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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended June 30, 2008
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OR
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TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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Commission
File No. 001-31298
LANNETT COMPANY, INC.
(Exact name of
registrant as specified in its charter)
State of Delaware
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23-0787699
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State of Incorporation
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I.R.S. Employer I.D. No.
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9000 State
Road
Philadelphia,
Pennsylvania 19136
Registrants
telephone number, including area code: (215) 333-9000
(Address of
principal executive offices and telephone number)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $.001 Par Value
(Title of
class)
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act
Yes
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No
x
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of
the Act.
Yes
o
No
x
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
o
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12B-12 of the Exchange Act).
Aggregate
market value of Common stock held by non-affiliates of the Registrant, as of December 31,
2007 was $30,654,552 based on the closing price of the stock on the American
Stock Exchange.
As of September 25,
2008, there were 24,340,402 shares of the issuers common stock, $.001 par
value, outstanding.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains
forward-looking statements in Item 1A Risk Factors, Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations and
in other statements located elsewhere in this Annual Report.
Any statements made in this Annual
Report that are not statements of historical fact or that refer to
estimated or anticipated future events are forward-looking statements. We have based our forward-looking statements
on our managements beliefs and assumptions based on information available to
them at this time. Such forward-looking
statements reflect our current perspective of our business, future performance,
existing trends and information as of the date of this filing. These include, but are not limited to, our
beliefs about future revenue and expense levels and growth rates, prospects
related to our strategic initiatives and business strategies, express or
implied assumptions about government regulatory action or inaction, anticipated
product approvals and launches, business initiatives and product development
activities, assessments related to clinical trial results, product performance
and competitive environment, and anticipated financial performance. Without limiting the generality of the
foregoing, words such as may, will, expect, believe, anticipate,
intend, could, would, estimate, continue, or pursue, or the
negative other variations thereof or comparable terminology, are intended to
identify forward-looking statements. The
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. We caution the reader that certain important
factors may affect our actual operating results and could cause such results to
differ materially from those expressed or implied by forward-looking
statements. We believe the risks and
uncertainties discussed under the Item
1A - Risk Factors and other risks and uncertainties detailed herein and
from time to time in our SEC
filings, may affect our actual
results.
We
disclaim any obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. We also may make additional disclosures in
our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and in other filings that we may make from time to time with the
SEC. Other factors besides those listed here
could also adversely affect us. This
discussion is provided as permitted by the Private Securities Litigation Reform
Act of 1995, as amended.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Lannett
Company, Inc. (the Company, Lannett, we, or us) was incorporated
in 1942 under the laws of the Commonwealth of Pennsylvania, and reincorporated
in 1991 as a Delaware corporation. We
develop, manufacture, market and distribute generic versions of pharmaceutical
products. The Company reports financial
information on a quarterly and fiscal year basis, the most recent being the
fiscal year ended June 30, 2008.
All references herein to a fiscal year refer to the Companys fiscal
year ending June 30.
The Company is focused on increasing our share of the generic
pharmaceutical market. We plan to
improve our financial performance by expanding our line of generic products,
increasing unit sales to current customers and reducing overhead and
administrative costs. In addition, our
recent acquisition of Cody Laboratories, Inc. allows us to work toward
vertically integrating our dosage form manufacturing in order to reduce active
pharmaceutical ingredients (API) costs. Some of the new generic products sold
by Lannett were developed and are manufactured by Lannett while other products
are manufactured by other companies. The
products manufactured or distributed by Lannett and their brand name
equivalents are identified in the section entitled
Products
in Item 1 of this Form 10-K.
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Over the past several years, Lannett has consistently devoted resources
to research and development (R&D) projects, including new generic product
offerings. The costs of these R&D
efforts are expensed during the periods incurred. The Company believes that such investments
may be recovered in future years as it submits applications to the Food and
Drug Administration (FDA), and when it receives marketing approval from the FDA
to distribute such products. In addition
to using cash generated from its operations, the Company has entered into
financing agreements with third parties to provide additional cash when
needed. These financing agreements are
more fully described in the section entitled
Liquidity
and Capital Resources
in Item 7 of this Form 10-K. The Company has embarked on a plan to grow in
future years. In addition to organic
growth to be achieved through its own R&D efforts, the Company has also
initiated marketing projects with other companies in order to expand future
revenue. The Company expects that its
growing list of generic drugs under development will drive future growth. The Company also intends to use the infrastructure
it has created, and to continually devote resources to additional R&D
projects. The following steps outline
Lannetts efforts:
Research and Development Process
There
are numerous stages in the generic drug development process:
1.)
Formulation and Analytical Method
Development: After a drug candidate is selected for future sales, product
development chemists perform various experiments on the incorporation of active
ingredients into a dosage form. These experiments
will result in the creation of a number of product formulations to determine
which formula will be most suitable for the Companys subsequent development
process. Various formulations are tested
in the laboratory to measure results against the innovator drug. During this time, the Company may use reverse
engineering methods on samples of the innovator drug to determine the type and
quantity of inactive ingredients. During
the formulation phase, the Companys research and development chemists begin to
develop an analytical, laboratory testing method. The successful development of this test
method will allow the Company to test developmental and commercial batches of
the product in the future. All of the
information used in the final formulation, including the analytical test
methods adopted for the generic drug candidate, will be included as part of the
Chemical, Manufacturing and Controls section of the Abbreviated New Drug
Application (ANDA) submitted to the FDA in the generic drug application.
2.)
Scale-up: After the product development
scientists and the R&D chemists agree on a final formulation to use in
moving the drug candidate forward in the developmental process, the Company
will attempt to increase the batch size of the product. The batch size represents the standard magnitude
to be used in manufacturing a batch of the product. The determination of batch size will affect
the amount of raw material that is input into the manufacturing process and the
number of expected tablets or capsules to be created during the production cycle. The Company attempts to determine batch size
based on the amount of active ingredient in each dosage, the available
production equipment and unit sales projections. The scaled-up batch is then generally
produced in the Companys commercial manufacturing facilities. During this manufacturing process, the
Company will document the equipment used, the amount of time in each major
processing step and any other steps needed to consistently produce a batch of
that product. This information generally
referred to as the validated manufacturing process, will be included in the
Companys generic drug application submitted to the FDA.
3.)
Clinical testing: After a successful scale-up
of the generic drug batch, the Company then schedules and performs clinical
testing procedures on the product if required by the FDA. These procedures, which are generally
outsourced to third parties, include testing the absorption of the generic
product in the human bloodstream compared to the absorption of the innovator
drug. The results of this testing are
then documented and reported to the Company to determine the success of the
generic drug product. Success, in this
context, means the successful comparison of the Companys product related to
the innovator product. Since
bioequivalence and a stable
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formula are the primary requirements for a generic drug approval
(assuming the manufacturing plant is in compliance with the FDAs good
manufacturing quality standards), lengthy and costly clinical trials proving
safety and efficacy, which are generally required by the FDA for innovator drug
approvals, are unnecessary for generic companies. If the results are successful, the Company
will continue the collection of documentation and information for assembly of
the drug application.
4.)
Submission of the ANDA for FDA review and
approval: The ANDA process became formalized under The Drug Price Competition
and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act
(Hatch-Waxman Act). An ANDA
represents a generic drug companys application to the FDA to manufacture
and/or distribute a drug that is the generic equivalent to an already-approved
brand named (innovator) drug. Once
bioequivalence studies are complete, the generic drug company submits an ANDA
to the FDA for marketing approval.
According
to the September 2008 issue of Generics Bulletin the current review time
exceeds 19 months. While we have
received approvals in 14 months we have also gone well beyond the 19 as
discussed in the article. We see no
improvement in this in the short term.
When
a generic drug company files an ANDA with the FDA, it must certify that no
patents are listed in the Orange Book, the FDAs reference listing of approved
drugs and listed patents. An ANDA filer must certify, with respect to
each application, whether the filer is challenging a patent that no patent was
filed for the listed drug (a paragraph I certification), that the patent has
expired (a paragraph II certification), that the patent will expire on a
specified date and the ANDA filer will not market the drug until that date (a
paragraph III certification), or that the patent is invalid or would not be
infringed by the manufacture, use, or sale of the new drug (a paragraph IV
certification). A paragraph IV certification can trigger an automatic 30
month stay of the ANDA if the innovator company files a claim. It will
delay the approval of the generic companys ANDA. Currently, Lannett has
filed no paragraph IV certifications with its ANDAs.
Over
the past several years, the Company has hired additional personnel in product
development, production, formulation and the R&D laboratory. Lannett believes that its ability to select
appropriate products for development, develop such products on a timely basis,
obtain FDA approval, and achieve economies in production will be critical for
its success in the generic industry. The
strategy involves a combination of decisions focusing on long-term
profitability and a secure market position with fewer challenges from
competitors.
Competition
in generic pharmaceutical manufacturing should continue to grow as more
pharmaceutical products lose patent protection.
However, the Company believes that with strong technical know-how, low
overhead expenses, and efficient product development, manufacturing and
marketing, it can remain competitive. It is the intention of the Company to
reinvest as much capital as possible to develop new products as the success of
any generic pharmaceutical manufacturer depends on its ability to continually
introduce new generic products to the market.
Over time, if a generic drug market for a specific product remains
stable and consumer demand remains consistent, it is likely that additional
generic manufacturing companies will pursue the generic product by developing
it, submitting an ANDA, and potentially receiving marketing approval from the
FDA. If this occurs, the generic
competition for the drug increases, and a companys market share may drop. In addition to reduced unit sales, the unit
selling price may also drop due to the products availability from additional
suppliers. This may have the effect of
reducing a generic companys future net sales of the product. Due to these factors that may potentially
affect a generic companys future results of operations, the ability to
properly assess the competitive effect of new products, including market share,
the number of competitors and the generic unit price erosion, is critical to a
generic companys R&D plan. A
generic company may be able to reduce the potential exposure to competitive
influences that negatively affect its sales and profits by having several drug
candidates in its R&D pipeline. As
such, a generic company may be able to avoid becoming materially dependent on
the sales of one drug. Please refer to
the following section entitled
Products
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for
more descriptive information on the 28 products the Company currently produces
or sells. Unlike the branded, innovator
companies, Lannett does not develop new molecules nevertheless it has filed and
received 2 patents at its Cody Wyoming facility with an additional one
pending. However, the typical
intellectual property in the generic drug industry are the ANDAs that generic
drug companies own.
Validated Pharmaceutical Capabilities
Lannetts
manufacturing facility consists of 31,000 square feet on 3.5 acres owned by the
Company. In addition, the Company owns a 63,000 square foot building
located within 1 mile of the manufacturing facility, which houses packaging,
warehousing, shipping, R&D and a number of administrative functions. In
addition, we lease a third building located several miles from the
manufacturing facility, consisting of 65,000 square feet. This building is currently being used as a
warehouse.
The
manufacturing facility of Lannetts wholly-owned subsidiary, Cody Laboratories, Inc.
(Cody) consists of 73,000 square feet on 16.2 acres in Cody, Wyoming.
Cody leases the facility from Cody LCI Realty, LLC, Wyoming, which is 50% owned
by Lannett and 50% by an officer of Cody.
