ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Lannett Company, Inc. (the "Company," "Lannett," "we," or "us") was incorporated
in 1942 under the laws of the Commonwealth of Pennsylvania. In 1991, the Company
merged into Lannett Company, Inc., a Delaware corporation. The sole purpose of
the merger was to reincorporate the Company as a Delaware corporation. The
Company develops, manufactures, packages, markets and distributes pharmaceutical
products sold under generic chemical names. References herein to a fiscal year
refer to the Company's fiscal year ending June 30.
Historically, the Company has competed for an increasing share of the
generic market. Although net sales and operating income declined in fiscal 2005,
the Company plans to improve future financial performance as a result of
additions to the Company's line of generic products, additional sales to current
customers, higher unit sales and a management focus on minimizing unnecessary
overhead and administrative costs. Some of the new generic products sold by
Lannett were developed and are manufactured by Lannett while others are
manufactured by others. The products manufactured by Lannett and those
manufactured by others are identified in the section entitled "PRODUCTS" in Item
1 of this Form 10-K.
Over the past several years, Lannett has consistently devoted resources
to research and development (R&D) projects, including new generic product
offerings. The costs of these R&D efforts are expensed during the periods
incurred. The Company believes that such investments may be paid back in future
years as it submits applications to the Food and Drug Administration (FDA), and
when it receives marketing approval from the FDA to distribute such products. In
addition to using cash generated from its operations, the Company has entered
into a number of financing agreements with third parties to provide for
additional cash when it is needed. These financing agreements are more fully
described in the section entitled "LIQUIDITY AND CAPITAL RESOURCES" in Item 7 of
this Form 10-K. The Company has embarked on an industrious plan to grow in
future years. In addition to organic growth to be achieved through its own R&D
efforts, the Company has also initiated marketing projects with other companies
in order to expand future revenue projections. The Company expects that its
growing list of generic drugs under development will drive future growth. The
Company also intends to use the infrastructure it has created, and to
continually devote resources to additional R&D projects. The following
strategies highlight Lannett's plan:
RESEARCH AND DEVELOPMENT
There are numerous stages in the generic drug development process:
1.) Formulation and Analytical Method Development: Once a drug candidate is
selected for future sales, product development scientists perform
various experiments on the incorporation of active ingredients into a
dosage form. These experiments include the creation of a number of
product formulations to determine which formula will be most
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suitable for the Company's subsequent development process. Various
formulations, are tested in the laboratory to measure results against
the innovator drug. During this time, the Company may use reverse
engineering methods on samples of the innovator drug to determine the
type and quantity of inactive ingredients. During the formulation
phase, the Company's research and development chemists begin to develop
an analytical, laboratory testing method. The successful development of
this test method will allow the Company to test developmental and
commercial batches of the product in the future. All of the information
used in the final formulation, including the analytical test methods
adopted for the generic drug candidate, will be included as part of the
Chemical, Manufacturing and Controls section of the Abbreviated New
Drug Application (ANDA) submitted to the FDA in the generic drug
application
2.) Scale-up: After the product development scientists and the R&D chemists
agree on a final formulation to use in moving the drug candidate
forward in the developmental process, the Company will attempt to
increase the batch size of the product. The batch size represents the
standard magnitude to be used in manufacturing a batch of the product.
The determination of batch size will affect the amount of raw material
that is input into the manufacturing process, and the number of
expected tablets or capsules to be created during the production cycle.
The Company attempts to determine batch size based on the amount of
active ingredient in each dosage, the available production equipment
and unit sales projections. The scaled-up batch is then generally
produced in the Company's commercial manufacturing facilities. During
this manufacturing process, the Company will document the equipment
used, the amount of time in each major processing step and any other
steps needed to consistently produce a batch of that product. This
information, generally referred to as the validated manufacturing
process, will be included in the Company's generic drug application
submitted to the FDA.
