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 alliances 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 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
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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, 1999, the Company submitted 9
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 31, 2000, 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)
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Prednisolone Syrup, USP................ 15mg/15ml Prelone(R)(5) FDA approval of ANDA
(systemic costicosteroid) received May 28, 1999
Hydrocodone Bitartrate and............. 5 mg/1.5mg/5ml Hydocan(R)(6) FDA approval of ANDA
Homatropine Methylbromide Syrup received July 21, 1999
(antitussive)
(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
(5) Registered Trademark of Muro Pharmaceuticals, Inc.
(6) Registered Trademark of Endo Pharmaceuticals, Inc.
During the fiscal year ended December 31, 1999, the Company submitted 1
ANDA for review by the FDA. The Company anticipates the submission during fiscal
2000 of 9 ANDA supplements or amendments. These supplements and amendments
relate to the transfer of existing ANDAs from the Company's Brooklyn facility to
its Congers facility as well as the transfer of certain ANDAs obtained from Barr
Laboratories. 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 supplements or
amendments thereto or those contemplated to 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.
Strategic Alliance with Watson Pharmaceuticals
On March 29, 2000, the Company completed various strategic alliance
transactions with Watson Pharmaceuticals, Inc. ("Watson"). The transactions with
Watson provided for Watson's purchase of a certain pending ANDA from the
Company, for Watson's rights to negotiate for Halsey to manufacture and supply
certain identified future products to be developed by Halsey, for Watson's
marketing and sale of the Company's core products and for Watson's extension of
a $17,500,000 term loan to the Company.
The product acquisition portion of the transactions with Watson
provided for Halsey's sale of a pending ANDA and related rights (the "Product")
to Watson for aggregate consideration of $13,500,000 (the "Product Acquisition
Agreement"). As part of the execution of the Product Acquisition Agreement, the
Company and Watson executed ten year supply agreements covering the active
pharmaceutical ingredient ("API") and finished dosage form of the Product
pursuant to which Halsey, at Watson's discretion, will manufacture and supply
Watson's requirements for the Product API and, where the Product API is sourced
from the Company, finish dosage forms of the Product. The purchase price for the
Product is payable in three approximately equal installments as certain
milestones are achieved.
The Company and Watson also executed a right of first negotiation
agreement providing Watson with a first right to negotiate the terms under which
the Company would manufacture and supply certain specified APIs and finished
dosage products to be developed by the Company. The right of first negotiation
agreement provides that upon Watson's exercise of
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its right to negotiate for the supply of a particular product, the parties will
negotiate the specific terms of the manufacturing and supply arrangement,
including price, minimum purchase requirements, if any, territory and term. In
the event Watson does not exercise its right of first negotiation upon receipt
of written notice from the Company as to its receipt of applicable governmental
approval relating to a covered product, or in the event the parties are unable
to reach agreement on the material terms of a supply arrangement relating to
such product within sixty (60) days of Watson's exercise of its right to
negotiate for such product, the Company may negotiate with third parties for the
supply, marketing and sale of the applicable product. The right of first
negotiation agreement has a term of ten years, subject to extension in the
absence of written notice from either party for two additional periods of five
years each. The right of first negotiation agreement applies only to API and
finished dosage products identified in the agreement and does not otherwise
prohibit the Company from developing APIs or finished dosage products for itself
or third parties.
The Company and Watson also completed a manufacturing and supply
agreement providing for Watson's marketing and sale of the Company's existing
core products portfolio (the "Core Products Supply Agreement"). The Core
Products Supply Agreement obligates Watson to purchase a minimum amount of
approximately $18,363,000 (the "Minimum Purchase Agreement") in core products
from the Company, in equal quarterly installments over a period of 18 months
(the "Minimum Purchase Period"). At the expiration of the Minimum Purchase
Period if Watson does not continue to satisfy the Minimum Purchase Amount, the
Company may market and sell the core products on its own or through a third
party. Pending the Company's development and receipt of regulatory approval for
its APIs and finished dosage products currently under development, including,
without limitation, the Product sold to Watson, and the marketing and sale of
same, of which there can be no assurance, substantially all the Company's
revenues will be derived from the Core Products Supply Agreement with Watson.
