ITEM 1. BUSINESS.
GENERAL
The Company, a New York corporation established in 1935, and its
subsidiaries, are engaged in the manufacture, sale and distribution of generic
drugs. A generic drug is the chemical and therapeutic equivalent of a brand-name
drug for which patent protection has expired. A generic drug may only be
manufactured and sold if patents (and any additional government-granted
exclusivity periods) relating to the brand-name equivalent of the generic drug
have expired. A generic drug is usually marketed under its generic chemical name
or under a brand name developed by the generic manufacturer. The Company sells
its generic drug products under its Halsey label and under private-label
arrangements with drugstore chains and drug wholesalers. While subject to the
same governmental standards for safety and efficacy as its brand-name
equivalent, a generic drug is usually sold at a price substantially below that
of its brand-name equivalent.
The Company manufactures its products at facilities in New York and
Indiana. During the last several years, the Company has sought to diversify its
businesses through strategic acquisitions and through the development,
manufacture and sale of bulk chemical products used by others as raw materials
in the manufacture of finished drug forms.
RECENT EVENTS
Regulatory Compliance
During the past several years, the Company's business has been adversely
affected by the discovery of various manufacturing and record keeping problems
identified with certain products manufactured at its Brooklyn, New York plant.
In October 1991, the U.S. Food and Drug Administration (the "FDA") placed the
Company on the FDA's Application Integrity Policy list and its restrictions
(collectively, the "AIP"). Under the AIP, the FDA suspended all of the parent
company's applications for new drug approvals, including Abbreviate New Drug
Applications ("ANDAs") and Supplements to ANDAs. During the period that
followed, the U.S. Department of Justice ("DOJ") conducted an investigation into
the manufacturing and record keeping practices at the Company's Brooklyn plant.
As a consequence, on June 21, 1993, the Company entered into a plea agreement
(the "Plea Agreement") with the DOJ to resolve the DOJ's investigation. Under
the terms of the Plea Agreement, the Company agreed to plead guilty to five
counts of adulteration of a single drug product shipped in interstate commerce
and related record keeping violations. The Plea Agreement also required the
Company to pay a fine of $2,500,000 over five years in quarterly installments of
$125,000 commencing in September 1993. As of February 28, 1998, the Company was
in default of the payment terms of the Plea Agreement and had made payments
aggregating $350,000. On March 27, 1998, the Company and the DOJ signed a Letter
Agreement serving to amend the Plea Agreement relating to the terms of the
Company's satisfaction of the fine assessed under the Plea Agreement. The Letter
Agreement provides, among other things, that the Company will satisfy the
remaining $2,150,000 of the fine through the payment of $25,000 on a monthly
basis commencing June 1, 1998, plus interest on the outstanding balance. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" for a more detailed
description of the Letter Amendment to the Plea Agreement between the DOJ and
the Company.
On June 29, 1993, the Company entered into a consent decree (the "Consent
Decree") with the U.S. Attorney for the Eastern District of New York on behalf
of the FDA that resulted from the FDA's investigation into the Brooklyn plant's
compliance with the FDA's Current Good Manufacturing Practices ("CGMP")
regulations. Under the terms of the Consent Decree, the Company was enjoined
from shipping any solid dosage drug products (i.e., excluding liquid drug
formulations) manufactured at the Brooklyn plant until the Company established,
to the satisfaction of the FDA, that the methods used in, and the facilities and
controls used for, manufacturing, processing, packing, labeling and holding any
drug, were established, operated, and administered in conformity with the
Federal Food, Drug, and Cosmetic Act and all CGMP
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Regulations. As part of satisfying these requirements, the Company was required
to validate the manufacturing processes for each solid dosage drug product prior
to manufacturing and shipping the drug product.
On October 23, 1996, the Company withdrew four of its ANDAs, including its
ANDA (the "Capsules ANDA") for acetaminophen/oxycodone capsules (the
"Capsules"), and halted sales of the affected products. Net sales derived from
the withdrawn Capsule ANDA were approximately $3 million and $8 million for the
years ended December 31, 1996 and December 31, 1995, respectively, and accounted
for approximately 24% and 40% of the Company's total net sales during such
twelve month periods. The Company instituted the withdrawal of the Capsule ANDA
at the suggestion of the FDA and in anticipation of its release from the AIP. At
the FDA's suggestion, the Company retained outside consultants to perform
validity assessments of its drug applications. Thereafter, in October 1996, the
FDA recommended that several applications, including the Capsule ANDA, be
withdrawn. As a basis for its decision, the FDA cited questionable and
incomplete data submitted in connection with the applications. The FDA indicated
that the withdrawal of the four ANDAs was necessary for the release of the
Company from the AIP. The FDA further required submission by the Company of a
Corrective Action Plan, which was prepared and submitted by the Company and
accepted by the FDA.