3.) Clinical testing: After a successful scale-up of the generic drug
batch, the Company then schedules and performs clinical testing
procedures on the product if required by the FDA. These procedures,
which are generally outsourced to third parties, include testing the
absorption of the generic product in the human bloodstream, compared to
the absorption of the innovator drug. The results of this testing are
then documented and reported to the Company to determine the "success"
of the generic drug product. Success, in this context, means the
successful comparison of the Company's product related to the innovator
product. Since bioequivalence and a stable formula are the primary
requirements for a generic drug approval (assuming the manufacturing
plant is in compliance with the FDA's manufacturing quality standards),
lengthy and costly clinical trials proving safety and efficacy, which
are generally required by the FDA for innovator drug approvals, are
unnecessary for generic companies. If the results are successful, the
Company will continue the collection of documentation and information
for assembly of the drug application.
4.) Submission of the ANDA for FDA review and approval: The ANDA process
became formalized under The Drug Price Competition and Patent Term
Restoration Act of 1984, also known as the Hatch-Waxman Act. An ANDA
represents a generic drug company's application to the FDA to
manufacture and/or distribute a drug that is the generic equivalent to
an already-approved brand named ("innovator") drug. Once bioequivalence
studies are complete, the generic drug company submits an ANDA to the
FDA for marketing approval.
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In a presentation to the Generic Pharmaceutical Association on February 26,
2005, Lester M. Crawford, D.V.M., Ph.D., and the Acting Commissioner of Food and
Drugs at the FDA, said that the median approval time for a new ANDA for the
FDA's Fiscal 2004 year was 16.2 months. However, there is no guarantee that the
FDA will approve a company's ANDA or that any approval will be given within this
time frame.
When a generic drug company files an ANDA to the FDA, it must certify that
no patents are listed in the Orange Book, the FDA's reference listing of
approved drugs, or listed patents have expired. If there are patents covering
some aspect of the innovator drug, the applicant must state whether it is
seeking approval for marketing after the expiration of the Orange Book patents;
or the patents listed therein are invalid, unenforceable, or not infringed --
usually referred to as a Paragraph IV Certification. ANDAs containing Paragraph
IV certifications frequently result in legal actions by the innovator drug
companies. These legal activities can trigger an automatic 30 month stay of our
ANDA if the innovator company files a claim and it will delay the approval of
the generic company's ANDA. Currently, Lannett has filed two Paragraph IV
certifications in its ANDAs.
Over the past several years, the Company has hired additional personnel in
product development, production, formulation and the R&D laboratory. Lannett
believes that its ability to select appropriate products for development,
develop such products on a timely basis, obtain FDA approval, and achieve
economies in production will be critical for its success in the generic
industry. The strategy involves a combination of decisions focusing on long-term
profitability and a secure market position with fewer challenges from
competitors.
Competition in generic pharmaceutical manufacturing will continue to grow as
more pharmaceutical products lose patent protection. However, the Company
believes that with strong technical know-how, low overhead expenses, and
efficient product development, manufacturing and marketing, it can remain
competitive. It is the intention of the Company to reinvest as much capital as
possible to develop new products since the success of any generic pharmaceutical
manufacturer depends on its ability to continually introduce new generic
products to the market. Over time, if a generic drug market for a specific
product remains stable and consumer demand remains consistent, it is likely that
additional generic manufacturing companies will pursue the generic product by
developing it, submitting an ANDA, and potentially receiving marketing approval
from the FDA. If this occurs, the generic competition for the drug increases,
and a company's market share may drop. In addition to reduced unit sales, the
unit selling price may also drop due to the product's availability from
additional suppliers. This may have the effect of reducing a generic company's
future net sales of the product. Due to these factors that may potentially
affect a generic company's future results of operations, the ability to properly
assess the competitive effect of new products, including market share, the
number of competitors and the generic unit price erosion, is critical to a
generic company's R&D plan. A generic company may be able to reduce the
potential exposure to competitive influences that negatively affect its sales
and profits by having several drug candidates in its R&D pipeline. As such, a
generic company may be able to avoid becoming materially dependent on the sales
of one drug. Unlike the branded, innovator companies, Lannett currently does not
own proprietary drug patents. However, the typical intellectual property in the
generic drug industry are the ANDAs that generic drug companies own.