Many
FDA regulations relating to current Good Manufacturing Practices (cGMP) have
been adopted by the Company in the last several years. In designing its
facilities, full attention was given to material flow, equipment and
automation, quality control and inspection. A granulator, an automatic
film coating machine, high-speed tablet presses, blenders, encapsulators, fluid
bed dryers, high shear mixers and high-speed bottle filling are a few examples
of the sophisticated product development, manufacturing and packaging equipment
the Company uses. In addition, the Companys Quality Control laboratory
facilities are equipped with high precision instruments, such as automated
high-pressure liquid chromatographs, gas chromatographs, robots and laser
particle sizers.
Lannett
continues to pursue its comprehensive plan for improving and maintaining
quality control and quality assurance programs for its pharmaceutical
development and manufacturing facilities. The FDA periodically inspects
the Companys production facilities to determine the Companys compliance with
the FDAs manufacturing standards. Typically, after the FDA completes its
inspection, it will issue the Company a report, entitled a Form 483,
containing the FDAs observations of possible violations of cGMP which may be
minor or severe in nature. The degree of severity of the observation is
generally determined by the time necessary to remediate the cGMP violation, any
consequences on the consumer of the products, and whether the observation is
subject to a Warning Letter from the FDA. By strictly enforcing the
various FDA guidelines, namely current Good Manufacturing Practices (cGMPs) and
Good Laboratory Practices (cGLPs), as well as adherence to Lannetts Standard
Operating Procedures (SOPs) the Company has successfully minimized the number
of observations in its FDA inspections.
Sales and Customer Relationships
The
Company sells its pharmaceutical products to generic pharmaceutical
distributors, drug wholesalers, chain drug retailers, private label
distributors, mail-order pharmacies, other pharmaceutical manufacturers,
managed care organizations, hospital buying groups and health maintenance
organizations. It promotes its products
through direct sales, trade shows, trade publications, and bids. The Company also licenses the marketing of
its products to other manufacturers and/or marketers in private label
agreements.
The Company continues to expand
its sales to the major chain drug stores.
Its policy of maintaining an adequate inventory and fulfilling orders in
a timely manner has contributed to the Companys reputation among its customers
as a dependable supplier of high quality generic pharmaceuticals. Its Cody Labs subsidiary sells to dosage form
manufacturers.
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Management
The
Company has been focused on increasing the size and quality of its management
team in anticipation of continued growth.
Managers from large, established, brand pharmaceutical companies as well
as competing generic companies have been brought in to complement the skills
and knowledge of the existing management team.
As the Company continues to grow, additional managers may need to be
added to the team. We intend to hire the
best people available to expand the knowledge and expertise within the Company,
in order to achieve the Companys goals.
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Products
As
of the date of this filing, the Company manufactured and/or distributed the
following products:
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Name of Product
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Medical Indication
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Equivalent Brand
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1
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Acetazolamide
Tablets
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Glaucoma
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Diamox®
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2
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Baclofen
Tablets
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Muscle Relaxer
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Lioresal®
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3
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Bethanechol
Chloride Tablets
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Urinary Retention
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Urecholine®
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4
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Butalbital,
Aspirin and Caffeine Capsules
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Migraine Headache
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Fiorinal®
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Butalbital,
Aspirin, Caffeine with Codeine Phosphate Capsules
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Migraine Headache
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Fiorinal w/ Codeine #3®
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Clidamycin
HCl Capsules
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Antibiotic
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Cleocin®
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7
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Danazol
Capsules
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Endometriosis
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Danocrine®
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Dicyclomine
Tablets/Capsules
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Irritable Bowels
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Bentyl®
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Digoxin
Tablets
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Congestive Heart Failure
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Lanoxin®
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10
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Dipyridamole
Tablets
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Blood Clot Reduction
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Persantine®
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Doxycycline
Tablets
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Antibiotic
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Adoxa®
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12
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Doxycycline
Hyclate Tablets
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Antibiotic
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Periostat®
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13
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Hydrochlorothiazide
Tablet
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Water Retention
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Hydrodiuril®
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14
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Hydromorphone
HCl Tablets
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Pain Management
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Dilaudid®
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15
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Levothyroxine
Sodium Tablets
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Thyroid Deficiency
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Levoxyl®/ Synthroid®
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Esterified
Estrogen & Methyltestoterone Tablets
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Hormone Replacement
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Estratest®
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Morphine
Sulfate Oral Solution
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Pain Management
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Roxanol®
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Multivitamin
with Minerals
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Prenatal Vitamin
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PrimaCare ONE ®
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Oxycodone
HCl Oral Solution
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Pain Management
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Roxicodone®
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Phentermine
HCl Tablets
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Weight Loss
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Adipex-P®
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Phentermine
HCl Capsules
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Weight Loss
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Fastin®
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Pilocarpine
HCl Tablets
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Dryness of the Mouth
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Salagen®
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Primidone
Tablets
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Epilepsy
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Mysoline®
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Probenecid
Tablets
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Gout
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Benemid®
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Rifampin
Capsules
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Antibiotic
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Rifadin®
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Sulfamethoxazole
with Trimethoprim
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Antibacterial
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Bactrim®
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Terbutaline
Sulfate Tablets
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Bronchospasms
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Brethine®
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28
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Unithroid®
Tablet
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Thyroid Deficiency
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N/A
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Key Products
All
of the products currently manufactured and/or sold by the Company are
prescription products. Of the products
listed above, those containing Butalbital, Digoxin, Primidone, and
Levothyroxine Sodium were the Companys key products, contributing
approximately 76%, 63% and 71% of the
Companys total net sales in fiscal 2008, 2007 and 2006 respectively. In Fiscal 2006, the Company began selling
Sulfamethoxazole w/ Trimethoprim (SMZ/TMP). Because of a market opportunity,
sales of SMZ/TMP grew from 3% of sales in 2006 to 19% of sales in 2007, but
declined to 9% of net sales in 2008. This product is not included in the above
key products because the supply agreement for the product expired in August 2008
and was not renewed.
The Company has two products containing Butalbital. One of the products, Butalbital with Aspirin
and Caffeine capsules, has been manufactured and sold by Lannett for more than
nine years. The other Butalbital
product, Butalbital with Aspirin, Caffeine and Codeine Phosphate capsules is
manufactured by Jerome Stevens Pharmaceuticals, Inc. (JSP). Lannett began buying this product from JSP
and selling it to its customers in December 2002. Both products, which are in orally
administered capsule dosage forms, are prescribed to treat tension headaches
caused by contractions of the muscles in the neck and shoulder area and
migraine. The drug is prescribed
primarily for adults of various demographic backgrounds. Migraine headache is an increasingly
prevalent condition in the United States.
As conditions continue to grow, the demand for effective medical
treatments will continue to grow. Common
side effects of drugs which contain Butalbital include dizziness and
drowsiness. The Company notes that
although new innovator drugs to treat migraine headaches have been introduced
by brand name drug companies, there is still a loyal following of doctors and
consumers who prefer to use Butalbital products for treatment. As the brand name companies continue to
promote products containing Butalbital, like Fiorinal®, the Company expects to
continue to produce and sell its generic Butalbital products.
Digoxin
tablets are produced and marketed with two different potencies (0.125 and 0.25
milligrams per tablet). This product is
manufactured by JSP. Lannett began
buying this product from JSP and selling it to its customers in September 2002. Digoxin tablets are used to treat congestive
heart failure in patients of various ages and demographic backgrounds. The beneficial effects of Digoxin result from
direct actions on the cardiac muscle, as well as indirect actions on the
cardiovascular system mediated by effects on the autonomic nervous system. Side effects of Digoxin may include apathy,
blurred vision, changes in heartbeat, confusion, dizziness, headaches, loss of
appetite, nausea, vomiting and weakness.
Primidone
tablets are produced and marketed with two different potencies (50 and 250
milligrams per tablet). This product was
developed and is manufactured by Lannett.
Lannett has been manufacturing and selling Primidone 250-milligram
tablets for more than seven years.
Lannett began selling Primidone 50-milligram tablets in June 2001. Both products, which are in orally
administered tablet dosage forms, are prescribed to treat convulsion and
seizures in epileptic patients of all ages and demographic backgrounds. Common side effects of Primidone include lack
of muscle coordination, vertigo and severe dizziness.
The
Companys products containing Levothyroxine Sodium tablets are produced and
marketed with eleven different potencies.
In addition to generic Levothyroxine Sodium tablets, the Company also
markets and distributes Unithroid tablets, a branded version of Levothyroxine
Sodium tablets, which is produced and marketed with eleven different
potencies. Both Levothyroxine Sodium
products are manufactured by JSP.
Lannett began buying generic Levothyroxine Sodium tablets from JSP and
selling it to its customers in April 2003.
In September 2003, the Company began buying the branded Unithroid
tablets from JSP and selling it to its customers. Levothyroxine Sodium tablets are used to
treat hypothyroidism and other thyroid disorders. It remains one of the most prescribed drugs
in the United States with over 13 million patients of various ages and
demographic backgrounds. Side effects
from Levothyroxine Sodium are rare, but may include allergic reactions, such as
rash or hives. In late June of 2004, JSP received a letter from the FDA
approving its supplemental application for generic bioequivalence to Levoxyl
®
.
In December 2004, JSP received a letter from the FDA approving its
supplemental application for generic bioequivalence
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to Synthroid®. With its distribution of these products, Lannett
competes in a market which is currently controlled by two branded Levothyroxine
Sodium tablet productsAbbott Laboratories Synthroid® and Monarch Pharmaceuticals
Levoxyl® as well as generic competition from Mylan Laboratories and Sandoz.
New
Products
In
Fiscal 2008, Lannett received 9 ANDA approvals from the FDA. We received only 1
ANDA approval in Fiscal 2007. The following contains more specific details regarding
our latest approvals. Market data is obtained from Wolters Kluwer.
In
July 2007, Lannett received a letter from the FDA with approval to market
and launch Baclofen 10mg tablets. Baclofen is the generic version of Lioresal®
and is a muscle relaxer used to treat symptoms of multiple sclerosis. According
to Wolters Kluwer, total sales of generic Baclofen 10mg tablets were $151
million at average wholesale price (AWP) in 2007.
In
August 2007, Lannett received two letters from the FDA with approval to
market and launch Hydrochlorothiazide 25mg & 50mg tablets.
Hydrochlorothiazide is the generic version of Hydrodiuril® and is a thiazide
diuretic (water pill) that helps prevent your body from absorbing too much
salt. According to Wolters Kluwer, total sales of generic Hydrochlorothiazide
25mg & 50mg tablets was $182 million at AWP in 2007.
In
December 2007, Lannett received a letter from the FDA with approval to
market and launch Phentermine HCl 30mg capsules. Phentermine HCl is the generic
version of Fastin® and is an appetite suppressant. According to Wolters Kluwer,
total sales of generic Phentermine HCl 30mg capsules were $37.5 million at AWP
in 2007.
In
March 2008, Lannett received three letters from the FDA with approval to
market and launch Bethanechol Chloride 5mg, 10mg & 25mg tablets.
Bethanechol Chloride is the generic version of Urecholine® and is indicated for
the treatment of acute postoperative and postpartum non obstructive
(functional) urinary retention and for neurogenic atony of the urinary bladder
with retention. According to Wolters Kluwer, total sales of generic Bethanechol
Chloride 5mg, 10mg & 25mg tablets at AWP was $56 million in 2007.
