UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2011
Commission file number: 1-10827
PAR PHARMACEUTICAL COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 22-3122182 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
300 Tice Boulevard, Woodcliff Lake, New Jersey 07677
(Address of principal executive offices)
Registrants telephone number, including area code: (201) 802-4000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act:
Large accelerated filer [ X ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X_
Number of shares of the Registrants common stock outstanding as of July 25, 2011: 36,502,634
TABLE OF CONTENTS
PAR PHARMACEUTICAL COMPANIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2011
PAGE
PART I
FINANCIAL INFORMATION
Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2011 and
December 31, 2010
3
Condensed Consolidated Statements of Operations for the three months and six months
ended June 30, 2011 and June 30, 2010
4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2011 and June 30, 2010
5
Notes to Condensed Consolidated Financial Statements
6
Managements Discussion and Analysis of Financial Condition
and Results of Operations
30
Quantitative and Qualitative Disclosures about Market Risk
47
Controls and Procedures
48
OTHER INFORMATION
Legal Proceedings
48
Risk Factors
52
Unregistered Sales of Equity Securities and Use of Proceeds
54
Exhibits
55
56
2
PART I - FINANCIAL INFORMATION
PAR PHARMACEUTICAL COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
|
| June 30, |
| December 31, |
|
| 2011 |
| 2010 |
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
| $307,011 |
| $218,674 |
Available for sale marketable debt securities |
| 38,652 |
| 27,866 |
Accounts receivable, net |
| 122,630 |
| 95,705 |
Inventories |
| 75,353 |
| 72,580 |
Prepaid expenses and other current assets |
| 14,338 |
| 17,660 |
Deferred income tax assets |
| 30,009 |
| 26,037 |
Income taxes receivable |
| 63,328 |
| 18,605 |
Total current assets |
| 651,321 |
| 477,127 |
|
|
|
|
|
Property, plant and equipment, net |
| 71,117 |
| 71,980 |
Intangible assets, net |
| 65,573 |
| 95,467 |
Goodwill |
| 63,729 |
| 63,729 |
Other assets |
| 6,624 |
| 5,441 |
Non-current deferred income tax assets, net |
| 56,395 |
| 69,488 |
Total assets |
| $914,759 |
| $783,232 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
| $27,381 |
| $23,956 |
Payables due to distribution agreement partners |
| 50,435 |
| 25,310 |
Accrued salaries and employee benefits |
| 10,401 |
| 16,397 |
Accrued government pricing liabilities |
| 32,148 |
| 32,169 |
Accrued legal fees |
| 8,604 |
| 7,084 |
Accrued legal settlements |
| 195,400 |
| - |
Accrued expenses and other current liabilities |
| 8,277 |
| 6,674 |
Total current liabilities |
| 332,646 |
| 111,590 |
|
|
|
|
|
Long-term liabilities |
| 42,810 |
| 43,198 |
Commitments and contingencies |
| - |
| - |
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
Common Stock, par value $0.01 per share, authorized 90,000,000 shares; issued |
|
|
|
|
39,655,227 and 38,872,663 shares |
| 394 |
| 389 |
Additional paid-in capital |
| 391,664 |
| 373,764 |
Retained earnings |
| 229,212 |
| 329,129 |
Accumulated other comprehensive gain |
| 68 |
| 137 |
Treasury stock, at cost 3,170,185 and 2,970,573 shares |
| (82,035) |
| (74,975) |
Total stockholders' equity |
| 539,303 |
| 628,444 |
Total liabilities and stockholders equity |
| $914,759 |
| $783,232 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PAR PHARMACEUTICAL COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
| Three months ended |
| Six months ended | ||||
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
Net product sales | $215,018 |
| $248,739 |
| $435,807 |
| $537,017 |
Other product related revenues | 9,170 |
| 6,735 |
| 21,333 |
| 10,389 |
Total revenues | 224,188 |
| 255,474 |
| 457,140 |
| 547,406 |
Cost of goods sold | 125,162 |
| 164,015 |
| 248,461 |
| 372,437 |
Gross margin | 99,026 |
| 91,459 |
| 208,679 |
| 174,969 |
Operating expenses: |
|
|
|
|
|
|
|
Research and development | 8,077 |
| 22,660 |
| 18,787 |
| 27,312 |
Selling, general and administrative | 46,156 |
| 48,865 |
| 93,101 |
| 90,100 |
Settlements and loss contingencies, net | - |
| (4,068) |
| 190,560 |
| (4,006) |
Restructuring costs | 26,986 |
| - |
| 26,986 |
| - |
Total operating expenses | 81,219 |
| 67,457 |
| 329,434 |
| 113,406 |
Gain on sale of product rights and other | - |
| 146 |
| - |
| 5,921 |
Operating (loss) income | 17,807 |
| 24,148 |
| (120,755) |
| 67,484 |
Interest income | 382 |
| 273 |
| 805 |
| 601 |
Interest expense | (150) |
| (918) |
| (301) |
| (1,826) |
Income (loss) from continuing operations before provision | 18,039 |
| 23,503 |
| (120,251) |
| 66,259 |
Provision (benefit) for income taxes | 8,859 |
| 5,468 |
| (20,587) |
| 21,798 |
Income (loss) from continuing operations | 9,180 |
| 18,035 |
| (99,664) |
| 44,461 |
Discontinued operations: |
|
|
|
|
|
|
|
Provision (benefit) for income taxes | 127 |
| (360) |
| 253 |
| (232) |
(Loss) income from discontinued operations | (127) |
| 360 |
| (253) |
| 232 |
Net income (loss) | $9,053 |
| $18,395 |
| ($99,917) |
| $44,693 |
|
|
|
|
|
|
|
|
Basic earnings (loss) per share of common stock: |
|
|
|
|
|
|
|
Income (loss) from continuing operations | $0.26 |
| $0.53 |
| ($2.79) |
| $1.31 |
(Loss) income from discontinued operations | (0.01) |
| 0.01 |
| (0.01) |
| 0.01 |
Net income (loss) | $0.25 |
| $0.54 |
| ($2.80) |
| $1.32 |
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share of common stock: |
|
|
|
|
|
|
|
Income (loss) from continuing operations | $0.25 |
| $0.51 |
| ($2.79) |
| $1.26 |
(Loss) income from discontinued operations | (0.00) |
| 0.01 |
| (0.01) |
| 0.01 |
Net income (loss) | $0.25 |
| $0.52 |
| ($2.80) |
| $1.27 |
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
Basic | 35,983 |
| 34,112 |
| 35,742 |
| 34,021 |
Diluted | 36,708 |
| 35,475 |
| 35,742 |
| 35,273 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
PAR PHARMACEUTICAL COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| Six months ended | ||
| June 30, |
| June 30, |
| 2011 |
| 2010 |
Cash flows from operating activities: |
|
|
|
Net (loss) income | ($99,917) |
| $44,693 |
Deduct: (Loss) gain from discontinued operations, net of tax | (253) |
| 232 |
(Loss) income from continuing operations | (99,664) |
| 44,461 |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
Deferred income taxes | 9,162 |
| (4,662) |
Resolution of tax contingencies | - |
| (3,750) |
Non-cash interest expense | - |
| 1,038 |
Depreciation and amortization | 12,381 |
| 14,921 |
Intangible asset impairments | 24,226 |
| - |
Allowances against accounts receivable | 6,280 |
| (8,200) |
Share-based compensation expense | 5,582 |
| 8,298 |
Tax deficiency on exercises of stock options | (382) |
| - |
Loss on disposal of fixed assets | 110 |
| 60 |
Other, net | 514 |
| - |
Changes in assets and liabilities: |
|
|
|
(Increase) decrease in accounts receivable | (33,205) |
| 30,860 |
(Increase) decrease in inventories | (2,773) |
| 11,907 |
Decrease (increase) in prepaid expenses and other assets | 2,139 |
| (4,417) |
Increase in accounts payable, accrued expenses and other liabilities | 196,544 |
| 19,090 |
Increase (decrease) in payables due to distribution agreement partners | 25,125 |
| (14,108) |
(Increase) decrease in income taxes receivable/payable | (45,899) |
| 8,753 |
Net cash provided by operating activities | 100,140 |
| 104,251 |
Cash flows from investing activities: |
|
|
|
Capital expenditures | (5,587) |
| (5,130) |
Purchases of intangibles | (450) |
| (35,500) |
Purchases of available for sale debt securities | (23,410) |
| (33,202) |
Proceeds from maturity and sale of available for sale marketable debt and equity securities | 12,000 |
| 21,601 |
Net cash used in investing activities | (17,447) |
| (52,231) |
Cash flows from financing activities: |
|
|
|
Proceeds from issuances of common stock upon exercise of stock options | 9,810 |
| 2,763 |
Proceeds from the issuance of common stock under the Employee Stock Purchase Program | 170 |
| 155 |
Excess tax benefits on share-based compensation | 6,859 |
| 455 |
Purchase of treasury stock | (7,062) |
| (1,812) |
Cash settlement of share-based compensation | (4,133) |
| - |
Net cash provided by financing activities | 5,644 |
| 1,561 |
Net increase in cash and cash equivalents | 88,337 |
| 53,581 |
Cash and cash equivalents at beginning of period | 218,674 |
| 121,668 |
Cash and cash equivalents at end of period | $307,011 |
| $175,249 |
Supplemental disclosure of cash flow information: |
|
|
|
Cash paid during the period for: |
|
|
|
Income taxes | $9,120 |
| $21,003 |
Interest paid | $198 |
| $686 |
Non-cash transactions: |
|
|
|
Capital expenditures incurred but not yet paid | $698 |
| $1,296 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
Par Pharmaceutical Companies, Inc. operates primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. (collectively referred to herein as the Company, we, our, or us), in two business segments. Our generic products division, Par Pharmaceutical (Par), develops (including through third party development arrangements and product acquisitions), manufactures and distributes generic pharmaceuticals in the United States. Our branded products division, Strativa Pharmaceuticals (Strativa), acquires (generally through third party development arrangements), manufactures and distributes branded pharmaceuticals in the United States. The products we market are principally in the solid oral dosage form (tablet, caplet and two-piece hard-shell capsule), although we also distribute several oral suspension products, nasal spray products, and products delivered by injection.
Note 1 - Basis of Presentation:
The accompanying condensed consolidated financial statements at June 30, 2011 and for the three-month and six-month periods ended June 30, 2011 and June 30, 2010 are unaudited. In the opinion of management, however, such statements include all normal recurring adjustments necessary to present fairly the information presented therein. The condensed consolidated balance sheet at December 31, 2010 was derived from the Companys audited consolidated financial statements included in the 2010 Annual Report on Form 10-K.
Pursuant to accounting requirements of the Securities and Exchange Commission (the SEC) applicable to Quarterly Reports on Form 10-Q, the accompanying condensed consolidated financial statements and these notes to condensed consolidated financial statements do not include all disclosures required by the accounting principles generally accepted in the United States of America for audited financial statements. Accordingly, these statements should be read in conjunction with our 2010 Annual Report on Form 10-K. Results of operations for interim periods are not necessarily indicative of those that may be achieved for full fiscal years.
Note 2 Recent Accounting Pronouncements:
The Financial Accounting Standards Board (FASB) has issued Accounting Standard Update (ASU) No. 2010-27, Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers. This ASU provides guidance on how pharmaceutical manufacturers should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act, both enacted in March 2010, referred to as the Acts. The Acts imposed an annual fee on the pharmaceutical manufacturing industry for each calendar year beginning on or after January 1, 2011. An entitys portion of the annual fee is payable no later than September 30 of the applicable calendar year and is not tax deductible. A portion of the annual fee will be allocated to individual entities on the basis of the amount of their brand prescription drug sales (including authorized generic product sales) for the preceding year as a percentage of the industrys brand prescription drug sales (including authorized generic product sales) for the same period. An entitys portion of the annual fee becomes payable to the U.S. Treasury once a pharmaceutical manufacturing entity has a gross receipt from branded prescription drug sales to any specified government program or in accordance with coverage under any government program for each calendar year on or after January 1, 2011. The amendments in this ASU specify that the liability for the fee should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The annual fee is classified as an operating expense in the income statement. The amendments in this ASU were effective for calendar years beginning after December 31, 2010, when the fee initially became effective.
The FASB has issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this ASU affect any public entity as defined by Topic 805, Business Combinations, that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The requirements of this ASU will be applicable to any future business acquisition we complete.
The FASB has issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This amendment of the Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates
6
the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity. The amendments to the Codification in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This ASU must be applied retrospectively. The amendments to the Codification in this ASU are effective for us for fiscal years and interim periods within those years, beginning after December 15, 2011.
Note 3 - Available for Sale Marketable Debt Securities:
At June 30, 2011 and December 31, 2010, all of our investments in marketable debt securities were classified as available for sale and, as a result, were reported at their estimated fair values on the condensed consolidated balance sheets. Refer to Note 4 - Fair Value Measurements. The following is a summary of amortized cost and estimated fair value of our marketable debt securities available for sale at June 30, 2011 ($ amounts in thousands):
|
|
|
|
|
| Estimated | ||
|
|
|
| Unrealized |
| Fair | ||
|
| Cost |
| Gain |
| (Loss) |
| Value |
Securities issued by government agencies |
| $5,000 |
| $3 |
| - |
| $5,003 |
Corporate bonds |
| 33,542 |
| 109 |
| (2) |
| 33,649 |
Available for sale marketable debt securities |
| $38,542 |
| $112 |
| ($2) |
| $38,652 |
All available for sale marketable debt securities are classified as current on our condensed consolidated balance sheet as of June 30, 2011.
The following is a summary of amortized cost and estimated fair value of our investments in marketable debt securities available for sale at December 31, 2010 ($ amounts in thousands):
|
|
|
|
|
| Estimated | ||
|
|
|
| Unrealized |
| Fair | ||
|
| Cost |
| Gain |
| (Loss) |
| Value |
Corporate bonds |
| $27,654 |
| $213 |
| ($1) |
| $27,866 |
The following is a summary of the contractual maturities of our available for sale debt securities at June 30, 2011 ($ amounts in thousands):
|
| June 30, 2011 | ||
|
|
|
| Estimated Fair |
|
| Cost |
| Value |
Less than one year |
| $17,787 |
| $17,806 |
Due between 1-2 years |
| 13,676 |
| 13,756 |
Due between 2-5 years |
| 7,079 |
| 7,090 |
Total |
| $38,542 |
| $38,652 |
Note 4 Fair Value Measurements:
FASB Accounting Standards Codification (ASC) 820-10 Fair Value Measurements and Disclosures defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets and liabilities. Active market means a market in which transactions for assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing unadjusted basis.
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets primarily include debt securities, including corporate bonds with quoted prices that are traded less frequently than exchange-traded instruments. All of our Level 2 asset values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. The pricing model information is provided by third party entities (e.g., banks or brokers). In some instances, these third party entities engage external pricing services to estimate the fair value of these securities. We have a general understanding of the methodologies employed by the
7
pricing services in their pricing models. We corroborate the estimates of non-binding quotes from the third party entities pricing services to an independent source that provides quoted market prices from broker or dealer quotations. We investigate large differences, if any. Based on historical differences, we have not been required to adjust quotes provided by the third party entities pricing services used in estimating the fair value of these securities.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair value of our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 were as follows ($ amounts in thousands):
|
| Estimated Fair Value at |
|
|
|
|
|
|
|
| June 30, 2011 |
| Level 1 |
| Level 2 |
| Level 3 |
Securities issued by government agencies (Note 3) |
| $5,003 |
| $ - |
| $5,003 |
| $ - |
Corporate bonds (Note 3) |
| 33,649 |
| - |
| 33,649 |
| - |
Available for sale marketable debt securities |
| $38,652 |
| $ - |
| $38,652 |
| $ - |
The fair value of our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 were as follows ($ amounts in thousands):
|
| Estimated Fair Value at |
|
|
|
|
|
|
|
| December 31, 2010 |
| Level 1 |
| Level 2 |
| Level 3 |
Corporate bonds (Note 3) |
| $27,866 |
| $ - |
| $27,866 |
| $ - |
Note 5 - Accounts Receivable:
We account for revenue in accordance with FASB ASC 605 Revenue Recognition. In accordance with that standard, we recognize revenue for product sales when title and risk of loss have transferred to our customers, when reliable estimates of rebates, chargebacks, returns and other adjustments can be made, and when collectability is reasonably assured. This is generally at the time that products are received by our direct customers. We also review available trade inventory levels at certain large wholesalers to evaluate any potential excess supply levels in relation to expected demand. We determine whether we will recognize revenue at the time that our products are received by our direct customers or defer revenue recognition until a later date on a product by product basis at the time of launch. Upon recognizing revenue from a sale, we record estimates for chargebacks, rebates and incentive programs, product returns, cash discounts and other sales reserves that reduce accounts receivable.
The following tables summarize the impact of accounts receivable reserves and allowance for doubtful accounts on the gross trade accounts receivable balances at each balance sheet date ($ amounts in thousands):
|
| June 30, |
| December 31, |
|
| 2011 |
| 2010 |
|
|
|
|
|
Gross trade accounts receivable |
| $237,200 |
| $203,995 |
Chargebacks |
| (19,086) |
| (19,482) |
Rebates and incentive programs |
| (23,279) |
| (23,273) |
Returns |
| (54,051) |
| (48,928) |
Cash discounts and other |
| (18,154) |
| (16,606) |
Allowance for doubtful accounts |
| - |
| (1) |
Accounts receivable, net |
| $122,630 |
| $95,705 |
Allowance for doubtful accounts |
| Six months ended | ||
|
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
Balance at beginning of period |
| ($1) |
| ($3) |
Additions charge to expense |
| - |
| 3 |
Adjustments and/or deductions |
| 1 |
| - |
Balance at end of period |
| $ - |
| $ - |
8
The following tables summarize the activity for the six months ended June 30, 2011 and the six months ended June 30, 2010, in the accounts affected by the estimated provisions described below ($ amounts in thousands):
|
| Six Months Ended June 30, 2011 | ||||||||
Accounts receivable reserves |
| Beginning balance |
| Provision recorded for current period sales |
| (Provision) reversal recorded for prior period sales |
| Credits processed |
| Ending balance |
Chargebacks |
| ($19,482) |
| ($120,659) |
| $ - | (1) | $121,055 |
| ($19,086) |
Rebates and incentive programs |
| (23,273) |
| (52,068) |
| 660 |
| 51,402 |
| (23,279) |
Returns |
| (48,928) |
| (15,808) |
| 265 |
| 10,420 |
| (54,051) |
Cash discounts and other |
| (16,606) |
| (49,605) |
| (357) |
| 48,414 |
| (18,154) |
Total |
| ($108,289) |
| ($238,140) |
| $568 |
| $231,291 |
| ($114,570) |
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities (2) |
| ($32,169) |
| ($27,473) |
| $344 |
| $27,150 |
| ($32,148) |
|
| Six Months Ended June 30, 2010 | ||||||||
Accounts receivable reserves |
| Beginning balance |
| Provision recorded for current period sales |
| (Provision) reversal recorded for prior period sales |
| Credits processed |
| Ending balance |
Chargebacks |
| ($16,111) |
| ($100,300) |
| ($77) | (1) | $100,510 |
| ($15,978) |
Rebates and incentive programs |
| (39,938) |
| (65,310) |
| (1,196) | (3) | 74,943 |
| (31,501) |
Returns |
| (39,063) |
| (11,490) |
| 570 |
| 7,351 |
| (42,632) |
Cash discounts and other |
| (19,160) |
| (37,890) |
| (658) |
| 41,744 |
| (15,964) |
Total |
| ($114,272) |
| ($214,990) |
| ($1,361) |
| $224,548 |
| ($106,075) |
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities (2) |
| ($24,713) |
| ($21,362) |
| ($614) |
| $10,025 |
| ($36,664) |
(1)
Unless specific in nature, the amount of provision or reversal of reserves related to prior periods for chargebacks is not determinable on a product or customer specific basis; however, based upon historical analysis and analysis of activity in subsequent periods, we have determined that our chargeback estimates remain reasonable.
(2)
Includes amounts due to indirect customers for which no underlying accounts receivable exists and is principally comprised of Medicaid rebates and rebates due under other U.S. Government pricing programs, such as TriCare, and the Department of Veterans Affairs.
(3)
During the first quarter of 2010, the Company settled a dispute with a major customer and as a result recorded an additional reserve of $1,300 thousand.
The Company sells its products directly to wholesalers, retail drug store chains, drug distributors, mail order pharmacies and other direct purchasers as well as customers that purchase its products indirectly through the wholesalers, including independent pharmacies, non-warehousing retail drug store chains, managed health care providers and other indirect purchasers. The Company often negotiates product pricing directly with health care providers that purchase products through the Companys wholesale customers. In those instances, chargeback credits are issued to the wholesaler for the difference between the invoice price paid to the Company by our wholesale customer for a particular product and the negotiated contract price that the wholesalers customer pays for that product. Approximately 62% of our net product sales were derived from the wholesale distribution channel for the three months ended June 30, 2011 and 61% for the three months ended June 30, 2010. The information that the Company considers when establishing its chargeback reserves includes contract and non-contract sales trends, average historical contract pricing, actual price changes, processing time lags and customer inventory information from its three largest wholesale customers. The Companys chargeback provision and related reserve vary with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventory.
Customer rebates and incentive programs are generally provided to customers as an incentive for the customers to continue carrying the Companys products or replace competing products in their distribution channels with our products. Rebate programs are based on a customers dollar purchases made during an applicable monthly, quarterly or annual period. The Company also provides indirect rebates,
9
which are rebates paid to indirect customers that have purchased the Companys products from a wholesaler under a contract with us. The incentive programs include stocking or trade show promotions where additional discounts may be given on a new product or certain existing products as an added incentive to stock the Companys products. We may, from time to time, also provide price and/or volume incentives on new products that have multiple competitors and/or on existing products that confront new competition in order to attempt to secure or maintain a certain market share. The information that the Company considers when establishing its rebate and incentive program reserves are rebate agreements with, and purchases by, each customer, tracking and analysis of promotional offers, projected annual sales for customers with annual incentive programs, actual rebates and incentive payments made, processing time lags, and for indirect rebates, the level of inventory in the distribution channel that will be subject to indirect rebates. We do not provide incentives designed to increase shipments to our customers that we believe would result in out-of-the-ordinary course of business inventory for them. The Company regularly reviews and monitors estimated or actual customer inventory information at its three largest wholesale customers for its key products to ascertain whether customer inventories are in excess of ordinary course of business levels.
Pursuant to a drug rebate agreement with the Centers for Medicare and Medicaid Services, TriCare and similar supplemental agreements with various states, the Company provides a rebate on drugs dispensed under such government programs. The Company determines its estimate of the Medicaid rebate accrual primarily based on historical experience of claims submitted by the various states and any new information regarding changes in the Medicaid program that might impact the Companys provision for Medicaid rebates. In determining the appropriate accrual amount we consider historical payment rates; processing lag for outstanding claims and payments; levels of inventory in the distribution channel; and the impact of the healthcare reform acts. The Company reviews the accrual and assumptions on a quarterly basis against actual claims data to help ensure that the estimates made are reliable. On January 28, 2008, the Fiscal Year 2008 National Defense Authorization Act was enacted, which expands TriCare to include prescription drugs dispensed by TriCare retail network pharmacies. TriCare rebate accruals reflect this program expansion and are based on actual and estimated rebates on Department of Defense eligible sales.
The Company accepts returns of product according to the following criteria: (i) the product returns must be approved by authorized personnel with the lot number and expiration date accompanying any request and (ii) we generally will accept returns of products from any customer and will provide the customer with a credit memo for such returns if such products are returned between six months prior to, and 12 months following, such products expiration date. The Company records a provision for product returns based on historical experience, including actual rate of expired and damaged in-transit returns, average remaining shelf-lives of products sold, which generally range from 12 to 48 months, and estimated return dates. Additionally, we consider other factors when estimating the current period return provision, including levels of inventory in the distribution channel, significant market changes that may impact future expected returns, and actual product returns, and may record additional provisions for specific returns that we believe are not covered by the historical rates.
The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for paying within invoice terms, which generally range from 30 to 90 days. The Company accounts for cash discounts by reducing accounts receivable by the full amount of the discounts that we expect our customers to take.
In addition to the significant gross-to-net sales adjustments described above, we periodically make other sales adjustments. The Company generally accounts for these other gross-to-net adjustments by establishing an accrual in the amount equal to its estimate of the adjustments attributable to the sale.
The Company may at its discretion provide price adjustments due to various competitive factors, through shelf-stock adjustments on customers existing inventory levels. There are circumstances under which we may not provide price adjustments to certain customers as a matter of business strategy, and consequently may lose future sales volume to competitors and risk a greater level of sales returns on products that remain in the customers existing inventory.
As detailed above, we have the experience and access to relevant information that we believe are necessary to reasonably estimate the amounts of such deductions from gross revenues, except as described below. Some of the assumptions we use for certain of our estimates are based on information received from third parties, such as wholesale customer inventories and market data, or other market factors beyond our control. The estimates that are most critical to the establishment of these reserves, and therefore, would have the largest impact if these estimates were not accurate, are estimates related to contract sales volumes, average contract pricing, customer inventories and return volumes. The Company regularly reviews the information related to these estimates and adjusts its reserves accordingly, if and when actual experience differs from previous estimates. With the exception of the product returns allowance, the ending balances of accounts receivable reserves and allowances generally are processed during a two-month to four-month period.
Use of Estimates in Reserves
We believe that our reserves, allowances and accruals for items that are deducted from gross revenues are reasonable and appropriate based on current facts and circumstances. It is possible however, that other parties applying reasonable judgment to the same facts and circumstances could develop different allowance and accrual amounts for items that are deducted from gross revenues. Additionally, changes in actual experience or changes in other qualitative factors could cause our allowances and accruals to fluctuate, particularly with newly launched or acquired products. We review the rates and amounts in our allowance and accrual estimates on a quarterly basis. If future estimated rates
10
and amounts are significantly greater than those reflected in our recorded reserves, the resulting adjustments to those reserves would decrease our reported net revenues; conversely, if actual product returns, rebates and chargebacks are significantly less than those reflected in our recorded reserves, the resulting adjustments to those reserves would increase our reported net revenues. We regularly review the information related to these estimates and adjust our reserves accordingly, if and when actual experience differs from previous estimates.
In 2011, Par launched propafenone, and amlodipine and benazepril HCl. As is customary and in the ordinary course of business, our revenue that has been recognized for these product launches included initial trade inventory stocking that we believed was commensurate with new product introductions. At the time of each product launch, we were able to make reasonable estimates of product returns, rebates, chargebacks and other sales reserves by using historical experience of similar product launches and significant existing demand for the products.
Strativa launched OravigTM (miconazole) buccal tablets in the third quarter of 2010 and launched Zuplenz® (ondansetron) oral soluble film in the fourth quarter of 2010. OravigTM is supplied to us by BioAlliance and Zuplenz® is supplied to us by MonoSol. In connection with the launches, our direct customers ordered, and we shipped, OravigTM and Zuplenz® units at a level commensurate with initial forecasted demand for the product. Due to our relatively limited history in the branded pharmaceutical marketplace, it is impractical to predict with reasonable certainty the rate of OravigTMs and Zuplenz®s prescription demand uptake and ultimate acceptance in the marketplace. Therefore, during the initial launch phase of OravigTM and Zuplenz®, we recognize revenue and all associated cost of sales as the product is prescribed to patients based on an analysis of third party market prescription data, third party wholesaler inventory data, order refill rates, and all substantive quantitative and qualitative data available to us at the time. Accordingly, for the six month period ended June 30, 2011, we have recognized $1,776 thousand of revenues for OravigTM and $485 thousand of revenues for Zuplenz® and deferred revenues of $457 thousand for OravigTM and deferred revenues of $565 thousand for Zuplenz®, related to product that has been shipped to customers but not yet prescribed to patients. Deferred revenue is included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet as of June 30, 2011. In June 2011, we resized our Strativa business. As part of this strategic assessment, we reduced our Strativa workforce by approximately 90 people. Refer to Note 18 Restructuring Costs. We will continue to recognize revenue and all associated cost of sales as OravigTM and Zuplenz® are prescribed to patients based on an analysis of third party market prescription data, third party wholesaler inventory data, order refill rates, and all substantive quantitative and qualitative data available to us. In July 2011, Strativa returned the U.S. commercialization rights of Zuplenz® to its development partner, MonoSol Rx, as part of the resizing of our branded products division.
Major Customers Gross Accounts Receivable
|
| June 30, |
| December 31, |
|
| 2011 |
| 2010 |
McKesson Corporation |
| 28% |
| 25% |
Cardinal Health, Inc. |
| 18% |
| 21% |
CVS Caremark |
| 17% |
| 14% |
AmerisourceBergen Corporation |
| 14% |
| 12% |
Other customers |
| 23% |
| 28% |
Total gross accounts receivable |
| 100% |
| 100% |
Note 6 - Inventories:
($ amounts in thousands)
|
| June 30, |
| December 31, |
|
| 2011 |
| 2010 |
Raw materials and supplies |
| $31,496 |
| $20,445 |
Work-in-process |
| 6,822 |
| 4,498 |
Finished goods |
| 37,035 |
| 47,637 |
|
| $75,353 |
| $72,580 |
Inventory write-offs (inclusive of pre-launch inventories detailed below)
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Inventory write-offs |
| $504 |
| $2,492 |
| $1,010 |
| $4,224 |
11
Par capitalizes inventory costs associated with certain products prior to regulatory approval and product launch, based on management's judgment of reasonably certain future commercial use and net realizable value, when it is reasonably certain that the pre-launch inventories will be saleable. The determination to capitalize is made once Par (or its third party development partners) has filed an Abbreviated New Drug Application (ANDA) that has been acknowledged by the FDA as containing sufficient information to allow the FDA to conduct their review in an efficient and timely manner and management is reasonably certain that all regulatory and legal hurdles will be cleared. This determination is based on the particular facts and circumstances relating to the expected FDA approval of the generic drug product being considered, and accordingly, the time frame within which the determination is made varies from product to product. Par could be required to write down previously capitalized costs related to pre-launch inventories upon a change in such judgment, or due to a denial or delay of approval by regulatory bodies, or a delay in commercialization, or other potential factors. Pre-launch inventories at June 30, 2011 were comprised of generic products in development.
The amounts in the table below represent inventories related to products that were not yet available to be sold and are also included in the total inventory balances presented above.
Pre-Launch Inventories
($ amounts in thousands)
|
| June 30, |
| December 31, |
|
| 2011 |
| 2010 |
Raw materials and supplies |
| $6,474 |
| $3,578 |
Work-in-process |
| 950 |
| 673 |
Finished goods |
| - |
| 3,207 |
|
| $7,424 |
| $7,458 |
Write-offs of pre-launch inventories
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Pre-launch inventory write-offs, net of partner allocation |
| $ - |
| $63 |
| $ - |
| $63 |
Note 7 Property, Plant and Equipment, net:
($ amounts in thousands)
|
| June 30, |
| December 31, |
|
| 2011 |
| 2010 |
Land |
| $1,882 |
| $1,882 |
Buildings |
| 28,133 |
| 27,930 |
Machinery and equipment |
| 53,799 |
| 52,032 |
Office equipment, furniture and fixtures |
| 5,903 |
| 5,752 |
Computer software and hardware |
| 46,543 |
| 46,065 |
Leasehold improvements |
| 12,137 |
| 12,137 |
Construction in progress |
| 5,475 |
| 2,905 |
|
| 153,872 |
| 148,703 |
Accumulated depreciation and amortization |
| (82,755) |
| (76,723) |
|
| $71,117 |
| $71,980 |
Depreciation and amortization expense related to property, plant and equipment
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Depreciation and amortization expense |
| $3,127 |
| $3,519 |
| $6,264 |
| $6,767 |
12
Note 8 - Intangible Assets, net:
($ amounts in thousands)
|
| June 30, |
| December 31, |
|
| 2011 |
| 2010 |
QOL Medical, LLC Asset Purchase Agreement, net of accumulated amortization of $10,260 |
| $44,461 |
| $46,741 |
BioAlliance Licensing Agreement, net of accumulated amortization of $1,399 and $559 |
| - |
| 19,441 |
Glenmark Generics Limited and Glenmark Generics, Inc. USA Licensing Agreement, net of |
| 15,000 |
| 15,000 |
MonoSol Rx Licensing Agreement, net of accumulated amortization of $350 and $125 |
| - |
| 5,875 |
Trademark licensed from Bristol-Myers Squibb Company, net of accumulated |
| 1,817 |
| 2,567 |
Genpharm, Inc. Distribution Agreement, net of accumulated amortization of $9,387 |
| 1,446 |
| 1,807 |
SVC Pharma LP License and Distribution Agreement, net of accumulated amortization |
| 961 |
| 1,159 |
MDRNA, Inc. Asset Purchase Agreement, net of accumulated amortization of $1,294 |
| 806 |
| 1,330 |
Spectrum Development and Marketing Agreement, net of accumulated amortization of |
| 195 |
| 746 |
Other intangible assets, net of accumulated amortization of $6,336 and $5,947 |
| 887 |
| 801 |
|
| $65,573 |
| $95,467 |
We recorded amortization expense related to intangible assets of $6,118 thousand for the six months ended June 30, 2011 and $8,154 thousand for the six months ended June 30, 2010. The majority of this amortization expense was included in cost of goods sold. We also recorded $24,226 thousand of intangible asset impairment charges in the three months and six months ended June 30, 2011. The impairment charges were included in Restructuring costs on the condensed consolidated statements of operations for the three months and six months ended June 30, 2011. Refer to Note 18 Restructuring Costs for further details.
In July 2010, the FDA approved Zuplenz®, an oral soluble film for the prevention of postoperative, highly and moderately emetogenic cancer chemotherapy-induced, and radiotherapy-induced nausea and vomiting. In June 2008, Strativa and MonoSol Rx entered into an exclusive licensing agreement under which Strativa acquired the U.S. commercialization rights to Zuplenz®. Under the terms of an amended agreement, the FDA approval triggered Strativa's payments to MonoSol Rx of a $4,000 thousand approval milestone and a $2,000 thousand pre-launch milestone. Strativa began to commercialize Zuplenz®, which was supplied by MonoSol, during the fourth quarter of 2010. Amortization expense of the related intangible asset commenced when the product was launched in the fourth quarter of 2010. In June 2011, we stopped marketing Zuplenz® as part of plans to resize Strativa. We also reduced our Strativa workforce by a total of approximately 90 people and we recorded intangible asset impairment charges as part of this strategic assessment. In July 2011, Strativa returned the U.S. commercialization rights of Zuplenz® to MonoSol, as part of the resizing of our branded products division. Refer to Note 18 Restructuring Costs for further details.
In May 2010, Par entered into a licensing agreement with Glenmark Generics to market ezetimibe 10 mg tablets, the generic version of Merck & Co. Inc.s Zetia®, in the U.S. Glenmark believes it is the first to file an ANDA containing a paragraph IV certification for the product, which would potentially provide 180 days of marketing exclusivity. On April 24, 2009, Glenmark was granted tentative approval for its product by the FDA. Under the terms of the licensing and supply agreement, we made a $15,000 thousand payment to Glenmark for exclusive rights to market, sell and distribute the product in the U.S. The companies will participate in a profit sharing arrangement based on any future sales of the product. Glenmark will supply the product subject to FDA approval. The product has a contractual launch date of no later than December 2016. Under defined conditions, the product could be launched earlier than December 2016. Amortization expense of the related intangible asset will commence when the product is launched.
In April 2010, the FDA approved OravigTM, an antifungal therapy for the treatment of oropharyngeal candidiasis, an opportunistic infection commonly found in immunocompromised patients, including those with HIV and cancer. Under the terms of Strativas exclusive U.S. license agreement with BioAlliance, we paid BioAlliance $20,000 thousand in the second quarter of 2010 as a result of the FDA approval. Strativa began to commercialize OravigTM, which was supplied by BioAlliance, during the third quarter of 2010. In June 2011, we decided to reduce our marketing efforts for this product as part of plans to resize Strativa. We also reduced our Strativa workforce by a total of approximately 90 people and we recorded intangible asset impairment charges as part of this strategic assessment. Refer to Note 18 Restructuring Costs for further details.
In March 2009, we acquired the rights to Nascobal® Nasal Spray from QOL Medical, LLC for $54,500 thousand in cash and the assumption of certain liabilities. The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired on the basis of estimated fair values. The fair value of the product rights received is being amortized on a straight-line basis over 12 years based on its estimated useful life.
13
Estimated Amortization Expense for Existing Intangible Assets at June 30, 2011
The following table does not include estimated amortization expense for future milestone payments that may be paid and result in the creation of intangible assets after June 30, 2011.
($ amounts in thousands)
|
| Estimated |
|
| Amortization |
|
| Expense |
2011 (remainder) |
| $4,544 |
2012 |
| 7,122 |
2013 |
| 5,447 |
2014 |
| 4,680 |
2015 |
| 4,605 |
2016 and thereafter |
| 39,175 |
|
| $65,573 |
As of June 30, 2011, we did not note any business circumstances or events that would indicate any of our remaining net intangible assets were impaired.
Note 9 - Income Taxes:
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
($ in thousands) |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
(Benefit) provision for income taxes |
| $8,859 |
| $5,468 |
| ($20,587) |
| $21,798 |
Effective tax rate |
| 49% |
| 23% |
| 17% |
| 33% |
The effective tax rate for the three months ended June 30, 2011 was increased by a charge for a change in valuation of our net deferred tax asset resulting from favorable state law changes enacted during the quarter. The effective tax rate for the six months ended June 30, 2011 is reduced by our estimate of the portion of legal settlements and loss contingencies provided for in the quarter which may not be tax deductible and by non-deductibility of our portion of the annual pharmaceutical manufacturer fee. For purpose of determining our tax benefit for the six months ended June 30, 2011, certain Average Wholesale Prices litigation matters had been treated as a discreet event in the three months ended March 31, 2011 under the provisions of ASC 740, Income Taxes. Current deferred income tax assets at June 30, 2011 and December 31, 2010 consisted of temporary differences primarily related to accounts receivable reserves. Non-current deferred income tax assets at June 30, 2011 and December 31, 2010 consisted of timing differences primarily related to intangible assets, stock options, severance, and depreciation.
Tax periods prior to 2004 are no longer subject to IRS audit. We are currently under audit in two state jurisdictions for the years 2003-2008. In most other state jurisdictions, we are no longer subject to examination by tax authorities for years prior to 2006.
We reflect interest and penalties attributable to income taxes, to the extent they arise, as a component of income tax provision or benefit.
The difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to FASB ASC 740-10 Income Taxes represents an unrecognized tax benefit. An unrecognized tax benefit is a liability that represents a potential future obligation to the taxing authorities. As of June 30, 2011, we had $41.9 million included in Long-term liabilities on the condensed consolidated balance sheet that represented unrecognized tax benefits, interest and penalties based on evaluation of tax positions. We believe that it is reasonably possible that approximately $22.0 million of our current unrecognized tax positions may be recognized within the next twelve months as a result of settlements or a lapse of the statute of limitations.
Note 10 - Unsecured Credit Facility:
Effective October 1, 2010, we entered into a $75 million unsecured credit facility with JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Bank National Association as Syndication Agent. The credit facility has an accordion feature pursuant to which we can increase the amount available to be borrowed by up to an additional $25 million under certain circumstances. The credit facility expires on October 1, 2013. We had no borrowings under the credit facility as of June 30, 2011 or December 31, 2010. The interest rates payable under the credit facility will be based on defined published rates plus an applicable margin. We must pay a commitment fee based on the unused portion of the revolving credit facility. The credit facility agreement contains customary representations and warranties, as well as customary events of default, in certain cases subject to reasonable and customary periods to cure, including but not limited to: failure to make payments when due, breach of covenants, breach of representations and warranties, insolvency proceedings, certain judgments and attachments and any
14
change of control. The credit facility agreement also contains various customary covenants that, in certain instances, restrict our ability to: (i) incur indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) engage in dispositions of assets; (v) make investments, loans, guarantees or advances; (vi) pay dividends and distributions or repurchase capital stock; (vii) enter into sale and leaseback transactions; (viii) engage in transactions with affiliates; and (ix) change the nature of our business. In addition, the credit facility agreement requires us to maintain the following financial covenants: (a) a maximum leverage ratio, and (b) a minimum fixed charge coverage ratio. All obligations under the credit facility are guaranteed by our material domestic subsidiaries. We incurred approximately $300 thousand in expenses associated with the credit facility during the six-month period ended June 30, 2011.
Note 11 - Changes in Stockholders Equity:
Changes in our Common Stock, Additional Paid-In Capital and Accumulated Other Comprehensive Gain/(Loss) accounts during the six-month period ended June 30, 2011 were as follows (share amounts and $ amounts in thousands):
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
| Additional |
| Other |
|
| Common Stock |
| Paid-In |
| Comprehensive | ||
|
| Shares |
| Amount |
| Capital |
| Gain/(Loss) |
Balance, December 31, 2010 |
| 38,873 |
| $389 |
| $373,764 |
| $137 |
Unrealized loss on available for sale securities, net of tax |
| - |
| - |
| - |
| (69) |
Exercise of stock options |
| 644 |
| 6 |
| 9,804 |
| - |
Net excess tax benefit from share-based compensation |
| - |
| - |
| 6,477 |
| - |
Issuance of common stock under the Employee Stock |
| - |
| - |
| 170 |
| - |
Forfeitures of restricted stock |
| (31) |
| 1 |
| (1) |
| - |
Issuances of restricted stock |
| 169 |
| (2) |
| 1 |
| - |
Cash settlement of share-based compensation |
| - |
| - |
| (4,133) |
|
|
Compensatory arrangements (a) |
| - |
| - |
| 5,582 |
| - |
Balance, June 30, 2011 |
| 39,655 |
| $394 |
| $391,664 |
| $68 |
(a) Share-based compensation expense includes equity-settled awards only.
Comprehensive (Loss) Income |
| Three months ended |
| Six months ended | ||||
($ amounts in thousands) |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $9,053 |
| $18,395 |
| ($99,917) |
| $44,693 |
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities, net of tax |
| (15) |
| (152) |
| (69) |
| (238) |
Add: reclassification adjustment for net losses included |
| - |
| - |
| - |
| - |
Comprehensive (loss) income |
| $9,038 |
| $18,243 |
| ($99,986) |
| $44,455 |
In September 2007, our Board of Directors approved an expansion of our share repurchase program allowing for the repurchase of up to $75 million of our common stock. The repurchases may be made, subject to compliance with applicable securities laws, from time to time in the open market or in privately negotiated transactions. Shares of common stock acquired through the repurchase program are and will be available for general corporate purposes. We repurchased 1,643 thousand shares of our common stock for approximately $31.4 million pursuant to the expanded program in 2007. We did not repurchase any shares of common stock under this authorization in 2008, 2009, 2010 or the first and second quarter of 2011. The authorized amount remaining for stock repurchases under the repurchase program was $43.6 million, as of June 30, 2011. The repurchase program has no expiration date.
15
Note 12 - Earnings Per Share:
The following is a reconciliation of the amounts used to calculate basic and diluted earnings per share (share amounts and $ amounts in thousands, except per share amounts):
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
| $9,180 |
| $18,035 |
| ($99,664) |
| $44,461 |
|
|
|
|
|
|
|
|
|
Provision for income taxes from discontinued operations |
| 127 |
| (360) |
| 253 |
| (232) |
Loss from discontinued operations |
| (127) |
| 360 |
| (253) |
| 232 |
Net (loss) income |
| $9,053 |
| $18,395 |
| ($99,917) |
| $44,693 |
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
| 35,983 |
| 34,112 |
| 35,742 |
| 34,021 |
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
| $0.26 |
| $0.53 |
| ($2.79) |
| $1.31 |
Loss from discontinued operations |
| (0.01) |
| 0.01 |
| (0.01) |
| 0.01 |
Net (loss) income per share of common stock |
| $0.25 |
| $0.54 |
| ($2.80) |
| $1.32 |
|
|
|
|
|
|
|
|
|
Assuming dilution: |
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
| 35,983 |
| 34,112 |
| 35,742 |
| 34,021 |
Effect of dilutive securities |
| 725 |
| 1,363 |
| - |
| 1,252 |
Weighted average number of common and common |
| 36,708 |
| 35,475 |
| 35,742 |
| 35,273 |
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
| $0.25 |
| $0.51 |
| ($2.79) |
| $1.26 |
Loss from discontinued operations |
| (0.00) |
| 0.01 |
| (0.01) |
| 0.01 |
Net (loss) income per share of common stock |
| $0.25 |
| $0.52 |
| ($2.80) |
| $1.27 |
Outstanding options of 774 thousand as of June 30, 2011 and 1,930 thousand as of June 30, 2010 were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common stock during the respective periods and their inclusion would, therefore, have been anti-dilutive. Since we had a net loss for the six months ended June 30, 2011, basic and diluted net loss per share of common stock is the same, because the effect of including potential common stock equivalents (such as stock options, restricted shares, and restricted stock units) would be anti-dilutive. The effect of dilutive securities would have been 813 thousand on weighted average number of common shares outstanding for the six months ended June 30, 2011. Similarly, outstanding warrants issued in conjunction with the acquisition of Kali in June 2004 were not included in the computation of diluted earnings per share for any period presented. The warrants related to the Kali acquisition expired in June 2011.
Note 13 - Share-Based Compensation:
We account for share-based compensation as required by FASB ASC 718-10 Compensation Stock Compensation, which requires companies to recognize compensation expense in the amount equal to the fair value of all share-based payments granted to employees. Under FASB ASC 718-10, we recognize share-based compensation ratably over the service period applicable to the award. FASB ASC 718-10 also requires that excess tax benefits be reflected as financing cash flows.