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VALIDATED PHARMACEUTICAL CAPABILITIES
Lannett's manufacturing facility consists of 31,000 square feet on 3.5 acres
owned by the Company. In July 2003, the Company signed a lease/purchase option
agreement for a 63,000 square foot building located at 9001 Torresdale Avenue,
Philadelphia, Pennsylvania. On November 26, 2003, the Company exercised its
option to purchase the facility. The initial renovation of the building is
complete and the Company moved some of its staff and operations into that
building in the fall of 2004. Lannett currently plans to move certain additional
non manufacturing personnel into the 9001 Torresdale building over the next
year.
Many FDA regulations relating to cGMP (current Good Manufacturing Practices)
have been adopted by the Company in the last several years. In designing its
facilities, full attention was given to material flow, equipment and automation,
quality control and inspection. A granulator, an automatic film coating machine,
high-speed tablet presses, blenders, encapsulators, fluid bed dryers, high shear
mixers and high-speed bottle filling are a few examples of the sophisticated
product development, manufacturing and packaging equipment the Company uses. In
addition, the Company's Quality Control laboratory facilities are equipped with
high precision instruments, like automated high-pressure liquid chromatographs,
gas chromatographs and laser particle sizers.
Lannett continues to pursue its comprehensive plan for improving and maintaining
quality control and quality assurance programs for its pharmaceutical
development and manufacturing facilities. The FDA periodically inspects the
Company's production facilities to determine the Company's compliance with the
FDA's manufacturing standards. Typically, after the FDA completes its
inspection, it will issue the Company a report, entitled a Form 483, containing
the FDA's observations of possible violations of cGMP. Such observations may be
minor or severe in nature. The degree of severity of the observation is
generally determined by the time necessary to remediate the cGMP violation, any
consequences upon the consumer of the Company's drug products, and whether the
observation is subject to a Warning Letter from the FDA. By strictly enforcing
the various FDA guidelines, namely Good Laboratory Practices, Standard Operating
Procedures and cGMP, the Company has successfully reduced the number of
observations in its latest FDA inspection. The Company believes that such
observations are minor in nature, and will be remediated in a timely fashion
with no material effect on its future results of operations.
SALES AND CUSTOMER RELATIONSHIPS
The Company sells its pharmaceutical products to generic pharmaceutical
distributors, drug wholesalers, chain drug retailers, private label
distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed
care organizations, hospital buying groups and health maintenance organizations.
It promotes its products through direct sales, trade shows, trade publications,
and bids. The Company also licenses the marketing of its products to other
manufacturers and/or marketers in private label agreements.
Despite the decline of Company sales in Fiscal 2005, the Company continues to
expand its sales to the major chain drug stores, including CVS, Brooks, Rite Aid
and Walgreen's. The mail order
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segment continued to be one of the fastest growing classes in the Company's
distribution efforts. Such companies, as Medco Health, Express Scripts and
Caremark are leaders in sales growth in the pharmaceutical market. Lannett also
increased distribution in the wholesaler segment led by Cardinal Health and
McKesson Corporation. Lannett is recognized by its customers as a dependable
supplier of high quality generic pharmaceuticals. The Company's policy of
maintaining an adequate inventory and fulfilling orders in a timely manner has
contributed to this reputation.
MANAGEMENT
As the Company continues to grow, additional managers will be hired to
complement the skilled team. These new managers will serve in a variety of
functions, including Research, Sales, Finance, Quality Control, Quality
Assurance, Regulatory Compliance and Production. Ultimately, the execution of a
sound business strategy requires a capable and knowledgeable management team.