In
March 2008, Lannett received a letter from the FDA with approval to market
and launch Rifampin 150mg & 300mg capsules. Rifampin is the generic
version of Rifadin® and is used to reduce the number of meningococcal bacteria
in the nose and throat. According to Wolters Kluwer, total sales of generic
Rifampin 150mg & 300mg capsules at AWP was $35 million in 2007.
In
April 2008, Lannett received a letter from the FDA with approval to market
and launch Dipyridamole 25mg, 50mg & 75mg tablets. Dipyridamole is the
generic version of Persantine® and is used to reduce the formation of blood
clots in people who have had heart valve surgery. According to Wolters Kluwer,
total sales of generic Dipyridamole 25mg, 50mg & 75mg tablets at AWP
was $45 million in 2007.
Additional
products are currently under development.
These products are either orally administered, solid-dosage products
(i.e. tablet/capsule) or oral solutions, topicals or parentarels designed to be
generic equivalents to brand named innovator drugs. The Companys developmental drug products are
intended to treat a diverse range of indications. The products under development are at various
stages in the development cycleformulation, scale-up, clinical testing and FDA
review.
The
cost associated with each product currently under development is dependent on
numerous factors not limited to the following: the complexity of the active
ingredients chemical characteristics, the price of the raw materials, the
FDA-mandated requirement of bioequivalence studiesdepending on the FDAs
Orange Book classification and other developmental factors. The estimated cost
to develop a new generic product ranges from $100,000 to $1 million.
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In
addition, as one of the oldest generic drug manufacturers in the country formed
in 1942, Lannett currently owns several ANDAs that are dormant on the Companys
records for products which it does not manufacture and market. Occasionally, the Company reviews such
ANDAs to determine if the market potential for any of these older drugs has
recently changed to make it attractive for Lannett to reconsider manufacturing
and selling them. If the Company decides
to introduce one of these products into the consumer market, it must review the
ANDA and related documentation to ensure that the approved product
specifications, formulation and other factors meet current FDA requirements for
the marketing of that drug. Generally,
in these situations, the Company must file a supplement to the FDA for the
applicable ANDA, informing the FDA of any significant changes in the
manufacturing process, the formulation, the raw material supplier or another
major feature of the previously approved ANDA.
The Company would then redevelop the product and submit it to the FDA
for supplemental approval. The FDAs
approval process for an ANDA supplement is similar to that of a new ANDA.
In
addition to the efforts of its internal product development group, Lannett has
contracted with several outside firms for the formulation and development of
several new generic drug products. These
outsourced R&D products are at various stages in the development
cycleformulation, analytical method development and testing and manufacturing
scale-up. These products are orally administered
solid dosage products intended to treat a diverse range of medical
indications. It is the Companys
intention to ultimately transfer the formulation technology and manufacturing
process for all of these R&D products to the Companys own commercial
manufacturing sites. The Company
initiated these outsourced R&D efforts to complement the progress of its
own internal R&D efforts.
The
majority of the Companys R&D projects are being developed in-house under
Lannetts direct supervision and with Company personnel. Hence, the Company does not believe that its
outside contracts for product development or manufacturing supply are material
in nature, nor is the Company substantially dependent on the services rendered
by such outside firms. Since the Company
has no control over the FDA review process, management is unable to anticipate
whether or when it will be able to begin producing and shipping such additional
products.
The
following table summarizes key information related to the Companys R&D
products. The column headings are
defined as follows:
1.)
Stage of R&D Defines the current stage of the R&D product in
the development process, as of the date of this filing.
2.)
Regulatory Requirement Defines whether the R&D product is or is
expected to be a new ANDA submission, an ANDA supplement, or a grand-fathered
product not requiring specific FDA approval.
3.)
Number of Products Defines the number of products in R&D at the
stage noted. In this context, a product
means any finished dosage form, including all potencies, containing the same
API or combination of APIs and which represents a generic version of the same
Reference Listed Drug (RLD) or innovator drug, identified in the FDAs Orange
Book.
Stage of R&D
|
|
Regulatory Requirement
|
|
Number of Products
|
|
|
|
|
|
FDA
Review
|
|
ANDA
|
|
10
|
FDA
Review
|
|
ANDA supplement
|
|
3
|
Clinical
Testing
|
|
ANDA
|
|
1
|
Scale-Up
|
|
Grand-fathered
|
|
0
|
Scale-Up
|
|
ANDA supplement
|
|
0
|
Scale-Up
|
|
ANDA
|
|
12
|
Formulation/Method
Development
|
|
ANDA
|
|
29
|
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Raw Materials and Finished Goods Inventory Suppliers
The
raw materials used by the Company in the production process consist of
pharmaceutical chemicals in various forms and are generally available from
several sources. FDA approval is
required in connection with the process of using most active ingredient
suppliers. In addition to the raw
materials purchased for the production process, the Company purchases certain
finished dosage inventories, including capsule, tablet, and oral liquid
products. The Company then sells these
finished dosage products directly to its customers along with the finished
dosage products internally manufactured.
If suppliers of a certain material or finished product are limited, the
Company will generally take certain precautionary steps to avoid a disruption
in supply, such as finding a secondary supplier or ordering larger quantities.
The
Companys primary finished product inventory supplier is Jerome Stevens
Pharmaceuticals, Inc. (JSP), in Bohemia, New York. Purchases of finished goods inventory from
JSP accounted for approximately 71% of the Companys inventory purchases in
Fiscal 2008, 63% in Fiscal 2007 and 76% in Fiscal 2006. On March 23, 2004,
the
Company entered into an agreement with JSP for the exclusive distribution
rights in the United States to the current line of JSP products in exchange for
four million (4,000,000) shares of the Companys common stock. The JSP products covered under the agreement
included Butalbital, Aspirin, Caffeine with Codeine Phosphate capsules, Digoxin
tablets and Levothyroxine Sodium tablets, sold generically and under the brand
name Unithroid
®
. The term of
the agreement is ten years, beginning on March 23, 2004 and continuing
through March 22, 2014. Refer to
the Materials Contract footnote to our consolidated financial statements for
more information on the terms, conditions, and financial impact of this
agreement.
During
the term of the agreement, the Company is required to use commercially
reasonable efforts to purchase minimum dollar quantities of JSPs products
being distributed by the Company. The
minimum quantity to be purchased in the first year of the agreement was $15 million. Thereafter, the minimum purchase quantity
increases by $1 million per year up to $24 million for the last year of the
ten-year contract. The Company has met
the minimum purchase requirement for the first four years of the contract, but
there is no guarantee that the Company will be able to continue to do so in the
future. If the Company does not meet the minimum purchase requirements, JSPs
sole remedy is to terminate the agreement.
In
August 2005, the Company signed an agreement with a finished goods
provider to purchase, at fixed prices, and distribute a certain generic
pharmaceutical product in the United States. Purchases of finished goods
inventory from this provider accounted for approximately 14% of the
Companys costs of purchased inventory in Fiscal 2008, 23% in 2007, and 11% in
2006. The term of the agreement was three years, beginning on August 22,
2005 and continuing through August 21, 2008. Following its expiration on August 21,
2008, the agreement was not renewed.
The
Company signed supply and development agreements with Olive Healthcare, Wintac
and Unichem of India; Orion Pharma of Finland; Azad Pharma AG of Switzerland,
Pharmaseed in Israel and Banner Pharmacaps and Catalent in the United States.
The Company is also in negotiations with companies in Israel for similar new
product initiatives in which Lannett will market and distribute products
manufactured by third parties.
Customers and Marketing
The
Company sells its products primarily to wholesale distributors, generic drug distributors,
mail-order pharmacies, group purchasing organizations, chain drug stores, and
other pharmaceutical companies. The
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industrys
largest wholesale distributors, McKesson, Cardinal Health, and Amerisource
Bergen, accounted for 6%, 10%, and 6%, respectively, of net sales in Fiscal
2008. The Companys largest chain drug store customer, Walgreens,
accounted for 36% of net sales in Fiscal 2008. The Company performs
ongoing credit evaluations of its customers financial condition, and has
experienced no significant collection problems to date. Generally, the
Company requires no collateral from its customers.
Sales
to these wholesale customers include indirect sales, which represent sales to
third-party entities, such as independent pharmacies, managed care
organizations, hospitals, nursing homes, and group purchasing organizations,
collectively referred to as indirect customers. Lannett enters into
agreements with its indirect customers to establish pricing for certain
products. The indirect customers then independently select a wholesaler
from which to actually purchase the products at these agreed-upon prices.
Lannett will provide credit to the wholesaler for the difference between the
agreed-upon price with the indirect customer and the wholesalers invoice
price. This credit is called a chargeback. For more information on
chargebacks, refer to the section entitled Chargebacks in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations of this Form 10-K. These indirect sale transactions are
recorded on Lannetts books as sales to the wholesale customers.
The
Company believes that retail-level consumer demand dictates the total volume of
sales for various products. In the event that wholesale and retail
customers adjust their purchasing volumes, the Company believes that consumer
demand will be fulfilled by other wholesale or retail sources of supply.
As such, Lannett attempts to develop and maintain strong relationships with
most of the major retail chains, wholesale distributors, and mail-order
pharmacies in order to facilitate the supply of the Companys products through
whatever channel the consumer prefers. Although the Company has
agreements with customers governing the transaction terms of its sales, there
are no minimum purchase quantities with these agreements.
The
Company promotes its products through direct sales, trade shows, trade
publications, and bids. The Company also markets its products through
private label arrangements, under which Lannett produces its products with a
label containing the name and logo of a customer. This practice is commonly
referred to as private label business. It allows the Company to leverage
its internal sales efforts by using the marketing services from other
well-respected pharmaceutical dosage suppliers. The focus of the
Companys sales efforts is the relationships it creates with its customer
accounts. Strong customer relationships have created a positive platform
for Lannett to increase its sales volumes. Advertising in the generic
pharmaceutical industry is generally limited to trade publications, read by
retail pharmacists, wholesale purchasing agents and other pharmaceutical
decision-makers. Historically and in Fiscal 2008, 2007, and 2006,
the Companys advertising expenses were immaterial. When the customer and
the Companys sales representatives make contact, the Company will generally
offer to supply the customer its products at fixed prices. If accepted,
the customers purchasing department will coordinate the purchase, receipt and
distribution of the products throughout its distribution centers and retail
outlets. Once a customer accepts the Companys supply of product, the
customer typically expects a high standard of service, including shipping
product in a timely manner, maintaining convenient and effective customer
service functions, and retaining a mutually beneficial dialogue of
communication. The Company believes that although the generic
pharmaceutical industry is a commodity industry where price is the primary
factor for sales success, these additional service standards are also important
to the customers that rely on a consistent source of supply.
Competition
The
manufacture and distribution of generic pharmaceutical products is a highly
competitive industry. Competition is based primarily on price,
service and quality. Our competitive advantage is based on our ability to
provide superior customer service (fulfilling customers in critical need of
inventory, carrying excess finished goods inventory and providing added value)
by insuring the Companys products are available from national suppliers as
well as our own warehouse. The modernization of our facilities, hiring of
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experienced
staff, and implementation of inventory and quality control programs have
improved our competitive cost position over the past five years.
The
Company competes with other manufacturers and marketers of generic and brand
drugs. Each product manufactured and/or sold by Lannett has a different
set of competitors. The list below identifies the companies with which
Lannett primarily competes for each of its major products.
