PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION MORE FULLY DESCRIBED ELSEWHERE IN
THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. BECAUSE
IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS, ESPECIALLY THE "RISK FACTORS" SECTION BEGINNING ON PAGE 9, OUR
FINANCIAL STATEMENTS AND THE RELATED NOTES AND THE DOCUMENTS INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, INCLUDING OUR ANNUAL REPORT ON FORM 10-KSB FOR THE
YEARS ENDED JUNE 30, 2003 AND 2002, OUR QUARTERLY REPORTS ON FORM 10-Q FOR THE
QUARTERS ENDED SEPTEMBER 30, 2003, DECEMBER 31, 2003 AND MARCH 31, 2004, OUR
PROXY STATEMENT ON FORM 14A RELATING TO OUR 2004 ANNUAL MEETING OF STOCKHOLDERS
AND FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 2003, AND
OUR CURRENT REPORTS ON FORM 8-K FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON AUGUST 26, 2003, OCTOBER 29, 2003, DECEMBER 2, 2003, JANUARY 20,
2004, FEBRUARY 17, 2004, APRIL 28, 2004 AND MAY 5, 2004 BEFORE DECIDING TO
INVEST.
ABOUT THE COMPANY
We were incorporated in 1942 under the laws of the Commonwealth of
Pennsylvania. In 1991, we merged into Lannett Company, Inc., a Delaware
corporation. The sole purpose of the merger was to reincorporate us as a
Delaware corporation. We develop, manufacture, package, market and distribute
pharmaceutical products sold under generic chemical names. References herein to
a fiscal year refer to our fiscal year ending June 30.
Historically, we have competed for an increasing share of the generic
market. During each of the fiscal years ended June 30, 2003 and 2002, we have
surpassed our historical highs in terms of net sales, gross profit, operating
income, net income and total market capitalization value. This growth is a
result of additions to our line of generic products, new customers, higher unit
sales, increased product prices and a management focus on minimizing unnecessary
overhead and administrative costs. Some of the new generic products sold by us
during the past two fiscal years were developed and manufactured by us while
others are manufactured by Jerome Stevens Pharmaceutical, Inc. ("JSP"), one of
our primary suppliers.
PRODUCTS
Currently, we manufacture and/or distribute twenty-three products:
NAME OF PRODUCT MANUFACTURE SOURCE MEDICAL INDICATION EQUIVALENT BRAND
--------------- ------------------ ------------------
1.) Butalbital, Aspirin and
Caffeine Capsules Lannett Migraine Headache Fiorinal(R)
2.) Butalbital, Aspirin, Caffeine Fiorinal(R)
with Codeine Capsules JSP Migraine Headache W/Codeine
3.) Digoxin 0.125 mg Tablets JSP Heart Failure Lanoxin(R)
4.) Digoxin 0.25 mg Tablets JSP Heart Failure Lanoxin(R)
5.) Primidone 50 mg Tablets Lannett Epilepsy Mysoline(R)
6.) Primidone 250 mg Tablets Lannett Epilepsy Mysoline(R)
7.) Dicyclomine 10 mg Capsules Lannett Irritable Bowels Bentyl(R)
8.) Dicyclomine 20 mg Tablets Lannett Irritable Bowels Bentyl(R)
9.) Acetazolamide 250 mg Tablets Lannett Glaucoma Diamox(R)
10.) Prednisolone 5 mg Tablets Lannett Coricosteroid Not applicable
11.) Diphenoxylate with Atropine
Sulfate Tablets Lannett Diarrhea Lomotil(R)
12.) Isoniazid 300 mg Tablets Lannett Tuberculosis Not applicable
13.) Levothyroxine Sodium 0.025 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
14.) Levothyroxine Sodium 0.050 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
15.) Levothyroxine Sodium 0.075 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
16.) Levothyroxine Sodium 0.088 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
17.) Levothyroxine Sodium 0.100 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
18.) Levothyroxine Sodium 0.112 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
19.) Levothyroxine Sodium 0.125 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
20.) Levothyroxine Sodium 0.150 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
21.) Levothyroxine Sodium 0.175 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
22.) Levothyroxine Sodium 0.200 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
23.) Levothyroxine Sodium 0.300 mg
Tablets JSP Thyroid Deficiency Unithroid(R)
All of the products currently manufactured and/or sold by us are
ethical, or prescription, products. Of the products listed above, those
containing butalbital, digoxin, primidone and levothyroxine sodium were our key
products, contributing to more than 95% of our total net sales during the fiscal
year ended June 30, 2003.