We grant share-based awards under our various plans, which provide for the granting of non-qualified stock options, restricted stock and restricted stock units to members of our Board of Directors and to our employees. Stock options, restricted stock and restricted stock units generally vest ratably over four years or sooner and stock options have a maximum term of ten years.
As of June 30, 2011, there were approximately 4.6 million shares of common stock available for future stock option grants. We issue new shares of common stock when stock option awards are exercised. Stock option awards outstanding under our current plans were granted at exercise prices that were equal to the market value of our common stock on the date of grant. At June 30, 2011, approximately 0.3 million shares remain available under such plans for restricted stock and restricted stock unit grants.
16
Stock Options
We use the Black-Scholes stock option pricing model to estimate the fair value of stock option awards with the following weighted average assumptions:
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Risk-free interest rate |
| - |
| 2.7% |
| 2.2% |
| 3.1% |
Expected life (in years) |
| - |
| 6.3 |
| 5.2 |
| 6.3 |
Expected volatility |
| - |
| 44.7% |
| 44.6% |
| 45.2% |
Dividend |
| - |
| 0% |
| 0% |
| 0% |
No stock options were granted during the three months ended June 30, 2011.
The Black-Scholes stock option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. We have three distinct populations of optionees; the Executive Officers Group, the Outside Directors Group, and the All Others Group. The expected life of options represents the period of time that the options are expected to be outstanding (that is, the period of time from the service inception date to the date of expected exercise or other expected settlement) and is based generally on historical trends. Through 2010, we had used the simplified method for plain vanilla options described in FASB ASC 718-10-S99 Compensation Stock Compensation SEC Materials. The simplified method calculation is the average of the vesting term plus the original contractual term divided by two. In 2011, we modified our expected life weighted average assumption based on an actuarial study derived from historical exercise data. The risk-free rate is based on the yield on the Federal Reserve treasury rate with a maturity date corresponding to the expected term of the option granted. The expected volatility assumption is based on the historical volatility of our common stock over a term equal to the expected term of the option granted. FASB ASC 718-10 also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. It is assumed that no dividends will be paid during the entire term of the options. All option valuation models require input of highly subjective assumptions. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, the actual value realized at the time the options are exercised may differ from the estimated values computed above.
The following is a summary of the weighted average per share fair value of options granted in the three-month and six-month periods ended June 30, 2011 and June 30, 2010.
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Weighted average per share fair value of |
| $ - |
| $12.77 |
| $15.42 |
| $13.32 |
Set forth below is the impact on our results of operations of recording share-based compensation from stock options for the three-month and six-month periods ended June 30, 2011 and June 30, 2010 ($ amounts in thousands):
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Cost of goods sold |
| $910 |
| $132 |
| $2,253 |
| $270 |
Selling, general and administrative |
| 101 |
| 1,806 |
| 250 |
| 3,052 |
Total, pre-tax |
| $1,011 |
| $1,938 |
| $2,503 |
| $3,322 |
Tax effect of share-based compensation |
| (384) |
| (736) |
| (951) |
| (1,262) |
Total, net of tax |
| $627 |
| $1,202 |
| $1,552 |
| $2,060 |
17
The following is a summary of our stock option activity (shares and aggregate intrinsic value in thousands):
|
| Shares |
| Weighted Average Exercise Price |
| Weighted Average Remaining Life |
| Aggregate Intrinsic Value |
Balance at December 31, 2010 |
| 3,132 |
| $26.23 |
|
|
|
|
Granted |
| 222 |
| 36.45 |
|
|
|
|
Exercised |
| (644) |
| 15.23 |
|
|
|
|
Forfeited |
| (223) |
| 26.73 |
|
|
|
|
Balance at June 30, 2011 |
| 2,487 |
| $29.97 |
| 5.7 |
| $19,637 |
Exercisable at June 30, 2011 |
| 1,431 |
| $36.29 |
| 3.9 |
| $6,637 |
Vested and expected to vest at June 30, 2011 |
| 2,441 |
| $30.13 |
| 5.1 |
| $21,830 |
Total fair value of shares vested (amounts in $ thousands):
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Total fair value of shares vested |
| $173 |
| $326 |
| $3,928 |
| $2,834 |
As of June 30, 2011, the total compensation cost related to all non-vested stock options granted to employees but not yet recognized was approximately $8.0 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over the remaining weighted average vesting period of 2.0 years.
Restricted Stock/Restricted Stock Units
Outstanding restricted stock and restricted stock units generally vest ratably over four years. The related share-based compensation expense is recorded over the requisite service period, which is the vesting period. The fair value of restricted stock is based on the market value of our common stock on the date of grant.
The impact on our results of operations of recording share-based compensation from restricted stock for the three-month and six-month periods ended June 30, 2011 and June 30, 2010 was as follows ($ amounts in thousands):
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Cost of goods sold |
| $1,265 |
| $172 |
| $2,772 |
| $345 |
Selling, general and administrative |
| 140 |
| 1,934 |
| 308 |
| 3,486 |
Total, pre-tax |
| $1,405 |
| $2,106 |
| $3,080 |
| $3,831 |
Tax effect of stock-based compensation |
| (534) |
| (800) |
| (1,170) |
| (1,456) |
Total, net of tax |
| $871 |
| $1,306 |
| $1,910 |
| $2,375 |
The following is a summary of our restricted stock activity (shares and aggregate intrinsic value in thousands):
|
| Shares |
| Weighted Average Grant Price |
| Aggregate Intrinsic Value |
Non-vested balance at December 31, 2010 |
| 496 |
| $19.52 |
|
|
Granted |
| 73 |
| 36.27 |
|
|
Vested |
| (183) |
| 21.20 |
|
|
Forfeited |
| (30) |
| 18.59 |
|
|
Non-vested balance at June 30, 2011 |
| 356 |
| $22.17 |
| $11,729 |
18
The following is a summary of our restricted stock unit activity (shares and aggregate intrinsic value in thousands):
|
| Shares |
| Weighted Average Grant Price |
| Aggregate Intrinsic Value |
Non-vested restricted stock unit balance at |
| 23 |
| $27.68 |
|
|
Granted |
| 72 |
| 36.42 |
|
|
Vested |
| (23) |
| 28.27 |
|
|
Forfeited |
| - |
| - |
|
|
Non-vested restricted stock unit balance at |
| 72 |
| $36.10 |
| $2,398 |
Vested awards not issued |
| 161 |
| $22.01 |
| $5,313 |
Total restricted stock unit balance at |
| 233 |
| $26.39 |
| $7,711 |
As of June 30, 2011, the total compensation cost related to all non-vested restricted stock and restricted stock units granted to employees but not yet recognized was approximately $7.6 million, net of estimated forfeitures; this cost will be amortized on a straight-line basis over the remaining weighted average vesting period of approximately 2.4 years.
Restricted Stock Grants With Market Vesting Conditions
In 2008, we issued restricted stock grants with market vesting conditions. The vesting of restricted stock grants issued to certain of our employees was contingent upon multiple market conditions that were factored into the fair value of the restricted stock at grant date with cliff vesting after three years if the market conditions had been met. Vesting was contingent upon applicable continued employment condition and the Total Stockholder Return (TSR) on our common stock relative to the Companys stock price at the beginning of the three-year vesting period as compared to the TSR of a defined peer group of approximately 12 companies, and the TSR of the Standard and Poors 400 Mid Cap Index (S&P 400) over the three-year measurement period. The measurement period ended on December 31, 2010. The Company achieved the maximum level of performance under the program because the Companys TSR was greater than the 75th percentile TSR of the peer group and the Companys TSR was greater than the median of the S&P 400 during the three-year measurement period. Approximately 454 thousand shares of common stock were earned as of the vesting date, January 11, 2011. Approximately 65 thousand shares were issued in 2008 by operation of the provisions of employment contracts for three senior executives whose employment with us was terminated. Approximately 339 thousand shares of common stock were distributed in January 2011. Approximately 115 thousand shares were cash settled upon the discretion of the Compensation Committee of the Board of Directors for approximately $4.1 million (pre-tax) in January 2011. In all circumstances, restricted stock granted did not entitle the holder the right, or obligate the Company, to settle the restricted stock in cash.
At the grant date, the effect of the market conditions on the restricted stock issued to certain employees was reflected in their fair value. The restricted stock grants with market conditions were valued using a Monte Carlo simulation. The Monte Carlo simulation estimates the fair value based on the expected term of the award, risk-free interest rate, expected dividends, and the expected volatility for the Company, our peer group, and the S&P 400. The expected term was estimated based on the vesting period of the awards (3 years), the risk-free interest rate was based on the yield on the Federal Reserve treasury rate with a maturity matching the vesting period (2.6%). The expected dividends were assumed to be zero. Volatility was based on historical volatility over the expected term (40%). Restricted stock that included multiple market conditions had a grant date fair value per restricted share of $24.78.
The following table summarizes the components of our stock-based compensation related to our restricted stock grants with market conditions recognized in our financial statements for the three-month and six-month periods ended June 30, 2011 and June 30, 2010 ($ amounts in thousands):
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Cost of goods sold |
| $ - |
| $42 |
| $ - |
| $93 |
Selling, general and administrative |
| - |
| 383 |
| - |
| 841 |
Total, pre-tax |
| $ - |
| $425 |
| $ - |
| $934 |
Tax effect of stock-based compensation |
| - |
| (162) |
| - |
| (355) |
Total, net of tax |
| $ - |
| $263 |
| $ - |
| $579 |
19
The following is a summary of our restricted stock grants with market condition vesting (shares and aggregate intrinsic value in thousands):
|
| Shares |
| Weighted Average Grant Date Fair Value Per Share |
| Aggregate Intrinsic Value |
Non-vested balance at December 31, 2010 |
| 242 |
| $24.78 |
|
|
Granted |
| 97 |
| 36.54 |
|
|
Vested |
| (339) |
| 25.95 |
|
|
Forfeited |
| - |
| - |
|
|
Non-vested balance at June 30, 2011 |
| $ - |
| $ - |
| $ - |
Cash-settled Restricted Stock Unit Awards
We grant cash-settled restricted stock unit awards that vest ratably over four years to certain employees. The cash-settled restricted stock unit awards are classified as liability awards and are reported within accrued expenses and other current liabilities and other long-term liabilities on the condensed consolidated balance sheet. Cash settled restricted stock units entitle such employees to receive a cash amount determined by the fair value of our common stock on the vesting date. The fair values of these awards are remeasured at each reporting period (marked to market) until the awards vest and are paid. Fair value fluctuations are recognized as cumulative adjustments to share-based compensation expense and the related liabilities. Cash-settled restricted stock unit awards are subject to forfeiture if employment terminates prior to vesting. Share-based compensation expense for cash-settled restricted stock unit awards are recognized ratably over the service period. Cash-settled restricted stock unit awards do not decrease shares available for future share-based compensation grants.
The impact on our results of operations of recording share-based compensation from cash-settled restricted stock units for the three-month and six-month periods ended June 30, 2011 and June 30, 2010 was as follows ($ amounts in thousands):
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Cost of goods sold |
| $257 |
| $11 |
| $934 |
| $21 |
Selling, general and administrative |
| 28 |
| 98 |
| 104 |
| 189 |
Total, pre-tax |
| $285 |
| $109 |
| $1,038 |
| $210 |
Tax effect of stock-based compensation |
| (108) |
| (41) |
| (394) |
| (80) |
Total, net of tax |
| $177 |
| $68 |
| $644 |
| $130 |
Information regarding activity for cash-settled restricted stock units outstanding is as follows (number of awards in thousands):
|
| Number of Awards |
| Weighted Average Grant Date Fair Value |
| Aggregate Intrinsic Value |
Awards outstanding at December 31, 2010 |
| 72 |
| $28.13 |
|
|
Granted |
| 104 |
| 35.60 |
|
|
Vested |
| (17) |
| 27.71 |
|
|
Forfeited |
| (2) |
| 28.04 |
|
|
Awards outstanding at June 30, 2011 |
| 157 |
| $33.12 |
| $5,176 |
As of June 30, 2011, unrecognized compensation costs related to non-vested cash-settled restricted stock units was approximately $3.6 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over the remaining vesting period of approximately 3.2 years.
Employee Stock Purchase Program:
We maintain an Employee Stock Purchase Program (the Program). The Program is designed to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. It enables eligible employees to purchase shares of our common stock at a 5% discount to the fair market value. An aggregate of 1.0 million shares of common stock has been reserved for sale to
20
employees under the Program. Employees purchased three thousand shares during the three-month period ended June 30, 2011 and three thousand shares during the three-month period ended June 30, 2010. Employees purchased six thousand shares during the six-month period ended June 30, 2011 and six thousand shares during the six-month period ended June 30, 2010.
Chief Executive Officer Specific Share-based Compensation
On November 2, 2010, we entered into a new employment agreement with Patrick LePore, in his capacity as President and Chief Executive Officer, effective as of January 1, 2011. His new employment agreement is for a three-year term, ending December 31, 2013, subject to certain early termination events. Pursuant to the employment agreement, Mr. LePore is eligible to receive an incentive compensation award based on the compound annual growth rate (CAGR) of our common stock over the course of Mr. LePores three-year employment term (January 1, 2011 to December 31, 2013). Mr. LePore will be eligible to receive an incentive compensation award ranging from $2 million (for a three-year CAGR of 4%) to $9 million (for a three-year CAGR of 20% or more). He will not be eligible to receive an incentive compensation award if the Companys three-year CAGR is below 4%, and no incentive compensation award will be payable if the employment agreement is terminated prior to its expiration unless a change of control (as defined in the agreement) has occurred. These CAGR based awards will be classified as liability awards and are reported within accrued expenses and other current liabilities and other long-term liabilities on the condensed consolidated balance sheet. The fair values of these awards are remeasured at each reporting period (mark-to-market) using a Monte Carlo valuation model until the awards vest and are paid. Fair value fluctuations are recognized as cumulative adjustments to share-based compensation expense and the related liabilities. Share-based compensation expense for these CAGR awards will be recognized ratably over the three-year service period. Our CAGR was below 4% from January 1, 2011. Through June 30, 2011, we recognized $268 thousand of expense associated with this plan.
Mr. LePore will not be eligible to participate in our annual long-term incentive programs during the three-year term of his new employment agreement. Instead, in January 2011, Mr. LePore was granted an equity award consisting of restricted stock units with a total grant date economic value of approximately $1.85 million. The units will vest on the earlier of (a) the expiration of Mr. LePores employment term on December 31, 2013, (b) the date that a change of control (as defined in the agreement) occurs, or (c) the date of an eligible earlier termination of Mr. LePores employment term in accordance with the provisions of the agreement. The related share-based compensation expense is being recorded over the three-year term of the new employment agreement, which is the vesting period. The fair value of restricted stock units was based on the market value of our common stock on the date of grant.
Note 14 - Commitments, Contingencies and Other Matters:
Legal Proceedings
Unless otherwise indicated in the details provided below, we cannot predict with certainty the outcome or the effects of the litigations described below. The outcome of these litigations could include substantial damages, the imposition of substantial fines, penalties, and injunctive or administrative remedies; however, unless otherwise indicated below, at this time we are not able to estimate the possible loss or range of loss, if any, associated with these legal proceedings. From time to time, we may settle or otherwise resolve these matters on terms and conditions that we believe are in the best interests of the Company. Resolution of any or all claims, investigations, and legal proceedings, individually or in the aggregate, could have a material adverse effect on our results of operations, cash flows or financial condition.
Corporate Litigation
We and certain of our former executive officers have been named as defendants in consolidated class action lawsuits filed on behalf of purchasers of our common stock between July 23, 2001 and July 5, 2006. The lawsuits followed our July 5, 2006 announcement regarding the restatement of certain of our financial statements and allege that we and certain members of our then management engaged in violations of the Exchange Act, by issuing false and misleading statements concerning our financial condition and results of operations. The class actions are pending in the U.S. District Court for the District of New Jersey. On July 23, 2008, co-lead plaintiffs filed a Second Consolidated Amended complaint. On September 30, 2009, the Court granted a motion to dismiss all claims as against Kenneth Sawyer but denied the motion as to the Company, Dennis OConnor, and Scott Tarriff. We and Messrs. OConnor and Tarriff have answered the Amended complaint and intend to vigorously defend the consolidated class action. Plaintiffs have filed a motion for class certification which we and the other defendants intend to oppose.
Following the announcement of our agreement to acquire Edict Pharmaceuticals Private Limited (Edict), a Chennai, India-based developer and manufacturer of generic pharmaceuticals, Gavis Pharma LLC (Gavis), an affiliate of Novel Laboratories, Inc. and a former shareholder of Edict, filed a lawsuit on June 29, 2011, in the Superior Court for the State of New Jersey, Somerset County, against us, Edict, and the shareholders of Edict, seeking to enjoin the closing of our acquisition of Edict and money damages. Gavis asserts claims against certain Edict shareholders for fraudulent inducement in connection with Gaviss 2009 decision to sell its equity interest in Edict; against Edict and certain Edict shareholders for breach of contract; and against us for tortious interference with contract for entering into our agreement to acquire Edict. The defendants have filed motions to dismiss the lawsuit and have agreed by stipulation to delay closing our acquisition of Edict until the Court renders a ruling on the plaintiffs preliminary injunction motion, scheduled for hearing on August 3, 2011. The defendants motions to dismiss have been scheduled for hearing on September 16, 2011. We intend to vigorously defend this lawsuit and pursue our defenses and counterclaims against Gavis.
21
Patent Related Matters
On April 28, 2006, CIMA Labs, Inc. (CIMA) and Schwarz Pharma, Inc. (Schwarz Pharma) filed separate lawsuits against us in the U.S. District Court for the District of New Jersey. CIMA and Schwarz Pharma each have alleged that we infringed U.S. Patent Nos. 6,024,981 (the 981 patent) and 6,221,392 (the 392 patent) by submitting a Paragraph IV certification to the FDA for approval of alprazolam orally disintegrating tablets. CIMA owns the 981 and 392 patents and Schwarz Pharma is CIMAs exclusive licensee. The two lawsuits were consolidated on January 29, 2007. In response to the lawsuit, we have answered and counterclaimed denying CIMAs and Schwarz Pharmas infringement allegations, asserting that the 981 and 392 patents are not infringed and are invalid and/or unenforceable. All 40 claims in the 981 patent were rejected in two non-final office actions in a reexamination proceeding at the United States Patent and Trademark Office (USPTO) on February 24, 2006 and on February 24, 2007. The 392 patent is also the subject of a reexamination proceeding. On July 10, 2008, the USPTO rejected with finality all claims pending in both the 392 and 981 patents. On September 28, 2009, the USPTO Board of Appeals affirmed the Examiners rejection of all claims in the 981 patent. On November 25, 2009, plaintiffs requested a rehearing before the USPTO Board of Appeals regarding the 981 patent. On March 24, 2011, the USPTO Board of Appeals affirmed the rejections pending for both patents and added new grounds for rejection of the 981 patent. We intend to vigorously defend this lawsuit and pursue our counterclaims.
We entered into a licensing agreement with developer Paddock Laboratories, Inc. (Paddock) to market testosterone 1% gel, a generic version of Unimed Pharmaceuticals, Inc.s (Unimed) product Androgel®. As a result of the filing of an ANDA, Unimed and Laboratories Besins Iscovesco (Besins), co-assignees of the patent-in-suit, filed a lawsuit on August 22, 2003 against Paddock in the U.S. District Court for the Northern District of Georgia alleging patent infringement (the Paddock litigation). On September 13, 2006, we acquired from Paddock all rights to the ANDA for the testosterone 1% gel, and the Paddock litigation was resolved by a settlement and license agreement that terminates all on-going litigation and permits us to launch the generic version of the product no earlier than August 31, 2015, and no later than February 28, 2016, assuring our ability to market a generic version of Androgel® well before the expiration of the patents at issue. On March 7, 2007, we were issued a Civil Investigative Demand seeking information and documents in connection with the court-approved settlement in 2006 of the patent dispute. On January 30, 2009, the Bureau of Competition for the Federal Trade Commission (FTC) filed a lawsuit against us in the U.S. District Court for the Central District of California alleging violations of antitrust laws stemming from our court-approved settlement in the Paddock litigation, and several distributors and retailers followed suit with a number of private plaintiffs complaints beginning in February 2009. On April 9, 2009, the U.S. District Court for the Central District of California granted Pars motion to transfer the FTC lawsuit and the private plaintiffs complaints to the U.S. District Court for the Northern District of Georgia. On July 20, 2009, we filed a motion to dismiss the FTCs case and on September 1, 2009, we filed a motion to dismiss the private plaintiffs cases in the U.S. District Court for the Northern District of Georgia, and on February 23, 2010, the Court granted our motion to dismiss the FTCs claims and granted in part and denied in part our motion to dismiss the claims of the private plaintiffs. On June 10, 2010, the FTC appealed the District Courts dismissal of the FTCs claims to the U.S. Court of Appeals for the 11th Circuit. On May 13, 2011, oral argument was held before the Court of Appeal and we currently await the Courts decision. We believe we have complied with all applicable laws in connection with the court-approved settlement and intend to continue to vigorously defend these actions.
On July 6, 2007, Sanofi-Aventis and Debiopharm, S.A. filed a lawsuit against us and our development partner, MN Pharmaceuticals ("MN"), in the U.S. District Court for the District of New Jersey. The complaint alleges infringement of U.S. Patent Nos. 5,338,874 (the 874 patent) and 5,716,988 (the 988 patent) after we and MN submitted a Paragraph IV certification to the FDA for approval of 50 mg/10 ml, 100 mg/20 ml, and 200 mg/40 ml oxaliplatin by injection. On January 14, 2008, following MN's amendment of its ANDA to include oxaliplatin injectable 5 mg/ml, 40 ml vial, Sanofi-Aventis filed a complaint asserting infringement of the '874 and the '988 patents. MN and we filed our Answer and Counterclaim on February 20, 2008. On June 18, 2009, the District Court granted summary judgment of non-infringement to several defendants, including us, on the 874 patent, but to date has not rendered a summary judgment decision regarding the 988 patent. On September 10, 2009, the U.S. Court of Appeals for the Federal Circuit reversed the District Court and remanded the case for further proceedings. On September 24, 2009, Sanofi-Aventis filed a motion for preliminary injunction against defendants who entered the market following the District Courts summary judgment ruling. On November 19, 2009, the District Court dismissed all pending motions for summary judgment with possibility of the motions being renewed upon letter request to the Court. On April 14, 2010, the District Court entered a consent judgment and order agreed to by us, MN, and the plaintiffs, which agreement settled the pending litigation. In view of this agreement, MN and we will enter the market with generic Eloxatin on August 9, 2012, or earlier in certain circumstances.
On October 1, 2007, Elan Corporation, PLC (Elan) filed a lawsuit against us and our development partners, IntelliPharmaCeutics Corp. and IntelliPharmaCeutics Ltd. ("IPC"), in the U.S. District Court for the District of Delaware. On October 5, 2007, Celgene Corporation (Celgene) and Novartis Pharmaceuticals Corporation and Novartis Pharma AG (Novartis) filed a lawsuit against IPC in the U.S. District Court for the District of New Jersey. The complaint in the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because we submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 15 mg, and 20 mg dexmethylphenidate hydrochloride extended release capsules. The complaint in the New Jersey case alleged infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because IPC and we submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 15 mg, and 20 mg dexmethylphenidate extended release capsules. On March 5, 2010 and March 15, 2010, the U.S. District Courts for the Districts of New Jersey and Delaware, respectively, entered stays of the litigation between plaintiffs and us and IPC in view of settlement agreements reached by the parties. The settlement agreement terms are confidential.
22
On March 25, 2011, Elan Corporation, PLC (Elan) filed a lawsuit against us and our development partners, IntelliPharmaceutics Corp. and IntelliPharmaCeutics Ltd. (IPC) in the U.S. District Court for the District of Delaware, and Celgene Corporation (Celgene) and Novartis filed a lawsuit against IPC in the U.S. District Court for the District of New Jersey. The complaint in the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because we submitted a Paragraph IV certification to the FDA for approval of 30 mg dexmethylphenidate hydrochloride extended release capsules. The complaint in the New Jersey case alleged infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because IPC and we submitted a Paragraph IV certification to the FDA for approval of 30 mg dexmethylphenidate extended release capsules. We intend to vigorously defend and expeditiously resolve these lawsuits.
On May 27, 2011, Elan Corporation, PLC (Elan) filed a lawsuit against us in the U.S. District Court for the District of Delaware, and Celgene Corporation (Celgene) and Novartis filed a lawsuit against IPC (in error, subsequently amended to Par) in the U.S. District Court for the District of New Jersey. The complaint in the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because we submitted a Paragraph IV certification to the FDA for approval of 40 mg dexmethylphenidate hydrochloride extended release capsules. The complaint in the New Jersey case alleged infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because IPC and we submitted a Paragraph IV certification to the FDA for approval of 40 mg dexmethylphenidate extended release capsules. We intend to vigorously defend and expeditiously resolve these lawsuits.
On September 13, 2007, Santarus, Inc. (Santarus) and The Curators of the University of Missouri (Missouri) filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 6,699,885; 6,489,346; and 6,645,988 because we submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate capsules. On December 20, 2007, Santarus and Missouri filed a second lawsuit against us in the U.S. District Court for the District of Delaware alleging infringement of the patents because we submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate powders for oral suspension. On March 4, 2008, the cases pertaining to our ANDAs for omeprazole capsules and omeprazole oral suspension were consolidated for all purposes. The District Court conducted a bench trial from July 13-17, 2009, and found for Santarus only on the issue of infringement, while not rendering an opinion on the issues of invalidity and unenforceability. On April 14, 2010, the District Court ruled in our favor, finding that plaintiffs patents were invalid as being obvious and without adequate written description. On May 17, 2010, Santarus filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit, appealing the District Courts decision of invalidity of the plaintiffs patents. On May 27, 2010, we filed our notice of cross-appeal to the Court of Appeals, appealing the District Courts decision of enforceability of plaintiffs patents. On July 1, 2010, we launched our generic Omeprazole/Sodium Bicarbonate product. Oral argument for the appeal was held on May 2, 2011. We will continue to vigorously defend the appeal.
On December 11, 2007, AstraZeneca Pharmaceuticals, LP, AstraZeneca UK Ltd., IPR Pharmaceuticals, Inc. and Shionogi Seiyaku Kabushiki Kaisha filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges patent infringement because we submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 20 mg and 40 mg rosuvastatin calcium tablets. On June 29, 2010, after an eight day bench trial, the District Court ruled in favor of the plaintiffs and against us, stating that the plaintiffs patents were infringed, and not invalid or unenforceable. On August 11, 2010, we filed our notice of appeal to the Court of Appeals for the Federal Circuit, appealing the District Courts decision. On December 15, 2010, the District Court granted our motion to dismiss a case brought by AstraZeneca asserting we infringed its rosuvastatin process patents. On April 25, 2011, we filed our final appeal brief and await an oral hearing date for the appeal. We intend to defend all of these actions vigorously.
On November 14, 2008, Pozen, Inc. (Pozen) filed a lawsuit against us in the U.S. District Court for the Eastern District of Texas. The complaint alleges infringement of U.S. Patent Nos. 6,060,499; 6,586,458; and 7,332,183, because we submitted a Paragraph IV certification to the FDA for approval of 500 mg/85 mg naproxen sodium/sumatriptan succinate oral tablets. We joined GlaxoSmithKline (GSK) as a counterclaim defendant in this litigation. On April 28, 2009, GSK was dismissed from the case by the Court, but will be bound by the Courts decision and will be required to produce witnesses and materials during discovery. A four day bench trial was held from October 12 through October 15, 2010. On April 14, 2011, the Court granted a preliminary injunction to Pozen that prohibits us from launching our generic naproxen /sumatriptan product before the issuance of a final decision in the case. We are awaiting the Courts final decision.
On April 29, 2009, Pronova BioPharma ASA (Pronova) filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 5,502,077 and 5,656,667 because we submitted a Paragraph IV certification to the FDA for approval of omega-3-acid ethyl esters oral capsules. On June 8, 2010, a new patent, U.S. 7,732,488, which was later listed in the Orange Book, was issued to Pronova. A second case, involving the claims of the 488 patent and two other patents not listed in the Orange Book and asserted by the plaintiffs, has a trial date set for January 3, 2012. A bench trial in the first case took place from March 29, 2011 to April 7, 2011. On July 25, 2011, a stipulation was submitted to the court dismissing the second case without prejudice. We intend to continue to defend this action vigorously and pursue our defenses and counterclaims against Pronova.
On July 1, 2009, Alcon Research Ltd. (Alcon) filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 5,510,383; 5,631,287; 5,849,792; 5,889,052; 6,011,062; 6,503,497; and 6,849,253 because we submitted a Paragraph IV certification to the FDA for approval of 0.004% travoprost ophthalmic solutions and 0.004% travoprost ophthalmic solutions (preserved). We filed an answer on August 21, 2009. The Court rescheduled the end of fact discovery for December 31, 2010 and the
23
end of expert discovery for May 9, 2011. Trial has yet to be rescheduled. On July 1, 2011, we, along with plaintiffs and co-defendants, submitted the joint pre-trial order. We intend to defend this action vigorously and pursue our defenses and counterclaims against Alcon.
On August 5, 2010, Warner Chilcott and Medeva Pharma filed a lawsuit against us and our partner EMET Pharmaceuticals in the U.S. District Court for the District of New Jersey. The complaint alleges infringement of U.S. Patent No. 5,541,170 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of a 400 mg delayed-release oral tablet of mesalamine. We filed an answer and counterclaims on August 25, 2010, and an initial Rule 16 conference was held on November 10, 2010. On March 29, 2011, the Court granted plaintiffs motion to dismiss our counterclaim for declaratory judgment of non-infringement of U.S. Patent No. 5,541,171. We intend to appeal that decision. Expert discovery closed July 5, 2011, and the close of fact discovery has been scheduled by the Court for August 5, 2011. A Markman hearing has been scheduled for August 15, 2011. We intend to defend this action vigorously and pursue all of our defenses and counterclaims against Warner Chilcott and Medeva Pharma.
On September 20, 2010, Schering-Plough HealthCare Products (Schering-Plough), Santarus, Inc. (Santarus), and the Curators of the University of Missouri filed a lawsuit against us in the U.S. District Court for the District of New Jersey. The complaint alleges infringement of U.S. Patent Nos., 6,699,885; 6,489,346; 6,645,988; and 7,399,772 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of a 20mg/1100 mg omeprazole/sodium bicarbonate capsule, a version of Schering-Ploughs Zegerid OTC®. We have previously received a decision of invalidity with respect to all of these patents in our case against Santarus and Missouri with respect to the prescription version of this product, which decision is presently on appeal. On November 9, 2010, we entered into a stipulation with the plaintiffs to stay litigation on the OTC product pending the decision by the U.S. Court of Appeals for the Federal Circuit on the prescription product appeal, and the parties have agreed to be bound by such decision for purposes of the OTC product litigation. We intend to pursue our appeal and defend this action vigorously.
On September 22, 2010, Biovail Laboratories filed a lawsuit against us in the U.S. District Court for the Southern District of New York. The complaint alleges infringement of U.S. Patent Nos. 7,569,610; 7,572,935; 7,649,019; 7,553,992; 7,671,094; 7,241,805; 7,645,802; 7,662,407; and 7,645,901 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of extended-release tablets of 174 mg and 348 mg bupropion hydrobromide. On November 10, 2010, we filed our answer to the complaint. On November 22, 2010, the Court set a June 30, 2011 deadline for all discovery. On March 7, 2011, the Court reset the deadline for all discovery to May 18, 2011. We intend to defend this action vigorously.
On October 4, 2010, UCB Manufacturing, Inc. (UCB) filed a verified complaint in the Superior Court of New Jersey, Chancery Division, Middlesex, naming us, our development partner Tris Pharma, and Tris Pharmas head of research and development, Yu-Hsing Tu. The complaint alleges that Tris and Tu misappropriated UCBs trade secrets and, by their actions, breached contracts and agreements to which UCB, Tris, and Tu were bound. The complaint further alleges unfair competition against Tris, Tu, and us relating to the parties manufacture and marketing of generic Tussionex®. On October 6, 2010, the Court denied UCBs petition for a temporary restraining order against us and Tris and set a schedule for discovery during which UCB must substantiate its claims. On December 23, 2010, the Court denied UCBs motion for a preliminary injunction, ruling that UCBs alleged trade secrets were known to the public and not misappropriated. On June 2, 2011, the Court granted Tris motion for summary judgment dismissing UCBs claims and UCB appealed the Courts order on June 22, 2011. We intend to vigorously defend the lawsuit and any appeal by plaintiffs.
On February 2, 2011, Somaxon Pharmaceuticals filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent No. 6,211,229 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of oral tablets of 3 mg equivalent and 6 mg equivalent doxepin hydrochloride. We filed our answer on February 23, 2011. On June 6, 2011, our case was consolidated in the same Court with that of the other defendants who filed ANDAs on this product. The Court has scheduled fact discovery to end on April 6, 2012; expert discovery to end on September 7, 2012; and set a trial-ready date of February 19, 2013. We intend to defend this action vigorously.
On March 23, 2011, we filed a declaratory judgment action against UCB, Inc. and UCB Pharma SA (UCB) in the U.S. District Court for the Eastern District of Pennsylvania requesting that the Court render a judgment of invalidity and/or non-infringement of U.S. Patent Nos. 7,858,122 and 7,863,316 in view of our eventual marketing of levetiracetam extended release oral tablets, 500 mg and 750 mg pursuant to our filed ANDA that was accompanied by a Paragraph IV certification. On June 8, 2011, we filed our answer to UCBs counterclaims and submitted our joint Rule 26(f) report with the court on July 18, 2011. We intend to vigorously prosecute this action against UCB.
Industry Related Matters
Beginning in September 2003, we, along with numerous other pharmaceutical companies, have been named as a defendant in actions brought by a number of state Attorneys General and municipal bodies within the state of New York, as well as a federal qui tam action brought on behalf of the United States by the pharmacy Ven-A-Care of the Florida Keys, Inc. ("Ven-A-Care") alleging generally that the defendants defrauded the state Medicaid systems by purportedly reporting Average Wholesale Prices (AWP) and/or Wholesale Acquisition Costs that exceeded the actual selling price of the defendants prescription drugs. To date, we have been named as a defendant in substantially similar civil law suits filed by the Attorneys General of Alabama, Alaska, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Mississippi, Oklahoma, South Carolina, Texas and Utah, and also by the city of New York, 46 counties across New York State and Ven-A-Care. These cases generally seek some combination of actual damages, and/or double damages, treble damages, compensatory
24
damages, statutory damages, civil penalties, disgorgement of excessive profits, restitution, disbursements, counsel fees and costs, litigation expenses, investigative costs, injunctive relief, punitive damages, imposition of a constructive trust, accounting of profits or gains derived through the alleged conduct, expert fees, interest and other relief that the court deems proper. Several of these cases have been transferred to the AWP multi-district litigation proceedings pending in the U.S. District Court for the District of Massachusetts for pre-trial proceedings. The case brought by the state of Mississippi will be litigated in the Chancery Court of Rankin County, Mississippi. The other cases will likely be litigated in the state or federal courts in which they were filed. In the Utah suit, the time for responding to the complaint has not yet elapsed. The Hawaii suit was settled on August 25, 2010 for $2,250 thousand. The Massachusetts suit was settled on December 17, 2010 for $500 thousand. The Alabama suit was settled on January 5, 2011 for $2,500 thousand. The Idaho suit was settled on March 25, 2011 for $1,700 thousand. On April 27, 2011, we reached a settlement in principle to resolve claims brought by Ven-A-Care, Texas, and Florida, under federal and state law, as well as Alaska, South Carolina, and Kentucky under state law for $154,000 thousand. Upon execution of definitive settlement documents and government and court approvals, the settlement will resolve a lawsuit relating to federal contributions to state Medicaid programs in 49 states (excluding Illinois), and claims of Texas, Florida, Alaska, South Carolina and Kentucky relating to their Medicaid programs. The settlement in principal will eliminate the majority of the alleged damages asserted against us in the various drug pricing litigations and removes all trials that had been scheduled to date. On June 2, 2011, we reached a settlement in principle to resolve claims brought by the city of New York, New York Counties and the state of Iowa under respective state law for $23,000 thousand. The remaining matters have yet to be scheduled for trial. We have accrued a $195,400 thousand reserve under the caption Accrued legal settlements on our condensed consolidated balance sheet as of June 30, 2011, in connection with the April 27, 2011 settlement in principal and the remaining AWP actions. In each of the remaining matters, we have either moved to dismiss the complaints or answered the complaints denying liability. We will continue to defend or explore settlement opportunities in other jurisdictions as we feel are in our best interest under the circumstances presented in those jurisdictions. However, we can give no assurance that we will be able to settle the remaining actions on terms that we deem reasonable, or that such settlements or adverse judgments, if entered, will not exceed the amount of the reserve.
In addition, the Attorneys General of Florida, Indiana and Virginia and the United States Office of Personnel Management (the USOPM) have issued subpoenas, and the Attorneys General of Michigan, Tennessee, Texas, and Utah have issued civil investigative demands, to us. The demands generally request documents and information pertaining to allegations that certain of our sales and marketing practices caused pharmacies to substitute ranitidine capsules for ranitidine tablets, fluoxetine tablets for fluoxetine capsules, and two 7.5 mg buspirone tablets for one 15 mg buspirone tablet, under circumstances in which some state Medicaid programs at various times reimbursed the new dosage form at a higher rate than the dosage form being substituted. We have provided documents in response to these subpoenas to the respective Attorneys General and the USOPM. During the second quarter of 2011, we continued to engage the respective Attorneys General, the USOPM and the Department of Justice, led by the U.S. Attorneys in the Northern District of Illinois, in discussions concerning these allegations, and we will continue to cooperate if called upon to do so.
Department of Justice Matter
On March 19, 2009, we were served with a subpoena by the Department of Justice requesting documents related to Strativas marketing of Megace® ES. The subpoena indicated that the Department of Justice is currently investigating promotional practices in the sales and marketing of Megace® ES. We believe that our marketing of Megace® ES has complied with all applicable laws and we have provided, or are in the process of providing, documents in response to this subpoena to the Department of Justice and will continue to cooperate with the Department of Justice in this inquiry if called upon to do so. Investigations of this type often result in settlements, including monetary amounts based on an agreed upon percentage of sales of the product at issue in the investigation.
Other
We are, from time to time, a party to certain other litigations, including product liability litigations. We believe that these litigations are part of the ordinary course of our business and that their ultimate resolution will not have a material adverse effect on our financial condition, results of operations or liquidity. We intend to defend or, in cases where we are the plaintiff, to prosecute these litigations vigorously.
Note 15 Discontinued Operations Related Party Transaction:
In January 2006, we divested FineTech Laboratories, Ltd (FineTech), effective December 31, 2005. We transferred the business for no proceeds to Dr. Arie Gutman, president and chief executive officer of FineTech. Dr. Gutman also resigned from our Board of Directors. In 2010 and 2009 we recorded tax amounts to discontinued operations for interest related to contingent tax liabilities. The results of FineTech operations are classified as discontinued for all periods presented because we have no continuing involvement in FineTech.
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Note 16 - Segment Information:
We operate in two reportable business segments: generic pharmaceuticals (referred to as Par Pharmaceutical or Par) and branded pharmaceuticals (referred to as Strativa Pharmaceuticals or Strativa). Branded products are marketed under brand names through marketing programs that are designed to generate physician and consumer loyalty. Branded products generally are patent protected, which provides a period of market exclusivity during which they are sold with little or no direct competition. Generic pharmaceutical products are the chemical and therapeutic equivalents of corresponding brand drugs. The Drug Price Competition and Patent Term Restoration Act of 1984 provides that generic drugs may enter the market upon the approval of an ANDA and the expiration, invalidation or circumvention of any patents on corresponding brand drugs, or the expiration of any other market exclusivity periods related to the brand drugs. Our chief operating decision maker is our President and Chief Executive Officer.
Our business segments were determined based on managements reporting and decision-making requirements in accordance with FASB ASC 280-10 Segment Reporting. We believe that our generic products represent a single operating segment because the demand for these products is mainly driven by consumers seeking a lower cost alternative to brand name drugs. Pars generic drugs are developed using similar methodologies, for the same purpose (e.g., seeking bioequivalence with a brand name drug nearing the end of its market exclusivity period for any reason discussed above). Pars generic products are produced using similar processes and standards mandated by the FDA, and Pars generic products are sold to similar customers. Based on the economic characteristics, production processes and customers of Pars generic products, management has determined that Pars generic pharmaceuticals are a single reportable business segment. Our chief operating decision maker does not review the Par (generic) or Strativa (brand) segments in any more granularity, such as at the therapeutic or other classes or categories. Certain of our expenses, such as the direct sales force and other sales and marketing expenses and specific research and development expenses, are charged directly to either of the two segments. Other expenses, such as general and administrative expenses and non-specific research and development expenses are allocated between the two segments based on assumptions determined by management.
The financial data for the two business segments are as follows ($ amounts in thousands):
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Revenues: |
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $202,449 |
| $231,938 |
| $412,193 |
| $503,977 |
Strativa |
| 21,739 |
| 23,536 |
| 44,947 |
| 43,429 |
Total revenues |
| $224,188 |
| $255,474 |
| $457,140 |
| $547,406 |
|
|
|
|
|
|
|
|
|
Gross margin: |
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $83,994 |
| $73,621 |
| $176,554 |
| $142,064 |
Strativa |
| 15,032 |
| 17,838 |
| 32,125 |
| 32,905 |
Total gross margin |
| $99,026 |
| $91,459 |
| $208,679 |
| $174,969 |
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $51,845 |
| $34,896 |
| ($80,901) |
| $80,918 |
Strativa |
| (34,038) |
| (10,748) |
| (39,854) |
| (13,434) |
Total operating income (loss) |
| $17,807 |
| $24,148 |
| ($120,755) |
| $67,484 |
Interest income |
| 382 |
| 273 |
| 805 |
| 601 |
Interest expense |
| (150) |
| (918) |
| (301) |
| (1,826) |
Provision (benefit) for income taxes |
| 8,859 |
| 5,468 |
| (20,587) |
| 21,798 |
Income (loss) from continuing operations |
| $9,180 |
| $18,035 |
| ($99,664) |
| $44,461 |
Our chief operating decision maker does not review our assets, depreciation or amortization by business segment at this time as they are not material to Strativa. Therefore, such allocations by segment are not provided.
26
Total revenues of our top selling products were as follows ($ amounts in thousands):
|
| Three months ended |
| Six months ended | ||||
Product |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Par Pharmaceutical |
|
|
|
|
|
|
|
|
Metoprolol succinate ER (Toprol-XL®) |
| $63,706 |
| $119,596 |
| $127,124 |
| $302,887 |
Budesonide (Entocort® EC) |
| 16,357 |
| - |
| 16,357 |
| - |
Sumatriptan succinate injection (Imitrex®) |
| 15,284 |
| 17,463 |
| 31,983 |
| 34,747 |
Propafenone (Rythmol SR®) |
| 13,311 |
| - |
| 35,350 |
| - |
Amlodipine and Benazepril HCl (Lotrel®) |
| 12,505 |
| - |
| 30,675 |
| - |
Dronabinol (Marinol®) |
| 8,118 |
| 7,183 |
| 14,989 |
| 11,274 |
Chlorpheniramine/Hydrocodone (Tussionex®) |
| 7,022 |
| - |
| 19,701 |
| - |
Tramadol ER (Ultracet ER®) |
| 5,873 |
| 5,676 |
| 11,954 |
| 10,962 |
Meclizine Hydrochloride (Antivert®) |
| 4,562 |
| 9,398 |
| 9,437 |
| 19,552 |
Cholestyramine Powder (Questran®) |
| 4,077 |
| 2,974 |
| 7,760 |
| 6,910 |
Nateglinide |
| 3,815 |
| 3,470 |
| 8,120 |
| 4,988 |
Cabergoline (Dostinex®) |
| 2,920 |
| 2,520 |
| 5,873 |
| 6,514 |
Methimazole (Tapazole®) |
| 2,456 |
| 2,590 |
| 4,560 |
| 5,430 |
Clonidine TDS (Catapres TTS®) |
| - |
| 26,290 |
| 4,793 |
| 44,751 |
Other (1) |
| 33,398 |
| 31,679 |
| 66,583 |
| 51,709 |
Other product related revenues (2) |
| 9,045 |
| 3,099 |
| 16,934 |
| 4,253 |
Total Par Pharmaceutical Revenues |
| $202,449 |
| $231,938 |
| $412,193 |
| $503,977 |
|
|
|
|
|
|
|
|
|
Strativa |
|
|
|
|
|
|
|
|
Megace® ES |
| $14,050 |
| $15,493 |
| $28,135 |
| $29,291 |
Nascobal® Nasal Spray |
| 6,274 |
| 4,407 |
| 10,152 |
| 8,002 |
OravigTM |
| 1,027 |
| - |
| 1,776 |
| - |
Zuplenz® |
| 263 |
| - |
| 485 |
| - |
Other product related revenues (2) |
| 125 |
| 3,636 |
| 4,399 |
| 6,136 |
Total Strativa Revenues |
| $21,739 |
| $23,536 |
| $44,947 |
| $43,429 |
(1) The further detailing of revenues of the other approximately 60 generic drugs is impracticable due to the low volume of revenues associated with each of these generic products. No single product in the other category is in excess of 3% of total generic revenues for six-month periods ended June 30, 2011 or June 30, 2010. |
(2) Other product related revenues represents licensing and royalty related revenues from profit sharing agreements related to products such as diazepam rectal gel, the generic version of Diastat®, and fenofibrate, the generic version of Tricor®. Other product related revenues included in the Strativa segment related to a co-promotion arrangement with Solvay for Androgel® in 2010. This co-promotion arrangement with Solvay was terminated in December 2010 for an associated $2 million payment. During the six-month period ended June 30, 2011, Strativa earned $4.3 million of royalty income from its share of the proceeds from Optimer Pharmaceuticals sale of certain rights in fidaxomicin to a third party. Under the terms of the 2007 termination agreement, we are also entitled to royalty payments on future sales of fidaxomicin. |
During the six-month period ended June 30, 2010, we recognized a gain on the sale of product rights of $5,921 thousand, related to the sale of multiple ANDAs.