On December 19, 1996, the FDA released the Company from the AIP. As a
consequence, for the first time since October 1991, the Company was permitted to
submit ANDAs to the FDA for review. Since its release from the AIP in December
1996, through the fiscal year ended December 31, 1998, the Company submitted 13
ANDAs for review by the FDA, including a new ANDA with respect to the Capsules.
During the period from the Company's release from the AIP to March 15, 1999, the
Company received the following ANDA approvals, all of which relate to ANDA
filings made with the FDA subsequent to the Company's release from the AIP:
PRODUCT NAME
(DRUG CLASS) STRENGTH TRADE NAME STATUS
------------ ----------- ------------- -----------------------------
Hydrocodone Bitartate and..... 5mg/500mg Vicodin(R)(1) FDA approval of ANDA received
Acetaminophen Tablets September 26, 1997.
(narcotic analgesic)
Hydrocodone Bitartate and..... 7.5mg/750mg VicodinES(R)(1) FDA approval of ANDA received
Acetaminophen Tablets September 26, 1997.
(narcotic analgesic)
Hydrocodone Bitartate and..... 7.5mg/650mg Lorcet FDA approval of ANDA received
Acetaminophen Tablets, CIII Plus(R)(2) November 26, 1997.
(narcotic analgesic)
Hydrocodone Bitartrate and.... 10mg/650mg Lorcet(R)(2) FDA approval of ANDA received
Acetaminophen Tablets, CIII November 26, 1997.
(narcotic analgesic)
Oxycodone HCI and............. 5mg/50mg Tylox(R)(3) FDA approval of ANDA received
Acetaminophen Capsules, CII January 22, 1998.
(narcotic analgesic)
Oxycodone HCI/Oxycodone....... 4.5mg/325mm Percodan(R)(4) FDA approval of ANDA received
Terephthalate Tablets, CII July 24, 1998
(narcotic analgesic)
(1) Registered trademark of Knoll Pharmaceutical Co.
(2) Registered trademark of Forest Laboratories, Inc.
(3) Registered trademark of McNeil Consumer Products Company
(4) Registered Trademark of DuPont Merck
As of March 15, 1999, the Company had submitted one ANDA for review by the
FDA in fiscal 1999 and anticipates the submission of five additional ANDAs
during the balance of fiscal 1999. Although the Company has been successful in
receiving the ANDA approvals described above since its release from the AIP in
December 1996, there can be no assurance that any of its newly submitted ANDAs,
or those contemplated to
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be submitted, will be approved by the FDA. The Company will not be permitted to
market any new product unless and until the FDA approves the ANDA relating to
such product. Failure to obtain FDA approval for the Company's pending ANDAs, or
a significant delay in obtaining such approval, would adversely affect the
Company's business operations and financial condition.
Private Offerings and Bridge Financing
On March 10, 1998, the Company completed a private offering of securities
(the "Offering") to Galen Partners III, L.P., Galen Partners International III,
L.P., Galen Employee Fund III, L.P., (collectively, "Galen") and each of the
Purchasers listed on the signature page to a certain Debenture and Warrant
Purchase Agreement dated March 10, 1998 between the Company and such Purchasers
(inclusive of Galen, collectively the "Galen Investor Group"). The securities
issued in the Offering consisted of 5% convertible senior secured debentures
(the "Debentures") and common stock purchase warrants (the "Warrants")
exercisable for an aggregate of 4,202,020 shares of the Company common stock.
The net proceeds to the Company from the Offering, after the deduction of
related Offering expenses, was approximately $19.6 million. In addition, in
accordance with the terms of the Debenture and Warrant Purchase Agreement
pursuant to which the Offering was completed, the Company granted the Galen
Investor Group an option to invest an additional $5 million in the Company at
any time within 18 months from the date of the closing of the Offering in
exchange for Debentures and Warrants having terms identical to those issued in
the Offering (the "Galen Option"). In June 1998, the Galen Investor Group
exercised this option.
