Competition
The pharmaceutical industry is highly competitive. Our branded products compete
with brands marketed by other pharmaceutical companies including large, fully
integrated concerns with financial, marketing, legal and product development
resources substantially greater than ours.
Our principal competitors are in the United States and include:
• Hormonal Contraceptives-Johnson & Johnson (Ortho Tri-Cyclen Lo, Ortho
Evra), Schering A.G./Berlex Laboratories, Inc. (Yasmin), Akzo Nobel
N.V./Organon (Nuvaring) and Barr Pharmaceuticals, Inc. (Seasonale);
• Hormone Therapy-Wyeth (Premarin, Premarin Low Dose, PremarinVaginal Cream,
Prempro™, Prempro Low Dose, Premphase ), Pfizer Inc. (Estring ), Schering
A.G./Berlex Laboratories, Inc. (Climara , Menostar ) and Barr
Pharmaceuticals, Inc. (Cenestin );
• Doryx-Medicis Pharmaceutical Corporation (Dynacin ), Bradley
Pharmaceutical (Adoxa ) and CollaGenex Pharmaceuticals, Inc. (Periostat );
• Dovonex-Allergan, Inc. (Tazorac) and Connetics Corporation (Olux Foam and
Soriatane).
Our branded pharmaceutical products are or may become subject to competition
from generic equivalents because there is no proprietary protection for some of
the branded pharmaceutical products we sell or because we lose proprietary
protection due to the expiration of a patent. Ovcon, Estrace Tablets, Estrace
Cream and Doryx are currently not protected by patents. Generic equivalents for
some of our branded pharmaceutical products are
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sold by other pharmaceutical companies which claim that their products provide
equivalent therapeutic benefits at a lower cost. For instance, Estrace Tablets
currently face generic competition and, although the product accounts for about
14% of oral estrogen therapy products prescribed in the United States according
to IMS, currently experiences a substitution rate of approximately 89%. Generic
equivalents generally generate higher margins for drug retailers. Therefore,
drug retailers have an incentive to substitute a generic equivalent when one is
available. Typically, after the introduction of a generic equivalents, up to 90%
of the prescriptions written by authorized prescribers for the branded product
may be filled with a generic at the pharmacy, resulting in a commensurate loss
in sales of the branded product (substitution rates are generally significantly
lower for hormonal contraceptives). In addition, under an agreement to settle
patent claims against Barr relating to our Estrostep oral contraceptive and our
femhrt hormone therapy, we granted Barr a non-exclusive license to launch
generic versions of Estrostep and femhrt six months prior to patent expiration
in 2008 and 2010, respectively. We cannot assure you what effect, if any, these
activities will have on our results of operations. In addition, legislation
enacted in the United States allows, or, in a few instances, in the absence of
specific instructions from the prescribing physician, mandates the use of
generic products rather than brand name products where a generic equivalent is
available. The availability of generic equivalent products may cause a material
decrease in revenue from our branded pharmaceutical products.
As the pharmaceutical industry is characterized by rapid product development and
technological change, our pharmaceutical products could be rendered obsolete or
made uneconomical by the development of new pharmaceuticals to treat the
conditions addressed by our products, technological advances affecting the cost
of production, or marketing or pricing actions by one or more of our
competitors. Our business, results of operations and financial condition could
be materially adversely affected by any one or more of these developments. Our
competitors may also be able to complete the regulatory process for new products
before we are able to do so and, therefore, may begin to market their products
in advance of our products. We believe that competition among both branded and
generic pharmaceuticals aimed at the markets identified by us will be based on,
among other things, product efficacy, safety, reliability, availability and
price.
Manufacturing, Supply and Raw Materials
In May 2004, we purchased an approximately 194,000 sq. ft. pharmaceutical
manufacturing facility located in Fajardo, Puerto Rico from Pfizer. Adjacent to
the facility is an approximately 24,000 sq. ft. warehouse and 102,000 sq. ft.
parking lot, both of which we lease from third parties. The Fajardo facility
currently manufactures our Estrostep oral contraceptive, packages femhrt and
Ovcon 35 and is being qualified to package delayed-release Doryx tablets. We
anticipate that the Fajardo facility will become our primary site for the
manufacture and packaging of our oral dose products. However, while we transfer
these manufacturing activities to the Fajardo facility, we will continue to be
dependent upon third-party contract manufacturers for the manufacture of many of
our products. To ensure their compliance, we conduct quality assurance audits of
our contract manufacturers' sites and records to determine compliance with the
relevant regulatory requirements.