Note 17 - Research and Development Agreements:
In June 2008, through an exclusive licensing agreement with MonoSol Rx (MonoSol), Strativa acquired the U.S. commercialization rights to MonoSols oral soluble film formulation of ondansetron (Zuplenz®). In December 2009, the parties amended the agreement to modify the terms of future milestone and royalty payments and concurrently entered into another agreement noted below. The amendment provided for a reduction in future payments. On July 2, 2010, the FDA approved Zuplenz®. We paid MonoSol a total of $6,000 thousand as a result of the FDA approval. Refer to Note 18 Restructuring Costs for details of intangible asset impairment charges in the three months and six months ended June 30, 2011.
In December 2009, concurrently with the amendment of the Zuplenz® agreement noted above, Strativa entered into another exclusive licensing agreement with MonoSol to acquire the U.S. commercialization rights to MonoSols oral soluble film formulation of up to three potential new products. Under this agreement, we made a one-time payment of $6,500 thousand, which was charged to research and development expense. On May 24, 2010, Strativa and MonoSol reached a mutual decision to discontinue the development of the first
27
product under the agreement. On June 22, 2010, MonoSol delivered certain development results for the second product, triggering a 90-day option period during which Strativa could have elected to have MonoSol continue development of the second product. Strativa did not elect to continue development of the second product. During the two-year period ending December 9, 2011, Strativa had the right to elect to have Monosol develop a third product, however Strativa has declined to exercise such right.
In second quarter of 2010, Par acquired the rights and obligations of a collaboration arrangement for a product currently in development for an up-front payment of $5,500 thousand that was expensed as research and development. The arrangement provides for additional milestone payments of up to $5,500 thousand based upon certain development activities, FDA approval, certain conditions and sales. The first two $500 thousand milestones were achieved during the second and fourth quarter of 2010, and the resultant payments were expensed as research and development. Par will participate in a profit sharing arrangement with its third party collaboration partner based on any future sales.
Note 18 Restructuring Costs:
In June 2011, we announced our plans to resize our branded products division Strativa Pharmaceuticals, as part of a strategic assessment. We reduced our Strativa workforce by approximately 90 people. The remaining Strativa sales force will focus their marketing efforts on Megace® ES and Nascobal® Nasal Spray. In connection with these actions, we incurred expenses for severance and other employee-related costs. The intangible assets related to products no longer a priority for our remaining Strativa sales force were fully impaired by these actions. We also had non-cash inventory write downs for product and samples associated with the products no longer a priority for our remaining Strativa sales force. Inventory write downs were classified as cost of goods sold on the condensed consolidated statements of operations for the three months and six months ended June 30, 2011. In July 2011, Strativa returned the U.S. commercialization rights of Zuplenz® to its development partner, MonoSol Rx, as part of the resizing of our branded products division.
The following table summarizes the restructuring costs incurred by us in the second quarter of 2011 and the remaining related restructuring liabilities balance (included in accrued expenses and other current liabilities on the condensed consolidated balance sheet) as of June 30, 2011 ($ amounts in thousands);
Restructuring Activities |
| Initial Charge |
| Cash Payments |
| Non-Cash Charge Related to Inventory and/or Intangible Assets |
| Reversals, Reclass or Transfers |
| Liabilities at June 30, 2011 |
Intangible asset impairments |
| $24,226 |
| $ - |
| ($24,226) |
| $ - |
| $ - |
Severance and employee |
| 1,556 |
| - |
| - |
| - |
| (1,556) |
Sample inventory write-down and other |
| 1,204 |
| - |
| (1,204) |
| - |
| - |
Total restructuring costs line item |
| $26,986 |
| $ - |
| ($25,430) |
| $ - |
| ($1,556) |
Commercial inventory write-down classified as cost of goods sold |
| 674 |
| - |
| (674) |
| - |
| - |
Total |
| $27,660 |
| $ - |
| ($26,104) |
| $ - |
| ($1,556) |
The total charge is related to the Strativa segment. We expect that the liability amount at June 30, 2011 will result in cash expenditures during 2011. The charges related to this plan to reduce the size of the Strativa business are reflected on the condensed consolidated statements of operations for the quarter ended June 30, 2011.
Note 19 Pending Acquisition:
During the three months ended June 30, 2011, we entered into a definitive agreement to purchase privately-held Edict Pharmaceuticals Private Limited, a Chennai, India-based developer and manufacturer of generic pharmaceuticals, for up to $37.6 million in cash and our repayment of certain additional pre-close indebtedness. The acquisition will be accounted for as a business combination under the guidance of FASB ASC 805 Business Combinations. The operating results of Edict will be included in our consolidated financial results from the date of acquisition. The operating results will be reflected as part of the Par Pharmaceutical segment. We intend to fund the purchase from cash on hand.
Our purchase of Edict is subject to the Reserve Bank of Indias approval of certain terms in the definitive agreement and the satisfaction or waiver of other conditions to closing. Our purchase of Edict also is subject to resolution of related litigation. Refer to Note 14 Commitments, Contingencies and Other Matters for further details.
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Note 20 Subsequent Event:
In July 2011, we received a notice letter from a generic pharmaceutical manufacturer, advising that it has filed an Abbreviated New Drug Application (ANDA) with the U.S. FDA containing a Paragraph IV certification referencing Megace® ES. Megace® ES is protected by Elan Pharma International Limiteds U.S. Patents 6,592,903 and 7,101,576. We intend, with Elan, to investigate the Paragraph IV certification and ANDA, and to enforce its patents, which expire in 2020 and 2024, respectively, as appropriate.
29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
Certain statements in this Quarterly Report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including those concerning managements expectations with respect to future financial performance, trends and future events, particularly relating to sales of current products and the development, approval and introduction of new products. To the extent that any statements made in this Quarterly Report contain information that is not historical, such statements are essentially forward-looking. These statements are often, but not always, made using words such as estimates, plans, projects, anticipates, continuing, ongoing, expects, intends, believes, forecasts or similar words and phrases. Such forward-looking statements are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond our control, which could cause actual results and outcomes to differ materially from those expressed in this Quarterly Report. Risk factors that might affect such forward-looking statements include those set forth in Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2010, in Item 1A of Part II of this Quarterly Report on Form 10-Q, and from time to time in our other filings with the SEC, including Current Reports on Form 8-K, and on general industry and economic conditions. Any forward-looking statements included in this Quarterly Report are made as of the date of this Quarterly Report only, and, subject to any applicable law to the contrary, we assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements contained elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Par Pharmaceutical Companies, Inc. operates primarily in the United States as two business segments, our generic products division (Par Pharmaceutical or Par) for the development, manufacture and distribution of generic pharmaceuticals, and Strativa Pharmaceuticals (Strativa Pharmaceuticals or Strativa), our branded products division.
The introduction of new products that generate adequate gross margins is critical to our ability to generate economic value and ultimately the creation of adequate returns for our stockholders. Par Pharmaceutical, our generic products division, creates economic value by optimizing our current generic product portfolio and our pipeline of potential high-value first-to-file and first-to-market generic products. Par Pharmaceutical is an attractive business partner because of its strong commercialization track record and presence in the generic trade. Pars 2010 and year-to-date 2011 achievements included several product launches (generic versions of Zegerid®, Tussionex®, Accolate®, Rythmol SR®, Lotrel®, Entocort® EC), the filing of 10 ANDAs in conjunction with its development partners, and execution of several collaboration agreements to sustain the future generic pipeline. As a result, we believe we are well positioned to compete in the generic marketplace over the long term. Our internal research and development targets high-value, first-to-file Paragraph IVs or first-to-market product opportunities. Externally, we intend to concentrate on acquiring assets and/or partnering with technology based companies that can deliver similar product opportunities. As of June 2011, we had 13 confirmed first-to-file product opportunities. Generally, products that we have developed internally contribute higher gross margin percentages than products that we sell under supply and distribution agreements, because under such agreements, we typically pay a percentage of the gross or net profits (or a percentage of net sales) to our strategic partners.
To continue the development of our branded products division, Strativa Pharmaceuticals, we acquired the worldwide rights to Nascobal® Nasal Spray in 2009. Nascobal® Nasal Spray is an FDA-approved prescription vitamin B12 treatment indicated for maintenance of remission in certain pernicious anemia patients, as well as a supplement for a variety of B12 deficiencies. It is the first and currently only once-weekly, self-administered alternative to B12 injections. In June 2011, we announced our plans to resize Strativa as part of a strategic assessment. We reduced our Strativa workforce by approximately 90 people. The remaining Strativa sales force will focus their marketing efforts on Megace® ES and Nascobal® Nasal Spray. In July 2011, we received a notice letter from a generic pharmaceutical manufacturer, advising that it has filed an Abbreviated New Drug Application (ANDA) with the U.S. FDA containing a Paragraph IV certification referencing Megace® ES. Megace® ES is protected by Elan Pharma International Limiteds U.S. Patents 6,592,903 and 7,101,576. We intend, with Elan, to investigate the Paragraph IV certification and ANDA, and to enforce its patents, which expire in 2020 and 2024, respectively, as appropriate.
Sales and gross margins of our products depend principally on (i) the introduction of other generic and brand products in direct competition with our products; (ii) the ability of generic competitors to quickly enter the market after our relevant patent or exclusivity periods expire, or during our exclusivity periods with authorized generic products, diminishing the amount and duration of significant profits we generate from any one product; (iii) the pricing practices of competitors and the removal of competing products from the market; (iv) the continuation of our existing license, supply and distribution agreements and our ability to enter into new agreements; (v) the consolidation among distribution outlets through mergers, acquisitions and the formation of buying groups; (vi) the willingness of generic drug customers, including wholesale and retail customers, to switch among drugs of different generic pharmaceutical manufacturers; (vii) our ability to procure approval of ANDAs and NDAs and the timing and success of our future new product launches; (viii) our ability to obtain marketing exclusivity periods for our generic products; (ix) our ability to maintain patent protection of our brand products; (x) the extent of market penetration for our existing product line; (xi) customer satisfaction with the level, quality and amount of our customer service; and (xii) the market acceptance of our recently introduced branded products (e.g., Nascobal® Nasal Spray) and the successful development and commercialization of our future in-licensed branded product pipeline.
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Net sales and gross margins derived from generic pharmaceutical products often follow a pattern based on regulatory and competitive factors that we believe to be unique to the generic pharmaceutical industry. As the patent(s) for a brand name product and the related exclusivity period(s) expire, the first generic manufacturer to receive regulatory approval from the FDA for a generic equivalent of the product is often able to capture a substantial share of the market. At that time, however, the branded company may license the right to distribute an authorized generic product to a competing generic company. As additional generic manufacturers receive regulatory approvals for competing products, the market share and the price of those products have typically declined - often significantly - depending on several factors, including the number of competitors, the price of the brand product and the pricing strategy of the new competitors.
Net sales and gross margins derived from brand pharmaceutical products typically follow a different pattern. Sellers of brand pharmaceutical products benefit from years of being the exclusive supplier to the market due to patent protections for the brand products. The benefits include significantly higher gross margins relative to sellers of generic pharmaceutical products. However, commercializing brand pharmaceutical products is more costly than generic pharmaceutical products. Sellers of brand pharmaceutical products often have increased infrastructure costs relative to sellers of generic pharmaceutical products and make significant investments in the development and/or licensing of these products without a guarantee that these expenditures will result in the successful development or launch of brand products that will prove to be commercially successful. Selling brand products also tends to require greater sales and marketing expenses to create a market for the products than is necessary with respect to the sale of generic products. Just as we compete against companies selling branded products when we sell generic products, we confront the same competitive pressures when we sell our branded products. Specifically, after patent protections expire, generic products can be sold in the market at a significantly lower price than the branded version, and, where available, may be required or encouraged in preference to the branded version under third party reimbursement programs, or substituted by pharmacies for branded versions by law.
Healthcare Reform Impacts
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA) and on March 30, 2010, President Obama signed into law the Health Care and Education Reconciliation Act, which includes a number of changes to the PPACA. These laws are hereafter referred to as healthcare reform or the Acts.
A number of provisions of healthcare reform have had and will continue to have a negative impact on the price of our products sold to U.S. government entities. The significant provisions that impacted net revenues, gross margin and net income for the six months ended June 30, 2011 and 2010 include, but are not limited to the following (all items were effective January 1, 2010 unless otherwise noted):
·
Increase in the Medicaid rebate rate. The base rebate rate on sales of branded drugs (Strativa) and authorized generics (Par) into the Medicaid channel was increased from 15.1% of AMP (average manufacturer price) to 23.1% of AMP. The base rebate on sales of multisource generic products (Par) into the Medicaid channel was increased from 11% of AMP to 13% of AMP. The base rebate is one component of the calculation for branded drugs and authorized generics, and may or may not result in an increase in rebates for a particular product.
·
Effective March 23, 2010, there was an extension of Medicaid rebates to drugs consumed by patients enrolled in Medicaid Managed Care Organizations (MMCOs). Prior to healthcare reform, MMCOs were not entitled to Medicaid rebates, as the drug benefit was independently managed by the commercial managed care entity. Given our current product portfolio, which is weighted more toward generic products, our exposure to commercial rebates for patients enrolled in MMCOs was low prior to March 23, 2010.
·
Increased Medicaid rebates for products defined as a line extension through application of an inflation penalty back to the original formulation price.
·
Expansion of the number of entities qualifying for Public Health System (PHS) status and therefore eligible to receive PHS pricing, which is typically equal to the net Medicaid price after rebates.
·
Revisions to the AMP calculation, effective October 1, 2010. This provision had a negligible impact on net revenues and gross margins for the six months ended June 30, 2011.
·
Change in the Federal Upper Limit as it relates to the pharmacy reimbursement of multisource drugs. This provision is expected to reduce the Medicaid funding from the federal government. While it is impractical to quantify the impact of the provision, it is expected to result in increased pressure at the state level to drive Medicaid utilization to low cost alternatives such as generic products.
In 2011, the following provisions went into effect:
·
An annual, non tax deductible, pharmaceutical fee to be assessed by the Secretary of the Treasury on any manufacturer or importer with gross receipts from the sale of branded prescription and authorized generic drugs to the following government programs and entities: Medicare Part D, Medicare Part B, Medicaid, Department of Veterans Affairs, Department of Defense, and Tricare. The total pharmaceutical fee, which is set at $2.5 billion for 2011, will be allocated across the pharmaceutical industry based upon relative market share into these programs. The total fee increases each year thereafter, reaching $4.1 billion in 2018.
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The market share calculation utilized to allocate the fee is to be calculated utilizing prior years sales statistics. We currently estimate the impact of the pharmaceutical fee on our 2011 net income to be approximately $2 million. In addition, the year to year impact of this provision of healthcare reform will be highly variable depending on:
o
the volume of Pars sales of authorized generics, which can vary dramatically based upon our ability to continue to secure authorized generic business development opportunities,
o
the volume of Strativas sales of branded products, and
o
our ability to share portions of this fee with partners under pre-existing and future distribution agreements.
·
A new 50% discount on cost for certain Medicare Part D beneficiaries for certain drugs, including branded and authorized generic pharmaceuticals, purchased during the Part D Medicare coverage gap (commonly referred to as the donut hole). The 2011 impact of this provision on the gross margin of Par is estimated to be approximately $2 million to $3 million and Strativa is estimated to be less than $0.8 million.
·
Additionally, the publication of monthly weighted average AMP by therapeutic class and retail price surveys could occur during 2011. It is not practical to forecast the impact of this provision on 2011 net revenues or gross margin.
For the six months ended June 30, 2011, the impact of healthcare reform resulted in a decrease of approximately $9.3 million to our net revenue, approximately $4.7 million to our gross margin, and approximately $4.0 million to our net income. The gross margin impact of these provisions is highly dependent upon product sales mix between products that are partnered with third parties and non-partnered products.
Any potential impact of healthcare reform on the future demand for our products is not determinable at this time. Any potential future impact on demand could differ between our Par and Strativa divisions, as well as between individual products within each division.
Par Pharmaceutical - Generic Products Division
Our strategy for our generic division is to continue to differentiate ourselves by carefully choosing opportunities with minimal competition (e.g., first-to-file and first-to-market products). By leveraging our expertise in research and development, manufacturing and distribution, we are able to effectively and efficiently pursue these opportunities and support our partners.
In the six month period ended June 30, 2011, our generic business net revenues and gross margin were concentrated in a few products. The top generic revenue products (metoprolol succinate ER (metoprolol), propafenone, amlodipine and benazepril HCl, sumatriptan, chlorpheniramine/hydrocodone, dronabinol, tramadol ER, budesonide, and meclizine) accounted for approximately 65% of our total consolidated revenues in the six month period ended June 30, 2011 and for approximately 52% of total consolidated gross margins in the six month period ended June 30, 2011.
We began selling metoprolol in the fourth quarter of 2006 as the authorized generic distributor pursuant to a supply and distribution agreement with AstraZeneca. There had been two competitors marketing generic metoprolol until the fourth quarter of 2008, when those two companies stopped selling metoprolol due to violations of the FDAs current Good Manufacturing Practices. Throughout the first two quarters of 2009, we did not have competition for sales of the four SKUs (packaging sizes) of metoprolol that we sell, which resulted in increased volume of units sold coupled with a price increase commensurate with being the sole generic distributor. Beginning in August 2009, however, we were no longer the sole distributor for two SKUs (25mg and 50mg). As of April 15, 2010, Par was no longer the sole distributor for the 100mg and 200mg SKUs. Our sales volume and unit price for metoprolol were adversely impacted subsequent to each entry of a competitors SKU into the market. In addition, another competitor received FDA approval for all four strengths of metoprolol on July 23, 2010 and our sales volume and unit price for metoprolol were adversely impacted by this second generic competitor. Additional competitors on any or all of the four SKUs will result in significant additional declines in sales volume and unit price, which would negatively impact our revenues and gross margins (including possible inventory write-downs) as compared to 2010. As the authorized generic distributor for metoprolol, we do not control the manufacturing of the product, and any disruption in supply due to manufacturing or transportation issues could also have a negative effect on our revenues and gross margins.
In August 2009, we launched clonidine TDS, the generic version of Boehringer Ingelheims Catapres TTS®. The product was manufactured by Aveva Drug Delivery Systems, Inc., our third party development partner, with whom we have a profit sharing arrangement. From launch to July 15, 2010, we were the sole generic distributor of this product. On July 16, 2010, Mylan received FDA approval for its generic version of clonidine TDS, therefore we were no longer the sole generic distributor. Our sales and related gross margins for clonidine TDS were negatively impacted due to Mylans receipt of FDA approval and subsequent launch. In May 2010, Aveva, the manufacturer of our product, received a Warning Letter from the FDA that cited conditions at the facility where clonidine TDS is manufactured that the FDA investigators believe may violate current Good Manufacturing Practices, based on their observations made between October and December of 2009. In April 2011, Aveva decided to discontinue manufacturing clonidine and the product was voluntarily withdrawn from the distribution channel. Because of these events, Par has discontinued marketing clonidine.
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In the fourth quarter of 2008, we launched generic versions of Imitrex® (sumatriptan) injection 4mg and 6mg starter kits and 4mg and 6mg prefilled syringe cartridges pursuant to a supply and distribution agreement with GlaxoSmithKline plc. As of June 30, 2011, we believe we were the sole generic distributor of three SKUs with one competitor for a single SKU. On August 1, 2011, an additional competitor launched a single SKU of sumatriptan. We believe our future sales volume and unit price for sumatriptan will be adversely impacted by the additional competition. We do not control the manufacturing of the product, and any disruption in supply due to manufacturing or transportation issues could also have a negative effect on our revenues and gross margins. The remaining net book value of the associated intangible asset was $0.2 million at June 30, 2011 and will be amortized over approximately one year.
We marketed meclizine until the supplier of our active pharmaceutical ingredient (API) experienced an explosion at its manufacturing facility in early 2008. Subsequently, we qualified a new API source and received the appropriate approval from the FDA of our ANDA to manufacture and market meclizine utilizing our new supplier. We reintroduced meclizine HCl tablets in 12.5mg and 25mg strengths in 2008. From the beginning of 2009 to May 2010, we were the exclusive supplier of this generic product. In June 2010, a competitor entered this market. This new competition negatively impacted our sales and gross margins for meclizine. Any additional competition could result in significant additional declines in sales volume and unit price, which may negatively impact our revenues and gross margins (including possible inventory write-downs) as compared to 2010.
In November 2009, we launched tramadol ER, the generic version of Ultram® ER, after a favorable court ruling in the related patent matter. We believe we are one of two competitors in this market, with the other competitor being the authorized generic. We manufacture and distribute this product.
In July 2010, we launched two strengths of omeprazole/sodium bicarbonate capsules, the generic version of Zegerid®. We were awarded 180 days of marketing exclusivity for being the first to file an ANDA containing a paragraph IV certification for these two strengths of the product. We are now one of two competitors in this market, with the other competitor being the authorized generic. Omeprazole/sodium bicarbonate capsules had been the subject of litigation in the U.S. District Court for the District of Delaware, but in April 2010, the Court ruled in our favor, finding that the related patents were invalid as being obvious and without adequate written description. The case is currently on appeal to the U.S. Court of Appeals for the Federal Circuit. We will continue to vigorously defend the appeal.
In the third quarter of 2008, we launched dronabinol in 2.5mg, 5mg and 10mg strengths in soft gel capsules. We believe we are one of two generic distributors of dronabinol. We share net product margin, as contractually defined, on sales of dronabinol with SVC Pharma LP, an affiliate of Rhodes Technologies. We do not control the manufacturing of the product, and any disruption in supply due to manufacturing or transportation issues could also have a negative effect on our revenues and gross margins. The remaining net book value of the associated intangible asset was $1.0 million at June 30, 2011 and will be amortized over approximately three years.
On October 5, 2010, we announced that our licensing partner, Tris Pharma, Inc., had received final FDA approval for its ANDA for hydrocodone polistirex and chlorpheniramine polistirex (CIII) extended-release (ER) oral suspension (equivalent to 10 mg of hydrocodone bitartrate and 8 mg of chlorpheniramine maleate per 5 mL). Hydrocodone polistirex and chlorpheniramine polistirex (CIII) ER oral suspension is a generic version of UCBs Tussionex®. We participate in a profit sharing arrangement with Tris Pharma based on our commercial sale of generic Tussionex®. We commenced a limited launch of generic Tussionex® on October 5, 2010. Our market share will continue to be limited into the foreseeable future by Drug Enforcement Administration regulations concerning allowable commercial quantities of controlled substances like hydrocodone, which is contained in generic Tussionex®. We do not control the manufacturing of the product, and any disruption in supply due to manufacturing or transportation issues could also have a negative effect on our revenues and gross margins. In October 2010, UCB filed a complaint naming us, our development partner Tris Pharma, and Tris Pharmas head of research and development as defendants. The complaint alleged that Tris and its head of research and development misappropriated UCBs trade secrets and, by their actions, breached contracts and agreements to which they were bound. The complaint further alleges unfair competition against the defendants relating to the parties manufacture and marketing of generic Tussionex®. On October 6, 2010, the Court denied UCBs petition for a temporary restraining order against us and Tris and set a schedule for discovery during which UCB must substantiate its claims. On December 23, 2010, the Court denied UCBs motion for a preliminary injunction, ruling that UCBs alleged trade secrets were known to the public and not misappropriated. On June 2, 2011, the Court granted Triss motion for summary judgment dismissing UCBs claims and UCB appealed the Courts order on June 22, 2011. We intend to vigorously defend the lawsuit and any appeal by plaintiffs.
We began selling budesonide in June 2011 as the authorized generic distributor pursuant to a supply and distribution agreement with AstraZeneca. We are one of two competitors in this market. As the authorized generic distributor for budesonide, we do not control the manufacturing of the product, and any disruption in supply due to manufacturing or transportation issues could also have a negative effect on our revenues and gross margins.
In addition, our investments in generic product development, including projects with development partners, are expected to yield approximately 5 to 7 new ANDA filings during each of 2011, 2012 and 2013. These ANDA filings are expected to lead to product launches based on one or more of the following: expiry of the relevant 30-month stay period; patent expiry date; and expiry of regulatory exclusivity. However, such potential product launches may be delayed or may not occur due to various circumstances, including extended litigation, outstanding citizens petitions, other regulatory requirements set forth by the FDA, and stays of litigation. These ANDA filings would be significant mileposts for us, as we expect many of these potential products to be first-to-file/first-to-market opportunities with gross margins in excess of the average of our current portfolio. We or our strategic
33
partners currently have approximately 31 ANDAs pending with the FDA, which include 13 first-to-file opportunities. No assurances can be given that we or any of our strategic partners will successfully complete the development of any of these potential products either under development or proposed for development, that regulatory approvals will be granted for any such product, that any approved product will be produced in commercial quantities or sold profitably.
Strativa Pharmaceuticals - Branded Products Division
For Strativa, in the near term we will continue to invest in the marketing and sales of our existing product portfolio (Megace® ES and Nascobal® Nasal Spray). In addition, in the longer term, we will continue to consider new strategic licenses and acquisitions to expand Strativas presence in supportive care and adjacent commercial areas.
In July 2005, we received FDA approval for our first NDA, and immediately began marketing Megace® ES (megestrol acetate) oral suspension. Megace® ES is indicated for the treatment of anorexia, cachexia or any unexplained significant weight loss in patients with a diagnosis of AIDS and utilizes the Megace® brand name that we have licensed from Bristol-Myers Squibb Company. The remaining net book value of the trademark was $1.8 million at June 30, 2011, and will be amortized over approximately two years. We promoted Megace® ES as our primary brand product from 2005 through March 2009. With the acquisition of Nascobal® in March 2009, Strativa increased its sales force and turned its focus on marketing both products. In July 2011, we received a notice letter from a generic pharmaceutical manufacturer, advising that it has filed an Abbreviated New Drug Application (ANDA) with the U.S. FDA containing a Paragraph IV certification referencing Megace® ES. Megace® ES is protected by Elan Pharma International Limiteds U.S. Patents 6,592,903 and 7,101,576. We intend, with Elan, to investigate the Paragraph IV certification and ANDA, and to enforce its patents, which expire in 2020 and 2024, respectively, as appropriate.
On March 31, 2009, we acquired the worldwide rights to Nascobal® (cyanocobalamin, USP) Nasal Spray from QOL Medical, LLC. Under the terms of the all cash transaction, we paid QOL Medical $54.5 million for the worldwide rights to Nascobal®. We manufacture Nascobal® with assets acquired on March 31, 2009 from MDRNA, Inc. The remaining net book value of the related intangible asset was $44.5 million at June 30, 2011, and will be amortized over approximately 10 years.
In January 2011, we completed a modest reorganization of the Strativa management team (approximately 10 positions eliminated) and refined our sales and marketing plan for each of Strativas currently marketed products as part of our on-going efforts to maximize the value and potential of our existing product portfolio. We announced that the President of Strativa Pharmaceuticals resigned and that effective January 31, 2011, Patrick G. LePore, the Chairman, CEO and President of Par Pharmaceutical Companies, Inc., assumed day-to-day oversight of Strativa on an interim basis. We have taken steps to further align the Strativa home office sales and marketing team with the objectives of our sales force and to leverage the relevant expertise and experience within our Par Pharmaceutical generics division.
In June 2011, we announced our plans to resize Strativa as part of a strategic assessment. We reduced our Strativa workforce by approximately 90 people. The remaining Strativa sales force will focus their marketing efforts on Megace® ES and Nascobal® Nasal Spray. The intangible assets related to products no longer a priority for our remaining Strativa sales force were fully impaired by these actions. In July 2011, Strativa returned the U.S. commercialization rights of Zuplenz® to its development partner, MonoSol Rx, as part of this resizing.
OTHER CONSIDERATIONS
In addition to the substantial costs of product development, we may incur significant legal costs in bringing certain products to market. Litigation concerning patents and proprietary rights is often protracted and expensive. Pharmaceutical companies with patented brand products increasingly are suing companies that produce generic forms of their products for alleged patent infringement or other violations of intellectual property rights, which could delay or prevent the entry of such generic products into the market. Generally, a generic drug may not be marketed until the applicable patent(s) on the brand name drug expires. When an ANDA is filed with the FDA for approval of a generic drug, the filer may certify either that any patent listed by the FDA as covering the branded product is about to expire, in which case the ANDA will not become effective until the expiration of such patent, or that the patent listed as covering the branded drug is invalid or will not be infringed by the manufacture, sale or use of the new drug for which the ANDA is filed. In either case, there is a risk that a branded pharmaceutical company may sue the filer for alleged patent infringement or other violations of intellectual property rights. Because a substantial portion of our current business involves the marketing and development of generic versions of brand products, the threat of litigation, the outcome of which is inherently uncertain, is always present. Such litigation is often costly and time-consuming, and could result in a substantial delay in, or prevent, the introduction and/or marketing of products, which could have a material adverse effect on our business, financial condition, prospects and results of operations.
34
RESULTS OF OPERATIONS
Results of operations, including segment net revenues, segment gross margin and segment operating income (loss) information for our Par Pharmaceutical - Generic Products segment and our Strativa Branded Products segment, consisted of the following:
Revenues
Total revenues of our top selling products were as follows:
|
| Three months ended |
| Six months ended | ||||||||
($ amounts in thousands) |
|
|
|
|
|
|
|
|
| |||
Product |
| June 30, 2011 |
| June 30, 2010 |
| $ Change |
| June 30, 2011 |
| June 30, 2010 |
| $ Change |
Par Pharmaceutical |
|
|
|
|
|
|
|
|
|
|
|
|
Metoprolol succinate ER (Toprol-XL®) |
| $63,706 |
| $119,596 |
| ($55,890) |
| $127,124 |
| $302,887 |
| ($175,763) |
Budesonide (Entocort® EC) |
| 16,357 |
| - |
| 16,357 |
| 16,357 |
| - |
| 16,357 |
Sumatriptan succinate injection (Imitrex®) |
| 15,284 |
| 17,463 |
| (2,179) |
| 31,983 |
| 34,747 |
| (2,764) |
Propafenone (Rythmol SR®) |
| 13,311 |
| - |
| 13,311 |
| 35,350 |
| - |
| 35,350 |
Amlodipine and Benazepril HCI (Lotrel®) |
| 12,505 |
| - |
| 12,505 |
| 30,675 |
| - |
| 30,675 |
Dronabinol (Marinol®) |
| 8,118 |
| 7,183 |
| 935 |
| 14,989 |
| 11,274 |
| 3,715 |
Chlorpheniramine/Hydrocodone (Tussionex®) |
| 7,022 |
| - |
| 7,022 |
| 19,701 |
| - |
| 19,701 |
Tramadol ER (Ultracet ER®) |
| 5,873 |
| 5,676 |
| 197 |
| 11,954 |
| 10,962 |
| 992 |
Meclizine Hydrochloride (Antivert®) |
| 4,562 |
| 9,398 |
| (4,836) |
| 9,437 |
| 19,552 |
| (10,115) |
Cholestyramine Powder (Questran®) |
| 4,077 |
| 2,974 |
| 1,103 |
| 7,760 |
| 6,910 |
| 850 |
Clonidine TDS (Catapres TTS®) |
| - |
| 26,290 |
| (26,290) |
| 4,793 |
| 44,751 |
| (39,958) |
Other |
| 42,589 |
| 40,259 |
| 2,330 |
| 85,136 |
| 68,641 |
| 16,495 |
Other product related revenues |
| 9,045 |
| 3,099 |
| 5,946 |
| 16,934 |
| 4,253 |
| 12,681 |
Total Par Pharmaceutical Revenues |
| $202,449 |
| $231,938 |
| ($29,489) |
| $412,193 |
| $503,977 |
| ($91,784) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Strativa |
|
|
|
|
|
|
|
|
|
|
|
|
Megace® ES |
| $14,050 |
| $15,493 |
| ($1,443) |
| $28,135 |
| $29,291 |
| ($1,156) |
Nascobal® Nasal Spray |
| 6,274 |
| 4,407 |
| 1,867 |
| 10,152 |
| 8,002 |
| 2,150 |
OravigTM |
| 1,027 |
| - |
| 1,027 |
| 1,776 |
| - |
| 1,776 |
Zuplenz® |
| 263 |
| - |
| 263 |
| 485 |
| - |
| 485 |
Other product related revenues |
| 125 |
| 3,636 |
| (3,511) |
| 4,399 |
| 6,136 |
| (1,737) |
Total Strativa Revenues |
| $21,739 |
| $23,536 |
| ($1,797) |
| $44,947 |
| $43,429 |
| $1,518 |
|
| Three months ended | ||||||||||
|
|
|
|
|
| Percentage of Total Revenues | ||||||
($ in thousands) |
| June 30, 2011 |
| June 30, 2010 |
| $ Change |
| % Change |
| June 30, 2011 |
| June 30, 2010 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $202,449 |
| $231,938 |
| ($29,489) |
| (12.7%) |
| 90.3% |
| 90.8% |
Strativa |
| 21,739 |
| 23,536 |
| (1,797) |
| (7.6%) |
| 9.7% |
| 9.2% |
Total revenues |
| $224,188 |
| $255,474 |
| ($31,286) |
| (12.2%) |
| 100.0% |
| 100.0% |
35
|
| Six months ended | ||||||||||
|
|
|
|
|
| Percentage of Total Revenues | ||||||
($ in thousands) |
| June 30, 2011 |
| June 30, 2010 |
| $ Change |
| % Change |
| June 30, 2011 |
| June 30, 2010 |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $412,193 |
| $503,977 |
| ($91,784) |
| (18.2%) |
| 90.2% |
| 92.1% |
Strativa |
| 44,947 |
| 43,429 |
| 1,518 |
| 3.5% |
| 9.8% |
| 7.9% |
Total revenues |
| $457,140 |
| $547,406 |
| ($90,266) |
| (16.5%) |
| 100.0% |
| 100.0% |
The decrease in generic segment revenues in the second quarter and year-to-date period of 2011 was primarily due to;
·
Additional competition on all SKUs (packaging sizes) of metoprolol succinate ER. The dollar amount decrease of metoprolol revenues for the second quarter and year-to-date period of 2011 can be attributed to a decrease in the volume of units sold (approximately 44% of total dollar decrease for second quarter 2011 and approximately 57% of total dollar decrease for the year-to-date period of 2011) with the remainder of the dollar amount decrease due to price. We expect metoprolol revenues to continue to decline in the future as more competitors enter this market.
·
We launched clonidine in August 2009 as the sole generic distributor, and we remained the exclusive supplier to this market on all strengths through August 2010. On July 16, 2010, Mylan received FDA approval for clonidine and subsequently launched its product, therefore we were no longer the sole generic distributor. Our sales and related gross margins for clonidine TDS were negatively impacted. In April 2011, the manufacturer of our product, Aveva decided to discontinue manufacturing clonidine and the product was voluntarily withdrawn from the distribution channel. Because of these events, Par has discontinued marketing clonidine.
·
Additional competition for meclizine beginning in June 2010.
The decreases above in the second quarter and year-to-date period of 2011 were tempered by;
·
The launches of budesonide in June 2011, propafenone and amlodipine and benazepril HCl in January 2011 and the launch of chlorpheniramine/hydrocodone in October 2010.
·
The increase of net sales of dronabinol, mainly due to volume increase. Our only competitor in the dronabinol market continues to be the authorized generic.
·
The increase in Other Par Pharmaceutical second quarter and year-to-date period of 2011 revenues as compared to prior year periods was primarily driven by the launch of omeprazole in late June 2010, the launch of zafirlukast in November 2010, the launch of doxycycline capsules in June 2011, the net sales improvement of calcitonin nasal spray mainly due to a competitors supply issues that led to our market share gain, and the net sales improvement of tramadol APAP due to market share gains in second quarter of 2011.
·
Improved royalties primarily from the sales of diazepam, which launched in September 2010 and from the sales of fenofibrate both of which are included in Par Pharmaceutical second quarter and year-to-date period of 2011 Other product related revenues.
Net sales of contract-manufactured products (which are manufactured for us by third-parties under contract) and licensed products (which are licensed to us from third-party development partners and also are generally manufactured by third parties) were approximately 55% of our total product revenues for the six month period ended June 30, 2011 and approximately 75% of our total product revenues for the six month period ended June 30, 2010. The decrease in the percentage is primarily driven by decreased revenues of metoprolol and clonidine combined with the launches of propafenone, amlodipine and benazepril HCl, and omeprazole. We are substantially dependent upon contract-manufactured and licensed products for our overall sales, and any inability by our suppliers to meet demand could adversely affect our future sales.
The decrease in the Strativa segment revenues in the second quarter of 2011 was primarily due to the decrease in other product-related revenues driven by the termination of the extended-reach agreement to co-promote Androgel® in December 2010 coupled with a net sales decline of Megace® ES primarily due to decreased volume tempered by a single digit increase in average net selling price as compared to the prior year comparable period. The increase in the Strativa segment revenues in the year-to-date period of 2011 is primarily due to the continued growth of Nascobal® and the latter half of 2010 launches of OravigTM and Zuplenz®. The year-to-date period increase was tempered by a net sales decrease of Megace® ES primarily due to lower volume and the decrease in other product related revenues driven by the termination of the extended-reach agreement to co-promote Androgel® in December 2010.
Strativa launched OravigTM in the third quarter of 2010 and Zuplenz® in the fourth quarter of 2010. In connection with the launches, our direct customers ordered, and we shipped, OravigTM and Zuplenz® units at a level commensurate with initial forecasted demand for the product. Due to our relatively limited history in the branded pharmaceutical marketplace, it is impractical to predict with reasonable certainty the rate of OravigTMs and Zuplenz®s prescription demand uptake and ultimate acceptance in the marketplace. Therefore, during the initial launch phase of OravigTM and Zuplenz®, we will recognize revenue and all associated cost of sales as the product is prescribed to patients based on an analysis of third party market prescription data, third party wholesaler inventory data, order refill rates, and all substantive quantitative and qualitative data available to us at the time. Accordingly, for the six month period ended June 30, 2011, we have recognized $1.8 million of OravigTM revenues and $0.5 million of revenues for Zuplenz® and deferred revenues of $0.5 million for OravigTM and deferred revenues of $0.6 million for Zuplenz®, related to product that has been shipped to customers but not yet been prescribed to patients. In June 2011, we resized our Strativa business. As part of this strategic assessment, we reduced our Strativa workforce by approximately 90 people. Refer to Note 18 Restructuring Costs. We will continue to recognize revenue and all associated cost of sales as OravigTM and Zuplenz® are prescribed to patients based on an analysis of third party market prescription data, third party wholesaler inventory data, order refill rates, and all substantive quantitative and qualitative data available to us. In July 2011, Strativa returned the U.S. commercialization rights of Zuplenz® to its development partner, MonoSol Rx, as part of the resizing of our branded products division.
36
Gross Revenues to Total Revenues Deductions
Generic drug pricing at the wholesale level can create significant differences between our invoice price and net selling price. Wholesale customers purchase product from us at invoice price, then resell the product to specific healthcare providers on the basis of prices negotiated between us and the providers, and the wholesaler submits a chargeback credit to us for the difference. We record estimates for these chargebacks as well as sales returns, rebates and incentive programs, and the sales allowances for all our customers at the time of sale as deductions from gross revenues, with corresponding adjustments to our accounts receivable reserves and allowances.
We have the experience and the access to relevant information that we believe necessary to reasonably estimate the amounts of such deductions from gross revenues. Some of the assumptions we use for certain of our estimates are based on information received from third parties, such as wholesale customer inventory data and market data, or other market factors beyond our control. The estimates that are most critical to the establishment of these reserves, and therefore would have the largest impact if these estimates were not accurate, are estimates related to expected contract sales volumes, average contract pricing, customer inventories and return levels. We regularly review the information related to these estimates and adjust our reserves accordingly if and when actual experience differs from previous estimates. With the exception of the product returns allowance, the ending balances of account receivable reserves and allowances generally are eliminated during a two-month to four-month period, on average.
We recognize revenue for product sales when title and risk of loss have transferred to our customers and when collectability is reasonably assured. This is generally at the time that products are received by the customers. Upon recognizing revenue from a sale, we record estimates for chargebacks, rebates and incentives, returns, cash discounts and other sales reserves that reduce accounts receivable.
Our gross revenues for the six month periods ended June 30, 2011 and June 30, 2010 before deductions for chargebacks, rebates and incentive programs (including rebates paid under federal and state government Medicaid drug reimbursement programs), sales returns and other sales allowances were as follows:
|
| Six months ended | ||||||
($ thousands) |
| June 30, 2011 |
| Percentage of Gross Revenues |
| June 30, 2010 |
| Percentage of Gross Revenues |
Gross revenues |
| $721,841 |
|
|
| $785,733 |
|
|
|
|
|
|
|
|
|
|
|
Chargebacks |
| (120,659) |
| 16.7% |
| (100,377) |
| 12.8% |
Rebates and incentive programs |
| (51,408) |
| 7.1% |
| (66,506) |
| 8.5% |
Returns |
| (15,543) |
| 2.2% |
| (10,920) |
| 1.4% |
Cash discounts and other |
| (49,962) |
| 6.9% |
| (38,548) |
| 4.9% |
Medicaid rebates and rebates due |
| (27,129) |
| 3.8% |
| (21,976) |
| 2.8% |
Total deductions |
| (264,701) |
| 36.7% |
| (238,327) |
| 30.3% |
|
|
|
|
|
|
|
|
|
Total revenues |
| $457,140 |
| 63.3% |
| $547,406 |
| 69.7% |
The total gross-to-net adjustments as a percentage of sales increased for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 primarily due to an increase in chargebacks, and cash discounts and other.
·
Chargebacks: the increase in the percentage of gross revenues was primarily driven by higher chargeback rates for certain products that had limited or no competition in the comparable period in 2010 and a slight increase in the percentage of wholesaler sales, which earn a chargeback.
·
Returns: the increase in the rate was driven by higher returns experienced for sumatriptan partially offset by a lower rate in 2010 derived from improvements in our historical return rate coupled with increased sales volume of products with lower than average return rates.
·
Cash discounts and other: the increase is primarily due to a change in customer mix, mainly for metoprolol, which resulted in higher price adjustments.
·
Rebates and incentive programs: the decrease in dollars was primarily driven by product mix, mainly metoprolol and clonidine, partially offset by the favorable impact of new product launches.
·
Medicaid rebates and rebates due under other U.S. Government pricing programs: expense increase was due to the full year-to-date period impact of the March 2010 health care reform acts which led to higher Medicaid rebate rates and additional
37
patients eligible for managed Medicaid benefits coupled with the Medicare Part D - Gap Coverage which was effective in the first quarter of 2011.
The following tables summarize the activity for the six months ended June 30, 2011 and June 30, 2010 in the accounts affected by the estimated provisions described above ($ amounts in thousands):
|
| Six Months Ended June 30, 2011 | ||||||||
Accounts receivable reserves |
| Beginning balance |
| Provision recorded for current period sales |
| (Provision) reversal recorded for prior period sales |
| Credits processed |
| Ending balance |
Chargebacks |
| ($19,482) |
| ($120,659) |
| $ - | (1) | $121,055 |
| ($19,086) |
Rebates and incentive programs |
| (23,273) |
| (52,068) |
| 660 |
| 51,402 |
| (23,279) |
Returns |
| (48,928) |
| (15,808) |
| 265 |
| 10,420 |
| (54,051) |
Cash discounts and other |
| (16,606) |
| (49,605) |
| (357) |
| 48,414 |
| (18,154) |
Total |
| ($108,289) |
| ($238,140) |
| $568 |
| $231,291 |
| ($114,570) |
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities (2) |
| ($32,169) |
| ($27,473) |
| $344 |
| $27,150 |
| ($32,148) |
|
| Six Months Ended June 30, 2010 | ||||||||
Accounts receivable reserves |
| Beginning balance |
| Provision recorded for current period sales |
| (Provision) reversal recorded for prior period sales |
| Credits processed |
| Ending balance |
Chargebacks |
| ($16,111) |
| ($100,300) |
| ($77) | (1) | $100,510 |
| ($15,978) |
Rebates and incentive programs |
| (39,938) |
| (65,310) |
| (1,196) | (3) | 74,943 |
| (31,501) |
Returns |
| (39,063) |
| (11,490) |
| 570 |
| 7,351 |
| (42,632) |
Cash discounts and other |
| (19,160) |
| (37,890) |
| (658) |
| 41,744 |
| (15,964) |
Total |
| ($114,272) |
| ($214,990) |
| ($1,361) |
| $224,548 |
| ($106,075) |
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities (2) |
| ($24,713) |
| ($21,362) |
| ($614) |
| $10,025 |
| ($36,664) |
(1)
Unless specific in nature, the amount of provision or reversal of reserves related to prior periods for chargebacks is not determinable on a product or customer specific basis; however, based upon historical analysis and analysis of activity in subsequent periods, we have determined that our chargeback estimates remain reasonable.
(2)
Includes amounts due to indirect customers for which no underlying accounts receivable exists and is principally comprised of Medicaid rebates and rebates due under other U.S. Government pricing programs, such as TriCare, and the Department of Veterans Affairs.
(3)
During the first quarter of 2010, the Company settled a dispute with a major customer and as a result recorded an additional reserve of $1.3 million.