The net proceeds of the Offering have, in large part, been used to satisfy
a substantial portion of the Company's liabilities and accounts payable.
Additionally, pursuant to agreements reached with other large creditors in
anticipation of the completion of the Offering, including the Company's landlord
and the DOJ, the Company has been able to bring these creditors current and will
be in compliance with installment payment agreements providing favorable terms
to the Company. The net proceeds from the exercise of the Galen Option have been
used, in large part, to fund working capital, including the purchase of raw
materials, payroll expenses and other Company expenses.
In addition to the net proceeds from the Offering and the exercise of the
Galen Option, the Company secured bridge financing from Galen and certain
investors in the Offering in the aggregate amount of $9,504,111 funded through
seven separate bridge loan transactions between the period from August through
and including December, 1998, as well as an additional bridge loan in March,
1999 (collectively, the "Bridge Loans"). The Bridge Loans were consolidated on
December 2, 1998 pursuant to an Amended, Restated and Consolidated Bridge Loan
Agreement (the "Consolidated Bridge Loan"). The Consolidated Bridge Loan bears
interest at 10% per annum, is secured by a first lien on all of the Company's
assets and has a maturity date of May 30, 1999. Approximately $9,120,000 in the
principal amount of the Consolidated Bridge Loan was advanced by Galen with the
balance of approximately $384,000 advanced by certain investors in the Offering.
The Consolidated Bridge Loan was secured by the Company in order to provide
necessary working capital. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a more detailed discussion of
the Consolidated Bridge Loan transaction.
Lease of Congers, New York Facility
Effective March 22, 1999, the Company leased, as sole tenant, a
pharmaceutical manufacturing facility located in Congers, New York (the "Congers
Facility") from Par Pharmaceuticals, Inc. ("Par") pursuant to an Agreement to
Lease (the "Lease"). The Congers Facility contains office, warehouse and
manufacturing space and is approximately 35,000 square feet. The Lease provides
for a term of three years, with a two year renewal option and provides for
annual fixed rent of $500,000 per year during the primary term of the Lease and
$600,000 per year during the option period. The Lease also covers certain
manufacturing and related equipment previously used by Par in its operations at
the Congers Facility (the "Leased Equipment"). In connection with the execution
of the Lease, the Company and Par entered into a certain Option Agreement
pursuant to which the Company may purchase the Congers Facility and the Lease
Equipment at any time during the lease term for $5 million.
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As part of the execution of the Lease, the Company and Par entered into a
certain Manufacturing and Supply Agreement (the "M&S Agreement") having a
minimum term of twenty seven months. The M&S Agreement provides for the
Company's contract manufacture of certain designated products manufactured by
Par at the Congers Facility prior to the effective date of the Lease. The M&S
Agreement also provides that Par will purchase a minimum of $1,150,000 in
product during the initial 18 months of the Agreement. The M&S Agreement further
provides that the Company will not manufacture, supply, develop or distribute
the designated products to be supplied by the Company to Par under the M&S
Agreement to or for any other person for a period of three years.
Cessation of California Operations
On March 20, 1998, the Company discontinued the operations of H.R. Cenci
Laboratories, a wholly-owned subsidiary. H.R. Cenci Laboratories had been a
manufacturer of drug products in liquid preparations. Continuing operating
losses and the Company's inability to leverage the manufacturing capacity of
Cenci Laboratories were among factors considered by the Board and Management in
its determination to cease such operations.
On March 30, 1998, the Company completed the sale of substantially all of
the non-real property assets of Cenci Powder Products, a wholly-owned
subsidiary, to Zuellig Botanical. The purchase price for the assets consisted of
the forgiveness by Zuellig Botanical of approximately $262,000 in indebtedness
owed by Cenci Powder to Zuellig Botanical related to the purchase of raw
materials. The Agreement provided further that Zuellig Botanical would satisfy
the manufacture and delivery requirements of Cenci Powder at its located
facility in Fresno, California, under an existing third party supply contract.
On December 4, 1998, the Company disposed of the real property owned by Cenci
Powder in Fresno, California to an unrelated third party for a net sales price
of approximately $73,000. Continuing operating losses and the Company's
inability to leverage the manufacturing capacity of Cenci Powder were among the
factors considered by the Board and Management in its determination to terminate
the operations of Cenci Powder.
