firm, suspected by the FDA of seeking to subvert the FDA's review and
approval of premarket applications, may seek to restore the FDA's confidence in
the integrity of its applications.
In order to be removed from the Validity Assessment Program, a company must have
an audit performed by an outside consultant to identify all the wrongful acts
associated with the application submitted to the FDA, and provide all the
reports to the FDA; develop procedures and controls to prevent the violations
from recurring; provide the FDA with a written corrective action plan to ensure
the validity and integrity of product application data; and remove from
authority anyone responsible for any fraudulent conduct that may have been
discovered. If the FDA determines that a company has satisfied the requirements
of the Validity Assessment Program, it will remove the company from such program
and continue its substantive review of the new drug applications pending before
the FDA.
In February 1992, in connection with an inspection of the Company's
manufacturing facility, the FDA raised questions about the data underlying the
Company's ANDAs for Minoxidil, one of the Company's previously approved
products. After investigating the FDA's concerns with respect to this product,
the Company withdrew this product. The Company also investigated, and in May
1992 withdrew, its ANDAs for a second product, Haloperidol, after similar
questions were raised regarding the data underlying these ANDAs. These products
were developed and these ANDAs were approved in 1986 and 1987, prior to
employment by the Company of the Company's current management and product
development personnel. In the Company's and the FDA's investigations of these
applications, which investigations took place between February 1992 and April
1992, it was determined that there were a number of apparent discrepancies in
the underlying data that support these applications and that there was
insufficient documentation to justify certain of the instances where data was
not included in these applications. Based on these findings, the Company
voluntarily withdrew its ANDAs relating to these two products and initiated a
product recall for these products.
In early April 1992, the FDA conducted a further examination of the Company's
ANDA for Piroxicam (the Company had received a tentative approval of its ANDA
for Piroxicam in September 1991). On April 21, 1992, the Company was advised by
the FDA that its ANDA for Piroxicam was deficient and, therefore, not approvable
as submitted. The FDA enumerated a number of discrepancies and inconsistencies
contained in the ANDA, which had originally been filed in 1989, and advised the
Company that unless these issues were resolved to their satisfaction, the
Company might have to provide data on new test batches manufactured in
accordance with cGMP, including the results of new bioequivalency studies, as
appropriate, to support approval of the product.
The Company was placed in the Validity Assessment Program in July 1992. During
the period in which the Company was in the Validity Assessment Program, the FDA
did not review any of the Company's pending ANDAs or accept ANDAs for new
products. Further, during this period, the Company's ANDAs for all of its
pending and approved products were audited by Company personnel under the
supervision of an independent consultant
9
approved by the FDA. The FDA also conducted an intensive inspection of the
Company's facility and all of the documentation supporting the Company's pending
and approved ANDAs. Additionally, the Company was required to develop procedures
and controls to prevent violations from recurring and provide the FDA with a
corrective action plan to assure the validity and integrity of the Company's
product application data. The Company was released from the Validity Assessment
Program on December 16, 1993. In connection with its release from the Validity
Assessment Program, the Company withdrew its then pending ANDA for Piroxicam.
The Company filed a new ANDA for this product in March 1994, which ANDA was
approved in September 1995. Since its release from the Validity Assessment
Program, the Company has received ANDA approvals for nine products.
HEALTH CARE POLICY AND REIMBURSEMENT
The methods of reimbursement and fixing of reimbursement levels under Medicare,
Medicaid and other reimbursement programs are under active review by federal,
state and local government entities as well as by private third-party
reimbursers and political pressure to contain health care costs at the federal
and state levels is increasing. In addition, Medicaid legislation requires that
all pharmaceutical manufacturers rebate to individual states a percentage of
their revenues arising from Medicaid-reimbursed drug sales. In 1995, the
required rebate for generic drug manufacturers was 11% of the Company's
Medicaid-reimbursed drug sales.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. During 1994, the Clinton
administration proposed comprehensive legislation, known as the Health Security
Act, to reform the health care system (which legislation did not pass). The
Health Security Act mandated basic health care benefits for all Americans,
sought to control health care expenditures by placing caps on private health
insurance premiums and Medicare and Medicaid spending, and proposed the creation
of large insurance purchasing alliances. Although the proposed Health Security
Act did not contain any provisions which directly regulate generic drug
manufacturers, members of the Clinton administration and Congress have expressed
interest in controlling the prices that pharmaceutical companies charge for
their products. The Health Security Act did contain inducements for patients and
providers to use generic drugs, where available. Members of Congress have
introduced other health care reform proposals whose possible impact on generic
drug manufacturers is uncertain. None of these proposals has been adopted. It
can also be anticipated that the Clinton administration will propose new health
care reform legislation in the future. In addition, several states in which the
Company distributes its products have passed or are considering their own health
care reform legislation. The Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care delivery
systems and payment methodologies and that public debate on these issues will
continue. Because of the uncertainties regarding the ultimate features of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, of such reform proposals will be adopted, when they may be
adopted or what impact they may have on the generic drug industry in general or
the Company in particular.
RAW MATERIALS
The raw materials essential to the Company's business are purchased primarily
from U.S. distributors of bulk pharmaceutical chemicals manufactured abroad. The
ANDA process requires specification of raw material suppliers, and only one
source has been approved for the active ingredient used in all but three of the
Company's products. The Company has filed supplements with the FDA to add a
second source of supply for several of its products. Two of these supplements
have been approved. There can be no assurance as to if and when the Company's
other supplements will be approved. In the event that raw materials from a
specified supplier were to become unavailable, FDA approval of a new supplier,
if available, would be required, which could cause a delay of between six and
twelve months in the manufacture of the drugs involved and the consequent loss
of revenues. The Company experienced raw material shortages during 1995 on one
of the Company's least significant products and there can be no assurance that
such shortages will not recur in the future. Additionally, arrangements with
foreign suppliers are subject to certain additional risks, including the
availability of governmental clearances, import/export duties, political
instability, currency fluctuations and restrictions on the transfer of funds.
Certain controlled substances are also subject to a DEA quota system and may not
be available in sufficient quantities for the Company to realize its sales
potential of such products.
10
The Company has recently entered into a development agreement with a raw
material supplier to develop two products and to purchase its raw materials
requirements for these products from the supplier. The Company currently has
ANDAs pending for both of these products. So long as the Company obtains
approval of its pending ANDAs within a specified time period and thereafter
satisfies certain purchase requirements, the supplier has agreed that the
Company shall be its exclusive customer for this raw material in the United
States, Canada and Mexico. There can be no assurance that the Company will
obtain approval of the ANDAs filed for these products.
PRODUCT LIABILITY
Product liability claims constitute a risk to all pharmaceutical manufacturers.
The Company maintains what it believes to be adequate product liability
insurance, although there can be no assurance that the coverage limit of such
policy will be adequate or that the cost of such insurance will not increase.
The Company's insurance provides coverage on a claims-made basis and is subject
to annual renewal. The insurance may not be available in the future on
acceptable terms or at all.
PATENTS, TRADEMARKS, AND LICENSES
Since the Company's current business is manufacturing products for which patents
have expired, it is not anticipated that any of the Company's products in the
near future will be patented. However, the Company may develop new products and
obtain patents for them in the future. The name Royce(R) and its design are
registered as a trademark with the Department of State of Florida and with the
U.S. Patent and Trademark Office.
EMPLOYEES
The Company employed 131 persons as of February 20, 1996. No employees are
members of a collective bargaining unit under a union representation contract.
The Company believes that its relationships with its employees is good.