Use of Estimates in Reserves
We believe that our reserves, allowances and accruals for items that are deducted from gross revenues are reasonable and appropriate based on current facts and circumstances. It is possible however, that other parties applying reasonable judgment to the same facts and circumstances could develop different allowance and accrual amounts for items that are deducted from gross revenues. Additionally, changes in actual experience or changes in other qualitative factors could cause our allowances and accruals to fluctuate, particularly with newly launched or acquired products. We review the rates and amounts in our allowance and accrual estimates on a quarterly basis. If future estimated rates and amounts are significantly greater than those reflected in our recorded reserves, the resulting adjustments to those reserves would decrease our reported net revenues; conversely, if actual product returns, rebates and chargebacks are significantly less than those reflected in our recorded reserves, the resulting adjustments to those reserves would increase our reported net revenues. If we were to change our assumptions and estimates, our reserves would change, which would impact the net revenues that we report. We regularly review the information related to these estimates and adjust our reserves accordingly, if and when actual experience differs from previous estimates.
38
Gross Margin
|
| Three months ended | ||||||||
|
|
|
| Percentage of Total Revenues | ||||||
|
| June 30, |
| June 30, |
|
|
| June 30, |
| June 30, |
($ in thousands) |
| 2011 |
| 2010 |
| $ Change |
| 2011 |
| 2010 |
Gross margin: |
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $83,994 |
| $73,621 |
| $10,373 |
| 41.5% |
| 31.7% |
Strativa |
| 15,032 |
| 17,838 |
| (2,806) |
| 69.1% |
| 75.8% |
Total gross margin |
| $99,026 |
| $91,459 |
| $7,567 |
| 44.2% |
| 35.8% |
The increase in Par Pharmaceutical gross margin dollars for the three months ended June 30, 2011 is primarily due to the launches of propafenone, amlodipine and benazepril HCl, budesonide, omeprazole and chlorpheniramine/hydrocodone, tempered by lower sales of metoprolol, clonidine, and meclizine.
The top sales volume generic products (metoprolol, propafenone, amlodipine and benazepril HCl, sumatriptan, chlorpheniramine/hydrocodone, dronabinol, tramadol ER, budesonide, and meclizine) accounted for approximately $49 million gross margin dollars and a margin percentage of approximately 33% for the second quarter of 2011. For the second quarter of 2010, these top net revenue products (excluding budnesonide, propafenone, amlodipine and benazepril HCl, and chlorpheniramine/hydrocodone all of which launched after the second quarter of 2010) totaled approximately $39 million gross margin dollars with a margin percentage of approximately 25%. The increase in the gross margin percentage in the second quarter of 2011 for the top sales volume generic products compared to the second quarter of 2010 is primarily due to the launches higher gross margin percentage products like propafenone, and amlodipine and benazepril HCl, coupled with declines in lower gross margin percentage products like metoprolol.
Gross margin dollars related to all other Par generic revenues totaled approximately $35.2 million with a margin percentage of approximately 63% for the second quarter of 2011. For the second quarter of 2010, gross margin dollars for all other generic revenues totaled approximately $34.6 million with a margin percentage of approximately 48%. Gross margin dollars and gross margin percentage for these revenue streams were mainly improved by launch of omeprazole in late June 2010, royalties from the sales of diazepam, which launched in September 2010, and higher royalties from the sales of fenofibrate.
Strativa gross margin dollars decreased for the three months ended June 30, 2011, primarily due to the decrease in other product-related revenues driven by the termination of the extended-reach agreement to co-promote Androgel® in December 2010 coupled with a net sales decline of Megace® ES primarily due to decreased volume tempered by the continued growth of Nascobal®. As noted in Restructuring costs below, we also had commercial inventory write downs for product no longer a priority for our remaining Strativa sales force.
|
| Six months ended | ||||||||
|
|
|
| Percentage of Total Revenues | ||||||
|
| June 30, |
| June 30, |
|
|
| June 30, |
| June 30, |
($ in thousands) |
| 2011 |
| 2010 |
| $ Change |
| 2011 |
| 2010 |
Gross margin: |
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $176,554 |
| $142,064 |
| 34,490 |
| 42.8% |
| 28.2% |
Strativa |
| 32,125 |
| 32,905 |
| (780) |
| 71.5% |
| 75.8% |
Total gross margin |
| $208,679 |
| $174,969 |
| $33,710 |
| 45.6% |
| 32.0% |
The increase in Par Pharmaceutical gross margin dollars for the six months ended June 30, 2011 is primarily due to the launches of propafenone, amlodipine and benazepril HCl, budesonide, omeprazole and chlorpheniramine/hydrocodone, tempered by lower sales of metoprolol, clonidine, and meclizine.
The top sales volume generic products (metoprolol, propafenone, amlodipine and benazepril HCl, sumatriptan, chlorpheniramine/hydrocodone, dronabinol, tramadol ER, budesonide, and meclizine) accounted for approximately $109 million gross margin dollars and a margin percentage of approximately 36% for the year-to-date period of 2011. For the year-to-date period of 2010, these top net revenue products (excluding budesonide, propafenone, amlodipine and benazepril HCl, and chlorpheniramine/hydrocodone all of which launched after the year-to-date period of 2010) totaled approximately $84 million gross margin dollars with a margin percentage of approximately 22%. The increase in the gross margin percentage in the year-to-date period of 2011 for the top sales volume generic products compared to the year-to-date period of 2010 is primarily due to the launches of higher gross margin percentage products like propafenone, and amlodipine and benazepril HCl, coupled with declines in lower gross margin percentage products like metoprolol.
39
Gross margin dollars related to all other Par generic revenues totaled approximately $68 million with a margin percentage of approximately 59% for the year-to-date period of 2011. For the year-to-date period of 2010, gross margin dollars for all other generic revenues totaled approximately $59 million with a margin percentage of approximately 47%. Gross margin dollars and gross margin percentage for these revenue streams were mainly improved by launch of omeprazole in late June 2010, royalties from the sales of diazepam, which launched in September 2010, and higher royalties from the sales of fenofibrate.
Strativa gross margin dollars decreased for the six months ended June 30, 2011, primarily due to the decrease in other product-related revenues driven by the termination of the extended-reach agreement to co-promote Androgel® in December 2010 coupled with a net sales decline of Megace® ES primarily due to decreased volume tempered by the continued growth of Nascobal®.
Operating Expenses
Research and Development
|
| Three months ended | ||||||||||
|
|
|
|
|
| Percentage of Total Revenues | ||||||
($ in thousands) |
| June 30, 2011 |
| June 30, 2010 |
|
$ Change |
|
% Change |
| June 30, 2011 |
| June 30, 2010 |
Research and development: |
|
|
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $7,634 |
| $22,189 |
| ($14,555) |
| (65.6%) |
| 3.8% |
| 9.6% |
Strativa |
| 443 |
| 471 |
| (28) |
| (5.9%) |
| 2.0% |
| 2.0% |
Total research and development |
| $8,077 |
| $22,660 |
| ($14,583) |
| (64.4%) |
| 3.6% |
| 8.9% |
Par Pharmaceutical:
The decrease in Par Pharmaceutical research and development expense for the three month period ended June 30, 2011 is principally comprised of the following components:
·
a net $15.8 million decrease in outside development costs driven by the non-recurrence of an $11.0 million up-front payment related to the acquisition of an ANDA from a third party in the prior year period and the non-recurrence of a $6.0 million up-front payment to acquire the rights and obligations of a collaboration product in development in the prior year period. Both payments were expensed as incurred during the three month period ended June 30, 2010.
·
a net $0.6 million increase in biostudy and material costs, related to the ongoing development of generic products.
Strativa:
Strativa research and development principally reflects FDA filing fees for the three months ended June 30, 2011 and June 30, 2010.
|
| Six months ended | ||||||||||
|
|
|
|
|
| Percentage of Total Revenues | ||||||
($ in thousands) |
| June 30, 2011 |
| June 30, 2010 |
|
$ Change |
|
% Change |
| June 30, 2011 |
| June 30, 2010 |
Research and development: |
|
|
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $17,711 |
| $26,275 |
| ($8,564) |
| (32.6%) |
| 4.3% |
| 5.2% |
Strativa |
| 1,076 |
| 1,037 |
| 39 |
| 3.8% |
| 2.4% |
| 2.4% |
Total research and development |
| $18,787 |
| $27,312 |
| ($8,525) |
| (31.2%) |
| 4.1% |
| 5.0% |
Par Pharmaceutical:
The decrease in Pars research and development expense for the six month period ended June 30, 2010 is driven by a net $15.0 million decrease in outside development costs driven by the non-recurrence of the aforementioned $17 million of up-front expenditures incurred in the prior year, tempered by a $5.4 million increase in biostudy and material costs and a $0.8 million increase in employment costs related to the ongoing development of generic products.
Strativa:
Strativa research and development principally reflects FDA filing fees for the six months ended June 30, 2011 and June 30, 2010.
40
Selling, General and Administrative Expenses
|
| Three months ended | ||||||||||
|
|
|
|
|
| Percentage of Total Revenues | ||||||
($ in thousands) |
| June 30, 2011 |
| June 30, 2010 |
|
$ Change |
|
% Change |
| June 30, 2011 |
| June 30, 2010 |
Selling, general and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $24,515 |
| $20,750 |
| $3,765 |
| 18.1% |
| 12.1% |
| 8.9% |
Strativa |
| 21,641 |
| 28,115 |
| (6,474) |
| (23.0%) |
| 99.5% |
| 119.5% |
Total selling, general and administrative |
| $46,156 |
| $48,865 |
| ($2,709) |
| (5.5%) |
| 20.6% |
| 19.1% |
The net decrease in SG&A expenditures principally reflects:
·
a $4.6 million reduction in direct Strativa selling costs driven by lower marketing expenditures across all products and the non-recurrence of certain pre-launch activities incurred in the prior year period related to Zuplenz® and OravigTM;
·
the non-recurrence of $2.6 million of one-time severance charges related to second quarter 2010 executive terminations; tempered by,
·
$2.7 million of incremental legal costs driven by ANDA litigation activities, business development matters, and the Department of Justice matter, and,
·
$1.0 million of accrued expense related to the annual pharmaceutical manufacturers fee assessed by the Secretary of Treasury under the 2011 provisions of last years U.S. healthcare reform.
|
| Six months ended | ||||||||||
|
|
|
|
|
| Percentage of Total Revenues | ||||||
($ in thousands) |
| June 30, 2011 |
| June 30, 2010 |
|
$ Change |
|
% Change |
| June 30, 2011 |
| June 30, 2010 |
Selling, general and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical |
| $49,183 |
| $39,798 |
| $9,385 |
| 23.6% |
| 11.9% |
| 7.9% |
Strativa |
| 43,918 |
| 50,302 |
| (6,384) |
| (12.7%) |
| 97.7% |
| 115.8% |
Total selling, general and administrative |
| $93,101 |
| $90,100 |
| $3,001 |
| 3.3% |
| 20.4% |
| 16.5% |
The net increase in SG&A expenditures principally reflects:
·
$7.7 million of incremental legal costs driven by AWP litigation, ANDA litigation activities, business development matters, and the Department of Justice matter;
·
$1.1 million of accrued expense related to the annual pharmaceutical manufacturers fee assessed by the Secretary of Treasury under the 2011 provisions of last years U.S. healthcare reform;
·
higher accounting fees related to business development activities of approximately $0.5 million; tempered by,
·
a $5.6 million reduction in direct Strativa selling costs driven by lower marketing expenditures across all products and the non-recurrence of certain pre-launch activities incurred in the prior year period related to Zuplenz® and OravigTM;
·
lower one-time severance charges of approximately $2.1 million.
Settlements and Loss Contingencies, net
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
($ in thousands) |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Settlements and loss contingencies, net |
| $ - |
| ($4,068) |
| $190,560 |
| ($4,006) |
In first quarter of 2011, we recorded the settlement in principal of AWP litigation claims related to federal contributions to state Medicaid programs in 49 states (excluding Illinois), and the claims of Texas, Florida, Alaska, South Carolina and Kentucky relating to their Medicaid programs for $154 million and a settlement with the State of Idaho for $1.7 million. We also recorded an accrual for the remaining AWP matters.
In May 2010, we announced that Par entered into a licensing agreement with Glenmark Generics to market ezetimibe 10 mg tablets, the generic version of Mercks Zetia®, in the U.S. Subsequent to our entering that agreement, Glenmark entered into a separate settlement agreement with Merck that resolved patent litigation relating to Glenmarks challenge to Mercks patent covering Zetia®. Under the terms of our agreement with Glenmark, Par earned $4.1 million of one-time income from Glenmark in connection with the settlement agreement.
41
Restructuring costs
In June 2011, we announced our plans to resize our branded products division, Strativa Pharmaceuticals, as part of a strategic assessment. We reduced our Strativa workforce by approximately 90 people. The remaining Strativa sales force will focus their marketing efforts on Megace® ES and Nascobal® Nasal Spray. In connection with these actions, we incurred expenses for severance and other employee-related costs. The intangible assets related to products no longer a priority for our remaining Strativa sales force were fully impaired by these actions. We also had non-cash inventory write downs for product and samples associated with the products no longer a priority for our remaining Strativa sales force. Inventory write downs were classified as cost of goods sold on the condensed consolidated statements of operations for the quarter ended June 30, 2011. In July 2011, Strativa returned the U.S. commercialization rights of Zuplenz® to its development partner, MonoSol Rx, as part of the resizing of our branded products division.
The following table summarizes the restructuring costs incurred by us in the second quarter of 2011 and the remaining related restructuring liabilities balance (included in accrued expenses and other current liabilities on the condensed consolidated balance sheet) as of June 30, 2011 ($ amounts in thousands);
Restructuring Activities |
| Initial Charge |
| Cash Payments |
| Non-Cash Charge Related to Inventory and/or Intangible Assets |
| Reversals, Reclass or Transfers |
| Liabilities at June 30, 2011 |
Intangible asset impairments |
| $24,226 |
| $ - |
| ($24,226) |
| $ - |
| $ - |
Severance and employee |
| 1,556 |
| - |
| - |
| - |
| (1,556) |
Sample inventory write-down and other |
| 1,204 |
| - |
| (1,204) |
| - |
| - |
Total restructuring costs line item |
| $26,986 |
| $ - |
| ($25,430) |
| $ - |
| ($1,556) |
Commercial inventory write-down classified as cost of goods sold |
| 674 |
| - |
| (674) |
| - |
| - |
Total |
| $27,660 |
| $ - |
| ($26,104) |
| $ - |
| ($1,556) |
The total charge related to the Strativa segment. We expect that the liability amount at June 30, 2011 will result in cash expenditures during 2011. The charges related to this plan to reduce the size of the Strativa business are reflected on the condensed consolidated statements of operations for the quarter ended June 30, 2011.
Gain on Sale of Product Rights and other
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
($ in thousands) |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Gain on sale of product rights and other |
| $ - |
| $146 |
| $ - |
| $5,921 |
In the first quarter of 2010, Optimer Pharmaceuticals announced positive results from the second of two pivotal Phase 3 trials evaluating the safety and efficacy of fidaxomicin in patients with clostridium difficile infection (CDI), triggering a one-time $5 million milestone payment due to us under a termination agreement entered into by the parties in 2007. The cash payment was received in the second quarter of 2010. Under the terms of the 2007 agreement, we are also entitled to royalty payments on future sales of fidaxomicin.
In addition, we recognized a gain on the sale of product rights of $0.9 million during the six-month period ended June 30, 2010, related to the sale of multiple ANDAs.
Operating (Loss) Income
|
| Three months ended | ||||
|
| June 30, |
| June 30, |
|
|
($ in thousands) |
| 2011 |
| 2010 |
| $ Change |
Operating (loss) income: |
|
|
|
|
|
|
Par Pharmaceutical |
| $51,845 |
| $34,896 |
| $16,949 |
Strativa |
| (34,038) |
| (10,748) |
| (23,290) |
Total operating (loss) income |
| $17,807 |
| $24,148 |
| ($6,341) |
For the three months ended June 30, 2011, the decrease in our operating income as compared to prior year was primarily due to restructuring costs associated with the second quarter reorganization of our Strativa segment tempered by an increase in gross margin from our Par Pharmaceutical segment coupled with a decrease in research and development expenditures.
|
| Six months ended | ||||
|
| June 30, |
| June 30, |
|
|
($ in thousands) |
| 2011 |
| 2010 |
| $ Change |
Operating (loss) income: |
|
|
|
|
|
|
Par Pharmaceutical |
| ($80,901) |
| $80,918 |
| ($161,819) |
Strativa |
| (39,854) |
| (13,434) |
| (26,420) |
Total operating (loss) income |
| ($120,755) |
| $67,484 |
| ($188,239) |
The decrease in our operating income in the six month period ended June 30, 2011 as compared to the prior year was primarily due to the first quarter AWP settlement in principal related accruals and restructuring costs associated with the second quarter reorganization of our Strativa segment tempered by an increase in gross margin from our Par Pharmaceutical segment.
Interest Income
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
($ in thousands) |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Interest income |
| $382 |
| $273 |
| $805 |
| $601 |
Interest income principally includes interest income derived from money market and other short-term investments.
Interest Expense
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
($ in thousands) |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Interest expense |
| ($150) |
| ($918) |
| ($301) |
| ($1,826) |
Interest expense in the three and six month period ended June 30, 2011, was principally comprised of amortization of deferred financing costs relating to our October 1, 2010 Credit Agreement. We have not drawn on the revolving credit facility as of the date of this Quarterly Report on Form 10-Q.
Interest expense in the three and six month period ended June 30, 2010, related to our senior subordinated convertible notes which matured on September 30, 2010.
Income Taxes
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
($ in thousands) |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
(Benefit) provision for income taxes |
| $8,859 |
| $5,468 |
| ($20,587) |
| $21,798 |
Effective tax rate |
| 49% |
| 23% |
| 17% |
| 33% |
The provisions (benefit) were based on the applicable federal and state tax rates for those periods (see Notes to Condensed Consolidated Financial Statements - Note 9 Income Taxes). The effective tax rate for the three months ended June 30, 2011 is increased by a charge for a change in valuation of our net deferred tax asset resulting from favorable state law changes enacted during the quarter. The effective tax rate for the six months ended June 30, 2011 is reduced by our estimate of the portion of legal settlements and settlement in principal in the quarter which may not be tax deductible and by non-deductibility of our portion of the annual pharmaceutical manufacturer fee.
43
Discontinued Operations
|
| Three months ended |
| Six months ended | ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
($ in thousands) |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
Provision for income taxes |
| $127 |
| ($360) |
| $253 |
| ($232) |
Loss from discontinued operations |
| ($127) |
| $360 |
| ($253) |
| $232 |
In January 2006, we announced the divestiture of FineTech Laboratories, Ltd (FineTech), effective December 31, 2005. In the periods presented we recorded tax amounts to discontinued operations for interest related to contingent tax liabilities. The results of FineTech operations have been classified as discontinued for all periods presented because we had no continuing involvement in FineTech.
FINANCIAL CONDITION
Liquidity and Capital Resources
|
| Six months ended |
|
| June 30, |
($ in thousands) |
| 2011 |
Cash and cash equivalents at beginning of period |
| $218,674 |
Net cash provided by operating activities |
| 100,140 |
Net cash used in investing activities |
| (17,447) |
Net cash provided by financing activities |
| 5,644 |
Net increase in cash and cash equivalents |
| $88,337 |
Cash and cash equivalents at end of period |
| $307,011 |
Cash provided by operations for the six months ended June 30, 2011, reflects increased gross margin dollars generated from revenues coupled with inventory draw downs and timing of outflows to distribution partners tempered by inflows from customers (net accounts receivables growth) relative to net revenue activity. Cash flows used by investing activities were primarily driven by capital expenditures and the net investment in available for sale debt securities. Cash provided by financing activities in the six month period ended June 30, 2011 mainly represented the proceeds from stock option exercises coupled with excess tax benefits on share-based compensation as actual tax benefits exceeded projected benefit as the value of vested restricted shares exceeded their grant date value tempered by the payment of withholding taxes related to the vesting of restricted shares coupled with the partial cash settlement of restricted stock grants with market vesting conditions.
Our working capital, current assets minus current liabilities, of $319 million at June 30, 2011 decreased approximately $46 million from $365 million at December 31, 2010, which primarily reflects the AWP settlement in principal related accruals at June 30, 2011 tempered by the cash generated by operations. The working capital ratio, which is calculated by dividing current assets by current liabilities, was 1.96x at June 30, 2011 compared to 4.28x at December 31, 2010. We believe that our working capital ratio indicates the ability to meet our ongoing and foreseeable obligations for at least the next 12 fiscal months.
Detail of Operating Cash Flows
|
| Six months ended | ||
|
| June 30, |
| June 30, |
($ in thousands) |
| 2011 |
| 2010 |
Cash received from customers, royalties and other |
| $469,018 |
| $598,271 |
Cash paid for inventory |
| (71,007) |
| (66,222) |
Cash paid to employees |
| (74,778) |
| (45,850) |
Cash paid to all other suppliers and third parties |
| (215,015) |
| (361,290) |
Interest received (paid), net |
| 1,042 |
| 346 |
Income taxes paid, net |
| (9,120) |
| (21,003) |
Net cash provided by operating activities |
| $100,140 |
| $104,251 |
Sources of Liquidity
Our primary source of liquidity is cash received from customers. The decrease in net cash provided by operating activities for the year-to-date period of 2011 as compared to the prior year comparable period can be attributed to lower cash receipts from customers, as detailed above, driven primarily by lower net revenues for metoprolol. Our ability to continue to generate cash from operations is predicated not only on our ability to maintain a sustainable amount of sales of our current product portfolio, but also our ability to monetize our product pipeline and future products that we may acquire. Our Par generic product pipeline consists of
44
approximately 31 ANDAs pending with the FDA, including 13 first-to-file opportunities. Our future profitability depends, to a significant extent, upon our ability to introduce, on a timely basis, new generic products that are either the first to market (or among the first to market) or otherwise can gain significant market share. No assurances can be given that we or any of our strategic partners will successfully complete the development of any of these potential products either under development or proposed for development, that regulatory approvals will be granted for any such product, that any approved product will be produced in commercial quantities or that any approved product will be sold profitably. Commercializing brand pharmaceutical products is more costly than generic products. We cannot be certain that our brand product expenditures will result in the successful development or launch of brand products that will prove to be commercially successful or will improve the long-term profitability of our business.
Another source of potential liquidity is the capital markets. We filed a shelf registration statement during the second quarter of 2009, under which we may sell a combination of common stock, preferred stock, debt securities, or warrants from time to time for an aggregate offering price of up to $150 million.
Effective October 1, 2010, we also entered into a $75 million unsecured credit facility with JP Morgan as Administrative Agent and US Bank as Syndication Agent. The credit facility has an accordion feature pursuant to which we can increase the amount available to be borrowed by up to an additional $25 million under certain circumstances. The credit facility expires on October 1, 2013. We had no borrowings under the credit facility as of June 30, 2011.
Uses of Liquidity
Our uses of liquidity and future and potential uses of liquidity include the following:
·
The payment of the $154 million settlement in principal for certain Average Wholesale Prices (AWP) matters (specifically, claims related to federal contributions to state Medicaid programs in 49 states (excluding Illinois), and the claims of Texas, Florida, Alaska, South Carolina and Kentucky relating to their Medicaid programs) in the second half of 2011. In addition on June 2, 2011, we reached a settlement in principle to resolve claims brought by the city of New York, New York Counties and the state of Iowa under respective state law for $23 million. The related payment of these settlements in principle are expected to be made in 2011.
·
Potential liabilities related to the outcomes of litigation, such as the remaining AWP matters, or the outcomes of investigations by federal authorities, such as the Department of Justice. In the event that we experience any loss, such loss may result in a material impact on our liquidity or financial condition when such liability is paid.
·
Cash paid for inventory purchases as detailed in Details of Operating Cash Flows above.
·
Cash paid to all other suppliers and third parties as detailed in Details of Operating Cash Flows above. The decrease is mainly due to lower metoprolol sales and sales of other licensed products that resulted in lower amounts paid to partners.
·
Cash compensation paid to employees as detailed in Details of Operating Cash Flows above. The increase for this period was mainly due to the bonus payments in the first quarter 2011 related to our 2010 operating performance coupled with a larger sales force for Strativa in the first quarter of 2011 as compared to the first quarter of 2010.
·
Cash paid to BioAlliance of $20 million in the second quarter of 2010 as a result of the FDA approval of OravigTM. In June 2011, we decided to reduce our marketing efforts for this product as part of plans to resize Strativa. Refer to Note 18 Restructuring Costs for further details.
·
The payment of our senior subordinated convertible notes that matured in September 2010 ($47.7 million principal amount).
·
Cash paid to Glenmark Generics of $15 million in the second quarter of 2010 related to a licensing agreement to market ezetimibe 10 mg tablets, the generic version of Mercks Zetia®, in the U.S.
·
Potential liabilities related to the outcomes of audits by regulatory agencies like the IRS or the Office of Inspector General of the Department of Veterans Affairs. In the event that our loss contingency is ultimately determined to be higher than originally accrued, the recording of the additional liability may result in a material impact on our liquidity or financial condition when such additional liability is paid.
·
2011 capital expenditures are expected to total approximately $15 million, approximately $6 million of which had been incurred as of June 30, 2011.
·
We entered into a definitive agreement to purchase privately-held Edict Pharmaceuticals Private Limited, a Chennai, India-based developer and manufacturer of generic pharmaceuticals, for up to $37.6 million in cash and our repayment of certain additional pre-close indebtedness. Our purchase of Edict is subject to the Reserve Bank of Indias approval of certain terms in the definitive agreement and the satisfaction or waiver of other conditions to closing. Our purchase of Edict also is subject to resolution of related litigation. Refer to Note 14 Commitments, Contingencies and Other Matters for further details.
45
·
Expenditures related to current business development and product acquisition activities. As of June 30, 2011, the total potential future payments that ultimately could be due under existing agreements related to products in various stages of development were approximately $14 million. This amount is exclusive of contingent payments tied to the achievement of sales milestones, which cannot be determined at this time and would be funded through future revenue streams.
·
Normal course payables due to distribution agreement partners of approximately $50 million as of June 30, 2011 related primarily to amounts due under profit sharing agreements. We expect to pay substantially all of the $50 million during the first two months of the third quarter of 2011. The risk of lower cash receipts from customers due to potential decreases in revenues associated with competition or supply issues related to partnered products, in particular metoprolol and budesonide, would be mitigated by proportional decreases in amounts payable to distribution agreement partners.
We believe that we will be able to monetize our current product portfolio, our product pipeline, and future product acquisitions and generate sufficient operating cash flows that, along with existing cash, cash equivalents and available for sale securities, will allow us to meet our financial obligations over the foreseeable future. We expect to continue to fund our operations, including our research and development activities, capital projects, in-licensing product activity and obligations under our existing distribution and development arrangements discussed herein, out of our working capital. Our future business or product acquisitions may require additional debt and/or equity financing; there can be no assurance that we will be able to obtain any such additional financing when needed on acceptable or favorable terms.
Stock Repurchase Program
In 2007, our Board approved an expansion of our share repurchase program allowing for the repurchase of up to $75.0 million of our common stock. The repurchases may be made, subject to compliance with applicable securities laws, from time to time in the open market or in privately negotiated transactions. Shares of common stock acquired through the repurchase program are and will be available for general corporate purposes. We repurchased 1,643 thousand shares of our common stock for approximately $31.4 million pursuant to the expanded program in 2007. We did not repurchase any shares of common stock under this authorization in 2008, 2009, 2010 or the first quarter of 2011. The authorized amount remaining for stock repurchases under the repurchase program was $43.6 million, as of June 30, 2011. The repurchase program has no expiration date.
Analysis of available for sale debt securities held as of June 30, 2011
In addition to our cash and cash equivalents, we had approximately $39 million of available for sale marketable debt securities classified as current assets on the condensed consolidated balance sheet as of June 30, 2011. These available for sale marketable debt securities were all available for immediate sale. We intend to continue to use our current liquidity to support our Par Pharmaceutical and Strativa businesses, enter into product license arrangements, potentially acquire other complementary businesses and products, and for general corporate purposes.
Contractual Obligations as of June 30, 2011
The dollar values of our material contractual obligations and commercial commitments as of June 30, 2011 were as follows ($ in thousands):
|
|
|
| Amounts Due by Period |
|
| ||||||
Obligation |
| Total Monetary |
| 2011 |
| 2012 to |
| 2014 to |
| 2016 and |
|
|
| Obligations |
|
| 2013 |
| 2015 |
| thereafter |
| Other | ||
AWP settlements in principal |
| $177,000 |
| $177,000 |
| $ - |
| $ - |
| $ - |
| $ - |
Operating leases |
| 12,253 |
| 1,730 |
| 6,271 |
| 3,977 |
| 275 |
| - |
Fees related to credit facility |
| 591 |
| 131 |
| 459 |
| - |
| - |
| - |
Purchase obligations (1) |
| 101,663 |
| 101,663 |
| - |
| - |
| - |
| - |
Long-term tax liability (2) |
| 41,905 |
| - |
| - |
| - |
| - |
| 41,905 |
Severance payments |
| 2,334 |
| 1,860 |
| 474 |
| - |
| - |
| - |
Other |
| 698 |
| 698 |
| - |
| - |
| - |
| - |
Total obligations |
| $336,444 |
| $283,082 |
| $7,204 |
| $3,977 |
| $275 |
| $41,905 |
(1)
Purchase obligations consist of both cancelable and non-cancelable inventory and non-inventory items. At June 30, 2011 of the total purchase obligations, approximately $18 million related to sumatriptan and approximately $14 million related to metoprolol.
(2)
The difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to FASB ASC 740-10 Income Taxes represents an unrecognized tax benefit. An unrecognized tax benefit is a liability that represents a potential future obligation to the taxing authorities. As of June 30, 2011, the amount represents unrecognized tax benefits, interest and penalties based on evaluation of tax positions and concession on tax issues challenged by the IRS. For presentation on the table above, we included the related long-term liability in the Other column.
46
Financing
Refer to Note 10 Unsecured Credit Facility for a description of a credit facility obtained on October 1, 2010.
Critical Accounting Policies and Use of Estimates
Our critical accounting policies are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. There has been no change, update or revision to our critical accounting policies subsequent to the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Subsequent Events
In July 2011, we received a notice letter from a generic pharmaceutical manufacturer, advising that it has filed an Abbreviated New Drug Application (ANDA) with the U.S. FDA containing a Paragraph IV certification referencing Megace® ES. Megace® ES is protected by Elan Pharma International Limiteds U.S. Patents 6,592,903 and 7,101,576. We intend, with Elan, to investigate the Paragraph IV certification and ANDA, and to enforce its patents, which expire in 2020 and 2024, respectively, as appropriate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Available for sale debt securities
The primary objectives for our investment portfolio are liquidity and safety of principal. Investments are made with the intention to achieve the best available rate of return on traditionally low risk investments. We do not buy and sell securities for trading purposes. Our investment policy limits investments to certain types of instruments issued by institutions with investment-grade credit ratings, the U.S. government and U.S. governmental agencies. We are subject to market risk primarily from changes in the fair values of our investments in debt securities including governmental agency and municipal securities, and corporate bonds. These instruments are classified as available for sale securities for financial reporting purposes. A ten percent increase in interest rates on June 30, 2011 would have caused the fair value of our investments in available for sale debt securities to decline by approximately $0.2 million as of that date. Additional investments are made in overnight deposits and money market funds. These instruments are classified as cash and cash equivalents for financial reporting purposes, which generally have lower interest rate risk relative to investments in debt securities and changes in interest rates generally have little or no impact on their fair values. For cash, cash equivalents and available for sale debt securities, a ten percent decrease in interest rates would decrease the interest income we earned by approximately $0.1 million on an annual basis.
The following table summarizes the carrying value of available for sale securities that subject us to market risk at June 30, 2011 and December 31, 2010 ($ amounts in thousands):
| June 30, |
| December 31, |
| 2011 |
| 2010 |
Securities issued by government agencies | $5,003 |
| $ - |
Corporate bonds | 33,649 |
| 27,866 |
Available for sale marketable debt securities | $38,652 |
| $27,866 |
We do not have any financial obligations exposed to significant variability in interest rates.
47
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings with the SEC is recorded, processed, summarized and reported within the time period specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure based on the definition of disclosure controls and procedures as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). In designing and evaluating disclosure controls and procedures, we have recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply judgment in evaluating our controls and procedures. An evaluation was performed under the supervision and with the participation of our management, including our CEO and CFO, to assess the effectiveness of the design and operation of our disclosure controls and procedures (as defined under the Exchange Act) as of June 30, 2011. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2011.
Changes in Internal Control over Financial Reporting
There have been no changes identified during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Unless otherwise indicated in the details provided below, we cannot predict with certainty the outcome or the effects of the litigations described below. The outcome of these litigations could include substantial damages, the imposition of substantial fines, penalties, and injunctive or administrative remedies; however, unless otherwise indicated below, at this time we are not able to estimate the possible loss or range of loss, if any, associated with these legal proceedings. From time to time, we may settle or otherwise resolve these matters on terms and conditions that we believe are in the best interests of the Company. Resolution of any or all claims, investigations, and legal proceedings, individually or in the aggregate, could have a material adverse effect on our results of operations, cash flows or financial condition.
Corporate Litigation
We and certain of our former executive officers have been named as defendants in consolidated class action lawsuits filed on behalf of purchasers of our common stock between July 23, 2001 and July 5, 2006. The lawsuits followed our July 5, 2006 announcement regarding the restatement of certain of our financial statements and allege that we and certain members of our then management engaged in violations of the Exchange Act, by issuing false and misleading statements concerning our financial condition and results of operations. The class actions are pending in the U.S. District Court for the District of New Jersey. On July 23, 2008, co-lead plaintiffs filed a Second Consolidated Amended complaint. On September 30, 2009, the Court granted a motion to dismiss all claims as against Kenneth Sawyer but denied the motion as to the Company, Dennis OConnor, and Scott Tarriff. We and Messrs. OConnor and Tarriff have answered the Amended complaint and intend to vigorously defend the consolidated class action. Plaintiffs have filed a motion for class certification which we and the other defendants intend to oppose.
Following the announcement of our agreement to acquire Edict Pharmaceuticals Private Limited (Edict), a Chennai, India-based developer and manufacturer of generic pharmaceuticals, Gavis Pharma LLC (Gavis), an affiliate of Novel Laboratories, Inc. and a former shareholder of Edict, filed a lawsuit on June 29, 2011, in the Superior Court for the State of New Jersey, Somerset County, against us, Edict, and the shareholders of Edict, seeking to enjoin the closing of our acquisition of Edict and money damages. Gavis asserts claims against certain Edict shareholders for fraudulent inducement in connection with Gaviss 2009 decision to sell its equity interest in Edict; against Edict and certain Edict shareholders for breach of contract; and against us for tortious interference with contract for entering into our agreement to acquire Edict. The defendants have filed motions to dismiss the lawsuit and have agreed by stipulation to delay closing our acquisition of Edict until the Court renders a ruling on the plaintiffs preliminary injunction motion, scheduled for hearing on August 3, 2011. The defendants motions to dismiss have been scheduled for hearing on September 16, 2011. We intend to vigorously defend this lawsuit and pursue our defenses and counterclaims against Gavis.
Patent Related Matters
On April 28, 2006, CIMA Labs, Inc. (CIMA) and Schwarz Pharma, Inc. (Schwarz Pharma) filed separate lawsuits against us in the U.S. District Court for the District of New Jersey. CIMA and Schwarz Pharma each have alleged that we infringed U.S. Patent Nos. 6,024,981 (the 981 patent) and 6,221,392 (the 392 patent) by submitting a Paragraph IV certification to the FDA for approval of alprazolam orally disintegrating tablets. CIMA owns the 981 and 392 patents and Schwarz Pharma is CIMAs exclusive licensee. The two lawsuits were consolidated on January 29, 2007. In response to the lawsuit, we have answered and counterclaimed denying CIMAs and Schwarz Pharmas infringement allegations, asserting that the 981 and 392 patents are
48
not infringed and are invalid and/or unenforceable. All 40 claims in the 981 patent were rejected in two non-final office actions in a reexamination proceeding at the United States Patent and Trademark Office (USPTO) on February 24, 2006 and on February 24, 2007. The 392 patent is also the subject of a reexamination proceeding. On July 10, 2008, the USPTO rejected with finality all claims pending in both the 392 and 981 patents. On September 28, 2009, the USPTO Board of Appeals affirmed the Examiners rejection of all claims in the 981 patent. On November 25, 2009, plaintiffs requested a rehearing before the USPTO Board of Appeals regarding the 981 patent. On March 24, 2011, the USPTO Board of Appeals affirmed the rejections pending for both patents and added new grounds for rejection of the 981 patent. We intend to vigorously defend this lawsuit and pursue our counterclaims.
We entered into a licensing agreement with developer Paddock Laboratories, Inc. (Paddock) to market testosterone 1% gel, a generic version of Unimed Pharmaceuticals, Inc.s (Unimed) product Androgel®. As a result of the filing of an ANDA, Unimed and Laboratories Besins Iscovesco (Besins), co-assignees of the patent-in-suit, filed a lawsuit on August 22, 2003 against Paddock in the U.S. District Court for the Northern District of Georgia alleging patent infringement (the Paddock litigation). On September 13, 2006, we acquired from Paddock all rights to the ANDA for the testosterone 1% gel, and the Paddock litigation was resolved by a settlement and license agreement that terminates all on-going litigation and permits us to launch the generic version of the product no earlier than August 31, 2015, and no later than February 28, 2016, assuring our ability to market a generic version of Androgel® well before the expiration of the patents at issue. On March 7, 2007, we were issued a Civil Investigative Demand seeking information and documents in connection with the court-approved settlement in 2006 of the patent dispute. On January 30, 2009, the Bureau of Competition for the Federal Trade Commission (FTC) filed a lawsuit against us in the U.S. District Court for the Central District of California alleging violations of antitrust laws stemming from our court-approved settlement in the Paddock litigation, and several distributors and retailers followed suit with a number of private plaintiffs complaints beginning in February 2009. On April 9, 2009, the U.S. District Court for the Central District of California granted Pars motion to transfer the FTC lawsuit and the private plaintiffs complaints to the U.S. District Court for the Northern District of Georgia. On July 20, 2009, we filed a motion to dismiss the FTCs case and on September 1, 2009, we filed a motion to dismiss the private plaintiffs cases in the U.S. District Court for the Northern District of Georgia, and on February 23, 2010, the Court granted our motion to dismiss the FTCs claims and granted in part and denied in part our motion to dismiss the claims of the private plaintiffs. On June 10, 2010, the FTC appealed the District Courts dismissal of the FTCs claims to the U.S. Court of Appeals for the 11th Circuit. On May 13, 2011, oral argument was held before the Court of Appeal and we currently await the Courts decision. We believe we have complied with all applicable laws in connection with the court-approved settlement and intend to continue to vigorously defend these actions.
On July 6, 2007, Sanofi-Aventis and Debiopharm, S.A. filed a lawsuit against us and our development partner, MN Pharmaceuticals ("MN"), in the U.S. District Court for the District of New Jersey. The complaint alleges infringement of U.S. Patent Nos. 5,338,874 (the 874 patent) and 5,716,988 (the 988 patent) after we and MN submitted a Paragraph IV certification to the FDA for approval of 50 mg/10 ml, 100 mg/20 ml, and 200 mg/40 ml oxaliplatin by injection. On January 14, 2008, following MN's amendment of its ANDA to include oxaliplatin injectable 5 mg/ml, 40 ml vial, Sanofi-Aventis filed a complaint asserting infringement of the '874 and the '988 patents. MN and we filed our Answer and Counterclaim on February 20, 2008. On June 18, 2009, the District Court granted summary judgment of non-infringement to several defendants, including us, on the 874 patent, but to date has not rendered a summary judgment decision regarding the 988 patent. On September 10, 2009, the U.S. Court of Appeals for the Federal Circuit reversed the District Court and remanded the case for further proceedings. On September 24, 2009, Sanofi-Aventis filed a motion for preliminary injunction against defendants who entered the market following the District Courts summary judgment ruling. On November 19, 2009, the District Court dismissed all pending motions for summary judgment with possibility of the motions being renewed upon letter request to the Court. On April 14, 2010, the District Court entered a consent judgment and order agreed to by us, MN, and the plaintiffs, which agreement settled the pending litigation. In view of this agreement, MN and we will enter the market with generic Eloxatin on August 9, 2012, or earlier in certain circumstances.
On October 1, 2007, Elan Corporation, PLC (Elan) filed a lawsuit against us and our development partners, IntelliPharmaCeutics Corp. and IntelliPharmaCeutics Ltd. ("IPC"), in the U.S. District Court for the District of Delaware. On October 5, 2007, Celgene Corporation (Celgene) and Novartis Pharmaceuticals Corporation and Novartis Pharma AG (Novartis) filed a lawsuit against IPC in the U.S. District Court for the District of New Jersey. The complaint in the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because we submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 15 mg, and 20 mg dexmethylphenidate hydrochloride extended release capsules. The complaint in the New Jersey case alleged infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because IPC and we submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 15 mg, and 20 mg dexmethylphenidate extended release capsules. On March 5, 2010 and March 15, 2010, the U.S. District Courts for the Districts of New Jersey and Delaware, respectively, entered stays of the litigation between plaintiffs and us and IPC in view of settlement agreements reached by the parties. The settlement agreement terms are confidential.
On March 25, 2011, Elan Corporation, PLC (Elan) filed a lawsuit against us and our development partners, IntelliPharmaceutics Corp. and IntelliPharmaCeutics Ltd. (IPC) in the U.S. District Court for the District of Delaware, and Celgene Corporation (Celgene) and Novartis filed a lawsuit against IPC in the U.S. District Court for the District of New Jersey. The complaint in the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because we submitted a Paragraph IV certification to the FDA for approval of 30 mg dexmethylphenidate hydrochloride extended release capsules. The complaint in the New Jersey case alleged infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because IPC and we submitted a Paragraph IV certification to the FDA for approval of 30 mg dexmethylphenidate extended
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release capsules. We intend to vigorously defend and expeditiously resolve these lawsuits.
On May 27, 2011, Elan Corporation, PLC (Elan) filed a lawsuit against us in the U.S. District Court for the District of Delaware, and Celgene Corporation (Celgene) and Novartis filed a lawsuit against IPC (in error, subsequently amended to Par) in the U.S. District Court for the District of New Jersey. The complaint in the Delaware case alleged infringement of U.S. Patent Nos. 6,228,398 and 6,730,325 because we submitted a Paragraph IV certification to the FDA for approval of 40 mg dexmethylphenidate hydrochloride extended release capsules. The complaint in the New Jersey case alleged infringement of U.S. Patent Nos. 6,228,398; 6,730,325; 5,908,850; 6,355,656; 6,528,530; 5,837,284; and 6,635,284 because IPC and we submitted a Paragraph IV certification to the FDA for approval of 40 mg dexmethylphenidate extended release capsules. We intend to vigorously defend and expeditiously resolve these lawsuits.
On September 13, 2007, Santarus, Inc. (Santarus) and The Curators of the University of Missouri (Missouri) filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 6,699,885; 6,489,346; and 6,645,988 because we submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate capsules. On December 20, 2007, Santarus and Missouri filed a second lawsuit against us in the U.S. District Court for the District of Delaware alleging infringement of the patents because we submitted a Paragraph IV certification to the FDA for approval of 20 mg and 40 mg omeprazole/sodium bicarbonate powders for oral suspension. On March 4, 2008, the cases pertaining to our ANDAs for omeprazole capsules and omeprazole oral suspension were consolidated for all purposes. The District Court conducted a bench trial from July 13-17, 2009, and found for Santarus only on the issue of infringement, while not rendering an opinion on the issues of invalidity and unenforceability. On April 14, 2010, the District Court ruled in our favor, finding that plaintiffs patents were invalid as being obvious and without adequate written description. On May 17, 2010, Santarus filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit, appealing the District Courts decision of invalidity of the plaintiffs patents. On May 27, 2010, we filed our notice of cross-appeal to the Court of Appeals, appealing the District Courts decision of enforceability of plaintiffs patents. On July 1, 2010, we launched our generic Omeprazole/Sodium Bicarbonate product. Oral argument for the appeal was held on May 2, 2011. We will continue to vigorously defend the appeal.
On December 11, 2007, AstraZeneca Pharmaceuticals, LP, AstraZeneca UK Ltd., IPR Pharmaceuticals, Inc. and Shionogi Seiyaku Kabushiki Kaisha filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges patent infringement because we submitted a Paragraph IV certification to the FDA for approval of 5 mg, 10 mg, 20 mg and 40 mg rosuvastatin calcium tablets. On June 29, 2010, after an eight day bench trial, the District Court ruled in favor of the plaintiffs and against us, stating that the plaintiffs patents were infringed, and not invalid or unenforceable. On August 11, 2010, we filed our notice of appeal to the Court of Appeals for the Federal Circuit, appealing the District Courts decision. On December 15, 2010, the District Court granted our motion to dismiss a case brought by AstraZeneca asserting we infringed its rosuvastatin process patents. On April 25, 2011, we filed our final appeal brief and await an oral hearing date for the appeal. We intend to defend all of these actions vigorously.
On November 14, 2008, Pozen, Inc. (Pozen) filed a lawsuit against us in the U.S. District Court for the Eastern District of Texas. The complaint alleges infringement of U.S. Patent Nos. 6,060,499; 6,586,458; and 7,332,183, because we submitted a Paragraph IV certification to the FDA for approval of 500 mg/85 mg naproxen sodium/sumatriptan succinate oral tablets. We joined GlaxoSmithKline (GSK) as a counterclaim defendant in this litigation. On April 28, 2009, GSK was dismissed from the case by the Court, but will be bound by the Courts decision and will be required to produce witnesses and materials during discovery. A four day bench trial was held from October 12 through October 15, 2010. On April 14, 2011, the Court granted a preliminary injunction to Pozen that prohibits us from launching our generic naproxen /sumatriptan product before the issuance of a final decision in the case. We are awaiting the Courts final decision.