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PRODUCTS AND PRODUCT DEVELOPMENT
Generic Drug Products
The Company historically has manufactured and sold a broad range of
prescription and over-the-counter drug products. The Company's pharmaceutical
product list currently includes a total of approximately 28 products, consisting
of 18 dosage forms and strengths of prescription drugs and 10 dosage forms and
strengths of over-the-counter drugs. Each dosage form and strength of a
particular drug is considered in the industry to be a separate drug product. The
Company's drug products are sold in various forms, including liquid and powder
preparations, compressed tablets and two-piece, hard-shelled capsules.
Most of the generic drug products manufactured by the Company can be
classified within one of the following categories:
1. Antibiotics,
2. Narcotic analgesics,
3. Anti-infective and anti-tubercular drugs,
4. Antihistamines and antihistaminic decongestants, or
5. Antitussives.
During fiscal 1998, sales of antitussives and narcotic analgesics accounted
for approximately 75% of total net sales during such year. The Company
anticipates that sales of antitussives and narcotic analgesics will continue to
represent a significant portion of the Company's revenue.
The Company's development strategy for new drug products has been to focus
on the development of a broad-range of generic form drugs, each of which (i) has
developed a solid market acceptance with a wide base of customers, (ii) can be
sold on a profitable basis notwithstanding intense competition from other drug
manufacturers, and (iii) is no longer under patent protection. The Company has
also diversified its current product line to include some less widely prescribed
drugs as to which limited competition might be expected. In addition, the
Company will continue to pursue the development of its existing pharmaceutical
business as well as the development of the chemical products business of its
Houba subsidiary.
Development activities for each new generic drug product begin several
years in advance of the patent expiration date of the brand-name drug
equivalent. This is because the profitability of a new generic drug usually
depends on the ability of the Company to obtain FDA approval to market that drug
product upon or immediately after the patent expiration date of the equivalent
brand-name drug. Being among the first to market a new generic drug product is
vital to the profitability of the product. As other off-patent drug
manufacturers receive FDA approvals on competing generic products, prices and
revenues typically decline. Accordingly, the Company's ability to attain
profitable operations will, in large part, depend on its ability to develop and
introduce new products, the timing of receipt of FDA approval of such products
and the number and timing of FDA approvals for competing products.
Active Pharmaceutical Ingredients
In the last few years, the Company has increased its efforts to develop and
manufacture active pharmaceutical ingredients also known as bulk chemical
products. The development and sale of active pharmaceutical ingredients
generally is not subject to the same level of regulation as is the development
and sale of drug products; accordingly, active pharmaceutical ingredients may be
brought to market substantially sooner than drug products. While the Company
currently is focusing on the development and manufacture of active
pharmaceutical ingredients for use in production of finished dosage products at
the Company's Brooklyn and Congers, New York facilities, active pharmaceutical
ingredients eventually may be marketed and sold to third parties.
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RESEARCH AND DEVELOPMENT
The Company conducts research and development activities at each of its
Brooklyn and Indiana facilities. The Company's research and development
activities consist primarily of new generic drug product development efforts and
manufacturing process improvements, as well as the development for sale of new
chemical products. New drug product development activities are primarily
directed at conducting research studies to develop generic drug formulations,
reviewing and testing such formulations for therapeutic equivalence to brand
name products and additional testing in areas such as bioavailability,
bioequivalence and shelf-life. For fiscal years 1998, 1997 and 1996, total
research and development expenditures were $651,000, $979,000 and $1,854,000,
respectively. During 1999, the Company's research and development efforts will
cover products in a variety of therapeutic applications.
As of March 15, 1999, the Company maintained a full-time staff of five in
its Research and Development Departments.
MARKETING AND CUSTOMERS
The application of the AIP to the Company's operations until December 1996,
combined with the Company's continuing operating losses and lack of adequate
working capital during fiscal 1997 and the first quarter of 1998 resulted in the
Company's inability to maintain sufficient raw materials and finish goods
inventories to permit the Company to actively solicit customer orders, and when
orders were received, to fill such orders promptly. Following the completion of
the Offering, new Management adopted a marketing strategy focused on developing
and maintaining sufficient raw materials and finish goods inventories so as to
permit a targeted sales effort by the Company to a core customer group, with an
emphasis on quality, prompt product delivery and excellent customer service. The
Company's products are sold by Stephanie Heitmeyer, Vice President of Sales, and
three salaried sales persons. Sales of the Company's drugs in dosage form are
made primarily to drug wholesalers, drugstore chains, distributors and other
manufacturers and are not concentrated in any specific region.