PRODUCTS
As of the date of this filing, the Company manufactured and/or distributed
sixteen products:
MANUFACTURE EQUIVALENT
NAME OF PRODUCT SOURCE MEDICAL INDICATION BRAND
--------------- ------------------ ------------------ ----------------
1) Acetazolamide Tablets Lannett Glaucoma Diamox(R)
2) Butalbital, Aspirin and Caffeine Capsules Lannett Migraine Headache Fiorinal(R)
3) Butalbital, Aspirin, Caffeine with Codeine JSP Migraine Headache Fiorinal w/
Phosphate Capsules Codeine #3(R)
4) Ciprofloxacin Tablets Spectrum Antibiotic Cipro(R)
5) Digoxin Tablets JSP Congestive Heart Failure Lanoxin(R)
6) Dicyclomine Tablets/Capsules Lannett Irritable Bowels Bentyl(R)
7) Diphenoxylate with Atropine Sulfate Lannett Diarrhea Lomotil(R)
Tablets
8) Hydromorphone HCl Tablets Lannett Pain Management Dilaudid
9) Levothyroxine Sodium Tablets JSP Thyroid Deficiency Levoxyl(R)/
Synthroid(R)
10) Methocarbamol Tablets Lannett Muscle Relaxer Robaxin(R)
11) Methyltestoterone/Esterified Estrogens Lannett Hormone Replacement Estratest(R)
Tablets
12) Phentermine HCl Tablets Lannett Weight Loss Adipex-P(R)
13) Phenylpropanolamine Tablets-Vet Lannett Incontinence Propagest(R)
14) Primidone Tablets Lannett Epilepsy Mysoline(R)
15) Terbutaline Sulfate Tablets Lannett Bronchospasms Brethine(R)
16) Unithroid Tablets JSP Thyroid Deficiency N/A
All of the products currently manufactured and/or sold by the Company are
prescription products. Of the products listed above, Unithroid and those
containing butalbital, digoxin, primidone and
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levothyroxine sodium were the Company's key products, contributing to more
than 93%, 97% and 95% of the Company's total net sales in Fiscal 2005, 2004 and
2003, respectively.
The Company has two products containing butalbital. One of the products,
Butalbital with Aspirin and Caffeine capsules has been manufactured and sold by
Lannett for more than seven years. The other butalbital product, Butalbital with
Aspirin, Caffeine and Codeine Phosphate capsules is manufactured by JSP. Lannett
began buying this product from JSP and selling it to its customers in December
2001. Both products, which are in orally administered capsule dosage forms, are
prescribed to treat tension headaches caused by contractions of the muscles in
the neck and shoulder area and migraine. The drug is prescribed primarily for
adults of various demographic backgrounds. Migraine headache is an increasingly
prevalent condition in the United States. As conditions continue to grow, the
demand for effective medical treatments will continue to grow. Common side
effects of drugs which contain butalbital include dizziness and drowsiness. The
Company notes that although new innovator drugs to treat migraine headaches have
been introduced by brand name drug companies, there is still a loyal following
of doctors and consumers who prefer to use butalbital products for treatment. As
the brand name companies continue to promote products containing butalbital,
like Fiorinal(R), the Company expects to continue to produce and sell its
generic butalbital products.
Digoxin tablets are produced and marketed with two different potencies (0.125
and 0.25 milligrams per tablet). This product is manufactured by JSP. Lannett
began buying this product from JSP, and selling it to its customers in September
2002. Digoxin tablets are used to treat congestive heart failure in patients of
various ages and demographic backgrounds. The beneficial effects of Digoxin
result from direct actions on the cardiac muscle, as well as indirect actions on
the cardiovascular system mediated by effects on the autonomic nervous system.
Side effects of Digoxin may include apathy, blurred vision, changes in
heartbeat, confusion, dizziness, headaches, loss of appetite, nausea, vomiting
and weakness.
Primidone tablets are produced and marketed with two different potencies (50 and
250 milligrams per tablet). This product was developed and manufactured by
Lannett. Lannett has been manufacturing and selling Primidone 250-milligram
tablets for more than seven years. Lannett began selling Primidone 50-milligram
tablets in June 2001. Both products, which are in orally administered tablet
dosage forms, are prescribed to treat convulsion and seizures in epileptic
patients of all ages and demographic backgrounds. Common side effects of
primidone include lack of muscle coordination, vertigo and severe dizziness.