On April 29, 2009, Pronova BioPharma ASA (Pronova) filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 5,502,077 and 5,656,667 because we submitted a Paragraph IV certification to the FDA for approval of omega-3-acid ethyl esters oral capsules. On June 8, 2010, a new patent, U.S. 7,732,488, which was later listed in the Orange Book, was issued to Pronova. A second case, involving the claims of the 488 patent and two other patents not listed in the Orange Book and asserted by the plaintiffs, has a trial date set for January 3, 2012. A bench trial in the first case took place from March 29, 2011 to April 7, 2011. On July 25, 2011, a stipulation was submitted to the court dismissing the second case without prejudice. We intend to continue to defend this action vigorously and pursue our defenses and counterclaims against Pronova.
On July 1, 2009, Alcon Research Ltd. (Alcon) filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 5,510,383; 5,631,287; 5,849,792; 5,889,052; 6,011,062; 6,503,497; and 6,849,253 because we submitted a Paragraph IV certification to the FDA for approval of 0.004% travoprost ophthalmic solutions and 0.004% travoprost ophthalmic solutions (preserved). We filed an answer on August 21, 2009. The Court rescheduled the end of fact discovery for December 31, 2010 and the end of expert discovery for May 9, 2011. Trial has yet to be rescheduled. On July 1, 2011, we, along with plaintiffs and co-defendants, submitted the joint pre-trial order. We intend to defend this action vigorously and pursue our defenses and counterclaims against Alcon.
On August 5, 2010, Warner Chilcott and Medeva Pharma filed a lawsuit against us and our partner EMET Pharmaceuticals in the U.S. District Court for the District of New Jersey. The complaint alleges infringement of U.S. Patent No. 5,541,170 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of a 400 mg delayed-release oral tablet of mesalamine.
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We filed an answer and counterclaims on August 25, 2010, and an initial Rule 16 conference was held on November 10, 2010. On March 29, 2011, the Court granted plaintiffs motion to dismiss our counterclaim for declaratory judgment of non-infringement of U.S. Patent No. 5,541,171. We intend to appeal that decision. Expert discovery closed July 5, 2011, and the close of fact discovery has been scheduled by the Court for August 5, 2011. A Markman hearing has been scheduled for August 15, 2011. We intend to defend this action vigorously and pursue all of our defenses and counterclaims against Warner Chilcott and Medeva Pharma.
On September 20, 2010, Schering-Plough HealthCare Products (Schering-Plough), Santarus, Inc. (Santarus), and the Curators of the University of Missouri filed a lawsuit against us in the U.S. District Court for the District of New Jersey. The complaint alleges infringement of U.S. Patent Nos., 6,699,885; 6,489,346; 6,645,988; and 7,399,772 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of a 20mg/1100 mg omeprazole/sodium bicarbonate capsule, a version of Schering-Ploughs Zegerid OTC®. We have previously received a decision of invalidity with respect to all of these patents in our case against Santarus and Missouri with respect to the prescription version of this product, which decision is presently on appeal. On November 9, 2010, we entered into a stipulation with the plaintiffs to stay litigation on the OTC product pending the decision by the U.S. Court of Appeals for the Federal Circuit on the prescription product appeal, and the parties have agreed to be bound by such decision for purposes of the OTC product litigation. We intend to pursue our appeal and defend this action vigorously.
On September 22, 2010, Biovail Laboratories filed a lawsuit against us in the U.S. District Court for the Southern District of New York. The complaint alleges infringement of U.S. Patent Nos. 7,569,610; 7,572,935; 7,649,019; 7,553,992; 7,671,094; 7,241,805; 7,645,802; 7,662,407; and 7,645,901 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of extended-release tablets of 174 mg and 348 mg bupropion hydrobromide. On November 10, 2010, we filed our answer to the complaint. On November 22, 2010, the Court set a June 30, 2011 deadline for all discovery. On March 7, 2011, the Court reset the deadline for all discovery to May 18, 2011. We intend to defend this action vigorously.
On October 4, 2010, UCB Manufacturing, Inc. (UCB) filed a verified complaint in the Superior Court of New Jersey, Chancery Division, Middlesex, naming us, our development partner Tris Pharma, and Tris Pharmas head of research and development, Yu-Hsing Tu. The complaint alleges that Tris and Tu misappropriated UCBs trade secrets and, by their actions, breached contracts and agreements to which UCB, Tris, and Tu were bound. The complaint further alleges unfair competition against Tris, Tu, and us relating to the parties manufacture and marketing of generic Tussionex®. On October 6, 2010, the Court denied UCBs petition for a temporary restraining order against us and Tris and set a schedule for discovery during which UCB must substantiate its claims. On December 23, 2010, the Court denied UCBs motion for a preliminary injunction, ruling that UCBs alleged trade secrets were known to the public and not misappropriated. On June 2, 2011, the Court granted Tris motion for summary judgment dismissing UCBs claims and UCB appealed the Courts order on June 22, 2011. We intend to vigorously defend the lawsuit and any appeal by plaintiffs.
On February 2, 2011, Somaxon Pharmaceuticals filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent No. 6,211,229 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of oral tablets of 3 mg equivalent and 6 mg equivalent doxepin hydrochloride. We filed our answer on February 23, 2011. On June 6, 2011, our case was consolidated in the same Court with that of the other defendants who filed ANDAs on this product. The Court has scheduled fact discovery to end on April 6, 2012; expert discovery to end on September 7, 2012; and set a trial-ready date of February 19, 2013. We intend to defend this action vigorously.
On March 23, 2011, we filed a declaratory judgment action against UCB, Inc. and UCB Pharma SA (UCB) in the U.S. District Court for the Eastern District of Pennsylvania requesting that the Court render a judgment of invalidity and/or non-infringement of U.S. Patent Nos. 7,858,122 and 7,863,316 in view of our eventual marketing of levetiracetam extended release oral tablets, 500 mg and 750 mg pursuant to our filed ANDA that was accompanied by a Paragraph IV certification. On June 8, 2011, we filed our answer to UCBs counterclaims and submitted our joint Rule 26(f) report with the court on July 18, 2011. We intend to vigorously prosecute this action against UCB.
Industry Related Matters
Beginning in September 2003, we, along with numerous other pharmaceutical companies, have been named as a defendant in actions brought by a number of state Attorneys General and municipal bodies within the state of New York, as well as a federal qui tam action brought on behalf of the United States by the pharmacy Ven-A-Care of the Florida Keys, Inc. ("Ven-A-Care") alleging generally that the defendants defrauded the state Medicaid systems by purportedly reporting Average Wholesale Prices (AWP) and/or Wholesale Acquisition Costs that exceeded the actual selling price of the defendants prescription drugs. To date, we have been named as a defendant in substantially similar civil law suits filed by the Attorneys General of Alabama, Alaska, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Mississippi, Oklahoma, South Carolina, Texas and Utah, and also by the city of New York, 46 counties across New York State and Ven-A-Care. These cases generally seek some combination of actual damages, and/or double damages, treble damages, compensatory damages, statutory damages, civil penalties, disgorgement of excessive profits, restitution, disbursements, counsel fees and costs, litigation expenses, investigative costs, injunctive relief, punitive damages, imposition of a constructive trust, accounting of profits or gains derived through the alleged conduct, expert fees, interest and other relief that the court deems proper. Several of these cases have been transferred to the AWP multi-district litigation proceedings pending in the U.S. District Court for the District of Massachusetts for pre-trial proceedings. The case brought by the state of Mississippi will be litigated in the Chancery Court of Rankin County, Mississippi. The other cases will likely be litigated in the state or federal courts in which they were filed. In the Utah suit, the time for responding to the complaint has not yet elapsed.
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The Hawaii suit was settled on August 25, 2010 for $2,250 thousand. The Massachusetts suit was settled on December 17, 2010 for $500 thousand. The Alabama suit was settled on January 5, 2011 for $2,500 thousand. The Idaho suit was settled on March 25, 2011 for $1,700 thousand. On April 27, 2011, we reached a settlement in principle to resolve claims brought by Ven-A-Care, Texas, and Florida, under federal and state law, as well as Alaska, South Carolina, and Kentucky under state law for $154,000 thousand. Upon execution of definitive settlement documents and government and court approvals, the settlement will resolve a lawsuit relating to federal contributions to state Medicaid programs in 49 states (excluding Illinois), and claims of Texas, Florida, Alaska, South Carolina and Kentucky relating to their Medicaid programs. The settlement in principal will eliminate the majority of the alleged damages asserted against us in the various drug pricing litigations and removes all trials that had been scheduled to date. On June 2, 2011, we reached a settlement in principle to resolve claims brought by the city of New York, New York Counties and the state of Iowa under respective state law for $23,000 thousand. The remaining matters have yet to be scheduled for trial. We have accrued a $195,400 thousand reserve under the caption Accrued legal settlements on our condensed consolidated balance sheet as of June 30, 2011, in connection with the April 27, 2011 settlement in principal and the remaining AWP actions. In each of the remaining matters, we have either moved to dismiss the complaints or answered the complaints denying liability. We will continue to defend or explore settlement opportunities in other jurisdictions as we feel are in our best interest under the circumstances presented in those jurisdictions. However, we can give no assurance that we will be able to settle the remaining actions on terms that we deem reasonable, or that such settlements or adverse judgments, if entered, will not exceed the amount of the reserve.
In addition, the Attorneys General of Florida, Indiana and Virginia and the United States Office of Personnel Management (the USOPM) have issued subpoenas, and the Attorneys General of Michigan, Tennessee, Texas, and Utah have issued civil investigative demands, to us. The demands generally request documents and information pertaining to allegations that certain of our sales and marketing practices caused pharmacies to substitute ranitidine capsules for ranitidine tablets, fluoxetine tablets for fluoxetine capsules, and two 7.5 mg buspirone tablets for one 15 mg buspirone tablet, under circumstances in which some state Medicaid programs at various times reimbursed the new dosage form at a higher rate than the dosage form being substituted. We have provided documents in response to these subpoenas to the respective Attorneys General and the USOPM. During the second quarter of 2011, we continued to engage the respective Attorneys General, the USOPM and the Department of Justice, led by the U.S. Attorneys in the Northern District of Illinois, in discussions concerning these allegations, and we will continue to cooperate if called upon to do so.
Department of Justice Matter
On March 19, 2009, we were served with a subpoena by the Department of Justice requesting documents related to Strativas marketing of Megace® ES. The subpoena indicated that the Department of Justice is currently investigating promotional practices in the sales and marketing of Megace® ES. We believe that our marketing of Megace® ES has complied with all applicable laws and we have provided, or are in the process of providing, documents in response to this subpoena to the Department of Justice and will continue to cooperate with the Department of Justice in this inquiry if called upon to do so. Investigations of this type often result in settlements, including monetary amounts based on an agreed upon percentage of sales of the product at issue in the investigation.
Other
We are, from time to time, a party to certain other litigations, including product liability litigations. We believe that these litigations are part of the ordinary course of our business and that their ultimate resolution will not have a material adverse effect on our financial condition, results of operations or liquidity. We intend to defend or, in cases where we are the plaintiff, to prosecute these litigations vigorously.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, results of operations, financial condition or liquidity. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2010 have not materially changed, other than as set forth below. The risks described below and in our Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that we currently believe are immaterial, also may materially adversely affect our business, results of operations, financial condition or liquidity.
Consummation of our acquisition of Edict Pharmaceuticals will subject us to risks and uncertainties that could adversely affect our business, financial position and results of operations and could cause a decline in the market value of our common stock.
On May 23, 2011, we announced our entry into a definitive agreement to purchase privately-held Edict Pharmaceuticals Pvt. Ltd. (Edict), a Chennai, India-based developer and manufacturer of generic pharmaceuticals. Closing of the acquisition is subject to regulatory approvals and resolution of related litigation (refer to Note 14 Commitments, Contingencies and Other Matters for further details). Assuming we receive the necessary approvals, closing of our acquisition of Edict will subject us to numerous risks that could adversely affect our business, financial position and results of operations and could cause a decline in the market value of our common stock, including without limitation the following.
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Upon closing of our acquisition of Edict, we will be subject to risks associated with doing business internationally.
Upon the consummation of the acquisition of Edict, we expect that some of our drug products will be developed and/or manufactured at Edicts facility in India. We have little or no experience in establishing and running foreign operations. We will face certain risks inherent in the establishment of foreign operations, many of which will be beyond our control. These risks include, among other things:
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geopolitical risks, terrorism, and changing economic conditions and political instability;
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foreign currency exchange rates and the impact of shifts in the U.S. and local economies on those rates;
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maintaining compliance with, and unexpected changes in, U.S. and foreign laws and regulations applicable to our international operations, including quality standards and other certification requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, export requirements, and anti-bribery laws such as the U.S. Foreign Corrupt Practices Act and local laws that prohibit corrupt payments to governmental officials;
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the protection of our intellectual property;
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the ability to provide sufficient working capital to a foreign subsidiary and to effectively and efficiently supply an international facility with the required personnel, equipment and materials;
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import/export license requirements, tariffs, customs, duties and other trade barriers; and
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difficulties in coordinating and managing foreign operations.
We may not be able to successfully manage these risks or avoid their effects, and our foreign operations may not produce the strategic benefits that we anticipate. Any of these risks could have a material adverse effect on our business, financial condition and results of operations.
Upon closing of our acquisition of Edict, we will own and operate (through Edict) a facility located in India, and we will be subject to regulatory, economic, social and political uncertainties in India, which could cause a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.
Upon consummation of our acquisition of Edict, we will be subject to certain risks associated with having (through Edict) a portion of our assets and operations located in India. Edicts operations in India may be adversely affected by general economic conditions and economic and fiscal policy in India, including changes in exchange rates and controls, interest rates and taxation policies; any reversal of Indias recent economic liberalization and deregulation policies; as well as social stability and political, economic or diplomatic developments affecting India in the future. India has, from time to time, experienced instances of civil unrest and hostilities, both internally and with neighboring countries. Rioting, military activity, terrorist attacks, or armed hostilities could cause our operations there to be adversely affected or suspended. We generally do not have insurance for losses and interruptions caused by terrorist attacks, military conflicts and wars.
In addition, India is known to have experienced governmental corruption to some degree and, in some circumstances, anti-bribery laws may conflict with some local customs and practices. As a result of our policy to comply with the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws, we may be at a competitive disadvantage to competitors that are not subject to, or do not comply with, such laws.
Upon closing of our acquisition of Edict, we will have increased exposure to tax liabilities, including foreign tax liabilities.
As a corporation with a subsidiary in India, we will be subject to income taxes as well as non-income based taxes, in both the United States and India. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. Changes in tax laws or tax rulings may have a significantly adverse impact on our effective tax rate. Recent proposals by the current U.S. administration for fundamental U.S. international tax reform, if enacted, could have a significant adverse impact on our effective tax rate following the Edict acquisition.
In addition, we will have potential tax exposures resulting from the varying application of statutes, regulations and interpretations, which include exposures on intercompany terms of cross border arrangements among any foreign subsidiary in relation to various aspects of our business, including research and development activities and manufacturing. Tax authorities in various jurisdictions may disagree with and subsequently challenge the amount of profits taxed in their country, which may result in increased tax liability, including accrued interest and penalties, which would cause our tax expense to increase. This could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.
We may make acquisitions of, or investments in, complementary businesses or products, which may be on terms that are not commercially advantageous, may require additional debt or equity financing, and may involve numerous risks, including the risks that we may be unable to integrate the acquired business successfully and that we may assume liabilities that adversely affect us.
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We regularly review the potential acquisition of technologies, products, product rights and complementary businesses. We may choose to enter into such transactions at any time. Nonetheless, we cannot provide assurance that we will be able to identify suitable acquisition or investment candidates. To the extent that we do identify candidates that we believe to be suitable, we cannot provide assurance that we will be able to make such acquisitions or investments on commercially advantageous terms or at all.
If we make any acquisitions or investments, we may finance such acquisitions or investments through our cash reserves, debt financing, or by issuing additional equity securities, which could dilute the holdings of our then-existing stockholders. If we require financing, we cannot provide assurance that we will be able to obtain required financing when needed on acceptable terms or at all. Any such acquisitions or investments could also result in an increase in goodwill, intangible assets and amortization expenses that could ultimately negatively impact our profitability. If the fair value of our goodwill or intangible assets is determined at some future date to be less than its recorded value, a charge to earnings may be required. Such a charge could be in an amount that is material to our results of operations and net worth.
Additionally, acquisitions involve numerous risks, including operational risks associated with the integration of acquired businesses. These risks include, but are not limited to:
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difficulties in achieving identified financial and operating synergies, cost savings, revenue synergies and growth opportunities;
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difficulties in assimilating the personnel, operations and products of an acquired company, and the potential loss of key employees;
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difficulties in consolidating information technology platforms, business applications and corporate infrastructure;
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difficulties in integrating our corporate culture with local customs and cultures;
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possible overlap between our products or customers and those of an acquired entity that may create conflicts in relationships or other commitments detrimental to the integrated businesses;
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the diversion of managements attention from other business concerns; and
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risks and challenges of entering or operating in markets in which we have limited or no prior experience, including the unanticipated effects of export controls, exchange rate fluctuations, foreign legal and regulatory requirements, and foreign political and economic conditions.
As a result of acquiring businesses, we may incur significant transaction costs, including substantial fees for investment bankers, attorneys, accountants and financial printing. Any acquisition could result in our assumption of unknown and/or unexpected, and perhaps material, liabilities. Additionally, in any acquisition agreement, the negotiated representations, warranties and agreements of the selling parties may not entirely protect us, and liabilities resulting from any breaches could exceed negotiated indemnity limitations. These factors could impair our growth and ability to compete; divert resources from other potentially more profitable areas; or otherwise cause a material adverse effect on our business, financial position and results of operations and could cause a decline in the market value of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities(1)
Quarter Ending June 30, 2011
Period |
| Total Number of Shares of Common Stock Purchased (2) |
| Average Price Paid per Share of Common Stock |
| Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs |
| Maximum Number of Shares of Common Stock that May Yet Be Purchased Under the Plans or Programs (3) |
April 1, 2011 through April 30, 2011 |
| 105 |
| N/A |
| - |
| - |
May 1, 2011 through May 31, 2011 |
| 573 |
| N/A |
| - |
| - |
June 1, 2011 through June 30, 2011 |
| 1,631 |
| N/A |
| - |
| 1,320,770 |
Total |
| 2,309 |
| N/A |
| - |
|
|
(1)
In April 2004, the Board authorized the repurchase of up to $50.0 million of our common stock. Repurchases are made, subject to compliance with applicable securities laws, from time to time in the open market or in privately negotiated transactions, whenever it appears prudent to do so. Shares of common stock acquired through the repurchase program are available for reissuance for general corporate purposes. In September 2007, we announced that the Board approved an expansion of our share repurchase program allowing for the repurchase of up to $75 million of our common stock, inclusive of the $17.8 million remaining from the April 2004 authorization. The authorized amount remaining for stock repurchases under the repurchase program was $43.6 million, as of June 30, 2011. The repurchase program has no expiration date.
54
(2)
The total number of shares purchased represents 2,309 shares surrendered to us to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.
(3)
Based on the closing price of our common stock on the New York Stock Exchange of $32.98 at June 30, 2011.
ITEM 6. EXHIBITS
10.1 Amendment to the Par Pharmaceutical Companies, Inc. Amended and Restated 1997 Directors Stock and Deferred Fee Plan, effective May 17, 2011 (filed herewith). ***
10.2
Share Purchase Agreement by and among Par Pharmaceutical, Inc., Clan Laboratories Pvt. Ltd., Muthasamy Shanmugam, Jaganathan Jayaseelan, Seema Suresh, Thertha Investment & Portfolio Services Private Limited, Edict Pharmaceuticals Private Limited and Jaganathan Jayaseelan, as Sellers Representative, dated as of May 17, 2011(filed herewith).*
31.1
Certification of the Principal Executive Officer (filed herewith).
31.2
Certification of the Principal Financial Officer (filed herewith).
32.1
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto). **
32.2
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto). **
101
The following financial statements and notes from the Par Pharmaceutical Companies, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 formatted in eXtensible Business Reporting Language (XBRL): (i) unaudited condensed consolidated balance sheets, (ii) unaudited condensed consolidated statements of operations, (iii) unaudited condensed consolidated statements of cash flows, and (iv) the notes to the unaudited condensed consolidated financial statements.
*
Certain portions have been omitted and have been filed with the SEC pursuant to a request for confidential treatment thereof.
** The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed to be filed with the SEC and are not to be incorporated by reference into any filing of ours under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in any such filing.
*** This exhibit constitutes a compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15 (b).
55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PAR PHARMACEUTICAL COMPANIES, INC.
(Registrant)
Date: August 3, 2011
/s/ Michael A. Tropiano
Michael A. Tropiano
Executive Vice President and Chief Financial Officer
56
EXHIBIT INDEX
Exhibit Number
Description
10.1 Amendment to the Par Pharmaceutical Companies, Inc. Amended and Restated 1997 Directors Stock and Deferred Fee Plan, effective May 17, 2011 (filed herewith).
10.2
Share Purchase Agreement by and among Par Pharmaceutical, Inc., Clan Laboratories Pvt. Ltd., Muthasamy Shanmugam, Jaganathan Jayaseelan, Seema Suresh, Thertha Investment & Portfolio Services Private Limited, Edict Pharmaceuticals Private Limited and Jaganathan Jayaseelan, as Sellers Representative, dated as of May 17, 2011(filed herewith).
31.1
Certification of the Principal Executive Officer (filed herewith).
31.2
Certification of the Principal Financial Officer (filed herewith).
32.1
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto).
32.2
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto).
101
The following financial statements and notes from the Par Pharmaceutical Companies, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 formatted in eXtensible Business Reporting Language (XBRL): (i) unaudited condensed consolidated balance sheets, (ii) unaudited condensed consolidated statements of operations, (iii) unaudited condensed consolidated statements of cash flows, and (iv) the notes to the unaudited condensed consolidated financial statements.
57
EXHIBIT 10.1
AMENDMENT TO THE
PAR PHARMACEUTICAL COMPANIES, INC.
AMENDED AND RESTATED
1997 DIRECTORS STOCK AND DEFERRED FEE PLAN
Pursuant to Article VIII of the Par Pharmaceutical Companies, Inc. Amended and Restated 1997 Directors Stock and Deferred Fee Plan, as amended and restated effective January 1, 2008 (the Plan), the Plan is hereby amended as follows:
Effective May 17, 2011, the first sentence of Section 6.1 of the Plan is amended and restated in its entirety to read as follows:
Effective from and after May 17, 2011, each Eligible Director shall be granted a Restricted Unit Award on each Date of Grant for a number of shares of Stock having an aggregate Fair Market Value, determined as of the Date of Grant, equal to such dollar amount as may be fixed from time to time by the Board prior to the applicable Date of Grant (after consideration of the Compensation Committees recommendations), which amount shall initially be set at One Hundred Twenty-Five Thousand Dollars ($125,000) (the Annual Restricted Unit Grant). Any fractional shares resulting from the calculation of the Annual Restricted Unit Grant shall be rounded up to the next highest whole number of shares.
EXECUTION
To record the adoption of this Amendment to the Plan, Par Pharmaceutical Companies, Inc. has caused its appropriate officers to execute this Amendment as of the 17th day of May, 2011.
PAR PHARMACEUTICAL COMPANIES, INC.
By: /s/ Thomas J. Haughey
Title: Executive Vice President, Chief Administrative
Officer, General Counsel and Secretary
CONFIDENTIAL INFORMATION OMITTED
(TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION)
ASTERISKS DENOTE SUCH OMMISSION
EXHIBIT 10.2
EXECUTION VERSION
SHARE PURCHASE AGREEMENT
by and among
PAR PHARMACEUTICAL, INC.,
CLAN LABORATORIES PVT. LTD.,
MUTHASAMY SHANMUGAM,
JAGANATHAN JAYASEELAN,
SEEMA SURESH,
THERTHA INVESTMENT & PORTFOLIO SERVICES PRIVATE LIMITED,
EDICT PHARMACEUTICALS PRIVATE LIMITED
and
JAGANATHAN JAYASEELAN, as Sellers Representative
Dated: May 17, 2011
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TABLE OF CONTENTS
Page
DEFINITIONS AND RULES OF CONSTRUCTION
Purchase Price; Payment of Purchase Price.
Adjustments to Purchase Price.
REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY.
Organization; Good Standing; Power
Capitalization; Options; Seller Rights
Due Authorization; Validity; No Conflicts
Governmental Authorizations; Third-Party Consents.
Compliance with Applicable Laws.
Title to Properties; Real Property.
Bank Accounts; Credit Cards; Corporate Accounts; and Powers of Attorney.
Absence of Certain Business Practices.
i
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Disclaimer of Other Representations and Warranties
REPRESENTATIONS AND WARRANTIES OF THE SELLERS.
Organization; Good Standing; Power
Due Authorization; Validity; No Conflicts
Governmental Authorizations; Third-Party Consents
Adequate Consideration; No Tax Proceeding
REPRESENTATIONS AND WARRANTIES OF THE BUYER.
Due Authorization; Validity; No Conflicts.
Resignations; Powers of Attorney
Payoff of Company Indebtedness
ii
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ASTERISKS DENOTE SUCH OMMISSION
Tax Periods Ending on or before the Closing Date
Treatment of Indemnity Payments
Conditions to the Buyers Obligation to Close
Conditions to the Sellers Obligations to Close
Survival of Representations, Warranties and Covenants
Indemnification by the Sellers.
Procedures for Indemnification; Defense
Limitations on Indemnification.
Indemnification in Case of Strict liability or Indemnitee Negligence
NON-COMPETITION; CONFIDENTIALITY.
Appointment and Duties of Sellers Representative.
iii
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Appointment for Service of Process
ANNEXES
Annex A Definitions
EXHIBITS
Exhibit A Form of Consulting Agreement
Exhibit B Form of Employment Agreement
Exhibit C Form of Seller Release
Schedules
Schedule 2.2 | Requested ANDAs |
Schedule 2.3(c) | Pre-Approved Purchases of Materials and Capital Assets |
Schedule 2.5 | Allocation among Sellers |
Schedule 3.1 | Organization; Good Standing; Power |
Schedule 3.2(a) | Capitalization |
Schedule 3.2(b) | Prior Offerings and Issuances |
Schedule 3.2(c) | Outstanding Options, Warrants, Rights, Calls, Commitments, etc. |
Schedule 3.2(d) | Preemptive Rights, Rights of First Refusal, Stock Option Grants, etc. |
Schedule 3.3 | Due Authorization; Validity; No Conflicts |
Schedule 3.5 | Companys Governmental Authorizations; Third-Party Consents |
Schedule 3.6(a) | Company Financial Statements |
Schedule 3.6(b) | Accruals for Taxes and Liabilities |
Schedule 3.6(d) | Undisclosed Liabilities |
Schedule 3.6(e)(i) | Company Indebtedness |
Schedule 3.6(e)(ii) | Loans and Advances |
Schedule 3.7(b) | Absence of Changes Liabilities |
Schedule 3.7(c) | Absence of Changes Repayment of Company Indebtedness |
Schedule 3.7(d) | Absence of Changes Discharge of Liabilities |
Schedule 3.7(e) | Absence of Changes Liens |
Schedule 3.7(j) | Absence of Changes Capital Expenditures |
Schedule 3.7(m) | Absence of Changes Loans to Employees |
Schedule 3.7(o) | Absence of Changes Insurance Policies |
Schedule 3.8(a) | Material Contracts |
Schedule 3.8(b) | Discounts, Allowances, etc. |
Schedule 3.9(a) | Sole-Source Suppliers of Goods or Services |
Schedule 3.9(c) | Non-Compete and Exclusive Dealing Agreements |
Schedule 3.9(d) | Notices from Material Suppliers |
Schedule 3.10(k) | Tax Matters |
Schedule 3.11 | Litigation |
Schedule 3.12 | Compliance with Applicable Laws
|
Schedule 3.13 |
iv
Environmental Matters |
Schedule 3.14 | Permits |
Schedule 3.15(a) | Sufficiency and Title to Properties |
Schedule 3.15(b) | Owned Real Property |
Schedule 3.16 | Equipment |
Schedule 3.17(a) | Infringement Claims |
Schedule 3.17(c) | Notice of Infringement Claims |
Schedule 3.17(d) | Domain Names |
Schedule 3.18 | Products |
Schedule 3.19 | Insurance |
Schedule 3.20(a) | Bank Accounts |
Schedule 3.20(b) | Credit Card Accounts |
Schedule 3.20(c) | Other Corporate Accounts |
Schedule 3.20(d) | Powers of Attorney |
Schedule 3.21(a) | Benefit Plans |
Schedule 3.21(b) | Claims Against Benefit Plans, etc. |
Schedule 3.21(c) | Obligations to Provide Benefits to Former Employees, etc. |
Schedule 3.21(d) | Self-Funded and Self-Insured Benefit Plans |
Schedule 3.21(g) | Restrictions on Right to Amend, Terminate or Assign Benefit Plans |
Schedule 3.21(h) | Agreements with Employees, Directors or Agents; Future Benefit Plans |
Schedule 3.22(a) | Employee Information |
Schedule 3.24 | Affiliated Transactions |
Schedule 3.26 | Prior Transactions |
Schedule 4.3 | Stock Ownership |
Schedule 4.4 | Sellers Governmental Authorizations; Third-Party Consents |
Schedule 4.5 | Shared Assets |
Schedule 6.2 | Post-Signing Conduct of Business |
Schedule 11.2 | Non-Solicitation |
v
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SHARE PURCHASE AGREEMENT
This SHARE PURCHASE AGREEMENT (this Agreement) is made this 17th day of May 2011, by and among Par Pharmaceutical, Inc., a Delaware corporation (the Buyer), Edict Pharmaceuticals Private Limited, a company incorporated under the laws of India, having its registered office at 1/58, Pudupakkam Main Road, Pudupakkam, Kelambakkam 603 103, Chennai, Tamilnadu, India (the Company), Clan Laboratories Private Limited, a company incorporated under the laws of India, having its registered office at 1/58, Pudupakkam Main Road, Pudupakkam, Kelambakkam 603 103, Chennai, Tamilnadu, India (Clan Laboratories), Muthusamy Shanmugam, an individual residing at 9 Revere Road, Monmouth Junction, New Jersey 08852 (M. Shanmugam), Jaganathan Jayaseelan, an individual residing at **** (J. Jayaseelan, and together with Clan Laboratories and M. Shanmugam, the Major Sellers and each, a Major Seller), Seema Suresh, an individual residing at **** holding **** (S. Suresh), Thertha Investment & Portfolio Services Private Limited, a company incorporated under the laws of India, having its registered office at Flat No. 1, Prasanna Enclave, No. 30, Bharathi Avenue, 2nd Street, Kotturpuram, Chennai 600085, Tamil Nadu, India (TIPS, collectively with Clan Laboratories, J. Jayaseelan, M. Shanmugam and S. Suresh, the Sellers, and each individually, a Seller), and Jaganathan Jayaseelan, solely in his capacity as Sellers Representative.
W I T N E S S E T H:
WHEREAS, the Company is principally engaged in the business of researching, developing and manufacturing pharmaceutical products for pharmaceutical companies (the Business);
WHEREAS, the Sellers are, in the aggregate, the record and beneficial owners of 58,762 fully paid up equity shares (exclusive of equity shares to be issued prior to closing upon conversion of the preference shares and 1,152 equity shares to be issued to S. Suresh in respect of share application money), Rs. 100 per share, of the Company (the Company Common Shares) and 79,330 5% cumulative convertible preference shares, Rs. 100 per share, of the Company (the Company Preference Shares, and together with Company Common Shares, (Company Stock), which shares represent all of the issued and outstanding share capital of the Company;
WHEREAS, prior to the Closing, each of S. Suresh and TIPS (the Preference Shareholders) shall convert all the Company Preference Shares that she or it holds into 3,153 Company Common Shares; and
WHEREAS, the Sellers desire to sell all their shares of Company Common Shares to the Buyer, and the Buyer desires to purchase all of the outstanding Company Common Shares from the Sellers, in the manner and subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements herein contained, the parties hereby agree as follows:
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1.
DEFINITIONS AND RULES OF CONSTRUCTION
1.1
Definitions
. Capitalized terms used in this agreement have the meanings set forth in Annex A.
1.2
Rules of Construction.
(a)
When the context in which words are used in this Agreement indicates that such is the intent, words used in the singular shall have a comparable meaning when used in the plural, and vice versa; pronouns stated in the masculine, feminine or neuter shall include each other gender.
(b)
The section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties hereto and shall not in any way affect the meaning or interpretation of this Agreement.
(c)
The term including is not limiting and means including, without limitation.
(d)
Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are disclosed to the Buyer, (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation, except that for purposes of determining the accuracy of any representation and warranty, such reference shall only be to such statute or regulation as in effect on the date the representation and warranty was made and (iii) references to Sections, Schedules or Exhibits are to sections, schedules or exhibits, as applicable, of this Agreement.
(e)
Unless otherwise expressly provided herein, dollars or $ means the currency of the U.S. that, as at the time of payment, is legal tender for the payment of public and private debts. Unless otherwise expressly provided herein, rupees or Rs. means the currency of India that, as at the time of payment, is legal tender for the payment of public and private debts. Any calculation of Rs. hereunder requiring a conversion from $, or vice versa, shall be calculated using the applicable exchange rate published in The Wall Street Journal for the close of the business day immediately preceding the date of such calculation, which exchange rate is quoted at 4:00 p.m. Eastern Time by Reuters. Where the context requires, amounts expressed in dollars shall be interpreted to mean the rupee equivalent of such amount.
(f)
This Agreement is between financially sophisticated and knowledgeable parties and is entered into by such parties in reliance upon the economic and legal bargains contained herein, the language used in this Agreement has been negotiated by the parties and their representatives and shall be interpreted and construed in a fair and impartial manner without regard to such factors as the party who prepared, or caused the preparation of, this Agreement or the relative bargaining power of the parties.
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ASTERISKS DENOTE SUCH OMMISSION
1.3
Disclosure Schedules.
The schedules referred to herein and delivered pursuant to and attached to this Agreement (collectively, Disclosure Schedules) are integral parts of this Agreement. Nothing in a Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein, unless the Disclosure Schedule identifies the exception with reasonable particularity and describes the relevant facts in reasonable detail, including by explicit cross-reference to another Disclosure Schedule to this Agreement. Without limiting the generality of the foregoing, the mere listing, or inclusion of a copy, of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein, unless the representation or warranty is being made as to the existence of the document or other item itself. The Company and the Major Sellers are responsible for preparing and arranging the Disclosure Schedules corresponding to the lettered and numbered sections of Section 3, and each Seller is responsible for preparing and arranging the information in respect of such Seller on the Disclosure Schedules corresponding to the lettered and numbered sections of Section 4.
2.
TERMS OF ACQUISITION.
2.1
Share Purchase.
Subject to the terms and conditions of this Agreement, on the Closing Date, each Seller shall sell, transfer, convey and deliver to the Buyer, free and clear of any Liens (other than restrictions of general applicability under applicable securities Laws or ownership Laws of India, including in respect of foreign ownership) and the Buyer shall purchase, acquire and accept from each Seller, all right, title and interest of such Seller, legal and equitable, beneficial and of record, in and to the number of shares of the Company Common Shares as of the Closing Date set forth opposite each Sellers name on Schedule 3.2(a), which shares shall represent all of the issued and outstanding share capital of the Company.
2.2
Purchase Price; Payment of Purchase Price.
(a)
Purchase Price. In accordance with Sections 2.2(b) and 2.2(c) and in respect of payments to be made under Section 2.2 subject to satisfaction of applicable conditions in Section 2.2(c), as full consideration for all of the Company Common Shares, the Buyer shall pay an amount equal to Thirty-Two Million Five Hundred Thousand and One Dollars ($32,500,001) (collectively, the Purchase Price).
(b)
Payments at Closing. Twenty Million Five Hundred Thousand Dollars ($20,500,000) subject to Sections 2.3 and 12.5 (the Closing Consideration), will be paid by the Buyer to the Sellers at Closing.
(c)
Additional Payments. In addition to the Closing Consideration, the Buyer shall pay up to a maximum of $12,000,001 as the balance of consideration for the Company Common Shares, payable as, and subject to the satisfaction of the conditions and the achievements, set forth below:
(i)
If the FDAs inspection of the Facility is successful as indicated by (A) a No Action Indicated Finding or a completed inspection without the issuance of a FDA Form 483, (B) an acknowledgement letter from the FDA stating that the Companys
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response to any Form 483 issued in connection with such inspection is acceptable to the FDA, or (C) a Voluntary Action Indicated classification with recommendation for approval of any and all ANDA filings which were subject of the inspection, then Buyer shall pay **** to the Sellers within five (5) business days after any of the criteria set forth subsections (A) through (C) above is satisfied, and **** upon the later of (1) five (5) business days after any of the criteria set forth in subsections (A) through (C) above is satisfied and (2) **** after the Closing Date.
(ii)
For each of the products listed in Sections (a)-(c) of Schedule 2.2, the Buyer shall pay **** to the Sellers if a complete ANDA is accepted for filing by the FDA on or before the first anniversary of the Closing Date, which amount shall be payable within five (5) business days after the applicable ANDA has been accepted for filing by the FDA.
(iii)
If complete ANDAs for all of the products listed in Sections (a)-(d) of Schedule 2.2 and a fifth product to be agreed upon by the Buyer and the Sellers Representative in writing (collectively, the Requested ANDAs, and each individually, a Requested ANDA) are accepted for filing by the FDA on or before the first anniversary of the Closing Date (or, if the Buyer and the Sellers Representative have not agreed on the fifth product by the Closing Date, the first anniversary of the date on which the identification of the fifth product is agreed), the Buyer shall pay **** to the Sellers within five (5) business days after all of the Requested ANDAs have been accepted for filing.
2.3
Adjustments to Purchase Price.
(a)
In the event that the aggregate amount of the Company Indebtedness (excluding (i) the loans made by Clan Laboratories to the Company after April 1, 2011 solely to fund the operating expenses of the Company (the Opex Loans) and (ii) any Indebtedness incurred by the Company after the date hereof, with the prior written consent of the Buyer, to purchase the materials and capital assets necessary for the Company to develop products under the Supply Agreement (the Capex Loans)), as set forth in the applicable Payoff Letters, exceeds the rupee equivalent of $4,300,000 on the Closing Date, then the Closing Consideration shall be reduced by the amount that the Company Indebtedness (excluding the Opex Loans and Capex Loans) exceeds $4,300,000.
(b)
In the event that the aggregate amount of the Opex Loans (including all interest and fees thereon) on the Closing Date, as set forth in the applicable Payoff Letter, exceeds the rupee equivalent of the product of (i) $177,000 multiplied by (ii) the number of calendar months that expire between April 1, 2011 and the Closing Date, prorated for any partial month (the Approved Opex Loan Amount), then the Closing Consideration shall be reduced by the amount that the Opex Loans exceed the Approved Opex Loan Amount.
(c)
In the event that the aggregate amount of the Capex Loans (including all interest and fees thereon) on the Closing Date, as set forth in the applicable Payoff Letter, exceeds the rupee equivalent of the sum of (i) $800,000 (for a portion of the capital and material expenditures set forth on Schedule 2.3(c)) plus (ii) any additional amount approved in writing by Buyer after the date hereof in respect of the purchase of materials or capital assets (the
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Approved Capex Loan Amount), then the Closing Consideration shall be reduced by the amount that the Capex Loans exceed the Approved Capex Loan Amount.
2.4
Payoff Amount Payments
. In addition to the Purchase Price, the Buyer shall, contemporaneously with the Closing, pay an advance to the Company equivalent to the Final Payoff Amount and the Company shall use such funds to pay the Final Payoff Amount to each of the Company Creditors (including the Opex Loan and Capex Loan creditors) on the Closing Date as specified in the Payoff Letters. Subject to compliance with applicable Law, as consideration towards the advance paid by the Buyer to the Company, the Company shall, within a period of 180 days from the Closing Date, issue Company Common Shares to the Buyer at a valuation equivalent to the purchase price per Company Common Share payable pursuant to this Agreement.
2.5
Payment of Funds
. All payments due to the Sellers pursuant to this Section 2 shall be allocated among the Sellers as set forth on Schedule 2.5 and shall be paid by wire transfer of immediately available funds to accounts designated in writing by the Sellers at least five (5) Business Days prior to each scheduled date of payment. Payments to M. Shanmugam shall be made in U.S. Dollars. Payments to all other Sellers shall be made to Sellers accounts, which shall all be at no more than two banks in India, in U.S. Dollars and converted into Rupees by such bank.
2.6
Closing.
(a)
Closing Date. The closing of the transactions contemplated by this Agreement (the Closing) shall take place at the offices of the Company at 10:00 a.m. IST on the second (2nd) business day after all conditions precedent set forth in Sections 8.1 and 8.2 shall have been satisfied or waived (other than those conditions precedent that by their nature are to be satisfied at Closing). The date on which the Closing occurs is referred to herein as the Closing Date.
(b)
The Buyers Closing Deliveries. Subject to the terms and conditions of this Agreement, at the Closing, the Buyer shall duly execute (to the extent a party thereto) and deliver those documents and make the other deliveries required to be made by the Buyer pursuant to Section 8.2.
(c)
The Sellers Deliveries. Subject to the terms and conditions of this Agreement, at the Closing, the Sellers shall duly execute (to the extent a party thereto) and deliver those documents and make the other deliveries required to be made by the Sellers and the Company pursuant to Section 8.1.
(d)
Closing Actions. On the Closing Date, upon satisfaction or waiver of the conditions to Closing set forth in Sections 8.1 and 8.2, the following shall occur:
(i)
The Buyer shall pay the Closing Consideration to the Sellers by wire transfer of immediately available funds and, subject to receipt of the Closing Consideration, the Sellers shall deliver to the Buyer, duly signed and executed share transfer forms for transfer of the Company Common Shares to the Buyer as well as the original share
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certificates duly endorsed pertaining to all of the Company Common Shares, free and clear of all Liens, other than restrictions of general applicability under applicable securities Laws or ownership Laws of India, including in respect of foreign ownership.
(ii)
The Sellers, the Company and the Buyer shall complete and deliver necessary forms and documents in respect of the Company Common Shares including Form FC-TRS, consent letters, undertakings and other documents required to be submitted pursuant to the Form FC-TRS, file the aforementioned documents with the concerned authorized dealer and the Company shall procure the requisite endorsement on the Form FC-TRS pursuant to applicable Law. Thereafter, a complete set of the Form FC-TRS, duly endorsed, shall be handed over to the Board of Directors of the Company (the Board of Directors) for its necessary action pursuant to clause (iii) below.
(iii)
The Company shall cause a meeting of the Board of Directors at which the Board of Directors shall take note of, approve and register the transfer of the Company Common Shares from the Sellers to the Buyer and authorize relevant persons for carrying out relevant notings/changes in all the corporate records of the Company, including the register of members to reflect the Buyer as the legal and beneficial owner of the Company Common Shares.
(iv)
The Sellers shall deliver or ensure the delivery of the following documents to the Buyer:
A.
duly stamped equity share certificates endorsed in favor of the Buyer in respect of the Company Common Shares;
B.
a certified extract of the register of members of the Company evidencing the inclusion of the name of the Buyer in the register of members as the owner of the Company Common Shares;
C.
(1) certified true copies of resolutions of the Board of Directors, approving, on and from the Closing Date, the transfer of the Company Common Shares contemplated hereunder; and (2) resolutions of the Board of Directors approving, effective on and from the Closing Date, the appointment of the directors appointed by the Buyer and acceptance of the resignation and discharge of the directors nominated by the Sellers;
D.
certified true copies of resolutions of the Board of Directors approving, on and from the Closing Date, revocation of any power of attorney or authority given by the Sellers or the Company to the directors appointed by the Sellers or to any other person to act on behalf of the Company, if any; and
E.
resignation letters of directors nominated by the Sellers as directors of the Company, effective as of Closing Date.
(v)
The Board of Directors shall be re-constituted and nominees of the Buyer shall be appointed as directors on the Board of Directors.
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2.7
Withholding.
(a)
Notwithstanding any other provision of this Agreement, and for the avoidance of doubt, (i) each payment made pursuant to this Agreement shall be made net of any Taxes required by applicable Law to be deducted or withheld from such payment and (ii) any amounts deducted or withheld from any such payment shall be remitted to the applicable Governmental Authority and shall be treated for all purposes of this Agreement as having been paid. The party making any such deduction or withholding shall furnish to the other party official receipts (or copies thereof) evidencing the payment of any such Taxes. If the Buyer or any of the Sellers become aware that any amount is required to be so deducted or withheld, such party shall promptly provide notice to the other parties hereto.
(b)
With regard to the Taxes deductible by Buyer in connection with the consideration payable to M. Shanmugam hereunder, Buyer shall deduct and withhold an amount from the gross consideration payable to M. Shanmugam for his Company Common Shares equal to the product of the gross consideration payable to M. Shanmugam for his Company Common Shares and the **** from the disposition of stock or securities, and any amounts deducted or withheld from any such payment shall be remitted to the applicable Governmental Authority and shall be treated for all purposes of this Agreement as having been paid by the Buyer.
3.
REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY.