During 1998, the Company had net sales to one customer aggregating 11.5% of
total sales. The sales to such customer were made pursuant to a certain contract
manufacturing agreement entered into with the Company as part of the Company's
sale of its ANDA for oxycodone HCI/325 mg acetaminophen tablets in March, 1995.
The Company anticipates that net sales to this customer (which aggregated
approximately 22.3% of total sales in 1997) will continue to decline during 1999
and thereafter. The Company does not believe that the continuing decline of net
sales to this customer will have a material adverse effect on the Company.
Also during 1998, the Company had net sales to two customers aggregating
approximately 19.1% of total sales. The Company believes that the loss of these
customers would have a material adverse effect on the Company. During 1997 the
Company had net sales to one customer in excess of 10% of total sales,
aggregating 22.3% of total sales. During 1996, the Company had net sales to one
customer in excess of 10% of total sales, aggregating 10% of total sales.
The estimated dollar amount of the backlog of orders for future delivery as
of March 15, 1999 was approximately $500,000 as compared with approximately
$800,000 as of March 15, 1998. Although these orders are subject to
cancellation, management expects to fill substantially all orders by the second
quarter of 1999. The decline in the Company's backlog as of March 15, 1999
compared to that in 1998 is largely a function of the Company's increased
efficiency in the processing and filling of customer orders.
GOVERNMENT REGULATION
General
All pharmaceutical manufacturers, including the Company, are subject to
extensive regulation by the Federal government, principally by the FDA, and, to
a lesser extent, by state and local governments. Additionally, the Company is
subject to extensive regulation by the DEA as a manufacturer of controlled
substances. The Company cannot predict the extent to which it may be affected by
legislative and other
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regulatory developments concerning its products and the healthcare industry
generally. The Federal Food, Drug, and Cosmetic Act, the Generic Drug
Enforcement Act of 1992, the Controlled Substance Act and other Federal statutes
and regulations govern or influence the testing, manufacture, safe labeling,
storage, record keeping, approval, pricing, advertising, promotion, sale and
distribution of pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, criminal
proceedings, total or partial suspension of production, and refusal of the
government to enter into supply contracts or to approve new drug applications.
The FDA also has the authority to revoke approvals of new drug applications. The
ANDA drug development and approval process now averages approximately eight
months to two years. The approval procedures are generally costly and time
consuming.
FDA approval is required before any "new drug," whether prescription or
over-the-counter, can be marketed. A "new drug" is one not generally recognized
by qualified experts as safe and effective for its intended use. Such general
recognition must be based on published adequate and well controlled clinical
investigations. No "new drug" may be introduced into commerce without FDA
approval. A drug which is the "generic" equivalent of a previously approved
prescription drug also will require FDA approval. Furthermore, each dosage form
of a specific generic drug product requires separate approval by the FDA. In
general, as discussed below, less costly and time consuming approval procedures
may be used for generic equivalents as compared to the innovative products.
Among the requirements for drug approval is that the prospective manufacturer's
methods must conform to the CGMPs. CGMPs apply to the manufacture, receiving,
holding and shipping of all drugs, whether or not approved by the FDA. CGMPs
must be followed at all times during which the drug is manufactured. To ensure
full compliance with standards, some of which are set forth in regulations, the
Company must continue to expend time, money and effort in the areas of
production and quality control. Failure to so comply risks delays in approval of
drugs, disqualification from eligibility to sell to the government, and possible
FDA enforcement actions, such as an injunction against shipment of the Company's
products, the seizure of noncomplying drug products, and/or, in serious cases,
criminal prosecution. The Company's manufacturing facilities are subject to
periodic inspection by the FDA.
In addition to the regulatory approval process, the Company is subject to
regulation under Federal, state and local laws, including requirements regarding
occupational safety, laboratory practices, environmental protection and
hazardous substance control, and may be subject to other present and future
local, state, Federal and foreign regulations, including possible future
regulations of the pharmaceutical industry.
Drug Approvals
There are currently three ways to obtain FDA approval of a new drug.