In this prospectus, the names of all branded drugs are trademarked and
the holders of the trademarks are unaffiliated pharmaceutical manufacturers,
except for Unithroid, which is owned by Jerome Stevens Pharmaceuticals, Inc.
Pursuant to the terms of an agreement entered into on March 23, 2004, Jerome
Stevens Pharmaceuticals has licensed us the right to use the Unithroid(R) mark.
We also have several general products under development. These products
are all orally-administered, solid-dosage (i.e. tablet/capsule) products
designed to be generic equivalents to brand named innovator drugs. One of these
developmental products, an orally-administered obesity product, represents a
generic Abbreviated New Drug Application ("ANDA") currently owned by us, but not
currently manufactured and distributed for commercial consumption. As one of the
oldest generic drug manufacturers in the country, formed in 1942, we currently
own several ANDAs for products that we do not manufacture and market. These
ANDAs are simply
-2-
dormant on our records. Occasionally, we review such ANDAs to determine if the
market potential for any of these older drugs has recently changed, so as to
make it attractive for us to reconsider manufacturing and selling the drug. If
we make the determination to reintroduce one of these products into the consumer
marketplace, we must review the ANDA and related documentation to ensure that
the approved product specifications, formulation and other features are feasible
in our current environment. Generally, in these situations, we must file a
supplement to the FDA for the applicable ANDA, informing the FDA of a
significant change in the manufacturing process, the formulation, the raw
material supplier or another major feature of the previously-approved ANDA. We
would then redevelop the product and submit it to the FDA for supplemental
approval. The FDA's approval process for ANDA supplements is similar to that of
a new ANDA.
Another developmental product is a new ANDA submitted to the FDA for
approval. This ANDA is for an orally-administered prescription capsule product
to treat obesity. The FDA has recently disclosed that the average amount of time
to review and approve a new ANDA is approximately eighteen months. Since we have
no control over the FDA review process, we are unable to anticipate whether or
when we will be able to begin commercially producing and shipping this product.
The remainder of the products in development represent either
previously approved ANDAs that we are planning to reintroduce (ANDA
supplements), or new formulations (new ANDAs). The products under development
are at various stages in the development cycle--formulation, scale-up, and/or
clinical testing. Depending on the complexity of the active ingredient's
chemical characteristics, the cost of the raw material, the FDA-mandated
requirement of bioequivalence studies, the cost of such studies and other
developmental factors, the cost to develop a new generic product varies. It can
range from $100,000 to $1 million. Some of our developmental products require
bioequivalence studies, while others do not. Since we have no control over the
FDA review process, we are unable to anticipate whether or when we will be able
to begin producing and shipping additional products.
We are also developing a drug product that does not require FDA
approval. The FDA allows generic manufacturers to manufacture and sell products
which are equivalent to innovator drugs which are grand-fathered, under FDA
rules, prior to the passage of the Hatch-Waxman Act of 1984. The FDA allows
generic manufacturers to produce and sell generic versions of such
grand-fathered products by simply performing and internally documenting the
product's stability over a period of time. Under this scenario, a generic
company can forego the time and costs related to a FDA-mandated ANDA approval
process. We currently have one product under development in this category. The
development drug is an orally administered solid dosage product.
We have also contracted with Spectrum Pharmaceuticals Inc., based in
California, to market generic products developed and manufactured by Spectrum
and/or its partners. The first applicable product under this agreement is
ciproflaxacin tablets, the generic version of Cipro, an anti-bacterial drug
marketed by Bayer prescribed to treat infections.