The Company and the Major Sellers hereby, jointly and severally, represent and warrant to the Buyer, as of the date hereof and as of the Closing Date, as follows:
3.1
Organization; Good Standing; Power
. The Company is a company duly organized and validly existing under the Laws of India and has all requisite corporate power and authority to own, lease and operate its assets and properties and to carry on the Business as presently conducted. Except as set forth on Schedule 3.1, there are no other jurisdictions in which the character and location of the properties owned or leased by the Company or the conduct of the Companys business require that the Company be duly qualified to transact business as a foreign corporation in such jurisdiction, except where the failure to be so qualified would not individually or in the aggregate reasonably be likely to have a Material Adverse Effect. The Companys Memorandum of Association and Articles of Association have been filed with the relevant Registrar of Companies and all resolutions or agreements required by the Act or other applicable Law to be attached to or incorporated in the Companys Memorandum of Association and Articles of Association have been so attached and incorporated. The statutory books and registers of the Company have been properly kept and maintained in all material respects and neither the Company nor the Major Sellers has received any notice, or expects to receive any notice, that the statutory books or records are incorrect. Except as set forth on Schedule 3.1, all returns, particulars, resolutions and other documents which the Company is required by applicable Law to file with or deliver to the Registrar of Companies or any other Governmental Authority have been correctly prepared and duly filed or delivered. The minute books of the Company contain true and complete records of all meetings and other material actions of Board of Directors and the shareholders of the Company, including actions by vote or written consent of the Board of Directors and the shareholders of the Company.
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3.2
Capitalization; Options; Seller Rights
. The authorized share capital of the Company consists solely of (a) 65,000 shares of the Company Common Shares, 58,762 of which shares are issued and outstanding as of the date hereof and 63,067 of which will be issued and outstanding on the Closing Date after conversion of the Company Preference Shares in accordance with Section 6.10 and (b) 80,000 shares of Company Preference Shares, 79,330 of which shares are issued and outstanding as of the date hereof and none of which shall be issued and outstanding as of the Closing Date, after conversion of the Company Preference Shares in accordance with Section 6.10. No shares of the share capital of the Company are held as treasury stock. All issued and outstanding shares of Company Stock are owned, of record, solely by the Sellers. The number and class of shares of Company Stock so owned by each of the Sellers as of the date hereof and as of the Closing Date is as set forth on Schedule 3.2(a). Except as set forth on Schedule 3.2(b), all shares of Company Stock have been duly authorized and validly issued and are fully paid and non-assessable. Except as set forth on Schedule 3.2(b), all prior offerings, issuances and transfers of Company share capital have been made in accordance with applicable securities Laws, the Act, other applicable Laws, the Company Organizational Documents and Contracts to which the Company is a party or otherwise bound. Except as set forth on Schedule 3.2(c), there are, and on the Closing Date there will be, no outstanding obligations, options, warrants, rights, calls, commitments, conversion rights, plans or other agreements of any character to which the Company is a party or by which it is otherwise bound that provide for the repurchase or issuance by the Company of any shares of its share capital or permit any Person to share or participate in any of the profits, revenues or sales of the Company. Except as set forth on Schedule 3.2(d), there are no preemptive rights, rights of first refusal or first offer, stock option grant or exercise rights, voting or veto rights, change of control or similar rights, anti-dilution protections or other rights that any shareholder, officer, employee or director of the Company or any other Person is (or would be) entitled to invoke as a result of the transactions contemplated by this Agreement or otherwise.
3.3
Due Authorization; Validity; No Conflicts
. Except as set forth on Schedule 3.3, the execution and delivery by the Company of this Agreement and each of the Ancillary Agreements to which it shall become a party, the performance by the Company of its obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action on the part of the Company, and the Company has all necessary corporate power with respect thereto. This Agreement and each of the Ancillary Agreements to which it shall become a party has been (or will be) duly executed and delivered by the Company and are, or will be when duly executed by the Company (assuming the due execution by the other parties hereto or thereto), valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except to the extent that enforceability thereof may be limited by general equitable principles or the operation of bankruptcy, insolvency, reorganization, moratorium or similar Laws. Except as set forth on Schedule 3.3, assuming all of the Consents are obtained, made or filed, neither the execution and delivery by the Company of this Agreement and the Ancillary Agreements to which it shall become a party, nor the consummation of the transactions contemplated hereby or thereby, nor the performance by the Company of its obligations hereunder or thereunder, shall (or, with the giving of notice or the lapse of time or both, would) (a) conflict with or violate any provision of the Company Organizational Documents; (b) (i) give rise to a material conflict, breach or default, or any right of termination, cancellation or
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acceleration of remedies or rights, (ii) give any Person any right to purchase or sell assets or securities from or to the Company or to exercise any remedy or modify any obligation or (iii) otherwise result in a loss of benefits to the Company under the provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which the Company is a party or by which it or its properties or assets is otherwise bound; (c) violate in any material respect any Law applicable to the Company or any of its properties or assets; (d) result in the creation or imposition of any Lien on any of the properties or assets of the Company (other than Permitted Liens); or (e) contravene, conflict with, or result in a violation of any of the terms or requirements of, or give rise to any right to revoke, suspend, terminate or modify, any Permit.
3.4
Interests in Other Entities.
The Company does not, (a) have any Subsidiaries or (b) directly or indirectly (i) own, of record or beneficially, any shares of voting stock or any other equity securities of any Person, (ii) have any other ownership or equity or debt interest, of record or beneficially, in any Person, or (iii) have any obligation or right, fixed or contingent, to purchase or subscribe for any interest in, advance or loan monies to, or in any way make an investment in, any Person or to share any profits or capital investments in any other Person.
3.5
Governmental Authorizations; Third-Party Consents.
Except as set forth in Schedule 3.5, no Consents are required to be obtained by the Company.
3.6
Financial Statements.
(a)
Attached as Schedule 3.6(a) are true and complete copies of the Companys (i) audited balance sheets as of March 31, 2009 and March 31, 2010 and the related audited profit and loss accounts for the fiscal years then ended and (ii) unaudited balance sheet as of February 28, 2011 (the Interim Balance Sheet) and the related unaudited statements profit and loss account for the eleven-month period then ended (collectively, the financial statements referenced in clauses (i) and (ii) are referred to herein as the Company Financial Statements). The Company Financial Statements, including any notes thereto, were prepared in accordance with GAAP (except for the absence of notes in the unaudited financial statements), applied on a consistent basis throughout the periods involved. The Company Financial Statements fairly present in all material respects the financial condition, operating results and cash flows of the Company as of the dates indicated and the results of its operations for the periods covered thereby (subject, in the case of unaudited statements, to normal year end adjustments).
(b)
Except as set forth on Schedule 3.6(b), the Company Financial Statements contain (as appropriate and required under GAAP and other applicable Laws) specific provisions, accruals or reserves in respect of, or full particulars in notes, all Taxes (including deferred Taxes) and other Liabilities of the Company as of the dates specified therein.
(c)
All accounts, books and ledgers related to the business of the Company are properly kept, are accurate and complete in all material respects, and there are no material inaccuracies or discrepancies of any kind contained or reflected therein.
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(d)
The Company does not have any Liabilities, including guarantees and indemnities by the Company of Liabilities of any other Person, except (i) Liabilities as and to the extent reflected on the Interim Balance Sheet; (ii) Liabilities incurred by it in the Ordinary Course of Business since the date of the Interim Balance Sheet (none of which is a Liability for breach of contract, breach of warranty, tort, infringement, claim, lawsuit or other proceeding) and adequately reflected on the books and records of the Company; (iii) obligations not in default under Contracts existing as of the date hereof or entered into after the date hereof in accordance with Section 6.2; and (iv) Liabilities set forth on Schedule 3.6(d).
(e)
Schedule 3.6(e)(i) sets forth a description of each item of Company Indebtedness (whether incurred pursuant to a written or oral agreement), including (i) the name of the Company Creditor; (ii) the aggregate amount that the Company owes to such Company Creditor as of the date hereof; (iii) whether such Company Indebtedness was incurred pursuant to a written or oral agreement; (iv) whether such Company Indebtedness is secured by any Lien on any property or asset of the Company; and (v) if applicable, whether such Company Indebtedness relates to Capex Loans or Opex Loans. Schedule 3.6(e)(ii) sets forth a description of each loan or advance made by the Company to a third-party (Company Debtor) (whether pursuant to a written or oral agreement), including (A) the name of the Company Debtor; (B) the aggregate amount loaned or advanced by the Company to such Company Debtor as of the date hereof; (C) whether such loan or advance was made by the Company pursuant to a written or oral agreement; and (D) whether such loan or advance is secured by any Lien on any property or asset of such Company Debtor.
(f)
The Company has not received any grants, subsidies or other financial assistance from a Governmental Authority.
3.7
Absence of Certain Changes.
Except as set forth on the Disclosure Schedules below, since March 31, 2010, the Company has conducted the Business in the ordinary course consistent with past practice and has maintained and preserved its organization, goodwill and properties. Since March 31, 2010, the Company has not:
(a)
suffered any Material Adverse Effect;
(b)
except as set forth on Schedule 3.7(b), incurred any material Liabilities (other than Indebtedness), except those incurred in the Ordinary Course of Business, none of which exceed $50,000 (counting obligations or liabilities arising from a series of related or similar transactions, and all periodic installments or payments under any lease or other agreement providing for periodic installments or payments, as a single obligation or liability), or experienced any increase in, or change in any underlying assumption or method used in calculating, any bad debt, contingency or other reserve;
(c)
except as set forth on Schedule 3.7(c), paid any amount in respect of Indebtedness, except for regularly scheduled payments of principal and interest that were required in accordance with the express terms thereof;
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(d)
except as set forth on Schedule 3.7(d), paid, discharged or satisfied any claim, liability or obligation (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction in the Ordinary Course of Business of liabilities and obligations (i) reflected or reserved against on the March 31, 2010 audited balance sheet or (ii) incurred since the date thereof in the Ordinary Course of Business;
(e)
except as set forth on Schedule 3.7(e), caused, permitted or allowed any of its property or assets (real, personal or mixed, tangible or intangible) to be subjected to any Lien other than Permitted Liens;
(f)
written off as uncollectible any notes or accounts receivable, except for write-offs in the Ordinary Course of Business and consistent with past practice, none of which is material and all of which together do not exceed $50,000 in the aggregate;
(g)
canceled any debts or waived or suffered to lapse any claims or rights of material value, or sold, transferred or otherwise disposed of any of its tangible properties or assets, except in the Ordinary Course of Business;
(h)
disposed of or suffered to lapse any right to use any material item of Company Intellectual Property or disclosed to any Person, other than pursuant to a valid and binding non-disclosure agreement, any trade secret, formula, process or know-how or any other material Confidential Information relating to the Company;
(i)
granted any increase in the compensation (including any increase pursuant to any bonus, pension, profit-sharing or other plan) payable or to become payable to any officer or employee, and no such increase is customary or required by any agreement or understanding;
(j)
except as set forth on Schedule 3.7(j), made any single capital expenditure or commitment in excess of $50,000 for additions to property, plant, equipment or intangible assets or made aggregate capital expenditures or commitments in excess of $250,000 for additions to property, plant, equipment and/or intangible assets;
(k)
subject to Section 6.10, issued, granted, redeemed or repurchased any shares of its share capital or any options, warrants or other rights to acquire any of its share capital, or declared, paid or set aside for payment any dividend or other distribution in respect of any of its share capital;
(l)
made any change in any of its methods of accounting or accounting practices or principles;
(m)
except as set forth on Schedule 3.7(m), paid, loaned or advanced any amount, or sold, transferred or leased any properties or assets (real, personal or mixed, tangible or intangible) to, or entered into any agreement or arrangement with, any of its officers, directors or employees or any Seller or any Affiliate of any of the Companys officers, directors or employees or of any Seller;
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(n)
acquired any assets or properties other than in the Ordinary Course of Business;
(o)
except as set forth on Schedule 3.7(o), made or suffered any material changes in any policies of insurances covering their business, assets, properties or operations; or
(p)
agreed, in writing or otherwise, to take any action described in this Section 3.7.
3.8
Contracts.
(a)
Schedule 3.8(a) sets forth a true and complete list of each contract, purchase order, agreement, mortgage, note, commitment, obligation and undertaking (collectively, Contracts) to which the Company is a party or by which it is otherwise bound that:
(i)
is an employment, consulting, severance, change of control, retention, indemnification or contribution agreement;
(ii)
is a franchise, distributorship, manufacturing, development, licensing, dealership, supply or sales agency agreement (whether or not exclusive);
(iii)
is an agreement that (A) limits or purports to limit the ability of the Company to compete in any line of business or with any Person or in any geographic area or during any period of time (except with respect to the use of information pursuant to any confidentiality or non-disclosure agreement), (B) requires the Company to use any supplier or third party for all or substantially all of the Companys requirements or needs for any product or service in connection with the Business, (C) limits or purport to limit the ability of the Company to solicit customers or clients of the other parties thereto, (D) requires the Company to provide to the other parties thereto most favored nations pricing or any type of exclusive dealing or other similar arrangement, (E) requires the Company to market or co-market any products or services of a third party, or (F) contains any take-or-pay provisions or similar arrangements requiring the Company to make a minimum payment for goods or services from third party suppliers irrespective of usage;
(iv)
is an agreement providing for a joint venture, partnership arrangement, or other arrangement involving a sharing of profits, losses, costs or liabilities by the Company with a third party, including a joint venture, partnership arrangement or other agreement that has been terminated within the last twelve (12) months;
(v)
is an agreement by which the Company grants or receives rights in or to (e.g., licenses, assignments, non-assertions, covenants not to sue and/or escrow agreements) any of the Company Intellectual Property;
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(vi)
is an agreement providing for the sale, acquisition or lease of any of the properties or assets of the Company or used in the Business in excess of $50,000, other than the purchase or sale of inventory in the Ordinary Course of Business;
(vii)
is a mortgage, pledge, security agreement or other similar agreement with respect to any tangible or intangible property of the Company;
(viii)
is a loan agreement, credit agreement, promissory note, guaranty, letter of credit, derivative contract (including foreign exchange facilities, options and swap contracts) or other similar agreement;
(ix)
is an engagement agreement with attorneys, accountants, investment bankers or other professional advisers;
(x)
is an agreement with any Governmental Authority;
(xi)
is an agreement referred to in Section 3.24;
(xii)
is an agreement providing for the purchase of any of the share capital or a material portion of the assets of any other Person;
(xiii)
to the extent not disclosed pursuant to any of the clauses above, is an agreement not made in the Ordinary Course of Business or that requires payments or performance during its term involving an amount in excess of $50,000;
(xiv)
is an agreement otherwise material to the operations, business or financial condition of the Company; or
(xv)
is a commitment or agreement to enter into any of the foregoing (collectively, the Material Contracts).
(b)
True and complete copies of all written Material Contracts required to be set forth on Schedule 3.8(a) and summaries of all oral Material Contracts required to be set forth on Schedule 3.8(a) have been furnished to the Buyer and each of them is in full force and effect. Neither the Company nor, to the Knowledge of the Company and the Major Sellers, any other Person that is a party to a Material Contract or is otherwise bound thereby is in default or breach thereunder, and no event, occurrence, condition or act exists that, with the giving of notice or the lapse of time or both, would give rise to any default, breach or right of cancellation or modification thereunder. To the Knowledge of the Company and the Major Sellers, there has been no threatened cancellation of any of the Material Contracts and there are no outstanding disputes thereunder. Except as set forth on Schedule 3.8(b), there are no agreements, understandings or arrangements with any other Person in respect of the Material Contracts that (i) give any Person the right to renegotiate or require a reduction in the price paid under such Contract or the repayment of any amount previously paid, (ii) provide for the sharing of any revenues or profits by or with the Company or (iii) provide for discounts, allowances or extended payment terms. The Material Contracts are in all respects consistent with applicable
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Law and, to the Knowledge of the Company and the Major Sellers, are not the subject of any investigation, inquiry, proceeding or audit by a Governmental Authority.
3.9
Certain Business Matters.
(a)
The Company does not have any sole-source supplier of significant goods or services (other than utilities) with respect to which practical alternative sources are not reasonably available on equivalent terms and conditions, except as set forth on Schedule 3.9(a).
(b)
The Company does not provide and is not bound by any express warranties relating to its product or services and, to the Knowledge of the Company and the Major Sellers, there has been no assertion of any breach of warranty against the Company.
(c)
The Company is not a party to or otherwise bound by any agreement or arrangement that limits its freedom to compete in any line of business or any geographic area or with any Person or that requires it to transact business exclusively with any Person, except as set forth on Schedule 3.9(c).
(d)
Except as set forth on Schedule 3.9(d), neither the Company nor any Major Seller has received any notice, written or oral, or otherwise has any knowledge or information, that any material supplier of the Company intends or expects to stop, or materially decrease the rate of, supplying materials, products or services to the Company in the 12-month period following the Closing Date.
3.10
Tax Matters.
Except as set forth below:
(a)
the Company has filed (on a timely basis) with the appropriate Governmental Authority all Tax Returns required to be filed by it and has timely paid in full any Taxes due, and all such Tax Returns were true and complete in all respects;
(b)
the Company is not the beneficiary of any extension of time within which to file any Tax Return;
(c)
the Company has provided the Buyer with true and complete copies of all Tax Returns filed by it since the Companys fiscal year ended March 31, 2007;
(d)
the Company has possession, custody or control of all records and documentation that it is obliged to hold, preserve and retain for the purposes of any Tax and sufficient information to enable it to compute correctly its liability for Taxes insofar as the information relates to any event occurring on or before Closing;
(e)
there is no claim for Taxes that is a Lien (other than Permitted Liens) against the Companys properties or, to the Knowledge of the Company and the Major Sellers, proposed or threatened Tax assessment against the Company;
(f)
the Company has not waived any statute of limitations in respect of Taxes or executed or filed with any Governmental Authority any agreement extending the period
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for the assessment or collection of any Taxes, and the Company is not a party to any pending or threatened suit, action or proceeding by any Governmental Authority for the assessment or collection of Taxes;
(g)
there is no pending unresolved claim by a Governmental Authority in any jurisdiction where the Company does not file Tax Returns that the Company is or may be subject to taxation by such jurisdiction;
(h)
there has been no examination or audit by any Tax authority with respect to Taxes with respect to any year since the Companys fiscal year ended March 31, 2007;
(i)
the Company has timely withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, Seller or other Person;
(j)
no agreements or rulings relating to Taxes have been entered into or issued by any Governmental Authority with or in respect of the Company;
(k)
except as set forth on Schedule 3.10(k), the Company: (i) is not a party to or otherwise bound by any tax indemnification, allocation or sharing agreement; (ii) is not a party to an agreement with any Governmental Authority providing for any tax incentives, credits, inducements or similar benefits, nor is it otherwise participating in or claiming benefits under such a program; (iii) is not (and has not been) a member of an affiliated consolidated, combined or unitary group filing an affiliated, consolidated, combined or unitary Tax Return; and (iv) has no liability for the Taxes of any other Person as a transferee, successor, or alter ego of another Person, by contract or otherwise;
(l)
the Company will not be required to include any item of income in, or exclude any item of deduction from, its taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any: (i) change in method of accounting for a taxable period ending on or prior to the Closing Date; or (ii) prepaid amount received on or prior to the Closing Date;
(m)
the Company does not own any interest in real property in any jurisdiction in which a Tax is imposed, or the value of the interest is reassessed, on the transfer of any interest in real property and which treats the transfer of an interest in an entity that owns an interest in real property as a transfer of the interest in real property;
(n)
the Company has not executed any power of attorney with respect to any Tax; and
(o)
the Company does not operate through a branch, permanent establishment, fixed base, joint venture, partnership, subsidiary, liaison or representative office or otherwise, in any jurisdiction, other than India.
3.11
Litigation.
Except as set forth on Schedule 3.11, there are no claims, suits or actions, administrative, arbitration or other proceedings, or governmental investigations or
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audits pending or, to the Knowledge of the Company and the Major Sellers, threatened against the Company, any of its properties, assets or businesses or the transactions contemplated hereby. Except as set forth on Schedule 3.11, no Person has, in the past four (4) years, notified the Company of a material claim against the Company seeking an injunction, seeking to limit, invalidate or cancel any rights in Company Intellectual Property, or alleging any injury, loss or damage to economic or personal interests incurred as a result of or relating to (a) the use of any products sold by or on behalf of the Company, (b) services rendered by the Company or (c) acts by or omissions of the Company. Except as set forth on Schedule 3.11, to the Knowledge of the Company and the Major Sellers, no event has occurred and no circumstance exists that may give rise to or serve as a reasonable basis for any claim, suit, action or other proceeding to be brought or threatened against the Company. There are no outstanding judgments, orders, stipulations, injunctions, decrees or awards against the Company or that relate to the Business that have not been fully satisfied.
3.12
Compliance with Applicable Laws.
Except as set forth on Schedule 3.12, the Company is and has been in compliance, in all material respects, with all Laws applicable to it, to the conduct of its businesses or operations or to the use of its properties or assets, including all Tax, privacy, employment and human rights Laws, the FDCA, regulations and requirements adopted by the FDA or any other Governmental Authority and Laws established by Governmental Authorities responsible for regulating the research, development, testing, manufacture, labeling, packaging, storage, handling, shipping, distribution, sale, import or export of the Products. The Company has not received written notice of any violation or alleged violation of any Law by the Company. To the Knowledge of the Company and the Major Sellers, no event has occurred and no circumstance exists that could reasonably be expected to constitute or result in (with or without notice or lapse of time or both) a violation of or failure to comply in any material respect with (a) any Law by the Company or (b) an order of any court with respect to which the Company or any of its assets or properties is subject.
3.13
Environmental Matters.
(a)
All activities at or upon the Facility by or on behalf of the Company and, to the Knowledge of the Company and the Major Sellers, any other Person have been and are being conducted in material compliance with all Environmental Laws, including drinking water standards. Except as set forth on Schedule 3.13, to the Knowledge of the Company and the Major Sellers, there have been no environmental inspections, investigations, studies, audits, tests, reviews or other analyses conducted in relation to any property or business now or previously owned, operated or leased by the Company. In relation to the environment assessments which to the Knowledge of the Company and the Major Sellers have been conducted on the Facility (other than the environmental assessment presently being conducted by Buyers consultant), if any, the Company has disclosed full details of all such environmental assessments and has carried out or procured the carrying out of all recommendations contained in such environmental assessments and reports.
(b)
No Hazardous Substance is present in any medium at the Facility in such a manner or amount as requires remediation under any applicable Environmental Law. To the Knowledge of the Company and the Major Sellers, there have not been any releases or
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discharges of Hazardous Substances, on, at or beneath the Facility. No employee has brought a claim, or threatened to bring a claim, against the Company that such employee was harmed by workplace exposure to a Hazardous Substance or due to a violation of Environmental Law, nor, to the Knowledge of the Company and the Major Sellers, is there any reasonable basis for such claim. There are no pending civil, criminal or administrative claims liabilities, investigations or proceedings against the Company under any Environmental Law arising out of or relating to the condition of the Facility or the Companys activities (or failure to act) thereon and, to the Knowledge of the Company and the Major Sellers, there is no reasonable basis for any such proceeding or investigation. The Company has not received any notice, demand, letter, claim or request for information alleging that the Company or any Person who is operating or maintaining the Companys drinking water system is in violation of any Environmental Laws. The Company is not subject to any order, decree, injunction or other arrangement with any Governmental Authority or is subject to any indemnity or other agreement with any third party relating to liability under any Environmental Law. To the Knowledge of the Company and the Major Sellers, there are no facts, circumstances or conditions that could reasonably be expected to result in a claim or action against the Company pursuant to any Environmental Law, including any obligations or liabilities arising from any contractual arrangements involving the manufacture, use, transport, disposal of any Hazardous Substances.
3.14
Permits.
A true and complete list of all governmental permits, approvals, licenses, certificates, franchises, authorizations, consents and orders necessary for the operation of the Business in the manner that it is presently conducted is set forth on Schedule 3.14, (collectively, Permits), including all such Permits required by the FDA or any other Governmental Authority engaged in the regulation of clinical trials, pharmaceuticals, biologics or biohazardous substances or materials. Except as set forth on Schedule 3.14, the Company has all such Permits, and all such Permits are valid and remain in full force and effect, and will remain so immediately following the Closing. The Company has not engaged in any activity that could reasonably be expected to cause revocation or suspension of any such Permits and no action or proceeding seeking or contemplating the revocation or suspension of any Permit is pending or, to the Knowledge of the Company and the Major Sellers, threatened. The Company has not received notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from the FDA or any other Governmental Authority or third party alleging that any product, testing and research, operation or activity is in violation of any Permits.
3.15
Title to Properties; Real Property.
(a)
Title to Properties. Except for (i) assets acquired after the date of the Interim Balance Sheet, (ii) inventory that has been sold or otherwise disposed of since the date of the Interim Balance Sheet, (iii) cash spent in the Ordinary Course of Business and (iv) as set forth on Schedule 3.15(a), the assets reflected on the Interim Balance Sheet are all of the material tangible assets that are necessary for the conduct of the Business as currently conducted by the Company. Except as set forth on Schedule 3.15(a), the Company has good title to all of the properties and assets (personal and mixed, tangible and intangible) that it purports to own, including those properties and assets reflected on the Interim Balance Sheet (other than inventory
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sold or otherwise disposed of and cash spent in the Ordinary Course of Business since the date of the Interim Balance Sheet), free and clear of all Liens (other than Permitted Liens).
(b)
Owned Real Property. The Facility is the only real property owned (beneficially or of record) by the Company. The Company has good, marketable, fee simple title to the Facility, free and clear of all Liens (other than Permitted Liens and Liens set forth on Schedule 3.15(a) which will be terminated on or prior to the Closing). All documents of title relating to the Facility have been validly executed, adequately stamped and duly registered in the name of the Company as required under Law. Except as set forth on Schedule 3.15(b), (i) the Company has not leased or otherwise granted to any Person the right to use or occupy the Facility or any portion thereof; and (ii) there are no outstanding options, rights of first offer or rights of first refusal to purchase the Facility or any portion thereof or interest therein. The Company is not a party to any agreement or option to purchase any real property or interest therein relating to, or intended to be used in the operation of, the Business. The Company has not received any written notice (which remains outstanding) from any Governmental Authority alleging that the Company does not possess any license, permit or approval necessary for the continued use of the Facility as presently used in the conduct of the Business. The Facility is in material compliance with all applicable Laws. There are no actual or, to the Knowledge of the Company and the Major Sellers, threatened suits, actions or proceedings with respect to the Facility for eminent domain. The plants, buildings, and structures located at the Facility are in good operating condition and repair (ordinary wear and tear excepted) and are suitable for their present uses and are structurally sound. To the Knowledge of the Company and the Major Sellers, except as set forth on Schedule 3.15(b), the Facility currently has (i) access to public ways that have been accepted by the appropriate local jurisdiction and (ii) connections to water supply, storm and sanitary sewer facilities, telephone, gas and electrical connections, fire protection, drainage and other public utilities, as is necessary for the conduct of the Business. To the Knowledge of the Company and the Major Sellers, there is no existing plan to modify or realign any street or highway abutting the Facility or any existing or proposed eminent domain proceeding that would prevent or hinder or interfere with, in any material respect, the use, occupancy or operation of the Facility for the conduct of the Business. The Company has delivered or made available to Buyer true and complete copies of all surveys, property plans and instruments creating the interests in the Facility, title insurance policies, Permits and material certificates (including certificates of occupancy), in each case relating to its ownership of the Facility, but only to the extent the same are in its possession or control and not otherwise recorded in the applicable public land records.
(c)
Leased Property. Except for that certain Rental Agreement between R. Hemalatha and the Company, dated April 1, 2010, the Company is not a party to any leases (whether by or to the Company) or contracts for the purchase, sale or lease (whether as lessor or lessee) of any real property or personal property. All of the tangible properties (whether owned or leased) of the Company are located at the Facility.
3.16
Fixed Assets
. Schedule 3.16 sets forth a true and complete list of each item of Equipment having a GAAP book value in excess of $25,000. Each such item of Equipment is in good operating condition, normal wear and tear excepted, and is adequate for the use to which it is being put.
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3.17
Intellectual Property.
(a)
The Company has all good title to or valid and enforceable rights under contract to use all Company Intellectual Property material to or necessary to conduct the Business as it is presently conducted and as presently contemplated by the Company, free and clear of all Liens (other than Permitted Liens and Liens set forth on Schedule 3.15(a) which will be terminated on or prior to the Closing). No Seller and no officer, director or employee of the Company, or any of their respective Affiliates, has any ownership, royalty, license or other interest in any of the Company Intellectual Property, and all such Persons who have developed, in whole or in part, any Company Intellectual Property have duly executed a valid and enforceable agreement assigning all rights therein to the Company and agreeing to maintain the confidentiality of all confidential or proprietary information. Except as set forth on Schedule 3.17(a), the validity and enforceability of any of the Company Intellectual Property or the title of the Company thereto has not been questioned in any litigation, governmental inquiry or proceeding and, to the Knowledge of the Company and the Major Sellers, there are no facts or information that would raise any colorable questions about the validity, enforceability or ownership of Company Intellectual Property. The Company has taken all actions necessary and appropriate to preserve the confidentiality of all trade secrets, proprietary and other Confidential Information material relating to the Business. The Company does not have any Company Intellectual Property Registrations. Other than as set forth in Schedule 3.8(a)(v) and Schedule 3.8(a)(viii), there is no agreement or arrangement by which the Company grants or receives rights in or to (e.g., licenses, assignments, non-assertions, covenants not to sue and/or escrow agreements) any of the Company Intellectual Property.
(b)
The use of the computer systems by the Company does not infringe the intellectual property rights of any Person. The Company has exclusive control of the operation of the computer systems and of the storage, processing and retrieval of all data stored on the computer systems.
(c)
To the Knowledge of the Company and the Major Sellers, the conduct of the Business by the Company has not and, if conducted as currently conducted and as presently contemplated by the Company, will not constitute an infringement or other violation of any copyright, trade secret, trademark, patent, invention, proprietary information, nondisclosure or any other rights of any Person. Except as set forth on Schedule 3.17(c), the Company has not received any notice and is not aware of infringement of or conflict with, any license, patent, copyright, trademark, service mark or other intellectual property right of any other Person.
(d)
Schedule 3.17(d) sets forth a true and complete list of all domain names owned or used by the Company in the conduct of the Business. Neither the Seller nor any officer, director or employee of the Seller, the Company or any of their respective Affiliates has any ownership or other interest in the domain names set forth on Schedule 3.17(d). None of the domain names infringe or conflict with any trademarks, trademark rights, trade names, trade name rights, service marks or other rights of any Person in India or the United States. No right to or interest in any domain name required to be listed on Schedule 3.17(d) has been obtained in violation of any Law.
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3.18
Regulatory Matters.
(a)
Schedule 3.18 sets forth a true and complete list of all of the Products, including the dosage form, active ingredient and strength of each such Product. In respect of the Products, Schedule 3.18 sets forth (i) a description of the regulatory status thereof (as of the date hereof), including the ANDAs that the Company has filed in respect of such Products (Filed ANDAs) and other documentation filed with the FDA or any other Governmental Authority in connection with the safety, efficacy, sale, distribution or use of each such Product; and (ii) whether the particular regulatory status has been presented to the FDA or any other Governmental Authority under the name of the Company or under the name of another Person.
(b)
The Filed ANDAs and any other filings or submissions made by the Company with the FDA or any other Governmental Authority in connection with the Products were complete and accurate when filed, made in good faith upon the best information available to Company at such time, and did not contain any material omissions. To the Knowledge of the Company and the Major Sellers, no fact or circumstance exists which may cause the FDA to refuse to grant full approval of the Filed ANDAs, the Requested ANDAs or any other Products manufactured, shipped or distributed or, as of the date hereof and the Closing Date, intended to be manufactured, shipped or distributed by the Company. The Company has complied with all obligations arising from or related to any commitments to or requirements of any applicable Governmental Authority involving the Products, including manufacturing the Products in accordance with their respective ANDAs and complying with cGMPs.
(c)
All of the Products tested, produced, manufactured, labeled, packaged, shipped, imported, or exported, whether for research and development, storage and handling, or distribution and sale (and the preparation thereof), by the Company, including all component ingredients and packaging and labeling materials, comply with all Laws relating to their research, development, safety, manufacture, labeling, packaging, storage, handling, distribution, import, export and stability testing.
(d)
No Products in process or in inventory are, and no Products manufactured, packaged, distributed, imported or exported by the Company at the time of delivery were, adulterated or misbranded within the meaning of said laws and regulations, nor did any such Product constitute an article prohibited from introduction into interstate commerce.
(e)
There exists no set of facts (i) which could reasonably be expected to furnish a basis for the withdrawal or suspension of any Product, including all component ingredients and packaging and labeling materials or (ii) which could otherwise cause the Company to withdraw or suspend any such Product from the market due to safety or effectiveness concerns or a change in regulatory status of any such Product by the FDA or any other Governmental Authority.
(f)
There are no defects in the designs, specifications, process or manufacture with respect to any Product, including all component ingredients and packaging and
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labeling materials, that is reasonably likely to give rise to any Losses or that will cause such Product to not be useable as intended, shipped, distributed, imported or exported.
(g)
The Company has not received from the FDA or any other Governmental Authority any notice of adverse findings, FDA Form 483s, notices of violations, warning letters, clinical holds, civil or criminal proceeding notices, or notices of investigation under the FDCA, or other similar communication from the FDA or any other Governmental Authority regarding the Products, and there have been no seizures or suspensions conducted or threatened by the FDA or any other Governmental Authority.
(h)
The Company has not, either voluntarily or involuntarily, initiated, conducted, or issued or caused to be initiated, conducted or issued, any market withdrawal or replacement, field notification, safety alert, warning or other similar notice or action relating to the alleged lack of safety or efficacy of any of the Products or any alleged product defect or violation including misbranding or adulteration, and to the Knowledge of the Company and the Major Sellers, neither the FDA or any other Governmental Authority has initiated, conducted or intends to initiate any such notice or action.
(i)
To the extent required by applicable Laws of the FDA or any other Governmental Authority, the Company has submitted to the FDA an Investigational New Drug Application or amendment or supplement thereto or other required documentation for each clinical trial it has conducted or sponsored or is conducting or sponsoring, all such submissions were in compliance with applicable Laws when submitted and no material deficiencies have been asserted by the FDA or any other applicable Governmental Authority with respect to any such submissions. The preclinical studies and tests and clinical trials conducted by or on behalf of the Company were, and, if still pending, are being, conducted in accordance with experimental protocols, procedures and controls pursuant to, where applicable, accepted professional and scientific standards for products or product candidates comparable to those being developed by the Company, including human subject protections and Institutional Review Board requirements; and such preclinical studies and tests and clinical trials were and, if still pending, are being conducted in accordance with applicable Laws of the FDA or any other applicable Governmental Authority; and the Company has not received any notice or correspondence from the FDA or any other applicable Governmental Authority exercising comparable authority, or any Institutional Review Board or comparable authority requiring the termination, suspension, clinical hold, material delay or material modification of any tests, studies or trials. Neither the Company nor the Sellers are aware of any facts which are reasonably likely to cause (i) a material change in the marketing classification of any such products or (ii) a termination or suspension of marketing authorization or clearance of any such products, or clinical trials being conducted by or on behalf of the Company.
3.19
Insurance.
Schedule 3.19 sets forth a true and complete list of all policies of insurance under which the Company or any of their officers or directors (in such capacity) is an insured party, beneficiary or loss payable payee. The Company has obtained insurance policies which, taken together, provide adequate insurance coverage for the assets (movable, immovable as well as tangible and intangible, owned or licensed by the Company) and the operations of the Business for all risks normally insured against by a Person carrying on the same
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business as the Company. True and complete copies of all such policies have been previously provided to the Buyer. Such policies are in full force and effect. The Company is not in default with respect to any provision contained in any such policy and the Company has not received or given a notice of cancellation or non-renewal with respect to any such policy. No claims have been made by the Company under any such policy, and, to the Knowledge of the Company and the Major Sellers, no event has occurred and no state of facts exists in respect of which the Company is entitled to make a claim under any such policy.
3.20
Bank Accounts; Credit Cards; Corporate Accounts; and Powers of Attorney.
A true and complete list showing the names of all: (a) banks in which the Company has an account or safe deposit box and the names of all Persons authorized to draw thereon and who have access thereto is set forth on Schedule 3.20(a); (b) credit card issuers with whom the Company has an account and the names of all Persons authorized to use such accounts or who have access thereto is set forth on Schedule 3.20(b); (c) cellular telephone, phone card or other corporate accounts with whom the Company has an account and the names of all Persons authorized to use such accounts or who have access thereto is set forth on Schedule 3.20(c); and (d) Persons holding powers of attorney from the Company is set forth on Schedule 3.20(d). There are no automatic, periodic or scheduled withdrawals or debits with respect to any of the bank or corporate accounts required to be set forth on Schedules 3.20(a) (d).
3.21
Employee Arrangements.
(a)
Schedule 3.21(a) sets forth a true and complete list of all Benefit Plans. The Company has provided to the Buyer the correct and complete copies of the following (where applicable) with respect to each Benefit Plan: (i) all plan documents (or, in the case of any unwritten Benefit Plan, a written summary of the terms of such Benefit Plan); summary plan descriptions, summaries of material modifications, amendments, and resolutions related to such plans; (ii) the most recent audited financial statement and actuarial valuation; and (iii) all related administrator, service and vendor agreements, insurance contracts and other agreements which implement each such Benefit Plan.
(b)
Except as set forth on Schedule 3.21(b), (i) there are no claims pending (other than routine claims for benefits) or, to the Knowledge of the Company and the Major Sellers, threatened against any Benefit Plan or against the assets of any Benefit Plan, nor are there any current or, to the Knowledge of the Company and the Major Sellers, threatened Liens on the assets of any Benefit Plan, (ii) all Benefit Plans conform to, and in their operation and administration are, in all material respects, in compliance with, the terms thereof and requirements prescribed by any and all applicable Laws, orders, or governmental rules and regulations currently in effect with respect thereto (including all applicable requirements for notification, reporting and disclosure to participants or any Governmental Authority), (iii) the Company has performed all obligations required to be performed by it under, is not in default under or in violation of, and, to the Knowledge of the Company and the Major Sellers, there is no default or violation by any other party with respect to, any of the Benefit Plans, (iv) all contributions due and payable on or before the Closing Date in respect of any Benefit Plan, the terms of the Benefit Plan or any collective bargaining agreement, have been or will be made in full and proper form on or before their due dates, and a reasonable amount has been accrued and
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provided for in accordance with and to the extent required by GAAP in the Company Financial Statements for all other contributions or amounts in respect of each Benefit Plan for the applicable periods covered by such Company Financial Statements.
(c)
Except as set forth on Schedule 3.21(c) and except to the extent required by applicable Laws, no Benefit Plan or written or oral agreement exists which obligates the Company to provide health care coverage, medical, surgical, hospitalization, death or similar benefits (whether or not insured) to any current or former employee, director, consultant or agent of the Company following such employees, directors, consultants or agents termination of employment or service with the Company, including retiree medical, health or life benefits.
(d)
Except as set forth on Schedule 3.21(d), no Benefit Plan is self-funded, self-insured or funded through the general assets of the Company.
(e)
Except as set forth on Schedule 3.2(c) or Schedule 3.2(d), no current or former employee, officer, director, consultant, agent or investor of the Company holds any option, warrant or other right to purchase shares of the share capital of the Company.
(f)
The consummation of the transactions contemplated by this Agreement will not (i) entitle any individual to severance or separation pay, or (ii) directly or indirectly result in an increase to benefits or compensation, acceleration of vesting or acceleration of timing for payment of any benefit or compensation.
(g)
With respect to each Benefit Plan, except as set forth on Schedule 3.21(g), (i) there are no restrictions on the ability of the sponsor of each Benefit Plan to amend, terminate or assign any Benefit Plan, or any related service, vendor or administrative agreement, insurance policy or contract, or other agreement which implements or otherwise relates to any such Benefit Plan, at any time without penalty or cost, and (ii) the Company has expressly reserved in itself the right to amend, modify, terminate or assign any such Benefit Plan, or any portion of it, and has made no representations (whether orally or in writing) which would conflict with or contradict such reservation or right.
(h)
Except as set forth on Schedule 3.21(h), the Company (i) is not a party to any written or oral agreement with any current or former employee, director, consultant or agent, the benefits of which are contingent upon, or the terms of which will be materially altered by, the consummation of transactions contemplated by this Agreement, or (ii) has not announced or otherwise made a commitment to implement any arrangement in the future that, if implemented, would be a Benefit Plan.
3.22
Employees.
(a)
Schedule 3.22(a) sets forth a true and correct summary of the following information for each current employee of the Company, including each employee on leave of absence, disability or layoff status: name; job title; employment status; current base pay and current bonus target and actual amount of the last bonus paid and any change(s) in compensation since March 31, 2010; vacation time accrued; and service years credited for purposes of vesting or eligibility to participate in any Benefit Plan.
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(b)
The Company does not have any union, collective bargaining, employment, management, severance or consulting agreements or arrangements to which the Company is a party or by which it is otherwise bound.
(c)
To the Knowledge of the Company and the Major Sellers, no union or other labor organization is seeking to organize, or to be recognized as, a collective bargaining unit of any group of employees that includes any employees of the Company on account of employment with the Company. There is no pending or, to the Knowledge of the Company and the Major Sellers, threatened representation proceeding or petition, strike, work stoppage, work slowdown, unfair labor practice charge or complaint or other material labor dispute affecting any employee of the Company.
(d)
To the Knowledge of the Company and the Major Sellers, no officer or employee of the Company is a party to or is otherwise bound by any agreement or arrangement, including any confidentiality, non-competition or proprietary rights agreement, with any Person (other than the Company) that in any way limits or adversely affects or will limit or affect (i) the performance of his duties as an employee, officer or director of the Company after the Closing or (ii) the ability of the Company to conduct the Business as presently conducted or any other businesses presently contemplated by the Company to be conducted.
(e)
Other than routine claims for health and welfare benefits under Benefit Plans, (i) there have not been any employment related claims under applicable Law, including wage and hour claims relating to the Business or the Company during the period of time prior to the Closing Date that is equivalent to the statute of limitations under applicable Law for such claim, nor, (ii) to the Knowledge of the Company and the Major Sellers, are there any employment related claims under applicable Law, including wage and hour claims, currently threatened against the Company or relating to the Business. To the Knowledge of the Company and the Major Sellers, there are no facts which would give rise to material Liabilities in connection with any employment related claims under applicable Law.
(f)
The Company has complied in all material respects with its obligations to its employees, applicants for employment, former employees and all unions or other labor organizations, including all obligations (including obligations relating to discharging in a timely manner all payments and any delayed payments along with the requisite penalty or interest as applicable) in respect of wages, working hours, unfair labor practices or other employment practices, discrimination, contract labor, payment of provident fund contribution, employee state insurance contribution, gratuity and other applicable employee welfare laws, including the (Indian) Payment of Gratuity Act, 1972, the (Indian) Employees Provident Fund and the Miscellaneous Provisions Act, 1952, the (Indian) Payment of Bonus Act, 1965, the (Indian) Contract Labor (Regulation and Abolition) Act, 1970, the (Indian) Workmens Compensation Act, 1923, and the (Indian) Minimum Wages Act, 1948, in each case, as amended from time to time. All statutory funding with respect to each employee of the Company has been fully funded.
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(g)
All individuals who performed, are performing or have performed consulting or other services for the Company have been correctly classified as either independent contractors or employees of the Company, as the case may be, based on the jurisdiction in which such individuals are performing or have performed such services. There are no pending or, to the Knowledge of the Company and the Major Sellers, threatened actions, claims or proceedings against the Company or in connection with the Business by or on behalf of or related to any individuals currently or formerly classified by the Company, as the case may be, as independent contractors or consultants. To the Knowledge of the Company and the Major Sellers, there are no facts which would give rise to material Liabilities for violations of any applicable Law concerning the classification of individuals performing services for the Company.
(h)
The Company is, and has at all times been, in compliance with all applicable immigration Laws in each jurisdiction in which it employs any employees, including compliance with the requirements under applicable Law for those individuals to be granted the relevant work permit or employment visa or any other necessary approval before he is or was employed by the Company in such jurisdiction.
(i)
The Company has, or will have no later than the Closing Date, paid all accrued salaries, bonuses, commissions, wages and vacation pay and any other benefits, in each case which is due and payable on or before the Closing Date, in accordance with the Companys normal payroll practices as in effect on the date of this Agreement and is not liable for any fines or penalties for failure to pay any of the foregoing or other sums due to employees of the Company.
(j)
To the Knowledge of the Company and the Major Sellers, the Company is, and has at all times been, in compliance with all applicable Laws which prohibit discrimination and harassment against employees of the Company.
(k)
Each employee of the Company has executed a nondisclosure and assignment-of-rights agreement for the benefit of the Company, as applicable, vesting all rights in work product created in the Company.
(l)
To the Knowledge of the Company and the Major Sellers, no employee of the Company intends to resign following the Closing or the transactions contemplated by this Agreement.
(m)
To the Knowledge of the Company and the Major Sellers, the Company has not entered into any arrangement with any entity such that a joint employer relationship exists. There are no pending or, to the Knowledge of the Company and the Major Sellers, threatened actions, claims or proceedings against the Company or in connection with the Business by or on behalf of or related to any individuals currently or formerly classified by as employees under a joint employer theory. There are no facts which would give rise to material Liabilities for violations of any applicable Law concerning a joint employer relationship between the Company and any third parties.
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(n)
The Company has in relation to each of its employees (and so far as relevant to each of its former employees) complied in all material respects with all obligations imposed on it by all applicable Law and relevant statutes, regulations and codes of conduct and practice affecting its employment of any Persons and all relevant orders and awards made thereunder and has maintained current, adequate and suitable records regarding the service, terms and conditions of employment of each of its employees.
3.23
Absence of Certain Business Practices.