In May 2004, we entered into a supply agreement with Barr for Ovcon 35 oral
contraceptive under which Barr agreed to provide us with our requirements for
finished product through 2009. Bristol-Myers no longer manufactures Ovcon 35 but
will be supplying Ovcon 35 Chewable product for us, Bristol-Myers manufactures
Estrace Cream under a long-term supply agreement that runs through February
2009. Estrace Tablets are also manufactured for us by Bristol-Myers under a
supply agreement that runs through July 2006. Duricef is manufactured for us by
Bristol-Myers under a supply agreement that runs through March 2007. Doryx is
supplied to us by FH Faulding & Co Limited under a license and distribution
arrangement that runs through 2009 and is renewable thereafter. Sarafem is
manufactured by Lilly pursuant to a three-year manufacturing agreement which
may, under certain circumstances, be extended for one additional year. femhrt is
manufactured under an agreement between Warner-Lambert and Duramed which has
been assigned to us by Warner-Lambert. These products accounted for a
significant percentage of our product sales in fiscal year 2004. In the event
that a supplier suffers an event that caused it to be unable to manufacture our
product requirements for a sustained period the resulting shortages of inventory
could have a material adverse effect on our business. See Note 19 to our
Predecessor's Consolidated Financial Statements for the three years ended
September 30,
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2004, Note 18 to our Predecessor's Consolidated Financial Statements for the
quarter ended December 31, 2004 and Note 15 to our Consolidated Financial
Statements for the quarter ended March 31, 2005 appearing elsewhere in this
prospectus for information concerning supplier concentration.
In the United States, the FDA must approve suppliers of certain ingredients for
our products and of finished product. The development and regulatory approval of
our products is dependent on our ability to procure active ingredients,
packaging materials and finished product from FDA-approved sources. If
pharmaceutical ingredients, packaging materials or finished products were no
longer available from an FDA-approved source, we would be required to obtain FDA
approval to change the supplier of that material or product. The qualification
of a new supplier could potentially disrupt the manufacture, and therefore our
supply of products for sale. Although we consider our sources of supply to be
adequate, there can be no assurance that we will continue to be able to obtain
materials and finished products as required.
Trademarks, Patents and Proprietary Rights
Protection of intellectual property, such as trademarks and patents, is a key
part of our strategy through which we seek the freedom to continue to
manufacture and sell our products and operate in our strategic areas without
interferences by third parties, and to prevent others from obtaining patent
protection limiting our freedom to operate within our strategic areas.
Patents, Trade Secrets and Proprietary Knowledge
We rely on patents, trade secrets and proprietary knowledge to protect our
products. We seek to protect our proprietary rights by enforcing our legal
rights against third parties that we believe may infringe our intellectual
property rights. For example, we have been involved in legal proceedings against
Teva for alleged infringement of our patent on our Sarafem product, in which we
have received a favorable judgment which has been affirmed on appeal. See
"-Legal Proceedings-Sarafem." We also generally seek to protect our proprietary
rights by filing applications for patents on certain inventions, and entering
into confidentiality, non-disclosure and assignment of invention agreements with
our employees, consultants, licensees and other companies. We do not ultimately
control whether we will be successful in enforcing our legal rights against
third party infringers, whether our patent applications will result in issued
patents, whether our confidentiality, non-disclosure and assignment of invention
agreements will not be breached and whether we will have adequate remedies for
any such breach, or that our trade secrets will not otherwise become known by
competitors. In addition, some of our key products are not protected by patents
and proprietary rights and therefore are or may become subject to competition
from generic equivalents. However, for some of these products, we have
maintained market exclusivity because it is difficult to produce a generic
equivalent for them. For example, because of the difficulty in demonstrating
bio-equivalence in topical products, Estrace Cream currently has no generic
competition despite the expiration of our patent in 2002. For a further
discussion of our competition, see " -Competition."
Patents covering the following products will expire prior to maturity of the
notes:
Product Patent Expires
Dovonex December 2007
Sarafem May 2008
Estrostep April 2008
femhrt May 2010
Patent expiration provides competitors with the first opportunity to introduce a
generic equivalent. Although part of our strategy includes introducing line
extensions that will extend our proprietary protection, other companies may
attempt to compete with our original products losing patent protection, and we
may not be successful in having our line extensions approved by the FDA and
prescribed by doctors. In addition, under an agreement to settle patent claims
against Barr relating to our Estrostep oral contraceptive and our femhrt hormone
therapy, we granted Barr a non-exclusive license to launch generic versions of
Estrostep and femhrt six months prior to patent expiration in 2008 and 2010,
respectively.