-3-
RAW MATERIALS AND INVENTORY SUPPLIERS
The raw materials used by us in the production process consist of
pharmaceutical chemicals in various forms, which are generally available from
various sources. FDA approval is required in connection with the process of
using active ingredient suppliers. In addition to the raw materials purchased
for the production process, we purchase certain finished dosage inventories,
including capsule and tablet products. We then sell these finished dosage
products directly to our customers along with the finished dosage products
internally manufactured. Currently, our only finished product inventory supplier
is Jerome Stevens Pharmaceuticals, Inc. (JSP), in Bohemia, New York. Purchases
of finished goods inventory from JSP accounted for approximately 62% of our
inventory purchases in Fiscal 2003. Another supplier, Siegfried (USA), Inc.,
accounted for 12% of our raw inventory purchases in Fiscal 2003. Purchases of
finished goods inventory from JSP accounted for approximately 26% of our raw
material/finished goods inventory purchases in Fiscal 2002. Siegfried (USA),
Inc. supplied 30% of our raw inventory purchases in Fiscal 2002. Generally, the
raw materials purchased from suppliers are available from a number of vendors.
The finished products purchased from JSP may not be available from other sources
due to the limited number of FDA approvals of competitive products. If suppliers
of a certain material or finished product are limited, we will generally take
certain precautionary steps to avoid a disruption in supply. This includes
building a satisfactory inventory level, and obtaining contractual supply
commitments.
CUSTOMERS AND MARKETING
We sell our products primarily to wholesale distributors, generic drug
distributors, mail-order pharmacies, drug chains, and other pharmaceutical
companies. Sales of our pharmaceutical products are made on an individual order
basis. One customer, Cardinal Health, one of the largest wholesale distributors
in the country, accounted for approximately 13% of net sales during the fiscal
year ended June 30, 2003. Another customer, Qualitest Pharmaceuticals, a large
private-label wholesale distributor, accounted for approximately 12% and 22% of
net sales during the fiscal years ended June 30, 2003 and 2002, respectively. A
third customer, United Research Laboratories, a large private-label wholesale
distributor, accounted for 19% of net sales during the fiscal year ended June
30, 2002. We perform ongoing credit evaluations of our customers' financial
condition, and have experienced no significant collection problems to date.
Generally, we require no collateral from our customers. We believe that
ultimately consumer demand dictates the total volume of sales for various
products. In the event that our wholesale and retail customers adjust their
purchasing volumes, we believe that consumer demand will be fulfilled by other
wholesale or retail sources of supply. As such, we attempt to obtain strong
relationships with most of the major retail chains, wholesale distributors and
mail-order wholesalers in order to facilitate the supply of our products through
whatever channel the consumer prefers.
We promote our products through direct sales, the Internet, trade
shows, trade publications, and bids. We also market our products through private
label arrangements, whereby we produce our products with a label containing the
name and logo of a customer. This practice is commonly referred to as private
label business. It allows us to expand on our own internal sales efforts by
using the marketing services from other well-respected pharmaceutical dosage
suppliers. The focus of our sales efforts are the relationships we create with
our customer
-4-
accounts. Strong customer relationships have created a positive platform for us
to increase our sales volumes. Advertising in the generic pharmaceutical
industry is generally limited to trade publications, read by retail pharmacists,
wholesale purchasing agents and other pharmaceutical decision-makers.
Historically and during the fiscal years ended June 30, 2003 and 2002, our
advertising expenses were immaterial. When the customer and our sales
representatives make contact, we will generally offer to supply the customer
with our products at fixed prices. If accepted, the customer's purchasing
department will coordinate the purchase, receipt and distribution of the
products throughout its distribution centers and retail outlets. Once a customer
accepts our supply of product, the customer generally expects a high standard of
service. This service standard includes shipping product in a timely manner on
receipt of customer purchase orders, maintaining convenient and effective
customer service functions and retaining a mutually-beneficial dialogue of
communication. We believe that although the generic pharmaceutical industry is a
commodity industry, where price is the primary factor for sales success, these
additional service standards are equally important to the customers that rely on
a consistent source of supply.