The final component of the Company's strategic alliance with Watson
provided for Watson's extension of a $17,500,000 term loan to the Company. The
loan will be funded in installments upon the Company's request for advances and
the provision to Watson of a supporting use of proceeds relating to each such
advance. The loan is secured by a first lien on all of the Company's assets,
senior to the lien securing all other Company indebtedness, carries a floating
rate of interest equal to prime plus two percent and matures on March 31, 2003.
The net proceeds from the term loan will, in large part, be used to upgrade and
equip the API manufacturing facility of Houba, Inc., the Company's wholly-owned
subsidiary, to upgrade and equip the Company's Congers, New York leased
facility, to satisfy approximately $3,300,000 in bridge financing provided by
Galen Partners and for working capital to fund continued operations. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a more detailed discussion of the $17,500,000 term loan from
Watson.
Private Offering
On May 26, 1999, the Company consummated a private offering of
securities for an aggregate purchase price of up to $22.8 million (the "Oracle
offering"). The securities issued in the Oracle Offering consisted of five
percent convertible senior secured debentures (the "1999 Debentures") and common
stock purchase warrants (the "1999 Warrants"). The 1999 Debentures and 1999
Warrants were issued by the Company pursuant to a certain Debenture and Warrant
Purchase Agreement dated May 26, 1999 (the "Oracle Purchase Agreement") by and
among the Company, Oracle Strategic Partners, L.P. ("Oracle") and such other
investors in the Company's March 10, 1998 offering electing to participate in
the Oracle Offering (inclusive of Oracle, collectively, the "Oracle Investor
Group").
The 1999 Debentures were issued at par and will become due and payable
as to principle on March 15, 2003. Approximately $12.8 million in principle
amount of the 1999 Debentures were issued on May 26, 1999. Interest on the
principle amount of the 1999 Debentures, at the rate of 5% per annum, is payable
on a quarterly basis.
The maximum principal amount of the 1999 Debentures are convertible
into shares of the Company's common stock at a conversion price of $1.404 per
share, for an aggregate of up to approximately 16,283,694 shares of the
Company's common stock. The 1999 Warrants are exercisable for an aggregate of
approximately 4,618,702 shares of the Company's common stock. Of such warrants,
2,309,351 warrants are exercisable at $1.404 per share and the remaining
2,309,351 warrants are exercisable at $2.279 per share. The 1999 Debentures and
1999 Warrants are convertible and exercisable, respectively, for an aggregate of
approximately 20,902,396 shares of the Company's common stock.
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Of the $22.8 million to be invested pursuant to the Oracle Purchase
Agreement, $5,000,000 was funded by Oracle on May 26, 1999, the closing date of
the Oracle Purchase Agreement, and an additional $5,000,000 was funded on July
27, 1999. On March 20, 2000, the Company and Oracle executed a Release Agreement
releasing Oracle from its obligation to make the remaining investment of
$5,000,000 pursuant to the Oracle Purchase Agreement. After giving effect to the
Release Agreement with Oracle, the 1999 Debentures and 1999 Warrants are
convertible and exercisable, respectively, for an aggregate of approximately
16,331,043 shares of the Company's common stock.
In addition to the $10,000,000 investment made by Oracle pursuant to
the Oracle Purchase Agreement, approximately $7,037,000 of the 1999 Debentures
issues pursuant to the Oracle Purchase Agreement were issued in exchange for the
surrender of a like amount of principle and accrued interest outstanding under
the Company's convertible promissory notes issued pursuant to various bridge
loan transactions with Galen Partners, III, L.P., Galen Partners International,
III, L.P., Galen Employee Fund, L.P. (collectively, "Galen Partners") and
certain other investors, in the aggregate amount of $10,104,110 during the
period from August, 1998 through and including May, 1999 (the "Galen Bridge
Loans"). The remaining balance of the Galen Bridge Loans in the principal amount
of $3,495,001 plus accrued and unpaid interest were satisfied with a portion of
the proceeds of Oracle's second $5,000,000 installment on made July 27, 1999
pursuant to the Oracle Purchase Agreement.