The Company's products containing Levothyroxine Sodium tablets are produced and
marketed with eleven different potencies (0.025, 0.05, 0.075, 0.088, 0.1, 0.112,
0.125, 0.15, 0.175, 0.2, and 0.3 milligrams per tablet). In addition to generic
Levothyroxine Sodium tablets, the Company also markets and distributes Unithroid
tablets, a branded version of Levothyroxine Sodium tablets, which is produced
and marketed with eleven different potencies. Both Levothyroxine Sodium products
are manufactured by JSP. Lannett began buying generic Levothyroxine Sodium
tablets from JSP, and selling it to its customers in April 2003. In September
2003, the Company began buying the branded Unithroid tablets from JSP and
selling it to its customers. Levothyroxine Sodium tablets are used to treat
hypothyroidism and other thyroid disorders. It remains one of the most
prescribed drugs in the United States with over 13 million patients of various
ages and demographic backgrounds. Side effects from Levothyroxine Sodium are
rare, but may include allergic reactions, such as rash or hives. In late June of
2004, JSP received a letter from the FDA
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approving its supplemental application for generic bioequivalence to Levoxyl(R).
In December 2004, JSP received a letter from the FDA approving its supplemental
application for generic bioequivalence to Synthroid(R). With its distribution of
these products, Lannett competes in a market which is currently controlled by
two branded Levothyroxine Sodium tablet products -- Abbott Laboratories'
Synthroid(R) and Monarch Pharmaceutical's Levoxyl(R) as well as generic
competition from Mylan Laboratories and Sandoz.
In April 2005, Lannett received a letter from the FDA with approval to market
and launch Phentermine Hydrochloride tablets 37.5 mg., which is a central
nervous system stimulant and anorexiant. Phentermine HCl tablets are the generic
version of Adipex-P manufactured and sold by TEVA through its Gate
Pharmaceutical division. It is indicated for the short-term management of
obesity.
In March 2005, Lannett received approval from the FDA for the ANDA of
Terbutaline Sulfate tablets 2.5mg and 5 mg. Terbutaline Sulfate is indicated for
the prevention and reversal of bronchospasm in patients 12 years of age and
older with asthma and reversible bronchospasm associated with bronchitis and
emphysema, and is the generic equivalent of Brethine(R) tablets marketed by
Novartis Pharmaceuticals and aaiPharma Inc.
Additional products are currently 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. The Company's developmental
drug products are intended to treat a diverse range of indications. The products
under development are at various stages in the development cycle -- formulation,
scale-up, clinical testing and FDA review.
The cost associated with each product currently under development is dependent
on numerous factors not limited to the following: the complexity of the active
ingredient's chemical characteristics, the price of the raw materials, the
FDA-mandated requirement of bioequivalence studies -- depending on the FDA's
Orange Book classification and other developmental factors. The overall cost to
develop a new generic product varies in range from $100,000 to $1 million.
In addition, as one of the oldest generic drug manufacturers in the country,
formed in 1942, Lannett currently owns several ANDAs for products which it does
not manufacture and market. These ANDAs are simply dormant on the Company's
records. Occasionally, the Company reviews such ANDAs to determine if the market
potential for any of these older drugs has recently changed, to make it
attractive for Lannett to reconsider manufacturing and selling them. If the
Company makes the determination to introduce one of these products into the
consumer marketplace, it must review the ANDA and related documentation to
ensure that the approved product specifications, formulation and other factors
meet current FDA requirements for the marketing of that drug. Generally, in
these situations, the Company must file a supplement to the FDA for the
applicable ANDA, informing the FDA of any significant changes in the
manufacturing process, the formulation, the raw material supplier or another
major feature of the previously approved ANDA. The Company 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.
In addition to the efforts of its internal product development group, Lannett
has contracted with several outside firms for the formulation and development of
several new generic drug products. These outsourced R&D products are at various
stages in the development cycle -- formulation,
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analytical method development and testing and manufacturing scale-up. These
products are orally administered solid dosage products intended to treat a
diverse range of medical indications. It is the Company's intention to
ultimately transfer the formulation technology and manufacturing process for all
of these R&D products to the Company's own commercial manufacturing sites. The
Company initiated these outsourced R&D efforts to complement the progress of its
own internal R&D efforts.