(a)
Neither the Company nor, to the Knowledge of the Company and the Major Sellers, any director, officer, employee, agent or representative of the Company, has directly or indirectly in violation of any applicable Law paid, offered or authorized any bribe, influence payment, kickback, or other improper contribution (whether in the form of money, services, or gifts and entertainment in excess of reasonable and customary business courtesies) to any government official for the purpose of (i) obtaining or retaining business for the Company, or (ii) securing any improper advantage for the Company. The Company has not established or maintained any material fund or asset of the Company that has not been recorded in the books and records of the Company.
(b)
There is no pending or, to the Knowledge of the Company and the Major Sellers, threatened, judicial, administrative or arbitral action, claim, suit or proceeding, investigation, complaint or action against the Company, nor is there any order, injunction, judgment, decree, debarment, ruling, writ, assessment or award imposed (or, to the Knowledge of the Company and the Major Sellers, threatened to be imposed) upon the Company by or before any Governmental Authority, in each case, in connection with an alleged violation of applicable Law relating to illegal payments and gratuities.
3.24
Affiliated Transactions.
Except as set forth on Schedule 3.24, no Seller and no director or officer of the Company (or any of their respective Affiliates or Associates) (a) is a party to or otherwise a beneficiary of any agreement, transaction or arrangement (oral or written) with or involving the Company or (b) has any claim, monetary or otherwise, against the Company.
3.25
Import and Export Controls.
(a)
The Company has not violated in any material respect any Laws of any jurisdiction regarding the export, transshipment, re-export or other transfer of data, goods, software, technology or services to any end users, end uses or destinations.
(b)
There is no pending or, to the Knowledge of the Company and the Major Sellers, threatened, judicial, administrative or arbitral action, claim, suit or proceeding, investigation, complaint or action against the Company by any Governmental Authority, nor is there any order, injunction, judgment, decree, ruling, writ, assessment or award imposed (or, to the Knowledge of the Company and the Major Sellers, threatened to be imposed) upon the Company by or before any Governmental Authority, in each case, in connection with an alleged violation of applicable Law relating to the import, export, transshipment, re-export or other
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transfer of data, goods, software, technology or services to any foreign jurisdiction against which any country maintains sanctions or export controls.
3.26
Prior Transactions
. Other than this Agreement and as set forth on Schedule 3.26, there has been no transaction involving the Company or any present or past shareholder of the Company pursuant to or as a result of which (a) any of the Company Stock or (b) any asset owned, purportedly owned or otherwise held by the Company, may be transferred or re-transferred to another Person or which gives, or may give rise to, a right of compensation or other payment in favor of another Person under the Law of any relevant jurisdiction.
3.27
Brokers.
No agent, broker, firm or other Person acting on behalf of the Company, or under the authority of any of the foregoing, is or shall be entitled to a brokerage commission, finders fee or similar payment in connection with any of the transactions contemplated hereby from the Company, any of the Sellers or the Buyer. Any such fee authorized by the Company shall be paid solely by the Major Sellers.
3.28
Disclosure.
No representation or warranty made by the Company or the Major Sellers herein, and no statement provided in any certificate or other document furnished or to be furnished by or on behalf of the Company at the Closing, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact that is necessary in order to make the statements herein or therein not misleading.
3.29
Disclaimer of Other Representations and Warranties
. The Company and the Sellers do not make, and have not made, any representations or warranties in connection with this Agreement or the transactions contemplated hereby other than those expressly set forth herein or in any certificates delivered by the Company or the applicable Sellers in connection with the Closing.
4.
REPRESENTATIONS AND WARRANTIES OF THE SELLERS.
Each of the Sellers (provided in the case of Section 4.5, each Major Seller, and in the case of Section 4.3(b), M. Shanmugam), severally, and not jointly, hereby represents and warrants to the Buyer with respect to himself, herself or itself, as of the date hereof and as of the Closing Date, as follows:
4.1
Organization; Good Standing; Power
. Such Seller, if not a natural person, is a corporation duly organized, validly existing and in good standing under the Laws of India, and has all requisite corporate power and authority to enter into this Agreement and the Ancillary Agreements to which such Seller is a party, to perform its obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby. If such Seller is a natural person, such Seller has the legal capacity to execute and deliver this Agreement and the Ancillary Agreements to which he or she shall become a party, perform his or her obligations hereunder and thereunder and consummate the transactions contemplated hereby and thereby.
4.2
Due Authorization; Validity; No Conflicts
. If such Seller is not a natural person, the execution and delivery by such Seller of this Agreement and each of the Ancillary Agreements to which it shall become a party, the performance by such Seller of its
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obligations hereunder and thereunder, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action on the part of such Seller. This Agreement and each of the Ancillary Agreements to which such Seller shall become a party has been (or will be) duly executed and delivered by such Seller and is, or will be when duly executed by such Seller (assuming the due execution of the other parties hereto or thereto), the valid and binding obligations of such Seller, enforceable against such Seller in accordance with their respective terms, except to the extent that enforceability thereof may be limited by general equitable principles or the operation of bankruptcy, insolvency, reorganization, moratorium or similar Laws. Assuming all of the Consents are obtained, neither the execution and delivery by such Seller of this Agreement and the Ancillary Agreements to which he, she or it shall become a party, nor the consummation of the transactions contemplated hereby or thereby by such Seller, nor the performance by such Seller of his, her or its obligations hereunder or thereunder, shall (a)(i) conflict with, or result in any breach or default (or would constitute a default but for any requirement of notice or lapse of time or both) under, or (ii) give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a benefit under, or (iii) give any Person any right to purchase or sell assets or securities from or to the Company or to exercise any remedy or modify any obligation or term, or (iv) result in the creation or imposition of any Lien on any of the assets or properties of the Company, pursuant to any agreement, contract, note, mortgage, indenture, lease, sublease, instrument, permit, concession, franchise or license to which such Seller is a party or by which such Seller or any of his, her or its properties or assets may be bound or affected, or (b) conflict with or result in a violation of any Law applicable to such Seller.
4.3
Stock Ownership.
(a)
Except as set forth on Schedule 4.3, such Seller is the sole record and beneficial owner of the number of shares of Company Stock set forth next to such Sellers name on Schedule 3.2(a), as of the date of this Agreement, and will be the sole record and beneficial owner of the number of shares of Company Stock set forth next to such Sellers name on Schedule 3.2(a), as of the Closing Date. All shares of Company Stock are owned free and clear of all Liens and restrictions on transfer (other than restrictions of general applicability under securities Laws or ownership laws of India, including in respect of foreign ownership) and Taxes. Except as set forth on Schedule 3.2(c) or Schedule 3.2(d), such Seller is not a party to any option, warrant, right, agreement or commitment providing for the disposition or acquisition of any shares of Company Stock (other than this Agreement) or any other share capital of the Company. Such Seller is not a party to (or has irrevocably terminated) any voting trust, proxy or other agreement or understanding with respect to the transfer or voting of any shares of Company Stock. The resale of shares of Company Common Shares by such Seller as provided herein shall, upon the Closing, vest the Buyer with good and marketable title to such shares of Company Common Shares, free and clear of all Liens and restrictions on transfer (other than restrictions of general applicability under securities Laws or ownership laws of India, including in respect of foreign ownership) and Taxes.
(b)
M. Shanmugam has, and as of the Closing Date shall have, continuously held his Company Common Shares for a period of more than 12 months.
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4.4
Governmental Authorizations; Third-Party Consents
. Except as set forth in Schedule 4.4, no Consents are required to be obtained by such Seller.
4.5
No Competing Interests.
Neither such Major Seller nor any of his or its Affiliates has any ownership or other interest in any business or activity that competes or can reasonably be expected to compete, directly or indirectly, with the Business. Except as set forth on Schedule 4.5, neither such Major Seller nor any of his or its Affiliates has or shares with the Company any ownership or similar interest in any asset or property (including any intellectual property) that is being (or has been in the past twelve-month period) used in connection with the operation of the Business.
4.6
Adequate Consideration; No Tax Proceeding
. With respect to J. Jayaseelan, Clan Laboratories, S. Suresh and TIPS, such Seller represents and warrants that (a) the Company Common Shares are being transferred for adequate consideration, (b) there are no proceedings pending under the Tax Act with respect to the Company Common Shares and (c) no amount is due and payable by such Seller in respect of the Company Common Shares held by such Seller under the Tax Act.
4.7
Brokers
. No agent, broker, firm or other Person acting on behalf of such Seller or under the authority of such Seller is or shall be entitled to a brokerage commission, finders fee or similar payment in connection with any of the transactions contemplated hereby from the Company or any of the Sellers or the Buyer. Any such fee authorized by such Seller shall be paid by such Seller.
5.
REPRESENTATIONS AND WARRANTIES OF THE BUYER.
The Buyer hereby represents and warrants to the Company and the Sellers, as of the date hereof and as of the Closing Date, as follows:
5.1
Organization and Power.
The Buyer is a corporation duly organized, validly existing and in good standing under the Laws of Delaware and has all requisite corporate power and authority to own, lease and operate its assets and properties, to carry on its business as presently conducted by it, to enter into this Agreement and each Ancillary Agreement to which the Buyer is (or will be) a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.
5.2
Due Authorization; Validity; No Conflicts.
(a)
The execution and delivery by the Buyer of this Agreement and of each of the Ancillary Agreements to which it shall become a party, the performance by the Buyer of its obligations under this Agreement and such Ancillary Agreements, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement and the Ancillary Agreements to which it shall become a party have been (or will be) duly executed and delivered by the Buyer and are or, when executed and delivered by Buyer, will be the valid and binding obligations of the Buyer, enforceable against Buyer in accordance with their respective terms, except to the extent that enforceability thereof may be limited by general equitable principles or the operation of bankruptcy, insolvency, reorganization, moratorium or similar Laws. Neither the execution and delivery by the Buyer of this Agreement
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and the Ancillary Agreements to which it shall become a party, nor the consummation of the transactions contemplated hereby or thereby, nor the performance by the Buyer of its obligations hereunder or thereunder, shall (or, with the giving of notice or the lapse of time or both, would) (i) conflict with or violate any provision of the Certificate of Incorporation or Bylaws of the Buyer or (ii) violate any Law applicable to the Buyer any of its properties or assets.
(b)
No declaration, filing or registration with, or notice to, or authorization, consent, order or approval of, any Governmental Authority is required to be obtained or made in connection with or as a result of the execution and delivery of this Agreement and the Ancillary Agreements by the Buyer or the performance by the Buyer of the transactions contemplated by this Agreement and Ancillary Agreements, other than such declarations, filings, registrations, notices, authorizations, consents or approvals which, if not made or obtained, as the case may be, could not reasonably be expected to result in the Buyers inability to consummate the transactions contemplated by this Agreement and Ancillary Agreements or in an unreasonable delay in the Buyers ability to consummate the transactions contemplated by this Agreement and the Ancillary Agreements.
5.3
Financing
. The Buyers obligation to effect the Closing is not subject to the receipt by Buyer of additional financing and the Buyer currently has, and at Closing will have, available sufficient funds (through existing credit facilities and cash on hand) to pay the Closing Consideration in full at the Closing and the additional payments under Section 2.2(c) if and when due.
5.4
Brokers
. No agent, broker, investment banker, financial advisor or other Person is entitled to any brokerage, finders, financial advisors or other similar fee or commission for which any of the Sellers could become liable in connection with the transactions contemplated by this Agreement as a result of any action taken by or on behalf of the Buyer or any of its Affiliates.
6.
COVENANTS.
6.1
Investigation by the Buyer.
(a)
From the date hereof until the earlier of the Closing Date and the termination of this Agreement in accordance with its terms, the Buyer may, through its representatives (including its counsel, accountants, lenders, and consultants), make such investigations of the properties, offices and operations of the Company and such audit of the financial condition of the Company as it reasonably deems necessary in connection with the transactions contemplated hereby, including any investigations enabling it to familiarize itself with such properties, offices, operations, financial condition and employees; such investigations shall not, however, affect or limit the Companys or the Sellers representations, warranties and agreements hereunder. The Company and the Major Sellers shall permit the Buyer and its authorized representatives to have reasonable access, upon reasonable prior notice, to the premises and to all books and records and Tax Returns of the Company, and the Buyer shall have the right to make copies thereof and excerpts therefrom. In connection with such review, upon notice to the Major Sellers, the Buyer and its representatives may contact and communicate with key employees, suppliers, customers, lenders and creditors of the Company. The Company and the Major Sellers shall timely furnish the Buyer with such financial and operating data and other
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information with respect to the Company and its operations as the Buyer may from time to time reasonably request.
(b)
Representatives of the Buyer shall be entitled to hold meetings and conferences during normal working hours with the Companys employees upon reasonable notice to the Company, to explain and answer questions about the conditions, policies and benefits of employment in the Buyers organization. Further, the Company and the Major Sellers shall cooperate with the Buyer in communicating to the Companys employees any information concerning employment in the Buyers organization and shall encourage the Companys employees to remain in the employment of the Company after the Closing. The Company shall be entitled to have one or more representatives attend all such meetings.
6.2
Carry on in Ordinary Course.
Except as set forth on Schedule 6.2, from the date hereof until the earlier of the Closing Date and the termination of this Agreement in accordance with its terms:
(a)
the Company shall, and the Major Sellers shall (i) cause the Company to, conduct the Business and operations of the Company in the Ordinary Course of Business, except as required by this Agreement or as otherwise approved by Buyer in writing and (ii) use commercially reasonable best efforts to preserve the present relationships between the Company and its material suppliers, distributors and customers; and
(b)
the Company shall not, except with the Buyers prior written consent:
(i)
declare, make or pay any distributions or dividends on or in respect of its share capital now or hereafter outstanding or return any capital to any of the Companys shareholders in their capacities as such, or redeem, purchase or acquire (other than pursuant to Section 6.10) any of the Companys share capital now or hereafter outstanding, or make any other distribution or payment to the holders of share capital and/or options to purchase share capital of the Company, other than salaries (and expressly excluding any bonuses) due in the Ordinary Course of Business;
(ii)
make or grant any increases in salary or other compensation or bonuses to employees or grant any employee any severance or termination pay or establish, adopt, enter into or amend any Benefit Plan (except, in each case, as required by applicable Law);
(iii)
make any general adjustment in the type or hours of work of its employees (except as required by applicable Law);
(iv)
enter into or amend any agreement, arrangement or transaction with any Seller or any Associate or Affiliate of the Company or of any Seller (other than agreements with respect to the Opex Loans);
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(v)
permit or engage in any of the actions or transactions set forth in Sections 3.7 or 3.24 (if and to the extent not otherwise covered by this Section 6.2), other than actions or transactions in connection with the Opex Loans and the Capex Loans;
(vi)
acquire, exchange, lease, license or dispose of any properties or assets of the Company, other than the disposal of cash in the Ordinary Course of Business and the purchase of raw materials in the Ordinary Course of Business;
(vii)
other than as contemplated by Section 6.10, issue or grant any shares of share capital, options, warrants or other securities, whether or not such are then exercisable for, convertible into or exchangeable for shares of share capital or such other securities;
(viii)
amend or repeal any of the Company Organizational Documents;
(ix)
incur any Indebtedness (other than the Opex Loans) or grant or permit any of its assets or property, including any Company Intellectual Property, to become subject to, any Lien (other than Permitted Liens and the Liens set forth on Schedule 3.15(a) which shall be terminated as of the Closing Date);
(x)
terminate or amend any agreement set forth on Schedule 3.8(a) or enter into any agreement or arrangement that would, if in effect as of the date hereof, otherwise be required to be set forth on such Schedule 3.8(a);
(xi)
discount or write-off any notes receivable or, other than in the Ordinary Course of Business, any accounts receivable;
(xii)
fail to pay any accounts payable when due or, if no due date is specified or payment is due on receipt, within thirty (30) days of receipt of the applicable invoice or bill;
(xiii)
waive any statute of limitations in respect of Taxes or execute or file with any Governmental Authority any agreement extending the period of assessment or collection of any Taxes;
(xiv)
change any method of accounting for Tax purposes;
(xv)
make or amend any elections for Tax purposes;
(xvi)
amend any Tax Returns or file any claim for Tax refunds, enter into any material closing agreement, settle any Tax claim, audit or assessment or surrender any right to claim a Tax refund, offset or other reduction in Tax liability;
(xvii)
change its taxable year; or
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(xviii)
enter into any agreement or arrangement to take any of the foregoing actions.
6.3
Exclusive Dealings.
From the date hereof until the earlier of the Closing Date and the termination of this Agreement in accordance with its terms, the Company and the Sellers shall not, and shall cause the Companys directors, officers, employees, agents, Affiliates not to, directly or indirectly, solicit or initiate the submission of proposals from, or solicit, encourage, entertain or enter into any arrangement, agreement, letter of intent or understanding with, or engage in any negotiations with, or furnish any information to, any Person, other than the Buyer or any representative(s) or agent(s) thereof, with respect to the direct or indirect acquisition of all or any material portion of the business, operations, properties or assets of the Company or any of its securities. Should the Company, any Seller or any of their respective Affiliates or representatives, during such period, receive any offer or inquiry relating to any such acquisition, or obtain information that such an offer is likely to be made, such Seller or the Company, as applicable, will provide the Buyer with immediate written notice thereof.
6.4
Reasonable Best Efforts
. Each of the parties shall act in good faith and use reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary or advisable to consummate the transactions contemplated by this Agreement as soon as reasonably practicable. If all of the conditions to a partys obligation to close hereunder shall have been satisfied, (other than those conditions precedent that by their nature are to be satisfied at Closing) such party shall diligently proceed to close. Without limiting the foregoing, the Company and each Seller shall, and shall cause its respective Affiliates to: (a) use their commercially reasonable best efforts to obtain, on or prior to the Closing, all Consents and waivers applicable to such party and in respect of such party provide all necessary notices to, and make all filings with and applications and submissions to, any Governmental Authority or Person required for the consummation of the transactions contemplated by this Agreement as promptly as reasonably practicable; provided, however, that to the extent that any of such Consents applicable to such party are not obtained by the Closing Date, each such party shall continue to use his, her or its commercially reasonable best efforts thereafter to obtain them; (b) provide all such information concerning such party and its officers, directors, employees, trustees and Affiliates as may be necessary or reasonably requested by another party in connection with the foregoing; and (c) in respect of such party, avoid the entry of, or have vacated or terminated, any injunction, decree, order or judgment that would restrain, prevent or materially delay the consummation of the transactions contemplated by this Agreement, including defending through litigation any claim asserted in any court by any Governmental Authority or other Person. Notwithstanding the foregoing, neither the Company nor any Seller will be obligated to pay any third party in order to obtain any Consent or waiver.
6.5
Supplemental Disclosure.
(a) The Company and the Major Sellers agree that, with respect to the representations and warranties made by them in Section 3 of this Agreement, they shall have a continuing obligation up through the Closing promptly to provide detailed disclosure to Buyer with respect to any matter, to their actual knowledge, hereafter arising or discovered that, if existing or known at the date of this Agreement or on the Closing Date, would otherwise have been required to be set forth or described on the Disclosure Schedules; and (b) each Seller agrees with respect to the representations and warranties made by
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such Seller in Section 4 of this Agreement, such Seller shall have a continuing obligation up through the Closing to provide detailed disclosure to Buyer with respect to any matter, to such Sellers actual knowledge, hereafter arising or discovered, that, if existing or known at the date of this Agreement or on the Closing Date, would otherwise have been required to be set forth or described on the Disclosure Schedules; provided, however, that, in each case, none of such disclosure shall be deemed to modify, amend or supplement the representations and warranties made in this Agreement or the Disclosure Schedules unless the other party(ies) shall have so consented in writing.
6.6
Compounding Actions
. Promptly after the date hereof and prior to the Closing Date, the Company shall apply for a compounding order with the Reserve Bank of India for violations of the foreign exchange laws of India committed by the Company and shareholders of the Company relating to the issue and/or transfer of the Company Preference Shares to or from non-residents of India (if applicable). On or prior to the Closing Date, the Company shall have completed all corrective measures required pursuant to such compounding order issued by the Reserve Bank of India.
6.7
Tax Certificates
. Promptly after the date hereof, J. Jayaseelan, Clan Laboratories, S. Suresh and TIPS shall use commercially reasonable efforts to procure and, if received provide to, Buyer a No Objection Certificate issued by the appropriate assessing officer under Section 281 of the Tax Act in connection with the purchase and sale of Company Common Shares hereunder.
6.8
Licenses and Certifications
. Promptly after the date hereof and prior to the Closing Date, the Company shall apply, at the Companys expense, for any licenses, permits or certifications from any Governmental Authority if such license, permit or certification is necessary and proper for the conduct of the Business by the Company. After the date hereof and prior to the Closing Date, the Company shall apply, at the Buyers expense, for any licenses, permits or certifications from any Governmental Authority requested by Buyer, that the Buyer reasonably deems necessary and proper for the conduct of the Business upon consummation of the transactions contemplated hereby. The Company shall use reasonable best efforts to obtain all licenses, permits or certifications filed for in accordance with this Section 6.8.
6.9
Corporate Compliance
. Promptly after the date hereof and prior to the Closing Date, the Company shall:
(a)
update the minute books pertaining to the meetings of the Board of Directors and shareholders of the Company in accordance with the provisions of Section 193(1A) of the Act;
(b)
make all necessary filings with the Registrar of Companies in respect of any issue or transfer of the Company Stock, including filing the prescribed Form 2 with the Registrar of Companies in connection with issuance and allotment of 480 (four hundred and eighty) Company Common Shares to Clan Laboratories;
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(c)
use commercially reasonable efforts to update the Permits as required to change the name appearing thereon from Novel Therapeutics Limited to Edict Pharmaceuticals Private Limited; and
(d)
update and correct the statutory registers, including the register of members and the register of transfers.
6.10
Company Preference Shares
. Prior to the Closing Date, the Company and each of the Preference Shareholders shall take all actions necessary to convert the Company Preference Shares held by such Preference Shareholder into Company Common Shares and the present and past preference shareholders of the Company shall terminate all agreements executed by them with the Company (in connection with the preference shares of the Company subscribed by them) and waive any outstanding rights thereunder. In the event the total number of Company Common Shares upon conversion of the Company Preference Shares would exceed the Company Common Shares authorized by the Company, the Company shall increase the authorized share capital of the Company to facilitate the issue of such additional Company Common Shares upon conversion of the Company Preference Shares.
6.11
Records
. On the Closing Date, the Sellers shall deliver or cause to be delivered to the Buyer at the Companys office all Company records, including original agreements, documents, books, stock ledgers, minutes, correspondence, and corporate and other records and files, including records and files stored on computer disks or tapes or any other storage medium, in the possession or control of any of the Sellers.
6.12
Maintenance of Insurance
. From the date hereof until the earlier of the Closing Date and the termination of this Agreement in accordance with its terms, the Company shall maintain in full force and effect its current insurance policies, unless simultaneously with any termination or lapse thereof, replacement policies shall be in full force and effect that provide coverage for the same risks and at levels and amounts equal to or greater than the coverage provided under such policies as of the date hereof.
6.13
Resignations; Powers of Attorney
. On or prior to the Closing Date, the Company and the Major Sellers shall cause to be delivered to the Buyer duly executed resignations, effective as of the Closing, of those officers and directors of the Company and duly executed terminations of such powers of attorney relating to the Company, effective as of the Closing Date, in each case, as shall be requested by the Buyer on or before the Closing Date.
6.14
Payoff of Company Indebtedness
. No later than five (5) business days prior to the Closing Date, the Company will cause to be delivered to the Buyer payoff letters (the Payoff Letters) from each of the Company Creditors, which letters shall specify the aggregate amount required to be paid in order to repay in full the Company Indebtedness related to such Payoff Letter (including any and all accrued but unpaid interest and prepayment penalty obligations due upon repayment) and payment instructions on the projected Closing Date, as well as the per diem amount to be added thereto in the event that the actual Closing Date is a date subsequent to the projected Closing Date. Each such Payoff Letter shall be in a form reasonably satisfactory to the Buyer and will include customary undertakings to deliver, upon payment of
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the amounts set forth in such Payoff Letters, (a) a charge release and loan facility satisfaction letter to the Buyer, which letter shall include an agreement by such Company Creditor to file a Form 17, (b) any collateral in the possession of such Company Creditor, including, with respect to the State Bank of India, all original title documents with respect to the Facility, and (c) such other instruments as may be required to effect or evidence the release of the Liens held by such Company Creditor.
6.15
Termination of Guaranty
. On or prior to the Closing Date, the Company shall cause the Guaranty to be terminated pursuant to a termination agreement in a form reasonably satisfactory to the Buyer.
6.16
Public Announcements
. The Company and the Sellers agree that the Buyer shall control the public announcement of the transactions contemplated by this Agreement, and neither the Company nor any of the Sellers shall issue any press release or otherwise make any public statement with respect to this Agreement or the transactions contemplated hereby without the prior written consent of the Buyer.
6.17
Sellers Further Assurances
. From time to time on and after the Closing Date, and without any further consideration but at the Buyers expense, each Seller shall, and shall cause its Affiliates and Associates to, execute and deliver such other instruments of conveyance, assignment, transfer and delivery and take such other actions as the Buyer may reasonably request in order more effectively to transfer to and to place the Buyer in possession or control of, all of the rights, properties, assets and businesses intended to be transferred hereby, to assist in the collection and enforcement of any and all such rights, properties and assets and to enable the Buyer to exercise and to enjoy all of the rights and benefits of the Company with respect thereto.
6.18
Buyers Further Assurances
. After the Closing Date, the Buyer shall, and the Buyer shall cause the Company to, use reasonable best efforts to pursue timely completion of each of the achievements set forth in Sections 2.2(c)(i), (ii) and (iii) in good faith based on the Buyers reasonable business judgment. Without limiting the generality of the foregoing, and subject thereto, the Buyer shall take, and cause the Company to take, the following actions: (a) file any necessary forms, documents, information reports or notices in connection with the Requested ANDAs, (b) timely submit responses to information, document or other requests from the FDA or any other Governmental Authority, (c) pay any application or filing fees and (d) permit FDA or any other Governmental Authority to inspect the Facility.
7.
CERTAIN TAX MATTERS
.
7.1
Tax Indemnification
. The Major Sellers hereby jointly and severally agree to indemnify, defend and hold harmless the Company, the Buyer and their respective directors, officers, shareholders, agents, Affiliates, successors and permitted assigns from and against, and shall pay and reimburse the foregoing Persons for, any and all losses, liabilities, claims, obligations, penalties, damages, costs and expenses (including all reasonable attorneys fees and disbursements and other costs incurred or sustained by an Indemnitee in connection with the investigation, defense or prosecution of any such claim or any action or proceeding
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between the Indemnitee and the Indemnifying Party or between the Indemnitee and any third party or otherwise), whether or not involving a third-party claim (collectively, Losses), relating to or arising out of (a) all Taxes of the Company for all taxable periods ending on or prior to the Closing Date and the portion of the taxable period through the end of the Closing Date for any taxable period that includes (but does not end on) the Closing Date (the Pre-Closing Tax Period); (b) all Taxes of any member of an affiliated, consolidated, combined or unitary group of which the Company (or any predecessor of the Company) is or was a member on or prior to the Closing Date; (c) all Taxes of any Person (other than the Company) imposed on the Company as a transferee, successor or as the alter ego of any such Person, by contract or pursuant to Law to the extent such Taxes are related to the execution of a contract, completion of a transaction or other similar event occurring on or prior to the Closing; and (d) any and all Taxes or Losses that may be imposed or incurred on or by the Buyer on account of the provisions of Section 281 of the Tax Act; provided that the Major Sellers shall not be responsible for penalties or interest in respect to any Tax liability of the Company as a result of a failure to file or a late filing of any Tax Return after the Closing Date which is the responsibility of the Buyer to prepare and file in accordance with Section 7.3. Subject to the indemnification procedures of Section 10.4 relating to Third Party Claims, the Major Sellers shall, jointly and severally, reimburse the Buyer for any Taxes of the Company covered by this Section 7.1 or that are the responsibility of the Major Sellers pursuant to this Section 7.1 within five (5) days after notice to the Major Sellers of the payment of such Taxes by the Buyer or the Company. Other than for fraud, in no event shall the Major Sellers be liable under this Section 7 for punitive damages for Direct Claims. For the avoidance of doubt, the parties acknowledge and agree that punitive damages awarded in favor of a third-party in connection with a claim that is indemnifiable hereunder shall constitute direct damages of the Indemnitee and shall be fully recoverable hereunder subject to the limitations set forth in Section 10.
7.2
Straddle Period
. In the case of any taxable period that includes, but does not end on, the Closing Date (a Straddle Period), the amount of any Taxes based on or measured by receipts of the Company and any sales, use and other similar Taxes for the Pre-Closing Tax Period shall be determined based on an interim closing of the books as of the close of business on the Closing Date and the amount of other Taxes of the Company for a Straddle Period that relate to the Pre-Closing Tax Period shall be deemed to be the amount of such Tax for such entire Straddle Period multiplied by a fraction, the numerator of which shall be the number of days in the taxable period ending on the Closing Date and the denominator of which shall be the total number of days in such Straddle Period.
7.3
Tax Periods Ending on or before the Closing Date
. The Buyer shall prepare (or cause to be prepared) and file (or cause to be filed) all Tax Returns for the Company for all periods ending on or prior to the Closing Date that are filed after the Closing Date and all Straddle Period Tax Returns; provided that the Buyer shall provide copies of such Tax Returns and all other relevant documents or work papers to the Sellers and the Sellers accountants a reasonable period of time in advance of the filing deadline or the filing of such Tax Returns. Buyer will consult with Sellers and Sellers accountants in respect of such Tax Returns.
7.4
Cooperation on Tax Matters.
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(a)
The Buyer, the Company and the Sellers shall cooperate, as and to the extent reasonably requested by any other party, in connection with the filing of Tax Returns and any audit, litigation or other proceeding with respect to Taxes pursuant to this Section 7. Such cooperation shall include the retention and (upon the other partys request) the provision of records and information that are reasonably relevant to any such audit, litigation or other proceeding and making employees or representatives available on a mutually convenient basis to provide additional information and explanation of any materials provided hereunder. The Company (after the Closing) shall (i) retain all books and records with respect to Tax matters pertinent to the Company relating to any taxable period beginning before the Closing Date until the expiration of the applicable statute of limitations for the respective taxable periods, and (ii) abide by all record retention agreements entered into with any taxing authority.
(b)
Each of the Buyer and the Sellers shall, upon request from the other party, use reasonable best efforts to obtain any certificate or other document from any Governmental Authority or other Person as may be necessary to mitigate, reduce, defer or eliminate any Tax that could be imposed (including, but not limited to, any Tax with respect to the transactions contemplated hereby).
7.5
Certain Taxes
. All transfer (including real property), documentary, sales, stamp, registration and other similar Taxes and fees (including any penalties and interest) incurred in connection with this Agreement shall be paid by the Buyer when due. The Sellers will, at their own expense, file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, stamp, registration and other similar Taxes and fees. If required by applicable Law, the Buyer will, and will cause its Affiliates to, join in the execution of any such Tax Returns and other documentation.
7.6
Treatment of Indemnity Payments
. It is the intent of the parties that amounts paid under this Section 7 and Section 10 shall represent an adjustment to the Purchase Price and the parties will report such payments consistent with such intent.
8.
CONDITIONS TO CLOSING.
8.1
Conditions to the Buyers Obligation to Close
. The obligation of the Buyer to close the transactions contemplated by this Agreement is subject to the satisfaction of each of the following conditions, any one or more of which may be waived by the Buyer in writing at or prior to the Closing:
(a)
Agreements and Conditions. On or before the Closing Date, the Sellers and the Company shall have complied with and duly performed, in all material respects, all agreements, covenants and conditions on their part to be complied with and performed pursuant to or in connection with this Agreement on or before the Closing Date.
(b)
Representations and Warranties. The representations and warranties of the Sellers and the Company contained in this Agreement shall have been true and correct in all material respects as of the date of this Agreement, and shall be true and correct in all material respects on and as of the Closing Date, without giving effect to any supplement to
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the Disclosure Schedules, except (i) any representation and warranty made as of a specified date shall continue to be true and correct in all material respects as of such date and (ii) any representation and warranty that is qualified by the term material, or contains terms such as Material Adverse Effect shall be true and correct in all respects on and as of the Closing Date as so written.
(c)
No Legal Proceedings. No injunction or decree prohibiting or materially restricting or delaying the consummation of the transactions contemplated hereby shall have been issued by any Governmental Authority and remain in force. As of the Closing Date, (i) no court or governmental suit, action or proceeding shall have been instituted or threatened (in writing) to restrain or prohibit the transactions contemplated hereby and (ii) except as set forth on Schedule 3.11 on the date hereof, no court or governmental suit, action or proceeding that involves a demand for injunctive relief or patent infringement or a judgment or Liability, whether or not covered by insurance, in excess of $1,500,000 shall have been instituted against the Company.
(d)
Loss, Damage or Destruction. Between the date hereof and the Closing Date, there shall not have been any loss, damage or destruction to the Facility in excess of $1,000,000 in the aggregate.
(e)
No Material Adverse Effect. There shall have been no Material Adverse Effect since March 31, 2010.
(f)
Sellers and Officers Certificate. The Buyer shall have received a certificate dated the Closing Date and executed by the Sellers and the Chief Executive Officer or Chief Financial Officer of the Company to the effect that the conditions set forth in Sections 8.1(a) through 8.1(e) shall have been satisfied.
(g)
Secretarys/Directors Certificate of the Company. The Buyer shall have received a certificate, dated the Closing Date and executed by the Secretary or a director of the Company (i) certifying the incumbency and signatures of the officers of the Company authorized to act on behalf of the Company in connection with the transactions contemplated hereby, (ii) certifying that the outstanding shares of Company Common Shares are fully paid, validly issued and registered in the name of the Sellers, and (iii) attaching and certifying as true and complete copies of (A) the Company Organizational Documents, all as may have been amended up through the Closing Date and (B) the resolutions duly adopted by the Board of Directors at a meeting of the Board of Directors (1) authorizing and approving the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, and (2) endorsing and delivering original share certificates for the Company Common Shares evidencing the Buyer as the lawful and beneficial owner of the Company Common Shares.
(h)
Secretarys Certificate of Clan Laboratories. The Buyer shall have received a certificate, dated the Closing Date and executed by the Secretary of Clan Laboratories, (i) certifying the incumbency and signatures of the officers of Clan Laboratories authorized to act on behalf of Clan Laboratories in connection with the transactions contemplated hereby and (ii)
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attaching and certifying as true and complete copies of (A) the Certificate of Incorporation, Memorandum of Association and Articles of Association of Clan Laboratories, all as may have been amended up through the Closing Date and (B) the resolutions duly adopted by the Board of Directors of Clan Laboratories authorizing and approving the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby.
(i)
Secretarys Certificate of TIPS. The Buyer shall have received a certificate, dated the Closing Date and executed by the Secretary of TIPS, (i) certifying the incumbency and signatures of the officers of TIPS authorized to act on behalf of TIPS in connection with the transactions contemplated hereby and (ii) attaching and certifying as true and complete copies of (A) the Certificate of Incorporation, Memorandum of Association and Articles of Association of TIPS, all as may have been amended up through the Closing Date and (B) the resolutions duly adopted by the Board of Directors of TIPS authorizing and approving the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby.
(j)
Environmental Assessment. The environmental assessment reports delivered by the Buyers environmental consultant, ERM, shall not indicate (i) the presence of any hazardous substance, hazardous waste, contaminant or pollutant that would require remediation, corrective action or removal resulting in the expenditure of more than or equal to $1,000,000; or (ii) any violation of any permit or environmental law or regulation that would result in the expenditure of more than or equal to $1,000,000 to cure such violation.
(k)
Opinion of Counsel. The Sellers and the Company shall have furnished the Buyer with opinions of Zukerman Gore Brandeis & Crossman, LLP and HSB Partners, counsel for the Company and the Sellers, dated as of the Closing Date, in form and substance reasonably satisfactory to the Buyer.
(l)
Consents. All Consents shall have been obtained and delivered to the Buyer.
(m)
Compounding Actions. The Company shall have obtained a compounding order from the Reserve Bank of India for each of the violations of the foreign exchange laws of India relating to the issue and/or transfer of the Company Preference Shares to or from non-residents of India, if applicable, and completed all corrective measures required pursuant to such compounding order.
(n)
Employment Agreement. The Buyer shall have received the Employment Agreement and the related Secondment Letter between the Buyer, the Seller and M. Shanmugam, both of which shall have been duly executed and delivered by M. Shanmugam on the date of this Agreement, and which shall be binding on M. Shanmugam, on the terms and conditions thereof, as of the Closing Date.
(o)
Consulting Agreement. The Buyer shall have received the Consulting Agreement, which shall have been duly executed and delivered by J. Jayaseelan on
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the date of this Agreement, and which shall be binding on J. Jayaseelan, on the terms and conditions thereof, as of the Closing Date.
(p)
Seller Releases. The Buyer shall have received all of the Seller Releases duly executed and delivered by the Sellers.
(q)
Terminations of Powers of Attorney. The Buyer shall have received terminations of powers of attorney requested by the Buyer pursuant to Section 6.13.
(r)
Liens. The Company shall have delivered to the Buyer satisfactory evidence that all Liens set forth on Schedule 3.15(a) in respect of the properties and assets of the Company (other than Permitted Liens) shall be discharged at or prior to Closing.
(s)
Termination of Guaranty. The Company shall have delivered to the Buyer a duly executed termination of the Guaranty, in form and substance reasonably satisfactory to Buyer.
(t)
Cancellation of Promissory Note. The Company shall have delivered to the Buyer a duly executed cancellation of the Demand Promissory Note in the principal amount of Rs. 25,00,00,000/-, dated July 11, 2009, issued by the Company to J. Jayaseelan in connection with the Memorandum of Understanding, dated July 11, 2009, by and between M. Shanmugam and J. Jayaseelan, in form and substance reasonably satisfactory to the Buyer.
(u)
Conversion of the Company Preference Shares. The Company and the Preference Shareholders shall have converted all Company Preference Shares into Company Common Shares.
(v)
Title Insurance. The Buyer shall be in a position to obtain title insurance on the Facility in form and substance reasonably satisfactory to it by insuring title to property.
(w)
Tax Certificates. The Buyer shall have received from J. Jayaseelan, Clan Laboratories, S. Suresh and TIPS No Objection Certificates issued by the appropriate assessing officer under Section 281 of the Tax Act in connection with the purchase and sale of Company Common Shares hereunder.
(x)
Other Closing Deliveries. The Buyer shall have received at or prior to the Closing such other documents, instruments and certificates as the Buyer may reasonably request in order to effectuate the transactions contemplated hereby.
8.2
Conditions to the Sellers Obligations to Close
. The obligations of each Seller to close the transactions contemplated by this Agreement are subject to the satisfaction of each of the following conditions, any one or more of which may be waived by the Sellers in writing at or prior to the Closing:
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(a)
Agreements and Conditions. On or before the Closing Date, the Buyer shall have complied with and duly performed, in all material respects, all agreements, covenants and conditions on its part to be complied with and performed pursuant to or in connection with this Agreement on or before the Closing Date, including payment of the Closing Consideration to the Sellers on the Closing Date.
(b)
Representations and Warranties. The representations and warranties of the Buyer contained in this Agreement shall have been true and correct in all material respects as of the date of this Agreement, and shall be true and correct in all material respects on and as of the Closing Date, without giving effect to any supplement to the Disclosure Schedules, except (i) any representation and warranty made as of a specified date shall continue to be true and correct in all material respects as of such date and (ii) any representation and warranty that is qualified by the term material, or contains terms such as Material Adverse Effect shall be true and correct in all respects on and as of the Closing Date as so written.
(c)
No Legal Proceedings. No injunction or decree prohibiting or materially restricting or delaying the consummation of the transactions contemplated hereby shall have been issued by any Governmental Authority and remain in force, and no court or governmental suit, action or proceeding shall have been instituted or overtly threatened to restrain or prohibit the transactions contemplated hereby.
(d)
Officers Certificate. The Sellers shall have received a certificate dated the Closing Date and executed by an authorized officer of the Buyer to the effect that the conditions set forth in Sections 8.2(a), 8.2(b) and 8.2(c) shall have been satisfied.
(e)
Incumbency Certificate of Buyer. The Sellers shall have received a certificate, dated the Closing Date and executed by the Secretary of the Buyer, certifying the incumbency and signatures of the officers of the Buyer authorized to act on behalf of the Buyer in connection with the transactions contemplated hereby.
9.
TERMINATION
9.1
Termination
. Subject to the provisions of Section 9.2, this Agreement may be terminated at any time prior to the Closing Date by any of the following:
(a)
by the mutual written agreement of the Buyer and the Company;
(b)
by either the Buyer or the Company, if the Closing shall not have occurred by August 31, 2011, upon written notice by such terminating party; provided that at the time such notice is given, a material breach of this Agreement by such terminating party shall not be the principal reason for the failure of the Closing to occur;
(c)
by the Buyer, by written notice to the Company and the Sellers, if there has been a material violation or breach of any of the Sellers or the Companys covenants or agreements made herein or if any representation or warranty of the Sellers or the Company contained herein is materially inaccurate or misleading;
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(d)
by the Buyer, by written notice to the Company, if:
(i)
any third-party attempts to acquire title or rights in or to the Facility; or
(ii)
in the event of an occurrence of a Material Adverse Effect.
(e)
by the Company and the Major Sellers, by written notice to the Buyer, if there has been a material violation or breach of any of the Buyers covenants or agreements made herein or if any representation or warranty of the Buyer contained herein is inaccurate or misleading.
9.2
Effects of Termination
. If this Agreement shall be terminated as provided in Section 9.1, then this Agreement shall forthwith become void and there shall be no continuing obligation on the part of the parties (or any of their respective shareholders, officers, directors, employees, legal beneficiaries, successors or Affiliates); provided, that no party shall be relieved of any Losses occurring or sustained as a result of a breach of any of such partys representations, warranties, covenants or agreements contained herein. Notwithstanding any termination of this Agreement, the provisions of Section 6.16 and 12 and this Section 9 shall survive.
10.
SURVIVAL; INDEMNIFICATION.
10.1
Survival of Representations, Warranties and Covenants
. Notwithstanding any right of the Buyer to investigate the Business and condition of the Company, the Buyer shall be entitled to rely upon the representations, warranties, covenants and agreements of the Company and the Sellers. All representations and warranties contained in this Agreement (as qualified by the Disclosure Schedules) and in all certificates required hereby to be delivered shall survive the Closing Date for a period of ****, and shall automatically terminate at the end of such period; provided, however, that (a) any such representations and warranties shall survive the time(s) that they would otherwise terminate with respect to claims of which notice has been given as provided in Section 10.4 prior to such termination and, in such case, the applicable representations and warranties shall survive until final resolution of such claim; and (b) such time limitation shall not apply to the representations and warranties contained in (i) Sections 3.6(e) (Indebtedness), 3.13 (Environmental Matters) and 3.15 (Title to Properties; Real Property), which shall survive for a period of ****, (ii) Sections 3.10 (Tax Matters), 3.27 (Brokers) and 4.6 (Adequate Consideration; No Tax Proceeding), which shall survive until ****, and (iii) Sections 3.1 (Organization; Good Standing; Power), 3.2 (Capitalization; Options; Seller Rights), 3.3 (Due Authorization; Validity; No Conflicts), 4.1 (Organization; Good Standing; Power), 4.2 (Due Authorization; Validity; No Conflicts), 4.3 (Stock Ownership), 5.1 (Organization and Power) and 5.2 (Due Authorization; Validity; No Conflicts), which shall survive ****. Each covenant and agreement contained in this Agreement will survive the Closing in accordance with its terms.
10.2
Indemnification by the Sellers.
(a)
Subject to the limitations set forth in Sections 10.1, 10.4 and 10.5, after the Closing Date, the Major Sellers shall jointly and severally
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indemnify, defend and hold harmless the Buyer, its Affiliates (including the Company) and their directors, officers, shareholders, agents, successors and permitted assigns (collectively, the Buyer Indemnified Persons) from and against, and shall pay and reimburse the foregoing Persons for, any and all Losses relating to or arising out of:
(i)
the breach (or alleged breach if asserted by a third party) of any representation or warranty in Section 3 of this Agreement or in any certificate delivered by or on behalf of the Company in connection herewith, or any covenant or agreement of any of the Sellers (other than breaches of Sections 6.7 or 11) or the Company contained in this Agreement or in any certificate delivered by or on behalf of the Company in connection herewith;
(ii)
acts or omissions of the Company or the conduct of the business or operations of the Company prior to September 25, 2007; or
(iii)
the failure of the Sellers to pay or reimburse the Company for any Seller Transaction Expenses in accordance with Section 12.5.
(b)
Subject to the limitations set forth in Sections 10.1, 10.4 and 10.5, after the Closing Date, each Seller shall severally and not jointly indemnify, defend and hold harmless Buyer Indemnified Persons from and against, and shall pay and reimburse the foregoing Persons for, any and all Losses relating to or arising out of the breach (or alleged breach if asserted by a third party) of any representation or warranty of such Seller in Section 4 of this Agreement or in any certificate delivered by or on behalf of such Seller in connection herewith or the breach by such Seller of any covenant or agreement of such Seller in Sections 6.2, 6.3, 6.4, 6.5, 6.7, 6.10, 6.11, 6.13, 6.16, 6.17 or 11 of this Agreement.
10.3
Indemnification by the Buyer
. The Buyer shall indemnify, defend and hold harmless the Sellers and their Affiliates, successors and permitted assigns (collectively, the Seller Indemnified Persons) from and against, and shall pay and reimburse the foregoing Persons for, any and all Losses relating to or arising out of the breach (or alleged breach if asserted by a third party) of any representation, warranty, covenant or agreement of the Buyer contained in this Agreement or any certificate delivered by or on behalf of the Buyer in connection herewith.
10.4
Procedures for Indemnification; Defense
. The party making a claim under Section 7.1 or this Section 10 is referred to as the Indemnitee, and the party against whom such claims are asserted under this Section 10 is referred to as the Indemnifying Party.