COMPETITION
The manufacture and distribution of generic pharmaceutical products is
a highly competitive industry. Competition is based primarily on price, service
and quality. We compete primarily on this basis, as well as by flexibility
(reacting to customer needs quickly and decisively - for example, shipping
samples of products via overnight delivery when the customer is in critical need
of inventory), availability of inventory, and by the fact that our products are
available only from a limited number of suppliers. The modernization of our
facilities, hiring of experienced staff, and implementation of inventory and
quality control programs have improved our competitive position over the past
five years.
GOVERNMENT REGULATION
Pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally by the FDA and the Drug Enforcement Agency
("DEA"), and, to a lesser extent, by other federal regulatory bodies and state
governments. The Federal Food, Drug and Cosmetic Act, the Controlled Substance
Act and other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval, pricing,
advertising and promotion of our generic drug products. Noncompliance with
applicable regulations can result in fines, recall and seizure of products,
total or partial suspension of production, personal and/or corporate prosecution
and debarment, and refusal of the government to approve new drug applications.
The FDA also has the authority to revoke previously approved drug products.
Generally, FDA approval is required before a prescription drug can be
marketed. The approval procedures are quite extensive. A new drug is one not
generally recognized by qualified experts as safe and effective for its intended
use. New drugs are typically developed and submitted to the FDA by companies
expecting to brand the product, and sell it as a new medical treatment. The FDA
review process for new drugs is very extensive; and it requires a substantial
investment to research and test the drug candidate. However, less burdensome
approval procedures may be used for generic equivalents. Typically, the
investment required to
-5-
develop a generic drug is less costly than the brand innovator drug. There are
currently three ways to obtain FDA approval of a drug:
New Drug Applications ("NDA"): Unless one of the two procedures discussed in the
following paragraphs is available, a manufacturer must conduct and submit to the
FDA complete clinical studies to establish a drug's safety and efficacy.
Abbreviated New Drug Applications ("ANDA"): An ANDA is similar to an NDA, except
that the FDA waives the requirement of complete clinical studies of safety and
efficacy, although it may require bioavailability and bioequivalence studies.
The FDA has recently stated that the average review and approval time for a new
ANDA is approximately 18 months. "Bioavailability" indicates the rate of
absorption and levels of concentration of a drug in the bloodstream needed to
produce a therapeutic effect. "Bioequivalence" compares one drug product with
another, and indicates if the rate of absorption and the levels of concentration
of a generic drug in the body are within prescribed statistical limits to those
of a previously approved drug. Under the Drug Price Act, an ANDA may be
submitted for a drug on the basis that it is the equivalent of an approved drug,
regardless of when such other drug was approved. The Drug Price Act, in addition
to establishing a new ANDA procedure, created statutory protections for approved
brand name drugs. Under the Drug Price Act, an ANDA for a generic drug may not
be made effective until all relevant product and use patents for the brand name
drug have expired or have been determined to be invalid. Prior to enactment of
the Drug Price Act, the FDA gave no consideration to the patent status of a
previously approved drug. Additionally, the Drug Price Act extends for up to
five years the term of a product or use patent covering a drug to compensate the
patent holder for the reduction of the effective market life of a patent due to
federal regulatory review. With respect to certain drugs not covered by patents,
the Drug Price Act sets specified time periods of two to ten years during which
ANDAs for generic drugs cannot become effective or, under certain circumstances,
cannot be filed if the brand name drug was approved after December 31, 1981. We
use the ANDA process for submission of our developmental generic drug
candidates.