Acquisition of Product ANDAs
On April 16, 1999, the Company completed an acquisition agreement with
Barr Laboratories, Inc. ("Barr") providing for the Company's purchase of the
rights to 50 pharmaceutical products (the "Barr Products"). Under the terms of
the acquisition agreement with Barr, the Company acquired all of Barr's rights
in the Barr Products, including all related governmental approvals (including
ANDAs) and related technical data and information. In consideration for the
acquisition of the Barr Products, the Company issued to Barr a common stock
purchase warrant exercisable for 500,000 shares of the Company's common stock
having an exercise price of $1.0625 per share (the fair market value of the
Common Stock on the date of issuance) and having a term of five years. The
acquisition agreement with Barr also allows Barr to purchase any of the Barr
Products manufactured by the Company for a period of five years.
The Barr Products acquired by the Company were previously marketed by
Barr, prior to its decision to strategically refocus its generic product
portfolio several years ago. While the Barr Products cover a broad range of
therapeutic applications and are the subject of approved ANDAs, the Company will
be required to obtain approval from the U.S. Food and Drug Administration
("FDA") to permit manufacture and sale of any of the Barr Products, including
site specific approval. The Company initially has identified 8 of the products
for which it will devote substantial effort in seeking approval from the FDA for
manufacture and sale. The Company estimates that certain of these Barr Product
will be available for sale in the fourth quarter of 2000, although no assurance
can be given that any of the Barr Products will receive FDA approval or that if
approved, that the Company will be successful in the manufacture and sale of the
such products. It is the Company's intention to continue to evaluate the
remaining Barr Products on an ongoing basis to assess their prospects for
commercialization and likelihood of obtaining regulatory approval.
Cessation and Relocation of Brooklyn, New York Operations
On March 22, 2000 the Company executed a Lease Termination and
Settlement Agreement with the landlord of the Company's Brooklyn, New York
manufacturing facility (the "Settlement Agreement"). The Settlement Agreement
provides for the early termination of the lease covering the Brooklyn facility
and provides the Company with the time necessary to transfer operations to the
Company's Congers, New York facility and cease all manufacturing, research and
development and warehouse operations currently conducted in Brooklyn. The
Settlement Agreement provides for the termination of the Brooklyn facility lease
on August 31, 2000, subject to the Company's right to extend the term to March
31, 2001. The original lease provided for a term expiring December 31, 2005 with
a rental payment obligation of $6,715,000 during the period from September 1,
2000 through December 31, 2005.
The Settlement Agreement provided for the Company's payment of a
termination fee of $1,150,000, the advance payment of rent through August 31,
2000 and the deposit of a restoration escrow of $200,000 to be used for facility
repairs. The Company also deposited $390,600 in escrow with its counsel. This
escrow amount represents the rental payments for the period September 1, 2000
through March 31, 2001 and will be returned to the Company in the event it
vacates the
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Brooklyn facility on or prior to August 31, 2000. The Company recorded a total
charge against earnings of approximately $3,220,000 resulting from the
elimination of its Brooklyn, New York operations. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
more detailed discussion of this charge against earnings.
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.
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.
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 31 products, consisting
of 21 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,
5. Antitussives, or
6. Steroids
During fiscal 1999, sales of antibiotics and narcotic analgesics
accounted for approximately 67% of total net sales during such year. The Company
anticipates that sales of antibiotics and narcotic analgesics will continue to
represent a significant portion of the Company's revenue.
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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. While the
Company will continue the development of its finished goods pharmaceutical
business, including the rehabilitation of the product ANDAs acquired from Barr,
the Company's will dedicate increasing resources to the expansion and
enhancement of its operations devoted to the development and manufacture of APIs
for use in the Company's finished dosage products as well as for sale to third
party pharmaceutical companies, including Watson, in the form and API and
finished dosage products.