The Company has 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
ciprofloxacin tablets, the generic version of Cipro(R), an anti-bacterial drug,
marketed by Bayer Corporation, prescribed to treat infections. The Company has
also initiated discussions with other firms for similar new product initiatives,
in which Lannett will market and distribute products manufactured by third
parties. Lannett intends to use its strong customer relationships to build its
market share for these third party products, and increase future revenues and
income.
The majority of the Company's R&D projects are being developed in-house under
Lannett's direct supervision and with Company personnel. Hence, the Company does
not believe that its' outside contracts for product development or manufacturing
supply, including Spectrum Pharmaceuticals Inc., are material in nature, nor is
the Company substantially dependent on the services rendered by such outside
firms. Since the Company has no control over the FDA review process, management
is unable to anticipate whether or when it will be able to begin producing and
shipping such additional products.
The following table summarizes key information related to the Company's R&D
products. The column headings are defined as follows:
1.) Stage of R&D - Defines the current stage of the R&D product in the
development process, as of the date of this filing.
2.) Regulatory Requirement - Defines whether the R&D product is or is
expected to be a new ANDA submission, an ANDA supplement, or a
grand-fathered product not requiring specific FDA approval.
3.) Number of Products - Defines the number of products in R&D at the
stage noted. In this context, a product means any finished dosage
form, including all potencies, containing the same API or combination
of APIs and which represents a generic version of the same Reference
Listed Drug (RLD) or innovator drug, identified in the FDA's Orange
Book.
STAGE OF R&D REGULATORY REQUIREMENT NUMBER OF PRODUCTS
------------ ---------------------- ------------------
FDA Review ANDA 11
FDA Review ANDA supplement 3
Clinical Testing ANDA 7
Scale-Up Grand-fathered 2
Scale-Up ANDA supplement 0
Scale-Up ANDA 0
Formulation/Method Development ANDA 25
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RAW MATERIAL(s) AND FINISHED GOOD(s) INVENTORY SUPPLIERS
The raw materials used by the Company in the production process consist of
pharmaceutical chemicals in various forms and are generally available from
several 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, the Company purchases certain finished dosage
inventories, including capsule, tablet, and oral liquid products. The Company
then sells these finished dosage products directly to its customers along with
the finished dosage products internally manufactured. If suppliers of a certain
material or finished product are limited, the Company will generally take
certain precautionary steps to avoid a disruption in supply.
The Company's primary finished product inventory supplier is Jerome Stevens
Pharmaceuticals, Inc. (JSP), in Bohemia, New York. Purchases of finished goods
inventory from JSP accounted for approximately 42% of the Company's inventory
purchases in Fiscal 2005, 81% in Fiscal 2004 and 62% in Fiscal 2003. On March
23, 2004, the Company entered into an agreement with JSP for the exclusive
distribution rights in the United States to the current line of JSP products in
exchange for four million (4,000,000) shares of the Company's common stock. The
JSP products covered under the agreement included Butalbital, Aspirin, Caffeine
with Codeine Phosphate capsules, Digoxin tablets and Levothyroxine Sodium
tablets, sold generically and under the brand name Unithroid(R). The term of the
agreement is ten years, beginning on March 23, 2004 and continuing through March
22, 2014. Refer to the Materials Contract footnote for more information on the
terms, conditions, and financial impact of this agreement.
During the term of the agreement, the Company is required to use commercially
reasonable efforts to purchase minimum dollar quantities of JSP's products being
distributed by the Company. The minimum quantity to be purchased in the first
year of the agreement is $15 million. Thereafter, the minimum quantity to be
purchased increases by $1 million per year up to $24 million for the last year
of the ten-year contract. The Company has met the minimum purchase requirement
for the first year of the contract, but there is no guarantee that the Company
will be able to continue to do so in the future. If the Company does not meet
the minimum purchase requirements, JSP's sole remedy is to terminate the
agreement.