1. New Drug Applications ("NDA"). Unless one of the procedures discussed
in paragraph 2 or 3 below is available, a prospective manufacturer must conduct
and submit to the FDA complete clinical studies to prove a drug's safety and
efficacy, in addition to the bioavailability and/or bioequivalence studies
discussed below, and must also submit to the FDA information about manufacturing
practices, the chemical make-up of the drug and labeling.
2. Abbreviated New Drug Applications ("ANDA"). The Drug Price Competition
and Patent Term Restoration Act of 1984 (the "1984 Act") established the ANDA
procedure for obtaining FDA approval for those drugs that are off-patent or
whose exclusivity has expired and that are bioequivalent to brand-name drugs. An
ANDA is similar to an NDA, except that the FDA waives the requirement of
conducting complete clinical studies of safety and efficacy, although it may
require expanded clinical bioavailability and/or bioequivalence studies.
"Bioavailability" means the rate of absorption and levels of concentration of a
drug in the blood stream needed to produce a therapeutic effect.
"Bioequivalence" means equivalence in bioavailability between two drug products.
In general, an ANDA will be approved only upon a showing that the generic drug
covered by the ANDA is bioequivalent to the previously approved version of the
drug, i.e., that the rate of absorption and the levels of concentration of a
generic drug in the body are substantially equivalent to those of a previously
approved equivalent drug. The principle advantage of this approval mechanism is
that an ANDA applicant is not required to conduct the same preclinical and
clinical studies to demonstrate that the product is safe and effective for its
intended use.
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The 1984 Act, in addition to establishing the ANDA procedure, created new
statutory protections for approved brand-name drugs. In general, under the 1984
Act, approval of an ANDA for a generic drug may not be made effective until all
product and use patents listed with the FDA for the equivalent brand name drug
have expired or have been determined to be invalid or unenforceable. The only
exceptions are situations in which the ANDA applicant successfully challenges
the validity or absence of infringement of the patent and either the patent
holder does not file suit or litigation extends more than 30 months after notice
of the challenge was received by the patent holder. Prior to enactment of the
1984 Act, the FDA gave no consideration to the patent status of a previously
approved drug. Additionally, under the 1984 Act, if specific criteria are met,
the term of a product or use patent covering a drug may be extended up to five
years to compensate the patent holder for the reduction of the effective market
life of that patent due to federal regulatory review. With respect to certain
drugs not covered by patents, the 1984 Act sets specified time periods of two to
ten years during which approvals of ANDAs for generic drugs cannot become
effective or, under certain circumstances, ANDAs cannot be filed if the
equivalent brand-name drug was approved after December 31, 1981.
3. "Paper" NDA. An alternative NDA procedure is provided by the 1984 Act
whereby the applicant may rely on published literature and more limited testing
requirements. While that alternative sometimes provides advantages over the ANDA
procedure, it is not frequently used.
Generic Drug Enforcement Act
As a result of hearings and investigations concerning the activities of the
generic drug industry and the FDA's generic drug approval process, Congress
enacted the Generic Drug Enforcement Act of 1992 (the "Generic Drug Act"). The
Generic Drug Act confers significant new authority upon the FDA to impose
debarment and civil penalties for individuals and companies who commit certain
illegal acts relating to the generic drug approval process.
The Generic Drug Act requires the mandatory debarment of companies or
individuals convicted of a federal felony for conduct relating to the
development or approval of any ANDA, and gives the FDA discretion to debar
corporations or individuals for similar conduct resulting in a federal
misdemeanor or state felony conviction. The FDA may not accept or review during
the period of debarment (one to ten years in the case of mandatory, or up to
five years in the case of permissive, debarment of a corporation) any ANDA
submitted by or with the assistance of the debarred corporation or individual.
The Generic Drug Act also provides for temporary denial of approval of generic
drug applications during the investigation of crimes that could lead to
debarment. In addition, in more limited circumstances, the Generic Drug Act
provides for suspension of the marketing of drugs under approved generic drug
applications sponsored by affected companies. The Generic Drug Act also provides
for fines and confers authority on the FDA to withdraw, under certain
circumstances, approval of a previously granted ANDA if the FDA finds that the
ANDA was obtained through false or misleading statements. The Company was not
debarred as a result of the FDA investigation and settlement and the Consent
Decree with the FDA makes no provision therefor.