Product
|
|
Primary Competitors
|
|
|
|
Butalbital
with Aspirin and Caffeine, with and without Codeine Phosphate Capsules
|
|
Watson
Pharmaceuticals, Breckenridge Pharmaceutical (manufactured by Anabolic
Laboratories)
|
|
|
|
Digoxin
Tablets
|
|
GlaxoSmithKline,
Caraco Pharmaceutical Laboratories, Westward Pharmaceuticals
|
|
|
|
Doxycycline
|
|
Par
Pharmaceuticals, Ranbaxy Laboratories
|
|
|
|
Levothyroxine
Sodium Tablets
|
|
Abbott
Laboratories, Monarch Pharmaceuticals, Mylan Laboratories, Sandoz, Forest
Laboratories
|
|
|
|
Primidone
Tablets
|
|
Watson
Pharmaceuticals, Qualitest Pharmaceuticals, URL, Westward Pharmaceuticals,
Amneal Pharmaceuticals, Impax Labs
|
|
|
|
Sulfamethoxazole
w/ Trimethoprim
|
|
URL/Mutual Pharmaceuticals, Sandoz, Vista,
Teva
|
|
|
|
Unithroid
Tablets
|
|
Abbott
Laboratories, Monarch Pharmaceuticals, Mylan Laboratories, Sandoz
|
Government Regulation
Pharmaceutical
manufacturers are subject to extensive regulation by the federal government,
principally by the FDA and the Drug Enforcement Agency (DEA) and to a lesser
extent, by other federal regulatory bodies and state governments. The Federal Food, Drug and Cosmetic Act, the
Controlled Substance Act, and other federal statutes and regulations govern or
influence the testing, manufacture, safety, labeling, storage, record keeping,
approval, pricing, advertising, and promotion of the Companys generic drug
products. Noncompliance with applicable regulations can result in fines, recall
and seizure of products, total or partial suspension of production, personal
and/or corporate prosecution and debarment, and refusal of the government to
approve new drug applications. The FDA
also has the authority to revoke previously approved drug products.
Generally, FDA approval is required before a prescription drug can be
marketed. A new drug is one not
generally recognized by qualified experts as safe and effective for its intended
use. New drugs are typically developed
and submitted to the FDA by companies expecting to brand the product and sell
it as a new medical treatment. The FDA
review process for new drugs is very extensive and requires a substantial
investment to research and test the drug candidate. However, less burdensome approval procedures
may be used for generic equivalents.
Typically, the investment required to develop a generic drug is less
costly than the brand innovator drug.
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There are currently three ways to obtain FDA approval of a drug:
·
New Drug Applications (NDA)
:
Unless one of the two procedures discussed in the following paragraphs
is available, a manufacturer must conduct and submit to the FDA complete
clinical studies to establish a drugs safety and efficacy.
·
Abbreviated New Drug Applications
(ANDA)
:
An
ANDA is similar to an NDA except that the FDA generally waives the requirement
of complete clinical studies of safety and efficacy. However, it may require
bioavailability and bioequivalence studies.
Bioavailability indicates the rate of absorption and levels of
concentration of a drug in the bloodstream needed to produce a therapeutic
effect. Bioequivalence compares one drug
product with another and indicates if the rate of absorption and the levels of
concentration of a generic drug in the body are within prescribed statistical
limits to those of a previously approved drug.
Under the Hatch-Waxman Act, an ANDA may be submitted for a drug on the
basis that it is the equivalent of an approved drug regardless of when such
other drug was approved. In addition to
establishing a new ANDA procedure, this Act created statutory protections for
approved brand name drugs. Under the
Hatch-Waxman Act, an ANDA for a generic drug may not be made effective until
all relevant product and use patents for the brand name drug have expired or
have been determined to be invalid.
Prior to this act, the FDA gave no consideration to the patent status of
a previously approved drug. Additionally, the Hatch-Waxman Act extends for up
to five years the term of a product or use patent covering a drug to compensate
the patent holder for the reduction of the effective market life of a patent
due to federal regulatory review. With
respect to certain drugs not covered by patents, the act sets specified time periods
of two to ten years during which ANDAs for generic drugs cannot become
effective or, under certain circumstances, cannot be filed if the branded drug
was approved after December 31, 1981.
Lannett, like most other generic drug companies, uses the ANDA process
for the submission of its developmental generic drug candidates.
·
Paper New Drug Applications
(Paper NDA also known as a 505(b)(2))
:
For a drug that is identical to a drug first
approved after 1962, a prospective manufacturer need not go through the full
NDA procedure. Instead, it may
demonstrate safety and efficacy by relying on published literature and
reports. The manufacturer must also
submit, if the FDA so requires, bioavailability or bioequivalence data
illustrating that the generic drug formulation produces the same effects,
within an acceptable range, as the previously approved innovator drug. Because published literature to support the
safety and efficacy of post-1962 drugs may not be available, this procedure is
of limited utility to generic drug manufacturers and the resulting approved
product will not be interchangeable with the innovator drug as an ANDA drug
would be unless bioeqivalency testing were undertaken and approved by FDA. Moreover, the utility of Paper NDAs has been
further diminished by the recently broadened availability of the ANDA process, as
described above.
Among the requirements for new drug approval is the requirement that
the prospective manufacturers methods conform to the FDAs current Good
Manufacturing Practice. The cGMP
Regulations must be followed at all times during which the approved drug is
manufactured. In complying with the
standards set forth in the cGMP Regulations, the Company must continue to
expend time, money, and effort in the areas of production and quality control
to ensure full technical compliance. Failure to comply with the cGMP
Regulations risks possible FDA action, including but not limited to, the
seizure of noncomplying drug products or, through the Department of Justice,
enjoining the manufacture of such products.
The
Company is also subject to federal, state, and local laws of general
applicability, such as laws regulating working conditions and the storage,
transportation, or discharge of items that may be considered hazardous
substances, hazardous waste, or environmental contaminants. The Company monitors its compliance with all
environmental laws. The Company is in
substantial compliance with all regulatory bodies.
As
a publicly traded company we are also subject to significant regulations,
including the Sarbanes-Oxley Act of 2002
Since its enactment, we have developed and instituted a corporate
compliance program based on what we believe are the current best practices and
we continue to update the program in response to newly implemented or changing
regulatory requirements.
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Lannett
operates in a highly regulated environment and is responsible for maintaining
compliance with many regulatory requirements. The U.S. Department of
Justice, acting on behalf of the U.S. Drug Enforcement Administration (DEA),
recently issued a letter to the Company requesting additional information on
certain record keeping matters regarding a DEA inspection of Lannetts facilities.
The Company intends to fully comply with this and all requests for
information that occur from time to time as a normal course of business
Research and Development
The
Company incurred research and development (R&D) expenses of approximately
$5,173,000 in 2008, $7,459,000 in 2007, and $8,102,000 in 2006. The
R&D spending includes spending on bioequivalence studies, internal
development resources, as well as outsourced development. While the
Company manages all R&D from our offices in Philadelphia, we have also been
taking advantage of favorable development costs in other countries. We
have alliances with various companies that either act as contract research
organizations or active pharmaceutical ingredient suppliers as well as dosage
form manufacturers. In addition, US based Clinical Research Organizations
have been engaged for product development to enhance our internal
development. Fixed payment arrangements are established with these
development partners, and can range from $150,000 to $250,000 to develop a
drug. Development payments are normally scheduled in advance, based on
milestones.
Employees
The
Company currently has 187 employees at Lannett and an additional 35 employees
at Cody.
Securities
Exchange Act Reports
The Company maintains an
Internet website at the following address: www.lannett.com. The Company makes
available on or through its Internet website certain reports and amendments to
those reports that are filed with the Securities and Exchange Commission (SEC)
in accordance with the Securities Exchange Act of 1934. These include annual
reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K. This
information is available on the Companys website free of charge as soon as
reasonably practicable after the Company electronically files the information
with, or furnishes it to, the SEC. The contents of the Companys website are
not incorporated by reference in this Form 10-K and shall not be deemed
filed under the Securities Exchange Act of 1934.
ITEM 1A. RISK
FACTORS
We operate in a rapidly
changing environment that involves a number of risks, some of which are beyond
our control. The following discussion highlights some of these risks and
others are discussed elsewhere in this report. These and other risks
could materially and adversely affect our business, financial condition,
operating results or cash flows.
If we are unable to successfully develop or commercialize new
products, our operating results will suffer.
Our
future results of operations will depend to a significant extent upon our
ability to successfully commercialize new generic products in a timely
manner. There are numerous difficulties in developing and commercializing
new products, including:
·
developing,
testing and manufacturing products in compliance with regulatory standards in a
timely manner;
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·
receiving
requisite regulatory approvals for such products in a timely manner;
·
the
availability, on commercially reasonable terms, of raw materials, including
active pharmaceutical ingredients and other key ingredients;
·
developing
and commercializing a new product is time consuming, costly and subject to
numerous factors that may delay or prevent the successful commercialization of
new products; and
·
commercializing
generic products may be substantially delayed by the listing with the FDA of
patents that have the effect of potentially delaying approval of the off-patent
product by up to 30 months, and in some cases, such patents have issued and
been listed with the FDA after the key chemical patent on the branded drug
product has expired or been litigated, causing additional delays in obtaining
approval.
As
a result of these and other difficulties, products currently in development by
Lannett may or may not receive the regulatory approvals necessary for
marketing. If any of our products, when
developed and approved, cannot be successfully or timely commercialized, our
operating results could be adversely affected. We cannot guarantee that
any investment we make in developing products will be recouped, even if we are
successful in commercializing those products.
If KV
were to prevail in its countersuit against us, and the Company were subject to
paying damages or were prohibited from selling the Prenatal Multivitamin in the
future, it could have an adverse impact on the Company
.
In
early June 2008, the Company filed a declaratory
judgment suit against KV Pharmaceuticals, DrugTech Corp., and Ther-Rx
Corp (collectively KV). The complaint sought declaratory judgment
for non-infringement and invalidity of certain patents owned by KV.
The complaint further sought declaratory judgment of anti-trust violations
and federal and state unfair competition violations for actions taken by KV in
securing and enforcing these patents. After the complaint was filed,
KV countered with a motion for a Temporary Restraining Order (TRO) to
prevent the Company from launching its Multivitamin with Mineral Capsules
(MMCs), due to alleged patent and trademark infringement issues. The
TRO was heard and, ultimately, resulted in a conclusion by the court that the
Companys product label on the MMCs should be modified. KV also
countered with claims of infringement by the Company of KVs patents seeking
the Companys profits for sales of MMCs or other monetary relief, preliminary
and permanent injunctive relief, attorneys fees and a finding of willful
infringement. The case is currently in its discovery phase with a hearing
expected in January 2009. The Company believes that it has
meritorious defenses with respect to the claims asserted against it and intends
to vigorously defend its position.
The pharmaceutical industry is highly competitive.
We
face strong competition in our generic product business. Revenues and
gross profit derived from the sales of generic pharmaceutical products tend to
follow a pattern based on certain regulatory and competitive factors. As
patents for brand name products and related exclusivity periods expire, the
first generic manufacturer to receive regulatory approval for generic
equivalents of such products is generally able to achieve significant market
penetration. As competing off-patent manufacturers receive regulatory
approvals on similar products or as brand manufacturers launch generic versions
of such products (for which no separate regulatory approval is required),
market share, revenues and gross profit typically decline, in some cases
dramatically. Accordingly, the level of market share, revenue and gross profit
attributable to a particular generic product is normally related to the number
of competitors in that products market and the timing of that products
regulatory approval and launch, in relation to competing approvals and
launches. Consequently, we must continue to develop and introduce new
products in a timely and cost-effective manner to maintain our revenues and
gross margins.