The Company has also contracted with Spectrum Pharmaceuticals (Spectrum), based
in California, to purchase and distribute Ciprofloxacin tablets which are
manufactured by Spectrum and/or its partners. Ciprofloxacin tablets are the
generic version of the brand Cipro(R), an anti-bacterial drug marketed by Bayer
Corporation and prescribed to treat infections. The Company began selling
Ciprofloxacin tablets in February 2005.
In October 2004, the Company signed an agreement with Orion Pharma (Orion),
based in Finland, to purchase and distribute three drug products. Under the
terms of the agreement, Orion will supply Lannett with the finished products and
all laboratory documentation, and Lannett will coordinate the completion of the
clinical biostudies necessary to submit Abbreviated New Drug Applications
(ANDAs) to the FDA.
Another supplier, Siegfried (USA), Inc. (Siegfried), supplies primidone and
butalbital, the raw materials in the Company's commercial products of the same
name, and accounted for 4% of the Company's inventory purchases in Fiscal 2005,
6% in Fiscal 2004 and 12% in Fiscal 2003. This includes building a satisfactory
inventory level, and obtaining contractual supply commitments.
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The agreement is a standard supply agreement evidencing the terms of the supply
of material. There are no guaranteed purchase volume commitments; however the
agreement does require Lannett to purchase 100% of its primidone raw material
requirements from Siegfried. The price of the material may vary depending on the
quantity of material purchased during the term of the agreement. The term of the
agreement was October 1, 2002 through December 31, 2003. As of June 30, 2005, a
new agreement with Siegfried had not yet been executed. The Company continues to
purchase raw materials from Siegfried under the terms of the expired purchase
agreement which is included in Exhibit 10.9 of the Company's Form 10-KSB for the
year ended June 30, 2004. The Company is in the process of finalizing a new
agreement with Siegfried.
The Company has also contracted with API Provider for the supply of raw
materials and oral dosage forms relating to future products. The agreements are
standard supply agreements evidencing the terms of the supply of material. There
are no guaranteed purchase volume commitments. The price of the material may
vary depending on the quantity of material purchased during the term of the
agreement.
CUSTOMERS AND MARKETING
The Company sells its products primarily to wholesale distributors, generic drug
distributors, mail-order pharmacies, group purchasing organizations, drug
chains, and other pharmaceutical companies. The wholesale distributors McKesson,
Cardinal Health, and Amerisource Bergen accounted for 17%, 14%, and 9%,
respectively, of net sales in Fiscal 2005. The Company performs ongoing credit
evaluations of its customers' financial condition, and has experienced no
significant collection problems to date. Generally, the Company requires no
collateral from its customers.
Sales to these wholesale customers include "indirect sales," which represent
sales to third-party entities, such as independent pharmacies, managed care
organizations, hospitals, nursing homes, and group purchasing organizations,
collectively referred to as "indirect customers." Lannett enters into agreements
with its indirect customers to establish pricing for certain products. The
indirect customers then independently select a wholesaler from which to actually
purchase the products at these agreed-upon prices. Lannett will provide credit
to the wholesaler for the difference between the agreed-upon price with the
indirect customer and the wholesaler's invoice price. This credit is called a
chargeback. For more information on chargebacks, refer to the section entitled
"Chargebacks" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Form 10-K. These indirect sale
transactions are recorded on Lannett's books as sales to the wholesale
customers. This has the effect of over-emphasizing the sales volume attributable
to such wholesaler customers.
The Company believes that retail-level consumer demand dictates the total volume
of sales for various products. In the event that wholesale and retail customers
adjust their purchasing volumes, the Company believes that consumer demand will
be fulfilled by other wholesale or retail sources of supply. As such, Lannett
attempts to obtain strong relationships with most of the major retail chains,
wholesale distributors, and mail-order pharmacies in order to facilitate the
supply of the Company's products through whatever channel the consumer prefers.
Although the Company has agreements with customers governing the transaction
terms of its sales, there are no minimum purchase quantities with these
agreements.