Healthcare Reform
Several legislative proposals to address the rising costs of healthcare
have been introduced in Congress and several state legislatures. Many of such
proposals include various insurance market reforms, the requirement that
businesses provide health insurance coverage for all their employees,
significant reductions in the growth of future Medicare and Medicaid
expenditures, and stringent government cost controls that would directly control
insurance premiums and indirectly affect the fees of hospitals, physicians and
other healthcare providers. Such proposals could adversely affect the Company's
business by, among other things, reducing the demand, and the prices paid, for
pharmaceutical products such as those produced and marketed by the Company.
Additionally, other developments, such as (i) the adoption of a nationalized
health insurance system or a single payor system, (ii) changes in needs-based
medical assistance programs, or (iii) greater prevalence of capitated
reimbursement of healthcare providers, could adversely affect the demand for the
Company's products.
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COMPETITION
The Company competes in varying degrees with numerous companies in the
health care industry, including other manufacturers of generic drugs (among
which are divisions of several major pharmaceutical companies) and manufacturers
of brand-name drugs. Many of the Company's competitors have substantially
greater financial and other resources and are able to expend more money and
effort than the Company in areas such as marketing and product development.
Although a company with greater resources will not necessarily receive FDA
approval for a particular generic drug before its smaller competitors,
relatively large research and development expenditures enable a company to
support many FDA applications simultaneously, thereby improving the likelihood
of being among the first to obtain approval of at least some generic drugs.
One of the principal competitive factors in the generic pharmaceutical
market is the ability to introduce generic versions of brand-name drugs promptly
after a patent expires. The Company believes that it was at a competitive
disadvantage until its release from the AIP program and the FDA's resumption of
review of ANDAs submitted by the Company's Brooklyn plant. See "Government
Regulation -- Generic Drug Enforcement Act" above. Other competitive factors in
the generic pharmaceutical market are price, quality and customer service
(including maintenance of sufficient inventories for timely deliveries).
RAW MATERIALS
The raw materials essential to the Company's business are bulk
pharmaceutical chemicals purchased from numerous sources. Raw materials are
generally available from several sources. The Federal drug application process
requires specification of raw material suppliers. If raw materials from a
supplier specified in a drug application were to become unavailable on
commercially acceptable terms, FDA supplemental approval of a new supplier would
be required. During 1998, the Company purchased approximately $2,583,000 of its
raw materials (constituting 29% of its aggregate purchases of raw materials)
from Mallinckrodt. Although the Company is now able to submit Supplements to the
FDA in order to allow the Company to purchase raw materials from alternate
sources, there can be no assurance that if the Company were unable to continue
to purchase raw materials from this supplier, that the Company would be
successful in receiving FDA approval to such Supplement or that it would not
face difficulties in obtaining raw materials on commercially acceptable terms.
Failure to receive FDA approval for, and to locate, an acceptable alternative
source of raw materials would have a material adverse effect on the Company.
The United States Drug Enforcement Administration (the "DEA") limits the
quantity of the Company's inventories of certain raw materials used in the
production of controlled substances based on historical sales data. In view of
the Company's recently depressed sales volume, these DEA limitations could
increase the likelihood of raw material shortages and of manufacturing delays in
the event the Company experiences increased sales volume or is required to find
new suppliers of these raw materials.
SUBSIDIARIES
The Company's Indiana manufacturing operations are conducted by Houba,
Inc., an Indiana corporation and wholly-owned subsidiary of the Company. Halsey
Pharmaceuticals, Inc., a Delaware corporation, is a wholly-owned subsidiary
which is currently inactive. The Company also has the following additional
subsidiaries, each of which is currently inactive and anticipated to be
dissolved during the remainder of the 1999 fiscal year: Indiana Fine Chemicals
Corporation, a Delaware corporation, H.R. Cenci Laboratories, Inc., a California
corporation, Cenci Powder Products, Inc., a Delaware corporation, Blue Cross
Products, Inc., a New York corporation, and The Medi-Gum Corporation, a Delaware
corporation.
EMPLOYEES
As of March 15, 1999, the Company had approximately 160 full-time
employees. Approximately 39 employees are administrative and professional
personnel and the balance are in production and shipping. Among the professional
personnel, 5 are engaged in research and product development. Approximately 45
employees at the Company's Brooklyn plant are represented by a local collective
bargaining unit. The collective bargaining agreement between the Company and the
union was extended on March 5, 1998
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(retroactive to July 2, 1997) and expires June 30, 2000. Management believes
that its relations with its employees and the union are satisfactory.
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