Our gross profit may fluctuate from period to period
depending upon our product sales mix, our product pricing, and our costs to
manufacture or purchase products.
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Our
future results of operations, financial condition and cash flows depend to a
significant extent upon our product sales mix. Our sales of products that
we manufacture tend to create higher gross margins than do the products we
purchase and resell. As a result, our sales mix will significantly impact
our gross profit from period to period. Factors that may cause our sales
mix to vary include:
·
the
amount of new product introductions;
·
marketing
exclusivity, if any, which may be obtained on certain new products;
·
the
level of competition in the marketplace for certain products;
·
the
availability of raw materials and finished products from our suppliers; and
·
the
scope and outcome of governmental regulatory action that may involve us.
The
profitability of our product sales is also dependent upon the prices we are
able to charge for our products, the costs to purchase products from third parties,
and our ability to manufacture our products in a cost effective manner.
If branded pharmaceutical companies are successful in
limiting the use of generics through their legislative and regulatory efforts,
our sales of generic products may suffer.
Many
branded pharmaceutical companies increasingly have used state and federal
legislative and regulatory means to delay generic competition. These
efforts have included:
·
pursuing new patents for existing products
which may be granted just before the expiration of one patent which could
extend patent protection for additional years or otherwise delay the launch of
generics;
·
using
the Citizen Petition process to request amendments to FDA standards;
·
seeking
changes to U.S. Pharmacopoeia, an organization which publishes industry
recognized compendia of drug standards;
·
attaching
patent extension amendments to non-related federal legislation; and
·
engaging
in state-by-state initiatives to enact legislation that restricts the
substitution of some generic drugs, which could have an impact on products that
we are developing.
If
branded pharmaceutical companies are successful in limiting the use of generic
products through these or other means, our sales may decline. If we
experience a material decline in product sales, our results of operations,
financial condition and cash flows will suffer.
Third parties may claim that we infringe their proprietary
rights and may prevent us from manufacturing and selling some of our products.
The
manufacture, use and sale of new products that are the subject of conflicting
patent rights have been the subject of substantial litigation in the
pharmaceutical industry. These lawsuits relate to the validity and
infringement of patents or proprietary rights of third parties. We may
have to defend against charges that we violated patents or proprietary rights
of third parties. This is especially true in the case of generic products
on which the patent covering the branded product is expiring, an area where
infringement litigation is prevalent, and in the case of new branded products
where a competitor has obtained patents for similar products. Litigation
may be costly and time-consuming, and could divert the attention of our
management and technical personnel. In addition, if we infringe on the
rights of others, we could lose our
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right
to develop or manufacture products or could be required to pay monetary damages
or royalties to license proprietary rights from third parties. Although
the parties to patent and intellectual property disputes in the pharmaceutical
industry have often settled their disputes through licensing or similar
arrangements, the costs associated with these arrangements may be substantial
and could include ongoing royalties. Furthermore, we cannot be certain
that the necessary licenses would be available to us on terms we believe to be
acceptable. As a result, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling a number of our products, which could harm
our business, financial condition, results of operations and cash flows.
If we are unable to obtain sufficient supplies from key
suppliers that in some cases may be the only source of finished products or raw
materials, our ability to deliver our products to the market may be impeded.
We
are required to identify the supplier(s) of all the raw materials for our
products in our applications with the FDA. To the extent practicable, we
attempt to identify more than one supplier in each drug application.
However, some products and raw materials are available only from a single
source and, in some of our drug applications, only one supplier of products and
raw materials has been identified, even in instances where multiple sources
exist. To the extent any difficulties experienced by our suppliers cannot
be resolved within a reasonable time, and at reasonable cost, or if raw
materials for a particular product become unavailable from an approved supplier
and we are required to qualify a new supplier with the FDA, our profit margins
and market share for the affected product could decrease, and our development
and sales and marketing efforts could be delayed.
Our policies regarding returns, allowances and chargebacks,
and marketing programs adopted by wholesalers, may reduce our revenues in
future fiscal periods.
Based
on industry practice, generic drug manufacturers have liberal return policies
and have been willing to give customers post-sale inventory allowances.
Under these arrangements, from time to time, we give our customers credits on
our generic products that our customers hold in inventory after we have
decreased the market prices of the same generic products due to competitive
pricing. Therefore, if new competitors enter the marketplace and
significantly lower the prices of any of their competing products, we would
likely reduce the price of our product. As a result, we would be
obligated to provide credits to our customers who are then holding inventories
of such products, which could reduce sales revenue and gross margin for the
period the credit is provided. Like our competitors, we also give credits
for chargebacks to wholesalers that have contracts with us for their sales to
hospitals, group purchasing organizations, pharmacies or other customers.
A chargeback is the difference between the price the wholesaler pays and the
price that the wholesalers end-customer pays for a product. Although we
establish reserves based on our prior experience and our best estimates of the
impact that these policies may have in subsequent periods, we cannot ensure
that our reserves are adequate or that actual product returns, allowances and
chargebacks will not exceed our estimates.
The design, development, manufacture and sale of our products
involves the risk of product liability claims by consumers and other third
parties, and insurance against such potential claims is expensive and may be
difficult to obtain.
The
design, development, manufacture and sale of our products involve an inherent
risk of product liability claims and the associated adverse publicity.
Insurance coverage is expensive and may be difficult to obtain, and may not be
available in the future on acceptable terms, or at all. Although we
currently maintain product liability insurance for our products in amounts we
believe to be commercially reasonable, if the coverage limits of these
insurance policies are not adequate, a claim brought against
19
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Lannett,
whether covered by insurance or not, could have a material adverse effect on
our business, results of operations, financial condition and cash flows.
Rising insurance costs could negatively impact profitability.
The
cost of insurance, including workers compensation, product liability and
general liability insurance, have risen in prior years and may increase in the
future. In response, we may increase deductibles and/or decrease certain
coverages to mitigate these costs. These increases, and our increased
risk due to increased deductibles and reduced coverages, could have a negative
impact on our results of operations, financial condition and cash flows.
The loss of our key personnel could cause our business to
suffer.
The
success of our present and future operations will depend, to a significant
extent, upon the experience, abilities and continued services of key
personnel. If the employment of any of
our current key personnel is terminated, we cannot assure you that we will be
able to attract and replace the employee with the same caliber of key
personnel. As such, we have entered into
employment agreements with of our senior executive officers.
Significant balances of intangible assets, including product
rights acquired, are subject to impairment testing and may result in impairment
charges, which will adversely affect our results of operations and financial
condition.
Our
acquired contractual rights to market and distribute products are stated at
cost, less accumulated amortization and related impairment charges identified
to date. We determined the initial cost by referring to the original fair
value of the assets exchanged. Future
amortization periods for product rights are based on our assessment of various
factors impacting estimated useful lives and cash flows of the acquired
products. Such factors include the products position in its life cycle,
the existence or absence of like products in the market, various other
competitive and regulatory issues and contractual terms. Significant
changes to any of these factors would require us to perform an additional
impairment test on the affected asset and, if evidence of impairment exists, we
would be required to take an impairment charge with respect to the asset.
Such a charge would adversely affect our results of operations and financial
condition.
Extensive industry regulation has had, and will continue to
have, a significant impact on our business, especially our product development,
manufacturing and distribution capabilities.
All
pharmaceutical companies, including Lannett, are subject to extensive, complex,
costly and evolving regulation by the federal government, principally the FDA
and to a lesser extent by the DEA, and state government agencies. The
Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other
federal statutes and regulations govern or influence the testing,
manufacturing, packing, labeling, storing, record keeping, safety, approval,
advertising, promotion, sale and distribution of our products.
Under
these regulations, we are subject to periodic inspection of our facilities,
procedures and operations and/or the testing of our products by the FDA, the
DEA and other authorities, which conduct periodic inspections to confirm that
we are in compliance with all applicable regulations. In addition, the
FDA conducts pre-approval and post-approval reviews and plant inspections to
determine whether our systems and processes are in compliance with current Good
Manufacturing Practice, or cGMP, and other FDA regulations. Following
such inspections, the FDA may issue notices on Form 483 that could cause
us to modify certain activities identified during the inspection. A Form 483
notice is generally issued at the conclusion of a FDA inspection and lists
conditions the FDA inspectors believe may violate cGMP or other FDA
regulations. FDA guidelines specify that a Warning Letter is issued
only for violations of
20
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regulatory
significance for which the failure to adequately and promptly achieve
correction may be expected to result in an enforcement action. Any such sanctions, if imposed, could
materially harm our operating results and financial condition. Under
certain circumstances, the FDA also has the authority to revoke previously
granted drug approvals. Similar sanctions as detailed above may be
available to the FDA under a consent decree, depending upon the actual terms of
such decree. Although we have instituted internal compliance programs, if
these programs do not meet regulatory agency standards or if compliance is deemed
deficient in any significant way, it could materially harm our business.
Certain of our vendors are subject to similar regulation and periodic
inspections.
The
process for obtaining governmental approval to manufacture and market
pharmaceutical products is rigorous, time-consuming and costly, and we cannot
predict the extent to which we may be affected by legislative and regulatory
developments. We are dependent on receiving FDA and other governmental or
third-party approvals prior to manufacturing, marketing and shipping our
products. Consequently, there is always the chance that we will not
obtain FDA or other necessary approvals, or that the rate, timing and cost of
such approvals, will adversely affect our product introduction plans or results
of operations. We carry inventories of certain product(s) in
anticipation of launch, and if such product(s) are not subsequently
launched, we may be required to write-off the related inventory.
Federal regulation of arrangements between manufacturers of
branded and generic products could adversely affect our business.
As
part of the Medicare Prescription Drug, Improvement, and Modernization Act of
2003, companies are now required to file with the Federal Trade Commission and
the Department of Justice certain types of agreements entered into between
brand and generic pharmaceutical companies related to the manufacture,
marketing and sale of generic versions of branded drugs. This new
requirement could affect the manner in which generic drug manufacturers resolve
intellectual property litigation and other disputes with branded pharmaceutical
companies and could result generally in an increase in private-party litigation
against pharmaceutical companies or additional investigations or proceedings by
the FTC or other governmental authorities. The impact of this new
requirement and the potential private-party lawsuits associated with
arrangements between brand name and generic drug manufacturers is uncertain,
and could adversely affect our business.
Sales of our products may continue to be adversely affected
by the continuing consolidation of our distribution network and the
concentration of our customer base.
Our
principal customers are wholesale drug distributors and major retail drug store
chains. These customers comprise a significant part of the distribution
network for pharmaceutical products in the U.S. This distribution network
is continuing to undergo significant consolidation marked by mergers and
acquisitions among wholesale distributors and the growth of large retail drug
store chains. As a result, a small number of large wholesale distributors
control a significant share of the market, and the number of independent drug
stores and small drug store chains has decreased. We expect that consolidation
of drug wholesalers and retailers will increase pricing and other competitive
pressures on drug manufacturers, including Lannett.