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The Company promotes its products through direct sales, trade shows, trade
publications, and bids. The Company also markets its products through private
label arrangements, whereby Lannett produces its products with a label
containing the name and logo of a customer. This practice is commonly referred
to as private label business. It allows the Company to expand on its own
internal sales efforts by using the marketing services from other well-respected
pharmaceutical dosage suppliers. The focus of the Company's sales efforts is the
relationships it creates with its customer accounts. Strong customer
relationships have created a positive platform for Lannett to increase its 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 in Fiscal 2005, 2004
and 2003, the Company's advertising expenses were immaterial. When the customer
and the Company's sales representatives make contact, the Company will generally
offer to supply the customer its 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 the Company's 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. The Company believes 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. The Company competes primarily on this basis, as well as by flexibility
(reacting to customer needs quickly and decisively -- for example shipping
product via overnight delivery when the customer is in critical need of
inventory), availability of inventory, and by the fact that the Company's
products are available only from a limited number of suppliers. The
modernization of its facilities, hiring of experienced staff, and implementation
of inventory and quality control programs have improved the Company's
competitive position over the past five years.
The Company competes with other manufacturers and marketers of generic and brand
drugs. Each product manufactured and/or sold by Lannett has a different set of
competitors. The list below identifies the companies with which Lannett
primarily competes for each of its major products.
PRODUCT PRIMARY COMPETITORS
------- -------------------
Butalbital with Aspirin and Caffeine, with Watson Pharmaceuticals, Breckenridge
and without Codeine Phosphate Capsules Pharmaceutical mfd. by Anabolic Laboratories,
GlaxoSmithKline, Amide (marketed by Bertek
Digoxin Tablets Pharmaceuticals), Caraco Pharmaceutical
Laboratories
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Levothyroxine Sodium Tablets Abbott Laboratories, Monarch Pharmaceuticals,
Mylan Laboratories, Sandoz
Methyltestoterone/Esterified Estrogens Solvay Pharmaceuticals, Syntho Pharmaceuticals
Tablets (marketed by Breckenridge Pharmaceutical)
Phentermine HCL Tablets Eon Laboratories, Amide Pharmaceutical, Purepac
Pharmaceutical Co.
Primidone Tablets Watson Pharmaceuticals, Qualitest Pharmaceuticals
Unithroid Tablets Abbott Laboratories, Monarch Pharmaceuticals,
Mylan Laboratories, Sandoz
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 the Company's 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.
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
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 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 generally waives the requirement of complete
clinical studies of safety and efficacy. However, it may require
bioavailability and bioequivalence studies. Bioavailability indicates
the rate of absorption and levels of concentration of a drug in the
bloodstream
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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. In addition to establishing a new ANDA
procedure, this act created statutory protections for approved brand
name drugs. Under the 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
this 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 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 branded drug was approved after December 31, 1981.
Lannett, like most other generic drug companies, uses the ANDA process
for the submission of its 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 possible FDA action, including but not limited to, the
seizure of noncomplying drug products or, through the Department of Justice,
enjoining the manufacture of such products.
The Company is 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. The Company monitors
its compliance with all environmental laws.
RESEARCH AND DEVELOPMENT
The Company incurred research and development expenses of approximately
$6,266,000 in 2005, $5,896,000 in 2004 and $2,575,000 in 2003.
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EMPLOYEES
The Company currently has 172 employees, of which 167 are full-time.
SECURITIES EXCHANGE ACT REPORTS
The Company maintains an Internet website at the following address:
www.lannett.com. The Company makes available on or through its Internet website
certain reports and amendments to those reports that are filed with the
Securities and Exchange Commission (SEC) in accordance with the Securities
Exchange Act of 1934. These include annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K. This information is
available on the Company's website free of charge as soon as reasonably
practicable after the Company electronically files the information with, or
furnishes it to, the SEC. The contents of the Company's website are not
incorporated by reference in this Form 10-K and shall not be deemed "filed"
under the Securities Exchange Act of 1934.
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