(a)
Third Party Claims. If any Indemnitee receives notice of the assertion or commencement of any action made or brought by any Person who is not a party to this Agreement or an Affiliate of a party to this Agreement or a representative of the foregoing (a Third Party Claim) against such Indemnitee with respect to which the Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnitee shall give the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than ten (10) calendar days after receipt of such notice of such Third Party Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its
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indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnitee shall describe the Third Party Claim in reasonable detail, shall include copies of all material written evidence thereof to the extent reasonably available and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party shall have the right to participate in, or if it shall have acknowledged in writing its obligation to provide indemnification to the Indemnitee in respect thereof, to assume the defense of any Third Party Claim at the Indemnifying Partys expense and by the Indemnifying Partys own counsel, and the Indemnitee shall cooperate in good faith in such defense; provided that if the Indemnifying Party is a Seller, such Indemnifying Party shall not have the right to defend or direct the defense of any such Third Party Claim that seeks an injunction or other equitable relief against the Indemnitee. In the event that the Indemnifying Party assumes the defense of any Third Party Claim, subject to Section 10.4(b), it shall have the right to take such action as it deems necessary to avoid, dispute, defend, appeal or make counterclaims pertaining to any such Third Party Claim in the name and on behalf of the Indemnitee. The Indemnitee shall have the right to participate in the defense of any Third Party Claim with counsel selected by it subject to the Indemnifying Partys right to control the defense thereof. The fees and disbursements of such counsel shall be at the expense of the Indemnitee; provided that if in the reasonable opinion of counsel to the Indemnitee, (A) there are legal defenses available to an Indemnitee that are different from or additional to those available to the Indemnifying Party; or (B) there exists a conflict of interest between the Indemnifying Party and the Indemnitee that is not waived, the Indemnifying Party shall be liable for the reasonable fees and expenses of counsel to the Indemnitee in each jurisdiction for which the Indemnitee determines counsel is required. If the Indemnifying Party elects not to compromise or defend such Third Party Claim, fails to promptly notify the Indemnitee in writing of its election to defend, or fails to diligently prosecute the defense of such Third Party Claim, the Indemnitee may pay, compromise and defend such Third Party Claim and seek indemnification for any and all Losses based upon, arising from or relating to such Third Party Claim. Seller and Buyer shall cooperate with each other in all reasonable respects in connection with the defense of any Third Party Claim, including making available, subject to the provisions of Section 11.4, records relating to such Third Party Claim and furnishing, without expense (other than reimbursement of actual out-of-pocket expenses) to the defending party, management employees of the non-defending party as may be reasonably necessary for the preparation of the defense of such Third Party Claim.
(b)
Settlement of Third Party Claims. Notwithstanding any other provision of this Agreement, neither the Indemnifying Party nor, in the case of a Third Party Claim seeking injunctive or other equitable relief, the Indemnitee shall enter into a settlement or compromise of any Third Party Claim without the prior written consent of the other party, which consent shall not be unreasonably withheld, delayed or conditioned.
(c)
Direct Claims. Any action by an Indemnitee on account of a Loss which does not result from a Third Party Claim (a Direct Claim) shall be asserted by the Indemnitee giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than ten (10) days after the Indemnitee becomes aware of such Direct Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits
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rights or defenses by reason of such failure. Such notice by the Indemnitee shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof to the extent reasonably available and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party shall have thirty (30) days after its receipt of such notice to respond in writing to such Direct Claim. The Indemnitee shall allow the Indemnifying party and its professional advisors to investigate the matter or circumstance alleged to give rise to the Direct Claim, and whether and to what extent any amount is payable in respect of the Direct Claim and the Indemnitee shall assist the Indemnifying Partys investigation by giving such information and assistance (including access to the Indemnitees premises and personnel and the right to examine and copy any accounts, documents or records) as the Indemnifying Party or any of its professional advisors may reasonably request. If the Indemnifying Party does not so respond within such thirty (30) day period, the Indemnifying Party shall be deemed to have rejected such claim, in which case the Indemnitee shall be free to pursue such remedies as may be available to the Indemnitee on the terms and subject to the provisions of this Agreement.
(d)
Cooperation. Upon a reasonable request by the Indemnifying Party, each Indemnitee seeking indemnification hereunder in respect of any Direct Claim, hereby agrees to consult with the Indemnifying Party and act reasonably to take actions reasonably requested by the Indemnifying Party in order to attempt to reduce the amount of Losses in respect of such Direct Claim. Any costs or expenses associated with taking such actions shall be included as Losses hereunder.
10.5
Limitations on Indemnification.
(a)
Notwithstanding any provision contained in this Section 10 to the contrary, (i) the Buyer Indemnified Persons shall not be entitled to assert any claim for indemnification in respect of breach(es) of representations and warranties under Section 10.2 until such time as all claims for indemnification under Section 10.2 by the Buyer Indemnified Persons against the Sellers hereunder shall exceed **** in the aggregate (the Basket), but then all such amounts shall be recoverable and (ii) any indemnification obligations of the Sellers under this Agreement for breaches of representations and warranties shall not exceed an aggregate amount of **** (the Claims Limitation); provided, however, that the Basket and the Claims Limitation shall not apply (A) if the Indemnifying Party shall have provided information to the Buyer or to the Company and the Sellers, as the case may be, in connection herewith or made any representation or warranty contained herein that, in either case, was fraudulent or was known to be inaccurate when made or (B) to any breach(es) of the representations and warranties contained in Sections 3.2 (Capitalization; Options; Seller Rights), 3.3 (Due Authorization; Validity; No Conflicts), 3.6(e) (Indebtedness), 3.10 (Tax Matters), 3.13 (Environmental Matters), 3.15 (Title to Properties; Real Property), 3.27 (Brokers), Section 4.2 (Due Authorization; Validity; No Conflicts), 4.3 (Stock Ownership) or 4.6 (Adequate Consideration; No Tax Proceeding). There shall be no duplications of amounts payable by the Major Sellers under Section 7 and Section 10 in respect to any Tax matter.
(b)
Except for the indemnification provisions set forth in this Section 10 or Section 7, no provision of this Agreement is intended to confer any third party beneficiary
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rights, including any extension of any statute of limitations pertaining to suits, actions or proceedings brought by third parties.
(c)
The amount of any claim by an Indemnitee pursuant to Section 10.2 or 10.3 will be reduced by the amount of any insurance proceeds actually realized by the Indemnitee in respect of such claim or the facts or events giving rise to such indemnity obligation. If the indemnified party realizes such insurance proceeds after the date on which an indemnity payment has been made to the indemnified party, the indemnified party shall promptly make payment to the indemnifying party in an amount equal to such insurance proceeds; provided such payment shall not exceed the amount of the indemnity payment.
(d)
Other than for fraud, in no event shall any party be liable under this Section 10 for punitive damages for Direct Claims. For the avoidance of doubt, the parties acknowledge and agree that punitive damages awarded in favor of a third-party in connection with a claim that is indemnifiable hereunder shall constitute direct damages of the Indemnitee and shall be fully recoverable hereunder subject to the limitations set forth in this Section 10.5.
10.6
Indemnification in Case of Strict liability or Indemnitee Negligence
. The indemnification provisions in this Section 10 shall be enforceable regardless of whether the liability is based upon past, present or future acts, claims or legal requirements and regardless of whether any Person (including the Person from whom indemnification is sought) alleges or proves the sole, concurrent, contributory or comparative negligence of the Person seeking indemnification or the sole or concurrent strict liability imposed upon the Person seeking indemnification.
10.7
Right to Offset
. Subject to the limitations set forth in Sections 10.1, 10.4 and 10.5, the Buyer shall have the right to offset against any amounts to be paid by the Buyer to the Sellers pursuant to Section 2.2 to satisfy an indemnification claim brought by the Buyer in accordance with this Section 10.
10.8
Exclusive Remedy
. If the Closing occurs, the remedies provided for in this Section 10 and Section 7 shall be the sole and exclusive remedies and shall be in lieu of all other remedies for any breach of any representation or warranty or the failure to perform or comply with any covenant, agreement or other provision of this Agreement; provided, however, that the foregoing clause of this sentence will not be deemed a waiver by either party of any right to specific performance or injunctive relief in accordance with applicable Law and, provided, further, that nothing in this Agreement (including this Section 10.8) will limit or restrict either partys right to maintain or recover any amounts in connection with any action or claim based upon fraud or willful misrepresentations.
11.
NON-COMPETITION; CONFIDENTIALITY.
11.1
Non-Competition
. Each Major Seller acknowledges that (a) the Buyer would not have entered into this Agreement but for the agreements and covenants contained in this Section 11 and (b) the agreements and covenants contained in this Section 11 are essential to protect the business and goodwill of the Company and the Business. To induce the Buyer to
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enter into this Agreement, each Major Seller hereby severally, and not jointly, agrees that following the Closing Date and for a period of **** thereafter (the Restricted Period), such Major Seller shall not, directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be employed or retained by, render services to, provide financing (equity or debt) or advice to any business engaged in the business of researching, developing, distributing and/or manufacturing generic pharmaceutical products for distribution, directly or through a third party in (i) any country where the Buyer or any of its Affiliates has commenced distribution, marketing or sales of generic pharmaceutical products prior to the date that such other business has commenced distribution, marketing or sales of generic pharmaceutical products in such country or (ii) in the United States of America; provided, however, that nothing contained herein shall (A) prevent the purchase or ownership by any Major Seller of less than ten (10%) percent of the outstanding equity securities of any class of securities of a company registered under Section 12 of the Securities and Exchange Act of 1934, as amended, or (B) restrict or prevent any Major Seller from, directly or indirectly, owning, managing, operating, joining, controlling or participating in the ownership, management, operation or control of, or being employed or retained by, rendering services to, providing financing (equity or debt) or advice to, or otherwise be connected in any manner with any business engaged in the business of researching, developing, distributing and/or manufacturing generic pharmaceutical products solely for distribution (whether directly or through a third party) (1) outside both (x) countries where the Buyer or any of its Affiliates has commenced distribution, marketing or sales of generic pharmaceutical products and (y) the United States of America or (2) in a country other than the United States of America in which such business is engaged in such conduct before the Buyer or any of its Affiliates has commenced distribution, marketing or sales of generic pharmaceutical products, regardless of the location of the facilities, offices, management, properties or assets of such business.
11.2
Non-Solicitation.
Except as set forth on Schedule 11.2, during the Restricted Period, each Seller severally, and not jointly, agrees that such Seller shall not, directly or indirectly, hire, engage, offer to hire, divert, entice away, solicit or in any other manner persuade or attempt to persuade (a Solicitation) any Person who is, or was, at any time within the 12-month period prior to such Solicitation, an officer, director, employee, agent, licensor, licensee, customer, or supplier of the Buyer or the Company to discontinue, terminate or adversely alter his, her or its relationship therewith.
11.3
Non-Disruption.
Except as set forth on Schedule 11.2, During the Restricted Period, each Seller severally, and not jointly, agrees that such Seller shall not, directly or indirectly, interfere with, disrupt or attempt to disrupt any present or prospective relationship, contractual or otherwise, between the Buyer or the Company or any of their Affiliates, on the one hand, and any of their customers, contractees, suppliers or employees, on the other hand.
11.4
Confidentiality.
From and after the Closing Date, each Seller severally, and not jointly, agrees that such Seller shall not at any time, directly or indirectly, use, exploit, communicate, disclose or disseminate any Confidential Information in any manner whatsoever (except disclosure to their personal financial or legal advisors and as may be required under legal process by subpoena or other court order; provided, that such Seller will take reasonable steps to
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provide the Buyer with sufficient prior written notice in order to contest such requirement or order).
11.5
Remedies upon Breach.
Each Seller severally, and not jointly, acknowledges and agrees that: (a) the Buyer (and the Company) would be irreparably injured in the event of a breach by such Seller of any of his, her or its obligations under this Section 11; (b) monetary damages would not be an adequate remedy for such breach; (c) the Buyer (and the Company) shall be entitled (without the need to post any bond) to injunctive relief, in addition to any other remedy that they may have, in the event of any such breach; and (d) the existence of any claims that such Seller may have against the Buyer (or the Company), whether under this Agreement, any Ancillary Agreement or otherwise, shall not be a defense to (or reason for the delay of) the enforcement by the Buyer (and the Company) of any of their rights or remedies under this Agreement.
12.
MISCELLANEOUS PROVISIONS.
12.1
Execution in Counterparts.
This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document, and will become effective when all counterparts which together contain the signatures of each party hereto will have been delivered to the Company, the Sellers and Buyer, which delivery may be by facsimile transmission or other electronic means.
12.2
Notices.
All notices, requests, demands and other communications that are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be delivered personally delivered by a recognized overnight courier or express mail service for next business day delivery (and requiring proof of delivery or receipt) or posted in the United States mail by registered or certified mail, with postage pre-paid, return receipt requested, and shall be deemed given when so delivered personally, the next day after delivered to such overnight courier or express mail service or five (5) business days after the date of mailing, as follows:
(a) If to the Buyer (and following the Closing, the Company) to: 300 Tice Boulevard Woodcliff Lake, NJ 07677 Attention: General Counsel Tel. No.: 201-802-4215 | with a copy to K&L Gates LLP 599 Lexington Avenue New York, NY 10022 Attn: Whitney J. Smith, Esq. Tel. No.: 212-536-3930 |
(b) If to the Sellers or the Sellers Representative (and prior to
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Edict Pharmaceuticals Private Limited 1/58, Pudupakkam Main Road, Pudupakkam, Kelambakka - 603 103, Chennai, Tamil Nadu, India Attn: Mr. J. Jayaseelan Tel. No.: +91 44-27474516
| with a copy to
Zukerman Gore Brandeis & Crossman, LLP 875 Third Avenue New York, NY 10022 Attn: Joseph E. Maloney, Esq. Tel. No.: 212-223-6700 |
Clan Laboratories Private Limited 1/58, Pudupakkam Main Road, Pudupakkam, Kelambakkam - 603 103, Chennai Tamil Nadu, India Attn: Mr. J. Jayaseelan **** |
|
Muthusamy Shanmugam 9 Revere Road Monmouth Junction, NJ 08852 ****
|
|
Jaganathan Jayaseelan **** |
|
Seema Suresh **** |
|
Thertha Investment & Portfolio Services Private Limited, Flat No. 1, Prasanna Enclave, No. 30, Bharathi Avenue, 2nd Street, Kotturpuram, Chennai 600085, Tamil Nadu, India Attn: Mrs. Seema Suresh Tel. No.: **** |
|
Any party may, by notice given in accordance with the provisions of this Section 12.2 to the other parties, designate another address or individual for receipt of notices hereunder.
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12.3
Amendments; Waivers.
This Agreement may be amended or modified at any time and any provision(s) waived, but only by a written instrument executed by all of the parties.
12.4
Entire Agreement.
This Agreement and the Ancillary Agreements constitute the entire agreement between the parties with respect to the subject matter hereof and thereof, and supersede all prior term sheets, agreements and understandings, oral and written, between the parties with respect to the subject matter hereof and thereof.
12.5
Fees and Disbursements.
The Buyer shall pay all costs and expenses, including the fees and disbursements of any counsel, accountants or other advisors retained or incurred by it in connection with the preparation, execution, delivery and performance of this Agreement, the Ancillary Agreements and the transactions contemplated hereby or thereby, whether or not the transactions contemplated hereby or thereby are consummated. The Sellers (and not the Company) shall be responsible for all costs and expenses, including the fees and disbursements of any counsel, accountants or other advisors retained or incurred by the Sellers or the Company in connection with the preparation, execution, delivery and performance of this Agreement, the Ancillary Agreements and the transactions contemplated hereby or thereby and any costs, expenses or penalties resulting from or arising out of any compounding applications filed by the Company or any Seller with the Reserve Bank of India (Seller Transaction Expenses), if the transactions contemplated hereby or thereby are consummated. Two days before the Closing, the Sellers and the Company shall provide an accounting of any Seller Transaction Expenses paid by the Company prior to the Closing Date. Any Seller Transaction Expenses paid by the Company prior to the Closing Date shall be reimbursed by the Sellers to the Company from the Closing Consideration if not reimbursed to the Company prior to the Closing Date. If the transactions contemplated hereunder are not consummated the Company and the Sellers shall be responsible for all Seller Transaction Expenses.
12.6
Assignment.
This Agreement may not be assigned by the Company or the Sellers without the prior written consent of the Buyer; provided, however, that the Buyer may assign or delegate any or all rights or obligations hereunder to an Affiliate; provided that such Affiliate has the financial capability to make all payments that may be required under Section 2.2; and provided, further, that the Buyer may assign or delegate any or all of its rights or obligations hereunder, including its rights under Sections 7 and 10, to any subsequent purchaser of the Business, the Company or the Buyer or all or substantially all of the Buyers or the Companys assets; provided that the applicable assignee or transferee has the financial capability to make all payments that may be required under Section 2.2.
12.7
Binding Effect; Benefits.
This Agreement shall inure to the benefit of, and be binding upon, the parties and their respective heirs, legal representatives, successors and permitted assigns. Except as provided in Sections 10.2 and 10.3, nothing in this Agreement, express or implied, is intended to or shall confer upon any Person other than the parties, and their respective heirs, legal representatives, successors and permitted assigns, any rights, remedies, obligations or liabilities under, in connection with or by reason of this Agreement.
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12.8
Severability
. If in any jurisdiction any term or provision hereof is determined to be invalid or unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired, (b) any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction, and (c) the invalid or unenforceable term or provision shall, for purposes of such jurisdiction, be deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision.
12.9
(a)
Each Seller hereby irrevocably appoints Jaganathan Jayaseelan to act as the Sellers Representative on his, her or its behalf hereunder and under all other agreements and certificates contemplated by this Agreement, including any certificates required to be delivered pursuant to Section 8.1, and to perform his, her or its obligations hereunder and thereunder. Each Seller hereby irrevocably authorizes the Sellers Representative to take such actions on his, her or its behalf and to exercise such powers as are provided to the Sellers Representative by the terms and provisions of this Agreement, together with such actions and powers as are reasonably incidental thereto. Jaganathan Jayaseelan hereby accepts such appointment as Sellers Representative.
(b)
The Buyer may rely upon written instructions from the Sellers Representative with respect to the giving of any notices to any Seller as an Indemnitee or Indemnifying Party hereunder or otherwise in connection with this Agreement. The Buyer shall not be liable for any acts or omissions of the Sellers Representative in connection with the performance by the Sellers Representative of his obligations hereunder. Each Seller hereby irrevocably appoints the Sellers Representative as his, her or its agent for purposes of the first sentence of this subsection (b).
12.10
Governing Law; Arbitration.
(a)
This Agreement and the legal relations among the parties shall be governed by and construed in accordance with the laws of the State of New York (without giving effect to the conflict of laws principles thereof that would result in the application of the law of a different jurisdiction).
(b)
Each of the parties hereby agrees that any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or validity thereof (Dispute), shall, on the demand of any party, be finally settled by arbitration administered by the American Arbitration Association (AAA) in accordance with its rules for large, complex commercial disputes. Prior to making a demand for arbitration, the parties agree to attempt in good faith to negotiate a resolution to any Dispute promptly. In the event that the parties are unable to negotiate a resolution in thirty (30) days after delivery of a notice of Dispute, either party may make a demand for arbitration hereunder.
(c)
The arbitration shall be decided by three (3) arbitrators, all of whom need not be from the AAAs panel of arbitrators. Each party shall choose one arbitrator of
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its choice within thirty (30) days of the demand for arbitration. The third arbitrator, who shall serve as the chairman of the arbitral tribunal, shall be a neutral and independent arbitrator mutually selected by the two party-appointed arbitrators within fifteen (15) days of the selection of the two party-appointed arbitrators. Notwithstanding the AAA rules, the neutral arbitrator: (i) shall be knowledgeable in the subject matter of the dispute; (ii) shall not be employed by, have an interest in or otherwise be affiliated with any of the parties or their representative counsels; and (iii) need not be selected from AAAs panel of arbitrators. If the arbitrators are not selected within the above-stated time periods, the arbitrators shall be selected by AAA in accordance with its rules.
(d)
The parties shall be afforded the discovery rights as established under the applicable AAA rules or as provided for by the arbitrators.
(e)
The award rendered in any arbitration commenced hereunder shall constitute an award under the Federal Arbitration Act, Title 9 US Code and the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, shall be final and binding upon the parties and judgment thereon may be entered in any court of competent jurisdiction. The arbitral tribunal may order any remedy permitted by Law and this Agreement, including damages and specific performance of this Agreement or any portion thereof. The fees and expenses of the arbitrators, administrative costs of the arbitration and fees and expenses of the prevailing party shall be paid by the non-prevailing party. For purposes hereof, the prevailing party shall be, as applicable, the party for whom the judgment was rendered or the party whose demand in the dispute most closely approximated the arbitration judgment, as determined by the arbitrators.
(f)
The language of the arbitration shall be English. The place of arbitration shall be New York, New York, United States.
(g)
By agreeing to arbitration, the parties do not intend to deprive any court of its jurisdiction to issue a pre-arbitral injunction, pre-arbitral attachment, or other order in aid of arbitration proceedings and/or the enforcement of any award. Without prejudice to such provisional remedies as may be available under the jurisdiction of a national court, the arbitral tribunal shall have full authority to grant provisional remedies and to direct the parties to request that any court modify or vacate any temporary or preliminary relief issued by such court, and to award damages for the failure of any party to respect the arbitral tribunals orders to that effect. Each of the parties irrevocably and unconditionally submits to the exclusive jurisdiction of the federal and New York State courts located in Manhattan (NYC) for the purpose of an order to compel arbitration, for provisional relief in aid of arbitration or to maintain the status quo or prevent irreparable harm prior to the appointment of the arbitral tribunal, and to the non-exclusive jurisdiction of such courts for the enforcement of any award issued hereunder. With respect to any action, suit or other proceeding for which it has submitted to jurisdiction pursuant to this Section 12.10, each party irrevocably consents to service of process in the manner provided for the giving of notices pursuant to Section 12.2 of this Agreement. Nothing in this Section 12.10 shall affect the right of any party to serve process in any other manner permitted by applicable law.
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12.11
Appointment for Service of Process
The Company (before the Closing) and each of the Sellers irrevocably appoint Muthusamy Shanmugam, 9 Revere Road, Monmouth Junction, New Jersey 08852 to be his, her or its agent for the service of process. The Company and each of the Sellers agree that any legal process may be effectively served on it in connection with legal proceedings by service on such agent.
(b)
If the agent at any time ceases for any reason to act as such for the Company or any of the Sellers, the Company (if before Closing) and such Seller, as applicable, shall appoint a replacement agent having an address for service of process in New York or New Jersey and shall notify the other parties of the name and address of the replacement agent. The provisions of this clause applying to service on an agent apply equally to service on a replacement agent. A copy of any document served on an agent shall be copied to all parties to this Agreement. Failure or delay in so doing shall not prejudice the effectiveness of service of the legal process.
[signatures appear on the following pages]
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IN WITNESS WHEREOF, the parties have executed this Share Purchase Agreement the day and year first above written.
Par Pharmaceutical, Inc.
By:/s/ Paul Campanelli
Name: Paul Campanelli
Title: President, Par Pharmaceutical
Edict Pharmaceuticals Private Limited
By:/s/ Muthusamy Shanmugam
Name: Muthusamy Shanmugam
Title: CEO
Clan Laboratories Pvt. Ltd.
By:/s/ Jaganathan Jayaseelan
Name: Jaganthan Jayaseelan
Title: Director
/s/ Muthusamy Shanmugam
Muthusamy Shanmugam
/s/ Jaganathan Jayaseelan
Jaganathan Jayaseelan
Signature Page to Share Purchase Agreement
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/s/ Seema Suresh
Seema Suresh
Thertha Investment & Portfolio Services Private Limited
By:/s/ Suresh Bhojraj
Name: Suresh Bhojraj
Title: Director
Jaganathan Jayaseelan, as Sellers Representative
By: /s/ Jaganathan Jayaseelan
Name: Jaganthan Jayaseelan
Title: Director
Signature Page to Share Purchase Agreement
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Annex A
Definitions
The following terms have the respective meanings set forth below:
Act means the (Indian) Companies Act, 1956.
Affiliate means, with respect to any Person, any Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified.
Ancillary Agreements means the Consulting Agreement, Employment Agreement and the Seller Releases and any other agreement executed pursuant to or in connection with this Agreement.
ANDA means an abbreviated new drug application filed with the FDA pursuant to 21 U.S.C. § 355(j) and 21 C.F.R. § 314.3.
Associate means, when used to indicate a relationship with any Person, (a) a corporation or organization (other than the Company) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, (b) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar capacity, and (c) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of the Company or any of its parents or subsidiaries.
Benefit Plan means each funded or unfunded, written or oral, employee benefit plan, contract, agreement, incentive, salary, wage, retention or other compensation plan or arrangement, including each pension and profit sharing plan, savings plan, bonus, deferred compensation, incentive compensation, stock purchase, supplemental retirement, severance, change of control or termination payment, stock option, hospitalization, medical, life insurance, dental, disability, salary continuation, vacation, supplemental unemployment benefit, union contract, employment contract, consulting agreement, retiree health or life benefit, and each other employee benefit program, plan, policy or arrangement, maintained, contributed to, or required to be contributed to by the Company for the benefit of employees or former employees and their dependents and beneficiaries, officers, directors, agents or consultants of the Company or for or as to which the Company may be responsible or have any Liability, whether or not legally binding and whether or not terminated.
cGMPs means those practices in the manufacture of pharmaceutical products that are recognized as the current good manufacturing practices by the FDA in accordance with FDA regulations, guidelines, other administrative interpretations, and rulings in connection therewith, including those regulations cited in 21 C.F.R. parts 210 and 211, all as they may be amended and in effect from time to time.
Company Creditors means the lender or creditor with respect to any Company Indebtedness.
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Company Indebtedness means the Indebtedness of the Company, including (a) amounts owing under that certain (i) Sanction Letter Agreement between State Bank of India and the Company, dated January 25, 2010, (ii) Memorandum of Agreement, between the Company and State Bank of India, dated February 4, 2010, and (iii) amounts owing to Clan Laboratories, J. Jayaseelan, M. Shanmugam, their respective family members and Affiliates, (b) share application money with respect to which shares have not been issued by the Company, (c) any obligations of the Company to redeem the Company Preference Shares or Company Common Shares, and (d) dividends due to the Preference Shareholders with respect to the Company Preference Shares, in each case along with related interest due (whether or not accrued,) fees, premiums and prepayment penalties, if any.
Company Intellectual Property means all intangible property owned or used by the Company in the conduct of the Business (other than off-the-shelf or standard software products) and includes all embodiments and stored/recorded copies of such property (e.g., software and information on electronic media). Company Intellectual Property includes any and all rights, anywhere in the world, with respect to (a) inventions, discoveries, formulations, syntheses, manufacturing processes, or improvements, including patents, patent applications, utility models and certificates of invention thereon; (b) trade secrets, Confidential Information, know-how, and technical and engineering drawings and information; (c) indicators of source or origin, including trademarks, service marks, trade dress, designs, logos, and slogans; (d) works of authorship or expression, including copyrights and moral rights; (e) data, databases, data models, and schema; (f) industrial designs and design patents; (g) computer code, including source code and object code; and (h) any other similar intellectual property, all whether or not registered or registrable.
Company Intellectual Property Registrations means all grants and acknowledgements by a Governmental Authority and all recordals and registrations with a Governmental Authority of intangible property rights that are included in or that comprise the Company Intellectual Property, along with all applications for any such grants, recordals, and registrations; for the avoidance of doubt, these include patents, trademark registrations, copyright registrations, and the applications for them.
Company Organizational Documents means the Companys Certificate of Incorporation, Memorandum of Association and Articles of Association, as amended.
Confidential Information means any and all secret, confidential or proprietary information or data (oral or written) relating to the Company, the Business and/or the Buyer and its Affiliates or any of their operations or activities, including the terms of this Agreement, information relating to existing or proposed research and development efforts, patent applications, trade secrets, plans, promotion and pricing techniques, procurement and sales activities and procedures, business methods and strategies (including acquisition strategies), software, software codes, advertising, sales, marketing and other materials, customers and supplier lists, data processing reports, customer sales analyses, invoice, price lists or information, and information pertaining to any lawsuits or governmental investigation, except such information that is in the public domain (such information not being deemed to be in the public
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domain merely because it is embraced by more general information that is in the public domain) other than as a result of a breach of any of the provisions hereof.
Consent means, with respect to the Company or a Seller, as the context requires, any approval, consent, waiver, exemption, order, authorization or other action by, or notice to or filing with, any Governmental Authority or any Person, and any lapse of a waiting period that is required to be obtained by the Company or such Seller (so as not to cause any of the results as set forth in Section 3.3(a) through (e) or Section 4.2(a) and (b)) in connection with (or in order to permit) the execution, delivery or performance by the Company or such Seller of this Agreement or any of the Ancillary Agreements to which the Company or such Seller is a party or the consummation of the transactions contemplated hereby or thereby by the Company or such Seller.
Consulting Agreement means the Consulting Agreement between the Company and J. Jayaseelan, executed as of the date hereof, substantially in the form attached as Exhibit A.
EIA Notification means the environment impact assessment notification dated September 14, 2006, issued by the Ministry of Environments and Forests (MoEF), in exercise of powers under section 3(2)(v) and 3(1) of the Environment Protection Act, 1986, read with Rule 5(3)(d) of Environment Protection Rules, 1986.
Employment Agreement means the Employment Agreement between the Buyer and M. Shanmugam, executed as of the date hereof, substantially in the form attached as Exhibit B.
Environmental Law means all Laws (including common law) and Permits relating to the environment, natural resources, property transfer, safety, or health of humans or other living organisms, including the manufacture, distribution in commerce, and use of, or discharge to the environment of, Hazardous Substances.
Equipment means machinery, equipment and other fixed assets of the Company used or useful in connection with the operation of the Business.
Facility means the real property located at No. 41, Pudupakkam Village, Chengpalet Taluk, Kancheepuram District, Patta No. 1426, together with all buildings and material fixtures and improvements erected thereon.
FDA means the U.S. Food and Drug Administration, or any successor Governmental Authority.
FDCA means the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. Section 301 et seq.
Final Payoff Amount means the amount necessary to fully and finally extinguish the Company Indebtedness in accordance with the Payoff Letters and consisting of all outstanding principal, accrued interest, fees and penalties thereon.
GAAP means generally accepted accounting principles and practices in India.
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Governmental Authority means any national, provincial, state, foreign or local government or any court, tribunal, administrative agency or commission or other governmental enforcement or other regulatory authority, body or agency, including any self-regulatory organization.
Guaranty means that certain Guaranty, dated December 8, 2009, executed by the Company in favor of in favor of the State Bank of India with respect to loans to Delvin Formulations Pvt. Ltd. and any additional, supplement or supplemental guaranty.
Hazardous Substances means any pollutant, chemical, contaminant, hazardous or toxic substances or wastes, pollutants, contaminants, or any constituent thereof, that is regulated, limited or prohibited in any manner pursuant to Environmental Law, including petroleum products, petroleum by-products, asbestos, special waste, radioactive material or waste, and polychlorinated biphenyls and medical waste.
Indebtedness of any Person means, without duplication, (i) the principal of and accrued interest, fees and premium (if any) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (ii) all obligations of such Person under leases required to be capitalized in accordance with GAAP; (iii) all obligations of such Person for the reimbursement of any obligor on any letter of credit, bankers acceptance or similar credit transaction; (iv) all derivative contracts (including foreign exchange facilities, options and swap contracts); (v) obligations of such Person to redeem any portion of its outstanding share capital, (vi) dividends due to the shareholders of such Person with respect to the share capital of such Person, and (vii) all obligations of the type referred to in clauses (i) through (vi) of other Persons for the payment of which such Person is responsible or liable, directly or indirectly, as obligor, guarantor, surety or otherwise, including guarantees of such obligations; and (viii) all obligations of the type referred to in clauses (i) through (vii) of other Persons secured by any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person).
Knowledge of the Company and the Major Sellers means facts or other information actually known by any Major Seller or Sampath Kumar or facts of which a prudent individual in a senior manager position with the Company could be expected to discover in the course of conducting a reasonably comprehensive investigation of the relevant subject matter.
Law means all national, provincial, state, local and foreign laws, statutes, ordinances, rules or regulations, administrative policies or guidance documents, orders, injunctions, decrees and administrative rulings promulgated by any court or Governmental Authority.
Liabilities means any debts, liabilities, commitments or obligations, whether absolute or contingent, asserted or unasserted, known or unknown, liquidated or unliquidated, due or to become due, fixed or unfixed.
Lien means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of
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a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset, (c) the interest of a licensee under a lease agreement and (d) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.
Material Adverse Effect means (a) any effect, occurrence, development or change that has had or could reasonably be expected to have a materially adverse effect on the business, assets, liabilities, operations or financial condition or results of operation, of the Company, taken as a whole or the ability of the Company or the Sellers to consummate the transactions contemplated hereby on a timely basis, other than in each instance any change, event or circumstance arising out of: (i) general economic, legal, regulatory or political conditions in the United States of America or India; (ii) conditions generally affecting the industries in which the Company operates (provided, that the impact on the Company is not materially disproportionate to the impact on other similarly situated entities); (iii) the announcement or pendency of the this transaction or the entry into this Agreement or any agreement contemplated hereunder and the consummation of the transactions contemplated hereby including, but not limited to, the impact thereof on or with respect to its relationship, contractual or otherwise, with the Companys clients, affiliates, licensors, independent contractors, employees, agents or representatives; (iv) the Companys performance of its obligations under this Agreement and compliance with the covenants set forth herein; (v) any change in the securities markets generally; or (vi) the commencement or escalation of a war or armed hostilities or the occurrence of acts of terrorism or sabotage (provided, that the impact on the Company is not materially disproportionate to the impact on other similarly situated entities, or (b) any action by a Governmental Authority that has a material adverse effect on the Companys ability to operate the Facility or conduct the Business as currently conducted by the Company.
Ordinary Course of Business means any action taken by a Person that is consistent in nature, scope and magnitude with the past practices of such Person and is taken in the ordinary and usual course of the normal, day-to-day operations of such Person.
Permitted Liens means(a) Liens for Taxes assessments and charges of Governmental Authorities that are not yet due and payable (or being contested in good faith; provided, that adequate reserves have been posted or set aside therefor); (b) mechanics, carriers, workers and other similar Liens arising or incurred in the Ordinary Course of Business, in each case that individually or in the aggregate with other such title defects and imperfections, does not materially impair the value of the property subject to such Liens or other such title defect or the use of such property in the conduct of the Business and (c) landlords liens.
Person means a natural person, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, any other business entity, or a governmental entity (or any department, agency, or political subdivision thereof).
Products means all products subject to the FDCA or to any similar Law and to the jurisdiction of the FDA, U.S. Drug Enforcement Administration or any similar state, local or
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foreign public health agency, board of health or other Governmental Authority that are or have been manufactured, developed, researched, tested, labeled, packaged, distributed, marketed, shipped or sold by the Company, including products that are in development or in inventory.
Seller Releases means the releases from each of the Sellers to the Company and the Buyer, substantially in the form attached as Exhibit C, releasing the Company from any and all debts, obligations, claims or liabilities of any kind or nature, known or unknown.
Subsidiary means, with respect to any Person, any corporation, limited liability company, partnership, association, or other business entity of which (a) if a corporation, a majority of the total voting power of shares of share capital entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other subsidiaries of that Person or a combination thereof, or (b) if a limited liability company, partnership, association, or other business entity (other than a corporation), a majority of the partnership or other similar ownership interests thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more subsidiaries of that Person or a combination thereof (for purposes of this clause (b), a Person or Persons own a majority ownership interest in such a business entity if such Person or Persons shall be allocated a majority of such business entitys gains or losses or shall be or control any managing director or general partner of such business entity).
Supply Agreement means that certain Product Supply and Development Agreement, between the Buyer and the Company, dated December 22, 2010.
Tax or Taxes means any income taxes, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, service, customs, duties, share capital, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax, of any kind, whatsoever, imposed by any Governmental Authority, which includes any interest, penalty or addition thereto, whether disputed or not, and including any obligations to indemnify or otherwise assume or succeed to the Tax Liability of any other Person.
Tax Act means the Indian Income Tax Act, 1961.
Tax Returns means any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Authority in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Law relating to any Tax.
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Other Terms. The following terms are defined in the body of this Agreement in the Sections indicated.
Term | Section |
AAA | Section 12.10(b) |
Agreement | Preamble |
Approved Capex Loan Amount | Section 2.3(c) |
Approved Opex Loan Amount | Section 2.3(b) |
Basket | Section 10.5 |
Board of Directors | Section 2.6(d) |
Business | Recitals |
Buyer | Preamble |
Buyer Indemnified Persons | Section 10.2(a) |
Capex Loans | Section 2.3 |
Claims Limitation | Section 10.5 |
Clan Laboratories | Preamble |
Closing | Section 2.6(a) |
Closing Consideration | Section 2.2(b) |
Closing Date | Section 2.6(a) |
Company | Preamble |
Company Common Shares | Recitals |
Company Debtor | Section 3.6(e) |
Company Financial Statements | Section 3.6. |
Company Preference Shares | Recitals |
Company Stock | Recitals |
Contracts | Section 3.8(a) |
Direct Claim | Section 10.4(c) |
Disclosure Schedules | Section 1.3 |
Dispute | Section 12.10(b) |
Filed ANDA | Section 3.18(a) |
Indemnifying Party | Section 10.4 |
Indemnitee | Section 10.4 |
Interim Balance Sheet | Section 3.6 |
J. Jayaseelan | Preamble |
Losses | Section 7.1 |
M. Shanmugam | Preamble |
Major Sellers | Preamble |
Material Contracts | Section 3.8(a)(xv) |
Opex Loans | Section 2.3 |
Payoff Letters | Section 6.14 |
Permits | Section 3.14 |
Pre-Closing Tax Period | Section 7.1 |
Preference Shareholders | Recitals |
Purchase Price | Section 2.2(a) |
Requested ANDA | Section 2.2(c)(iii) |
Restricted Period | Section 11.1 |
S. Suresh | Preamble |
Seller Indemnified Persons | Section 10.3 |
Seller Transaction Expenses | Section 12.5 |
Sellers
| Preamble |
A-7
Sellers Representative |
Section 12.9(a) |
Solicitation | Section 11.2 |
Straddle Period | Section 7.2 |
Third Party Claim | Section 10.4(a) |
TIPS | Preamble |
A-8
Exhibit 31.1
Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934
I, Patrick G. LePore, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Par Pharmaceutical Companies, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors:
a)
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 3, 2011 | /s/ Patrick G. LePore |
| Patrick G. LePore Chairman, President and Chief Executive Officer |
Exhibit 31.2
Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934
I, Michael A. Tropiano, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Par Pharmaceutical Companies, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors:
a.
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: August 3, 2011 | /s/ Michael A. Tropiano |
| Michael A. Tropiano Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Par Pharmaceutical Companies, Inc. (the “Company”) for the quarterly period ended June 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick G. LePore, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
This certification accompanies the Report and shall not be deemed filed with the Securities and Exchange Commission and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933 or Securities Exchange Act of 1934 (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.
/s/ Patrick G. LePore
Patrick G. LePore
Chairman, President and Chief Executive Officer
August 3, 2011
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Par Pharmaceutical Companies, Inc. (the “Company”) for the quarterly period ended June 30, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael A. Tropiano, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
This certification accompanies the Report and shall not be deemed filed with the Securities and Exchange Commission and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933 or Securities Exchange Act of 1934 (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.
/s/ Michael A. Tropiano |
Michael A. Tropiano Executive Vice President and Chief Financial Officer |
August 3, 2011
Property, Plant And Equipment, Net (Schedule Of Depreciation And Amortization Expense Related To Property, Plant And Equipment) (Details) (USD $)
In Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
Jun. 30, 2011
|
Jun. 30, 2010
|
|
Property, Plant And Equipment, Net | Â | Â | Â | Â |
Depreciation and amortization expense | $ 3,127 | $ 3,519 | $ 6,264 | $ 6,767 |
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
|
Jun. 30, 2011
|
Dec. 31, 2010
|
---|---|---|
Condensed Consolidated Balance Sheets | Â | Â |
Common Stock, par value | $ 0.01 | $ 0.01 |
Common Stock, shares authorized | 90,000,000 | 90,000,000 |
Common Stock, shares issued | 39,655,227 | 38,872,663 |
Treasury stock at cost, shares | 3,170,185 | 2,970,573 |
Condensed Consolidated Statements Of Operations (USD $)
In Thousands, except Per Share data |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
Jun. 30, 2011
|
Jun. 30, 2010
|
|
Revenues: | Â | Â | Â | Â |
Net product sales | $ 215,018 | $ 248,739 | $ 435,807 | $ 537,017 |
Other product related revenues | 9,170 | 6,735 | 21,333 | 10,389 |
Total revenues | 224,188 | 255,474 | 457,140 | 547,406 |
Cost of goods sold | 125,162 | 164,015 | 248,461 | 372,437 |
Gross margin | 99,026 | 91,459 | 208,679 | 174,969 |
Operating expenses: | Â | Â | Â | Â |
Research and development | 8,077 | 22,660 | 18,787 | 27,312 |
Selling, general and administrative | 46,156 | 48,865 | 93,101 | 90,100 |
Settlements and loss contingencies, net | Â | (4,068) | 190,560 | (4,006) |
Restructuring costs | 26,986 | Â | 26,986 | Â |
Total operating expenses | 81,219 | 67,457 | 329,434 | 113,406 |
Gain on sale of product rights and other | Â | 146 | Â | 5,921 |
Operating (loss) income | 17,807 | 24,148 | (120,755) | 67,484 |
Interest income | 382 | 273 | 805 | 601 |
Interest expense | (150) | (918) | (301) | (1,826) |
Income (loss) from continuing operations before provision for income taxes | 18,039 | 23,503 | (120,251) | 66,259 |
Provision (benefit) for income taxes | 8,859 | 5,468 | (20,587) | 21,798 |
Income (loss) from continuing operations | 9,180 | 18,035 | (99,664) | 44,461 |
Discontinued operations: | Â | Â | Â | Â |
Provision (benefit) for income taxes | 127 | (360) | 253 | (232) |
(Loss) income from discontinued operations | (127) | 360 | (253) | 232 |
Net income (loss) | $ 9,053 | $ 18,395 | $ (99,917) | $ 44,693 |
Basic earnings (loss) per share of common stock: | Â | Â | Â | Â |
Income (loss) from continuing operations | $ 0.26 | $ 0.53 | $ (2.79) | $ 1.31 |
(Loss) income from discontinued operations | $ (0.01) | $ 0.01 | $ (0.01) | $ 0.01 |
Net income (loss) | $ 0.25 | $ 0.54 | $ (2.80) | $ 1.32 |
Diluted earnings (loss) per share of common stock: | Â | Â | Â | Â |
Income (loss) from continuing operations | $ 0.25 | $ 0.51 | $ (2.79) | $ 1.26 |
(Loss) income from discontinued operations | $ 0.00 | $ 0.01 | $ (0.01) | $ 0.01 |
Net income (loss) | $ 0.25 | $ 0.52 | $ (2.80) | $ 1.27 |
Weighted average number of common shares outstanding: | Â | Â | Â | Â |
Basic | 35,983 | 34,112 | 35,742 | 34,021 |
Diluted | 36,708 | 35,475 | 35,742 | 35,273 |
Segment Information (Narrative) (Details) (USD $)
|
6 Months Ended | ||
---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
Dec. 31, 2010
|
|
Segment Information | Â | Â | Â |
Number of other generic drugs not detailed | 60 | Â | Â |
Maximum percentage revenue of other products compared to generic products. | 3.00% | 3.00% | Â |
Payment on agreement termination | Â | Â | $ 2,000,000 |
Royalty Revenue | 4,300,000 | Â | Â |
Gain on sale of product rights | Â | $ 5,921,000 | Â |
Intangible Assets, Net (Schedule Of Estimated Amortization Expense) (Details) (USD $)
In Thousands |
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Intangible Assets, Net | Â |
2011 (remainder) | $ 4,544 |
2012 | 7,122 |
2013 | 5,447 |
2014 | 4,680 |
2015 | 4,605 |
2016 and thereafter | 39,175 |
Estimated Amortization Expense, Total | $ 65,573 |
Restructuring Costs
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2011
|
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Restructuring Costs | Â | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring Costs | Note 18 – Restructuring Costs:
In June 2011, we announced our plans to resize our branded products division Strativa Pharmaceuticals, as part of a strategic assessment. We reduced our Strativa workforce by approximately 90 people. The remaining Strativa sales force will focus their marketing efforts on Megace® ES and Nascobal® Nasal Spray. In connection with these actions, we incurred expenses for severance and other employee-related costs. The intangible assets related to products no longer a priority for our remaining Strativa sales force were fully impaired by these actions. We also had non-cash inventory write downs for product and samples associated with the products no longer a priority for our remaining Strativa sales force. Inventory write downs were classified as cost of goods sold on the condensed consolidated statements of operations for the three months and six months ended June 30, 2011. In July 2011, Strativa returned the U.S. commercialization rights of Zuplenz® to its development partner, MonoSol Rx, as part of the resizing of our branded products division.
The following table summarizes the restructuring costs incurred by us in the second quarter of 2011 and the remaining related restructuring liabilities balance (included in accrued expenses and other current liabilities on the condensed consolidated balance sheet) as of June 30, 2011 ($ amounts in thousands);
The total charge is related to the Strativa segment. We expect that the liability amount at June 30, 2011 will result in cash expenditures during 2011. The charges related to this plan to reduce the size of the Strativa business are reflected on the condensed consolidated statements of operations for the quarter ended June 30, 2011. |
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