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Trademarks
Due to our branded product focus, we consider our trademarks to be valuable
assets. Therefore, we actively manage our trademark portfolio, maintain
long-standing trademarks and obtain trademark registrations for new brands in
all jurisdictions in which we operate. The names indicated below are certain of
our key registered trademarks, some of which may not be registered in all
jurisdictions:
Doryx Loestrin
Estrace Ovcon
Estrostep Sarafem
femhrt Warner Chilcott
Femring
We also police our trademark portfolio against infringement. However, our
efforts may be unsuccessful against competitors or other violating entities and
we may not have adequate remedies for any breach because, for example, a
violating company may be insolvent.
Government Regulation
FDA and other Regulatory Requirements
The pharmaceutical industry is subject to regulation by regional, country, state
and local agencies. The research, development and commercial activities relating
to prescription pharmaceutical products are subject to extensive regulation by
the FDA. The Federal Food, Drug, and Cosmetic Act ("FDCA"), the Public Health
Services Act, other federal and state statutes and regulations govern to varying
degrees the testing, approval, production, labeling, distribution, post-market
surveillance, advertising, dissemination of information, and promotion of
pharmaceutical products. In addition, manufacturers of approved drugs must
comply with current Good Manufacturing Practices, or cGMP. Manufacture and
disposal of pharmaceutical products in the United States is also regulated by
the Environmental Protection Agency.
All pharmaceutical marketers are directly or indirectly (through third parties)
subject to regulations that cover the manufacture, testing, storage, labeling,
documentation/record keeping, approval, advertising, promotion, sale,
warehousing, and distribution of pharmaceutical drug products. We are required
to obtain, as are other drug companies manufacturing or marketing drugs,
approval from the FDA and other regulatory bodies based upon pre-clinical
testing, manufacturing chemistry and control data, bioequivalence and other
clinical data which we are required to generate prior to gaining regulatory
approval necessary to begin marketing most new drug products. The generation of
this required data is regulated by the FDA and other regulatory bodies. The
process of clinical testing, data analysis, manufacturing development, and
regulatory review necessary for required governmental approvals can be costly.
Non-compliance can result in fines and judicially imposed sanctions. In
addition, administrative or judicial actions can result in the recall of
products and the total or partial suspension of manufacture and/or distribution.
The government can also refuse to approve pending applications or supplements to
approved applications.
FDA approval is required before any drug, including a generic equivalent of a
previously approved drug, can be marketed. Certain drugs are not considered by
the FDA to be "new" drugs and fall outside of the typical FDA pre-marketing
approval process. These drugs, referred to as "grandfathered" products,
generally were in use prior to the enactment of the FDCA. Several of the
products sold by us are grandfathered products. The FDA has expressed the view
that all prescription drugs should ultimately be subject to pre-market clearance
requirements. If the FDA adopts this stance it could potentially affect products
currently, or proposed to be, marketed as grandfathered drugs.
The FDA regulations require post-marketing reporting of adverse drug events of
the drug product. The FDA may, at any time, take action to modify and restrict
the drug's product labeling or withdraw approval of the product should new
information come to light about the safety of the drug product.
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The FDA also regulates post-approval advertising and promotional activities to
assure that these activities are being conducted in conformity with statutory
and regulatory requirements. Failure to adhere to these requirements could
result in regulatory actions.
The FDA's Quality Systems Regulations mandate that drugs be manufactured,
packaged and labeled in conformity with cGMP. In complying with cGMP
regulations, manufacturers must continue to expend time, money and effort in
production, record keeping and quality control to ensure that the product meets
applicable specifications and other requirements to ensure product safety and
efficacy. The FDA periodically inspects drug manufacturing facilities to ensure
compliance with applicable cGMP requirements. Failure to comply with the
statutory and regulatory requirements subjects the manufacturer to possible
legal or regulatory action. Adverse experiences with the use of products must be
reported to the FDA and could result in the imposition of market restrictions
through labeling changes or in product removal. Product approvals may be
withdrawn if compliance with regulatory requirements is not maintained or if
problems concerning safety or efficacy of the product occur following approval.
Such legal or regulatory action could materially adversely affect our business,
financial condition and results of operations.
Other Regulation
The distribution of pharmaceutical products is subject to the Prescription Drug
Marketing Act, or ("PDMA"), which regulates such activities at both the federal
and state level. Under the PDMA and its implementing regulations, states are
permitted to require registration of manufacturers and distributors who provide
pharmaceuticals even if such manufacturers or distributors have no place of
business within the state. PDMA imposes requirements and limitations upon drug
sampling and prohibits states from licensing wholesale distributors of
prescription drugs unless the state licensing program meets certain federal
guidelines that include, among other things, minimum standards for storage,
handling and record keeping. The PDMA also sets forth civil and criminal
penalties for violations of these and other provisions. The FDA and the states
are still implementing various sections of the PDMA.