For
the year ended June 30, 2008, our three largest customers accounted for
36%, 10% and 6% respectively, of our net sales. The loss of any of these
customers could materially adversely affect our business, results of operations
and financial condition and our cash flows. In addition, the Company has
no long-term supply agreements with its customers which would require them to
purchase our products.
21
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ITEM
2.
DESCRIPTION OF PROPERTY
Lannett owns two facilities in Philadelphia, Pennsylvania. The administrative offices, quality control
laboratory, and manufacturing and production facilities are located in a 38,000
square foot facility at 9000 State Road in Philadelphia. The second facility consists of 65,000 square
feet, and is located within 1 mile of the State Road location, 9001 Torresdale
Avenue in Philadelphia. Our research
laboratory, package, warehousing and distribution operations, sales and
accounting departments are located in the second building.
In June 2006, Lannett signed a lease agreement on a 66,000 square
foot facility in Philadelphia. An
additional agreement which gives us the option to buy the facility was also
signed. This new facility is initially
going to be used for warehouse space with the expectation of making this
facility our headquarters in addition to manufacturing and warehousing. The other Philadelphia locations will
continue to be utilized as manufacturing, packaging, and as a research
laboratory. This gives Lannett the space
to fit its desire to expand.
Cody, a subsidiary of Lannett, leases a 73,000 square foot facility in
Cody, Wyoming. This location houses
Codys manufacturing and production facilities. Cody leases the facility from
Cody LCI Realty, LLC, Wyoming, which is 50% owned by Lannett and 50% by an
affiliate of Cody Labs.
ITEM 3.
LEGAL PROCEEDINGS
In
early June 2008, the Company filed a declaratory
judgment suit against KV Pharmaceuticals, DrugTech Corp., and
Ther-Rx Corp (collectively KV). The complaint sought declaratory
judgment for non-infringement and invalidity of certain patents owned by
KV. The complaint further sought declaratory judgment of anti-trust
violations and federal and state unfair competition violations for actions
taken by KV in securing and enforcing these patents. After the
complaint was filed, KV countered with a motion for a Temporary
Restraining Order (TRO) to prevent the Company from launching
its Multivitamin with Mineral Capsules (MMCs), due to alleged patent and
trademark infringement issues. The TRO was heard and, ultimately,
resulted in a conclusion by the court that the Companys product label on the
MMCs should be modified. KV also countered with claims of
infringement by the Company of KVs patents seeking the Companys profits for sales
of MMCs or other monetary relief, preliminary and permanent injunctive relief,
attorneys fees and a finding of willful infringement. The case is
currently in its discovery phase with a hearing expected in January 2009. The
Company believes that it has meritorious defenses with respect to the claims
asserted against it and intends to vigorously defend its position.
In
or about July 2008, Albion International and Albion, Inc. filed suit
against Lannett asserting claims for patent and trademark infringement, as well
as unfair competition, arising out of Lannetts use of product that it
purchased from Albion and used as an ingredient in its MMC. Lannett filed
a motion to dismiss the complaint on the basis that it purchased the product
from Albion and, as such, was authorized to use the product in its
MMC. The Court has not ruled on the motion. Lannett is no longer
purchasing product from Albion. If Albion were to prevail on its claims,
it may be entitled to a reasonable royalty on the Lannett product that
contained the Albion ingredient. The Company believes that Albions
claims have no merit and Lannett intends to vigorously defend the suit.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
No
matters have been submitted to a vote of the Companys security holders during
the quarter ended June 30, 2008.
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PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information
On
April 15, 2002, the Companys common stock began trading on the American
Stock Exchange. Prior to this, the Companys common stock traded in the
over-the-counter market through the use of the inter-dealer pink-sheets
published by Pink Sheets LLC. The
following table sets forth certain information with respect to the high and low
daily closing prices of the Companys common stock during Fiscal 2008 and 2007,
as quoted by the American Stock Exchange.
Such quotations reflect inter-dealer prices without retail mark-up,
markdown, or commission and may not represent actual transactions.
Fiscal Year Ended June 30,
2008
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
6.20
|
|
$
|
3.65
|
|
Second quarter
|
|
$
|
5.14
|
|
$
|
3.05
|
|
Third quarter
|
|
$
|
3.55
|
|
$
|
2.34
|
|
Fourth quarter
|
|
$
|
4.80
|
|
$
|
2.05
|
|
Fiscal Year Ended June 30, 2007
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
6.38
|
|
$
|
4.55
|
|
Second quarter
|
|
$
|
6.94
|
|
$
|
5.28
|
|
Third quarter
|
|
$
|
6.83
|
|
$
|
5.09
|
|
Fourth quarter
|
|
$
|
7.15
|
|
$
|
5.08
|
|
Holders
As
of September 25, 2008, there were approximately 258
holders
of record of the Companys common stock.
Dividends
The Company did not pay cash
dividends in Fiscal 2008 or Fiscal 2007. The Company intends to use available
funds for working capital, plant and equipment additions, and various product
extension ventures. The Company does not
expect to pay, nor should shareholders expect to receive, cash dividends in the
foreseeable future.
23
Table of Contents
ITEM 6.
SELECTED FINANCIAL DATA
The following financial
information as of and for the five years ended June 30, 2008, has been derived
from the Companys Consolidated Financial Statements. This information should
be read in conjunction with the Consolidated Financial Statements and related
notes thereto included elsewhere herein.
The comparability of
information is affected by the write-off of a portion of a note receivable due
from Cody Labs, and the subsequent acquisition of Cody Labs (a provider of
active pharmaceutical ingredients (API)) in Fiscal 2007. Approximately $7.8 million of notes were
written-off prior to the Cody Labs acquisition, representing the excess of the
note receivable over the fair value of assets received of approximately $4.4
million.
Statement of Financial
Accounting Standards (SFAS) 123(R),
Share-Based
Payment,
was adopted on
July 1, 2005 using the modified prospective transition method. Because the
modified prospective transition method was elected, results for prior periods
have not been restated to include share-based compensation expense for stock
options or the Companys Employee Stock Purchase Plan. See Note 1 to the
financial statements in Item 8 for more information.
In Fiscal 2005, the Company
determined that an intangible asset related to acquired product rights was
impaired. At that time, the Company
determined that this intangible was impaired and a $46.1 million impairment
charge was recorded.
Lannett Company, Inc. and Subsidiaries
Financial Highlights
As of and for the Fiscal Year Ended
June 30,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Operating Highlights
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
72,403,283
|
|
$
|
82,577,591
|
|
$
|
64,060,375
|
|
$
|
44,901,645
|
|
$
|
63,781,219
|
|
Gross Profit
|
|
$
|
16,301,071
|
|
$
|
21,424,987
|
|
$
|
28,375,665
|
|
$
|
7,968,320
|
|
$
|
35,609,834
|
|
Operating (Loss)/Income
|
|
$
|
(5,430,534
|
)
|
$
|
(5,964,409
|
)
|
$
|
8,453,918
|
|
$
|
(53,639,658
|
)
|
$
|
20,830,969
|
|
Net (Loss)/Income
|
|
$
|
(2,318,059
|
)
|
$
|
(6,929,008
|
)
|
$
|
4,968,922
|
|
$
|
(32,779,596
|
)
|
$
|
13,215,454
|
|
Basic (Loss)/Earnings Per Share
|
|
$
|
(0.10
|
)
|
$
|
(0.29
|
)
|
$
|
0.21
|
|
$
|
(1.36
|
)
|
$
|
0.63
|
|
Diluted (Loss)/Earnings Per Share
|
|
$
|
(0.10
|
)
|
$
|
(0.29
|
)
|
$
|
0.21
|
|
$
|
(1.36
|
)
|
$
|
0.63
|
|
Balance Sheet Highlights
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
116,858,608
|
|
$
|
104,656,100
|
|
$
|
105,992,064
|
|
$
|
94,917,060
|
|
$
|
131,904,084
|
|
Total Debt
|
|
$
|
8,978,834
|
|
$
|
9,679,965
|
|
$
|
8,196,692
|
|
$
|
9,532,448
|
|
$
|
10,092,857
|
|
Long Term Debt
|
|
$
|
8,186,922
|
|
$
|
8,987,846
|
|
$
|
7,649,806
|
|
$
|
7,262,672
|
|
$
|
8,104,141
|
|
Total Stockholders Equity
|
|
$
|
69,271,480
|
|
$
|
70,183,175
|
|
$
|
75,755,916
|
|
$
|
69,249,244
|
|
$
|
102,246,991
|
|
24
Table of Contents
ITEM 7.
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In
addition to historical information, this Form 10-K contains
forward-looking information. The forward-looking information is subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Important
factors that might cause such a difference include, but are not limited to,
those discussed in the following section, entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect managements analysis only as of the date of this Form 10-K.
The Company undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that may occur.
Readers should carefully review the risk factors described in other documents
the Company files from time to time with the SEC, including the quarterly
reports on Form 10-Q to be filed by the Company in Fiscal 2009, and any
current reports on Form 8-K filed by the Company.
Critical Accounting Policies
The
discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States of America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties and potentially result in materially different
results under different assumptions and conditions. We believe that our
critical accounting policies include those described below. For a detailed
discussion on the application of these and other accounting policies, refer to
Note 1 in the Notes to the Consolidated Financial Statements included herein.
Consolidation
of Variable Interest Entity
The Company consolidates any Variable Interest Entity (VIE) of
which we are the primary beneficiary. The liabilities recognized as a result of
consolidating a VIE do not represent additional claims on our general assets;
rather, they represent claims against the specific assets of the consolidated
VIE. Conversely, assets recognized as a result of consolidating a VIE do not
represent additional assets that could be used to satisfy claims against our
general assets. Reflected in the June 30, 2008 and 2007 balance sheets are
consolidated VIE assets of $1.9 and $1.8 million, respectively, which is
comprised mainly of land and a building.
VIE liabilities consist of a mortgage on that property in the amount of
$1.7 and $1.8 million at June 30, 2008 and 2007, respectively. This VIE was initially consolidated by Cody,
as Cody has been the primary beneficiary.
Cody has then been consolidated within Lannetts financial statements since
its acquisition in April 2007.
Revenue
Recognition
The Company recognizes revenue when its products
are shipped. At this point, title and
risk of loss have transferred to the customer and provisions for rebates,
promotional adjustments, price adjustments, returns, chargebacks, and other
potential adjustments are reasonably determinable. Accruals for these provisions are presented
in the consolidated financial statements as rebates, chargebacks and returns payable
and as reductions to net sales. The change in the reserves for various sales
adjustments may not be proportionally equal to the change in sales because of
changes in both the product and the customer mix. Increased sales to
wholesalers will generally require additional accruals as they are the primary
recipient of chargebacks and rebates. Incentives offered to secure sales vary
from product to product. Provisions for estimated rebates and promotional
credits are estimated based upon contractual terms. Provisions for other customer credits, such
as price adjustments, returns,
25
Table of Contents
and chargebacks, require
management to make subjective judgments on customer mix. Unlike branded
innovator drug companies, Lannett does not use information about product levels
in distribution channels from third-party sources, such as IMS and Wolters
Kluwer, in estimating future returns and other credits. Lannett calculates a
chargeback/rebate rate based on contractual terms with its customers and
applies this rate to customer sales. The
only variable is customer mix, and this assumption is based on historical data
and sales expectations. The
chargeback/rebate reserve is reviewed on a monthly basis by management using
several ratios and calculated metrics.