Paper New Drug Applications ("PAPER NDA"): For a drug that is identical to a
drug first approved after 1962, a prospective manufacturer need not go through
the full NDA procedure. Instead, it may demonstrate safety and efficacy by
relying on published literature and reports. The manufacturer must also submit,
if the FDA so requires, bioavailability or bioequivalence data illustrating that
the generic drug formulation produces the same effects, within an acceptable
range, as the previously approved innovator drug. Because published literature
to support the safety and efficacy of post-1962 drugs may not be available, this
procedure is of limited utility to generic drug manufacturers. Moreover, the
utility of Paper NDAs has been further diminished by the recently broadened
availability of the ANDA process, as described above.
Among the requirements for new drug approval is the requirement that
the prospective manufacturer's methods conform to the FDA's current good
manufacturing practices ("CGMP Regulations"). The CGMP Regulations must be
followed at all times during which the approved drug is manufactured. In
complying with the standards set forth in the CGMP Regulations, the Company must
continue to expend time, money and effort in the areas of production and quality
control to ensure full technical compliance. Failure to comply with the CGMP
Regulations risks
-6-
possible FDA action such as the seizure of noncomplying drug products or,
through the Department of Justice, enjoining the manufacture of such products.
We are also subject to federal, state and local laws of general
applicability, such as laws regulating working conditions, and the storage,
transportation or discharge of items that may be considered hazardous
substances, hazardous waste or environmental contaminants. We monitor our
compliance with all environmental laws. Compliance costs are charged against
operations when incurred. We incurred no monitoring costs during the fiscal
years ended June 30, 2003 and 2002.
RECENT DEVELOPMENTS
Perrigo Transaction
William Farber ("Mr. Farber"), our Chief Executive Officer and Chairman
of the Board of the Company, beneficially owns 13,518,629 shares of our common
stock which represents approximately 56.2% of our outstanding common stock.
Pursuant to a Stock Purchase Option Agreement (the "Option"),
incorporated by reference in this prospectus, Mr. Farber has granted an
irrevocable option to Perrigo Company ("Perrigo") to purchase all of his shares
of our common stock for $14.56 per share plus contingent additional
consideration. Perrigo has the right to exercise the Option, and buy Mr.
Farber's stock, any time between now and August 6, 2004. If Perrigo exercises
the Option and acquires Mr. Farber's shares of our common stock, Perrigo is
obligated pursuant to the Option to either make a tender offer (to the extent
permitted by law) to our remaining shareholders or to use its commercially
reasonable efforts to enter into a business combination with us that could
result in Perrigo acquiring the remaining outstanding shares of our common
stock. The total price per share to be paid pursuant to any such tender offer or
business combination must be no less than the higher of (i) $17.84, and (ii) the
total price per share paid to Mr. Farber, including any contingent additional
consideration. The decision to recommend or not recommend any such tender offer
or approve or disapprove of any such business combination will rest with a
special committee of the Company's Board of Directors and/or the remaining
stockholders.
Because of Mr. Farber's large percentage ownership interest in our
Company, if Perrigo exercises the Option, such a sale of his Common Stock would
constitute a change of control and could lead to other consequences, including a
change in our present board of directors or management. However, this decision
would rest solely in the hands of Perrigo.
Jerome Stevens Pharmaceuticals Transaction
On March 23, 2004, we entered into an agreement with JSP granting us
exclusive distribution rights in the United States to the current line of JSP
products, in exchange for four million (4,000,000) shares of our common stock.
We have agreed to register these shares and these shares are the shares being
registered under this Registration Statement. According to the agreement, which
has a term of ten years, JSP will supply us with Butalbital with Aspirin,
Caffeine and Codeine Phosphate capsules, Digoxin tablets and Levothroxine Sodium
tablets sold under the generic name and the brand name "Unithroid" (collectively
referred to as the "JSP Products"). Our obligation to issue the four million
(4,000,000) shares was subject to the receipt
-7-
of a fairness opinion issued by a recognized and reputable investment banking
firm in opining that the issuance of the four million (4,000,000) shares and the
resulting dilution of the ownership interest of or minority stockholders was
fair to such stockholders in view of the JSP Products' contribution or potential
contribution to our profitability. We received the fairness opinion on April 20,
2004 and issued the shares to JSP's designees on that date.
|