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 APIs, also known as bulk chemical products. The development and
sale of APIs generally is not subject to the same level of regulation as is the
development and sale of drug products. Accordingly, APIs may be brought to
market substantially sooner than drug products. As described under the caption
"Recent Events - Strategic Alliance with Watson Pharmaceuticals" above, the
Company is a party to agreements with Watson Pharmaceuticals providing for
Watson's right to negotiate for a supply of select APIs currently in development
and to be developed by the Company. In addition to its alliance with Watson, it
is the Company's intention to develop APIs for its own manufacture and sale
(both in API and finished dosage form) and in partnership with other
pharmaceutical manufacturers. A significant portion of the net proceeds from the
Watson loan transaction described above will be devoted to the upgrade of its
Culver, Indiana manufacturing facility operated by its Houba subsidiary,
including HVAC, equipment and operational upgrades. During fiscal 1999, all of
the Company's revenues were delivered from the sale of finished dosage products.
It is the Company's expectation that in connection with a strategic alliance
with Watson and other API development efforts, in addition to assisting in the
expansion of the Company's line of finished products, the Company will generate
revenues from the sale of APIs starting in the latter part of 2000 and such
revenue segment will likely increase thereafter as a percentage of total
revenue.
RESEARCH AND DEVELOPMENT
The Company currently conducts research and development activities at
each of its Brooklyn and Indiana facilities. Once the cessation and relocation
of the Company's Brooklyn, New York operations are completed, the Company's
research and development activities previously conducted in Brooklyn will be
transferred to its Congers, New York facility. The Company's research and
development activities consist primarily of new generic drug product development
efforts and manufacturing process improvements, the development for sale of new
chemical products and the development of APIs. 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 1999,
1998 and 1997, total research and development expenditures were $1,075,000,
$651,000 and $979,000, respectively. During 2000, the Company's research and
development efforts will cover finished dosage products and APIs in a variety of
therapeutic applications.
As of March 31, 2000, the Company maintained a full-time staff of 11 in
its Research and Development Departments.
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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 in March 1998 of the offering with Galen Partners (the "Galen
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 strategic alliance with Watson entered into on March 29, 2000
provides for the Company's core products portfolio to be sold by Watson's sales
force under Watson's label. Accordingly, the Company intends to discontinue
sales efforts of these products. The two companies are working together during
the second quarter of 2000 to effect an orderly transition of existing sales
agreements and orders from Halsey to Watson. The Company continues to perform
limited contract manufacturing of certain non-core products for other
pharmaceutical companies.
During 1999, the Company had net sales to two customers aggregating
approximately 25.3% of total sales. The Company believes that the loss of these
customers would have a material adverse effect on the Company. During 1998 the
Company had net sales to two customers, aggregating 19.1% of total sales. During
1997, the Company had net sales to one customer in excess of 10% of total sales,
aggregating 22.3% of total sales.
The estimated dollar amount of the backlog of orders for future
delivery as of March 31, 2000 was approximately $800,000 as compared with
approximately $500,000 as of March 15, 1999. Although these orders are subject
to cancellation, management expects to fill substantially all orders by the
second quarter of 2000. The increase in the Company's backlog as of March 31,
2000 compared to that in 1999 is largely a function of an increase in market
penetration.
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 U.S. Drug Enforcement Agency ("DEA") as a
manufacturer of controlled substances. The Company cannot predict the extent to
which it may be affected by legislative and other 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
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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.
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
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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.
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 1999 and 1998, the Company purchased approximately
$1,107,000 and $2,583,000, respectively, of its raw materials (constituting 15%
and 29%, respectively, 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.
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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 2000 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 31, 2000, the Company had approximately 179 full-time
employees. Approximately 39 employees are administrative and professional
personnel and the balance are in production and shipping. Among the professional
personnel, 11 are engaged in research and product development. Approximately 46
employees at the Company's Brooklyn facility are represented by a local
collective bargaining unit. The collective bargaining agreement between the
Company and the union was extended on March 5, 1998 (retroactive to July 2,
1997) and expires June 30, 2000. As discussed above under the caption "Recent
Events - Cessation and Relocation of Brooklyn, New York Operations", the Company
is in the process of ceasing operations at its leased facility in Brooklyn, New
York. The Company estimates that it will complete its relocation of the
operations conducted in Brooklyn to its Congers, New York facility by August 31,
2000. After giving effect to the cessation of operations in Brooklyn, New York,
the Company estimates that it will have approximately 107 employees. Management
believes that its relations with its employees are satisfactory.
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