As we continue to obtain additional information about our historical
experience for chargebacks, rebates and returns, we also update our estimates
of the required reserves.
Chargebacks
The provision for chargebacks is the most
significant and complex estimate used in the recognition of revenue. The Company sells its products directly to
wholesale distributors, generic distributors, retail pharmacy chains, and
mail-order pharmacies. The Company also
sells its products indirectly to independent pharmacies, managed care
organizations, hospitals, nursing homes, and group purchasing organizations,
collectively referred to as indirect customers. Lannett enters into agreements with its
indirect customers to establish pricing for certain products. The indirect customers then independently
select a wholesaler from which to actually purchase the products at these
agreed-upon prices. Lannett will provide
credit to the wholesaler for the difference between the agreed-upon price with
the indirect customer and the wholesalers invoice price if the price sold to
the indirect customer is lower than the direct price to the wholesaler. This credit is called a chargeback. The provision for chargebacks is based on
expected sell-through levels by the Companys wholesale customers to the
indirect customers and estimated wholesaler inventory levels. As sales by the Company to the large
wholesale customers, such as Cardinal Health, AmerisourceBergen, and McKesson,
increase, the reserve for chargebacks will also generally increase. However, the size of the increase depends on
the expected mix of product sales to the indirect customers. The Company
continually monitors the reserve for chargebacks and makes adjustments when
management believes that expected chargebacks on actual sales may differ from
the amounts that were assumed in the establishment of the chargeback reserves.
Rebates
Rebates are offered to the Companys key
chain drug store and wholesaler customers to promote customer loyalty and
increase product sales. These rebate
programs provide customers with rebate credits upon attainment of
pre-established volumes or attainment of net sales milestones for a specified
period. Other promotional programs are
incentive programs offered to the customers.
At the time of shipment, the Company estimates reserves for rebates and
other promotional credit programs based on the specific terms in each
agreement. The reserve for rebates
increases as sales to rebate-eligible customers are recognized and decreases
when actual rebate payments are made.
However, since rebate programs are not identical for all customers, the
size of the reserve will depend on the mix of sales to customers that are
eligible to receive rebates.
Returns
Consistent with industry practice, the
Company has a product returns policy that allows certain customers to return
product within a specified period prior to and subsequent to the products lot
expiration date in exchange for a credit to be applied to future
purchases. The Companys policy requires
that the customer obtain pre-approval from the Company for any qualifying
return. The Company estimates its
provision for returns based on historical experience, adjusted for any changes
in business practices or conditions that would cause management to believe that
future product returns may differ from those returns assumed in the
establishment of reserves. Generally,
the reserve for returns increases as sales increase and decrease when credits
are issued or payments are made for actual returns received. The reserve for returns is included in the
rebates and chargebacks payable account on the balance sheet.
Other Adjustments
Other adjustments consist primarily of price
adjustments, also known as shelf stock adjustments, which are credits issued
to reflect decreases in the selling prices of the Companys products that
customers have remaining in their inventories at the time of a price reduction. Decreases in selling prices are discretionary
decisions made by management to reflect competitive market conditions. Amounts recorded for estimated shelf stock
adjustments are based upon specified terms with direct
26
Table
of Contents
customers, estimated declines in market prices, and estimates of
inventory held by customers. The Company
regularly monitors these and other factors and evaluates the reserve as
additional information becomes available.
Other adjustments are included in the rebates and chargebacks payable
account on the balance sheet. When
competitors enter the market for existing products, shelf stock adjustments may
be issued to maintain price competitiveness
The following tables identify the reserves for each major category of
revenue allowance and a summary of the activity for the fiscal years ended June 30,
2008, 2007 and 2006. Unless we have
specific information to indicate otherwise, actual credits issued in a given
year are assumed to be related to sales recorded in prior years based on the
Companys returns policy. The following
tables have been revised to conform to this assumption.
For the Year Ended June 30, 2008
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
Reserve Balance as of June 30, 2007
|
|
$
|
4,649,478
|
|
$
|
871,339
|
|
$
|
113,313
|
|
$
|
52,234
|
|
$
|
5,686,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales
recorded in prior fiscal years
|
|
(4,556,488
|
)
|
(1,741,804
|
)
|
(4,909,659
|
)
|
|
|
(11,207,951
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves or (reversals) charged during
Fiscal 2008 related to sales in prior fiscal years
|
|
|
|
870,465
|
|
5,892,805
|
|
(50,000
|
)
|
6,713,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves charged to net sales during Fiscal
2008 related to sales recorded in Fiscal 2008
|
|
26,126,995
|
|
7,999,232
|
|
12,546,130
|
|
473,423
|
|
47,145,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales
recorded in Fiscal 2008
|
|
(22,170,578
|
)
|
(7,366,918
|
)
|
|
|
(473,550
|
)
|
(30,011,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of June 30, 2008
|
|
$
|
4,049,407
|
|
$
|
632,314
|
|
$
|
13,642,589
|
|
$
|
2,107
|
|
$
|
18,326,417
|
|
27
For the Year Ended June 30, 2007
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
Reserve Balance as of June 30, 2006
|
|
$
|
10,137,400
|
|
$
|
2,183,100
|
|
$
|
416,000
|
|
$
|
275,600
|
|
$
|
13,012,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales
recorded in prior fiscal years
|
|
(10,170,000
|
)
|
(1,800,000
|
)
|
(5,578,000
|
)
|
(250,000
|
)
|
(17,798,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves or (reversals) charged during
Fiscal 2007 related to sales recorded in prior fiscal years
|
|
|
|
(300,000
|
)
|
3,572,313
|
|
|
|
3,272,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves charged to net sales in fiscal
2007 related to sales recorded in fiscal 2007
|
|
28,034,000
|
|
9,562,000
|
|
1,703,000
|
|
1,044,800
|
|
40,343,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales in
fiscal 2007
|
|
(23,351,922
|
)
|
(8,773,761
|
)
|
|
|
(1,018,166
|
)
|
(33,143,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of June 30, 2007
|
|
$
|
4,649,478
|
|
$
|
871,339
|
|
$
|
113,313
|
|
$
|
52,234
|
|
$
|
5,686,364
|
|
For the Year Ended June 30, 2006
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
Reserve Balance as of June 30, 2005
|
|
$
|
7,999,700
|
|
$
|
1,028,800
|
|
$
|
1,692,000
|
|
$
|
29,500
|
|
$
|
10,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales
recorded in prior fiscal years
|
|
(7,920,500
|
)
|
(1,460,500
|
)
|
(1,273,300
|
)
|
(59,300
|
)
|
(10,713,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves or (reversals) charged during
Fiscal 2006 related to sales recorded in prior fiscal years
|
|
|
|
500,000
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves charged to net sales in fiscal
2006 related to sales recorded in fiscal 2006
|
|
28,237,000
|
|
5,688,500
|
|
497,300
|
|
1,298,200
|
|
35,721,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales in
fiscal 2006
|
|
(18,178,800
|
)
|
(3,573,700
|
)
|
0
|
|
(992,800
|
)
|
(22,745,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of June 30, 2006
|
|
$
|
10,137,400
|
|
$
|
2,183,100
|
|
$
|
416,000
|
|
$
|
275,600
|
|
$
|
13,012,100
|
|
Reserve
Activity 2008 vs. 2007
The total reserve for
chargebacks, rebates, returns and other adjustments increased from $5,686,364
at June 30, 2007 to $18,326,415 at June 30, 2008. The increase in the reserve balance was
primarily the result of our decision to record during the fourth quarter of
Fiscal 2008 a $10,536,000 provision for the expected return of 100% of the
shipments of Prenatal Multivitamin. Our
expectation that all of the product would be returned was based on our
inability to have the product specified as a brand equivalent, and information
from our customers regarding their intentions to return the product. Also during our fiscal year 2008 we
increased our estimated returns reserve by approximately $3.0 million, based on
an analysis of our historical returns experience, the average lag time between
sales and returns and our understanding of the
buying patterns and inventory practices of both our direct and indirect
customers. This change in estimate
incorporated new information that has allowed us to better estimate the average
length of time between product sales and returns. As this change resulted from new information
that has allowed us to better estimate the average length of time between
product sales and returns, we consider it to be a change in estimate as defined
in SFAS 154:
Accounting Changes and Error Corrections A
Replacement of APB Opinion No. 20 and FASB Statement No. 3.
28
During fiscal year 2008, we
also experienced an unanticipated increase in our returns compared to
historical experience that required us to record a provision of approximately
$3.0 million in fiscal year 2008 for returns related to sales in prior
years. We believe, however, that this
increase in return was largely related to certain specific nonrecurring events.
The decline in chargeback
and rebate reserves between June 30, 2007 and June 30, 2008 was due
in part to a change in our sales mix away from wholesalers and toward the chain
drug stores as well as a decrease in inventory levels at wholesaler
distribution centers. The following
tables compare the year-end reserve balances in fiscal 2008 and 2007 and the
sales mix in fiscal 2008 and fiscal 2007.
|
|
Fiscal Year Ended June 30,
|
|
|
|
2008
|
|
%
|
|
2007
|
|
%
|
|
Chargeback reserve
|
|
$
|
4,049,407
|
|
22
|
%
|
$
|
4,649,478
|
|
82
|
%
|
Rebate reserve
|
|
632,314
|
|
3
|
%
|
871,339
|
|
15
|
%
|
Return reserve
|
|
13,642,589
|
|
74
|
%
|
113,313
|
|
2
|
%
|
Other reserve
|
|
2,107
|
|
0
|
%
|
52,234
|
|
1
|
%
|
|
|
$
|
18,326,417
|
|
100
|
%
|
$
|
5,686,364
|
|
100
|
%
|
|
|
Fiscal Year ended June 30,
|
|
Fiscal Fourth Quarter
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Chain drug stores
|
|
34
|
%
|
24
|
%
|
35
|
%
|
34
|
%
|
Mail Order
|
|
3
|
%
|
4
|
%
|
4
|
%
|
4
|
%
|
Wholesalers
|
|
62
|
%
|
72
|
%
|
61
|
%
|
62
|
%
|
Private Label
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
Reserve Activity 2007 vs.
2006
The total reserves for
chargebacks, rebates, returns and other adjustments decreased from $13,012,100
at June 30, 2006 to $5,686,364 at June 30, 2007 The decrease reflected
a change in customer sales mix away from
wholesalers and toward the chain drug stores which reduces total chargebacks
because wholesalers are typically the only customers who are eligible for
chargebacks and rebates,. The decrease
in rebate reserve to $871,339 from $2,183,100 at June 30, 2006 was also
due to the decrease in sales to wholesalers as well as a decrease in sales in
the fourth quarter of Fiscal 2007. There
was a large rebate reserve as of June 30, 2006 as direct customers (only
direct customers are eligible to receive rebates) represented a
larger-than-usual percentage of sales in the month of June.
The following tables compare
the year-end reserve balances for fiscal 2007 and 2006, and the customer sales
mix in Fiscal 2007 and Fiscal 2006.