We are also subject to the jurisdiction of various other federal and state
regulatory and enforcement departments and agencies, such as the Federal Trade
Commission ("FTC"), the Department of Justice and the Department of Health and
Human Services. We are, therefore, subject to possible administrative and legal
proceedings and actions by those organizations. Such actions may result in the
imposition of civil and criminal sanctions, which may include fines, penalties
and injunctive or administrative remedies.
In recent years, Congress and some state legislatures have considered a number
of proposals and have enacted laws that could effect major changes in the health
care system, either nationally or at the state level. On December 8, 2003, new
Medicare legislation was enacted that provides prescription drug reimbursement
beginning in 2006 for all Medicare beneficiaries. In the meantime a temporary
drug discount card program is being established for Medicare beneficiaries. The
federal government, through its purchasing power under these programs, is likely
to demand discounts from pharmaceutical companies that may implicitly create
price controls on prescription drugs.
We also participate in the Federal Medicaid rebate program established by the
U.S. Omnibus Budget Reconciliation Act of 1990, as well as several state
supplemental rebate programs. Under the Medicaid rebate program, we pay a rebate
to each state Medicaid program for our products that are reimbursed by those
programs. The Medicaid rebate amount is computed each quarter based on our
submission to the Centers for Medicare and Medicaid Services at the U.S.
Department of Health and Human Services of our current AMP and best price for
each of our products. The terms of our participation in the program impose an
obligation to correct the prices reported in previous quarters, as may be
necessary. Any such corrections could result in an overage or underage in our
rebate liability for past quarters, depending on the direction of the
correction. In addition to retroactive rebates (and interest, if any), if we are
found to have knowingly submitted false information to the government, the
statute provides for civil monetary penalties in the amount of $100,000 per item
of false information. Governmental agencies may also make changes in program
interpretations, requirements or conditions of participation, some of which may
have implications for amounts previously estimated or paid.
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Based upon our past practice and experience, to the extent that we were required
to correct prices reported in previous quarters, we would not expect such
corrections to have a material adverse effect on us.
In addition, the Medicare Prescription Drug, Improvement, and Modernization Act
allows for the importation of less expensive prescription drugs from Canada
under specified circumstances. These additional import provisions will not take
effect until the Secretary of Health and Human Services makes a required
certification regarding the safety and cost savings of imported drugs and the
FDA has promulgated regulations setting forth parameters for importation. In the
absence of such regulations, importation of prescription drugs from Canada
generally remains illegal. We currently sell femhrt in Canada. In addition,
Estrace Tablets, Dovonex and Dovobet are sold in Canada by third parties. For
fiscal year 2004, femhrt and Estrace Tablets accounted for 17.4% of our sales.
For the first quarter of fiscal year 2005, femhrt and Estrace Tablets accounted
for 14.5% of our sales. Due to government price regulation in Canada, these
products are generally sold in Canada for lower prices than in the United
States.
Products marketed outside of the United States that are manufactured in the
United States are subject to certain FDA regulations, as well as regulation by
the country in which the products are sold. While we do not currently have plans
to market any of our U.S. products in other countries, except the sale of femhrt
in Canada, we may do so from time to time.
Regulation in the United Kingdom
Though we have divested our businesses in the United Kingdom, we are still
subject to regulation in certain areas by the U.K. Medicines and Healthcare
products Regulatory Agency (the "MHRA"). For example, our facility in Larne,
Northern Ireland is approved and regularly inspected by the MHRA. The United
Kingdom Medicines Act 1968, which governs applications for marketing
authorizations for human use in the United Kingdom, imposes additional burdens
on manufacturers and promoters of pharmaceuticals sold in the United Kingdom. We
contract manufacture Menoring (known as Femring in the United States) for Nelag
Limited in the United Kingdom.
Seasonality
The results of operations of our pharmaceutical products business are minimally
affected by seasonality.
Property, Plant and Equipment
In May 2004, we purchased an approximately 194,000 sq. ft. pharmaceutical
manufacturing facility located in Fajardo, Puerto Rico from Pfizer. The Fajardo
facility currently manufactures our Estrostep oral contraceptive, packages
femhrt and Ovcon 35 and is being qualified to package delayed-release Doryx
tablets. The Fajardo facility will become our primary site for the manufacture
of our oral dose products. For a discussion of our Fajardo facility, see
"Manufacturing, Supply and Raw Materials."
We also have a 106,000 sq. ft. FDA approved facility in Larne, Northern Ireland,
43,000 sq. ft. of which is leased to the purchaser of our sterile products
business. The remainder is dedicated to the manufacture of our vaginal rings,
research and product development as well as development of analytical methods.
We lease approximately 42,000 sq. ft. of office space in Rockaway, New Jersey,
where our U.S. operations are headquartered.
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