29
|
|
Fiscal Year Ended 6/30,
|
|
|
|
2007
|
|
%
|
|
2006
|
|
%
|
|
Chargeback reserve
|
|
$
|
4,649,478
|
|
82
|
%
|
$
|
10,137,400
|
|
78
|
%
|
Rebate reserve
|
|
871,339
|
|
15
|
%
|
2,183,100
|
|
17
|
%
|
Return reserve
|
|
113,313
|
|
2
|
%
|
416,000
|
|
3
|
%
|
Other reserve
|
|
52,234
|
|
1
|
%
|
275,600
|
|
2
|
%
|
|
|
$
|
5,686,364
|
|
100
|
%
|
$
|
13,012,100
|
|
100
|
%
|
|
|
Fiscal Year ended June 30,
|
|
Fiscal Fourth Quarter
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Chain drug stores
|
|
24
|
%
|
13
|
%
|
34
|
%
|
10
|
%
|
Mail Order
|
|
4
|
%
|
7
|
%
|
4
|
%
|
6
|
%
|
Wholesalers
|
|
72
|
%
|
78
|
%
|
62
|
%
|
82
|
%
|
Private Label
|
|
0
|
%
|
2
|
%
|
0
|
%
|
2
|
%
|
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
Other reserves have
decreased since June 30, 2006, due to an unusually high level of shelf
stock adjustments required in the prior year.
Changes in competition in the Primidone 50 market required Lannett to
give more of this type of credit in the prior year.
During the year, the Company
began to implement improvements to separately calculate the provisions, credits
and reserves for chargebacks, rebates and returns including the performance of
several types of analysis to ensure reserves are reasonable. These included analysis of wholesaler versus direct (or
retail) sales mix; revenue reserve relative to gross sales; comparison of net
receivables to net sales; comparison of gross receivables to gross sales; and
recalculation of wholesaler inventory levels. Because we were unable to
independently verify product sales levels at the final customer, wholesaler
inventory reports were used to calculate potential chargebacks and rebates
based on known contracted rebate and chargeback rates.
The decrease in the
chargeback reserve to $4,649,478 at June 30, 2007 from $10,137,400 at June 30,
2006 is due to the decrease in sales to wholesalers. The decrease in rebate reserve to $871,339 from
$2,183,100 at June 30, 2006 is also due to the decrease in sales to
wholesalers plus the decrease in overall sales in the fourth quarter of Fiscal
2007. There was a large rebate reserve
as of June 30, 2006 as direct customers (those who receive the only
rebates) were a larger than usual portion of sales in the month of June
58%, typically 50%.
During the Fiscal year ended
June 30, 2007, the Company began to implement improvements to separately
calculate the chargebacks and reserves.
Management is continuing to make improvements to the calculation and
reconciliation of these amounts.
Management performs several types of analysis to ensure reserves are
reasonable. This includes ratio analysis
of: 1) wholesaler versus direct (or
retail) sales mix, 2) revenue reserve to gross sales, 3) comparison of net
receivables to net sales, 4) comparison of gross receivables to gross sales and
5) recalculation of wholesaler inventory levels.
30
The return and other
reserves have decreased since June 30, 2006, due to an unusually high
level of shelf stock adjustments required in the prior year. Changes in the competition in the Primidone
50 market required Lannett to give more of this type of credit in the prior year.
Fluctuations
in the amount of sales through the wholesaler channel will have an impact on
the amount of reserve being charged. Due
to the fact that wholesale sales result in greater chargebacks, a change in
wholesale sales will directly correlate to change in the chargebacks
required. For the first, second, third
and fourth quarters of Fiscal 2007, reserves recorded against sales amounted to
$12.0 million, $10.5 million, $12.7 million and $4.7 million, respectively. Wholesaler sales were $16.2 million, $12.4
million, $12.8 million and $8.7 million, respectively. The decrease in the dollar value of the
reserves corresponds to the increase in wholesale sales, most significantly in
the fourth quarter. For the first, second, third and fourth quarters of Fiscal
2006, reserves recorded against sales amounted to $7.1 million, $7.4 million,
$12.0 million and $9.7 million, respectively.
Wholesaler sales were $9.3 million, $9.9 million, $16.7 million and
$15.8 million, respectively. This third
quarter increase in sales and reserves during Fiscal 2006 is a result of
increased demand for Levothyroxine Sodium, for which the reserve rebate and
chargeback reserve remains consistent, but is higher than most other
products. This drugs reserves are
higher than other drugs because of the number of competitors in the
market. This may change if the number of
competitors decline because low prices will force some competitors out of the
market, which in turn may lead to higher prices. Fourth quarter sales to wholesalers dropped
off slightly from the third quarter. The
reserves in the fourth quarter also declined because of the product mix, but
were consistent with reserves in the first and second quarters.
Accounts Receivable
- The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customers current
credit worthiness, as determined by a review of current credit information. The
Company continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based upon historical
experience and any specific customer collection issues that have been
identified. While such credit losses have historically been within both the
Companys expectations and the provisions established, the Company cannot
guarantee that it will continue to experience the same credit loss rates that
it has in the past.
The Company also regularly monitors accounts receivable (AR) balances
by reviewing both net and gross days sales outstanding (DSO). Net DSO is calculate by dividing gross
accounts receivable less the reserve for rebates, chargebacks, returns and
other adjustments by the average daily net sales for the period. Gross DSO shows the result of the same
calculation without regard to rebates, chargebacks, returns and other
adjustments.
The Company monitors both net DSO and gross DSO as an overall check on
collections and to assess the reasonableness of the reserves. Gross DSO
provides management with an understanding of the frequency of customer
payments, and the ability to process customer payments and deductions. The net DSO calculation provides management
with an understanding of the relationship of the A/R balance net of the reserve
liability compared to net sales after charges to the reserves during the
period. Standard payment terms offered
to customers are consistent with industry practice at 60 days. Net DSO provides us with an understanding of
the relationship of the A/R balance net of the reserve liability compared to
net sales after reserves charged during the period. It eliminates the effect of timing of
processing, which is inherent in the gross DSO calculation.
The following table shows the results of these calculations for the
fiscal years ended June 30, 2008, 2007 and 2006:
Fiscal Year Ended June 30,
|
|
2008
|
|
2007
|
|
2006
|
|
Net DSO (in days)
|
|
65
|
|
72
|
|
56
|
|
Gross DSO (in days)
|
|
70
|
|
74
|
|
77
|
|
31
The level of both net and gross DSO at June 30, 2008 is consistent
with the Companys expectation that DSO will be in the 60 to 70 day range,
based on 60 day payment terms for most customers
Inventories
- The Company values its inventory at the lower of cost (determined by the
first-in, first-out method) or market, regularly reviews inventory quantities
on hand, and records a provision for excess and obsolete inventory based
primarily on estimated forecasts of product demand and production
requirements. The Companys estimates of
future product demand may prove to be inaccurate, in which case it may have
understated or overstated the provision required for excess and obsolete
inventory. In the future, if the Companys inventory is determined to be
overvalued, the Company would be required to recognize such costs in cost of
goods sold at the time of such determination. Likewise, if inventory is
determined to be undervalued, the Company may have recognized excess cost of
goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale.
New Accounting
Pronouncements -
.
In July 2006, the FASB
issued FIN 48, which addresses the determination of whether tax benefits
claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based solely on position should be measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition,
classification, interest and penalties on income taxes, accounting in interim
periods and requires increased disclosures. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We adopted the provisions of
FIN 48 on July 1, 2007. See Note 16.
In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This Statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that
require or permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new
fair value measurements. However, for some entities, the application of this
Statement will change current practice. In February, 2008, the FASB issued FASB
Staff Position 157-1, Application of FASB Statement No. 157 to FASB
Statement 13 and Other Accounting Pronouncements That Address Fair value
Measurements for Purposes of Lease Classification and Measurement under
Statement 13 (FSP FAS 157-1) and FASB Staff Position 157-2, Effective Date of
FASB Statement No. 157 (FSP FAS 157-2).
FSP FAS 157-1 amends SFAS 157 to remove certain leasing transactions
from its scope. FSP FAS 157-2 defers the
effective date of SFAS No. 157 for all non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. We adopted the guidance of SFAS 157 as it
applies to our financial instruments on July 1, 2008 and do not expect the
adoption will have a significant impact on our consolidated financial
statements
In February 2007, the
FASB issued SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115
(SFAS No. 159), which
allows companies to choose, at specific election dates, to measure eligible
financial assets and liabilities at fair value that are not otherwise required
to be measured at fair value. If a company elects the fair value option for an
eligible item, changes in that items fair value in subsequent reporting
periods must be recognized in current earnings.
SFAS 159 is effective for our fiscal year beginning July 1,
2008. We do not expect the adoption of SFAS 159 will have a significant
impact on our consolidated financial statements as we have not elected to apply
the fair value option to any of our financial assets and liabilities.
32
In June 2007, the EITF
reached a final consensus on EITF Issue No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities (EITF 07-3). EITF 07-3 is
effective for our fiscal year beginning July 1, 2008. EITF 07-3
requires non-refundable advance payments for future research and development
activities to be capitalized until the goods have been delivered or related
services have been performed. As the guidance in EITF 07-03 is consistent
with our existing policy we do not believe EITF 07-03 will have any impact
on our financial statements or related disclosures.
In November 2007, the
EITF reached a final consensus on EITF Issue No. 07-1, Accounting for
Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property (EITF 07-1). EITF 07-1 will be effective for
our fiscal year beginning July 1, 2009 and interim periods within that
fiscal year. Adoption is on a retrospective basis to all prior periods
presented for all collaborative arrangements existing as of the effective date.
We are currently evaluating the impact of adopting EITF 07-1 on our
consolidated financial statements.
In December 2007, the
FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)).
SFAS 141(R) will significantly change the accounting for business
combinations in a number of areas including the treatment of contingent
consideration, contingencies, acquisition costs, in-process research and
development and restructuring costs. In addition, under SFAS 141(R),
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will
impact income tax expense. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the fiscal year beginning July 1, 2009. Early application is not permitted. The
effect of SFAS 141(R) on our consolidated financial statements will
depend on the nature and terms of any business combinations that occur after
its effective date.
In December 2007, the
FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 amends Accounting
Research Bulletin No. 51 to establish accounting and reporting standards
for the noncontrolling (minority) interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements and establishes a
single method of accounting for changes in a parents ownership interest in a
subsidiary that do not result in deconsolidation. SFAS 160 is effective
for our fiscal year beginning July 1, 2009. We are currently evaluating
the impact the adoption of SFAS 160 will have our consolidated financial
statements.
In March 2008, the FASB
issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161). The new standard is intended to help investors
better understand how derivative instruments and hedging activities affect an
entitys financial position, financial performance and cash flows through
enhanced disclosure requirements. The new standard is effective for our
fiscal year beginning July 1, 2009 and for all interim periods within that
fiscal year. Early adoption is
encouraged. We do not expect the adoption of SFAS 161 to have a
significant impact on our consolidated financial statements as we do not
currently have any derivatives within the scope of SFAS 161.
In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3,
Determination of the Useful Life of
Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill and Other Intangible Assets. The FSP is
intended to improve the consistency between the useful life of a recognized
intangible asset under Statement 142 and the period of expected cash flows used
to measure the fair value of the asset under
33
SFAS
141(R) and other U.S. generally accepted accounting principles. The
new standard is effective for our financial statements issued for fiscal years
and interim periods beginning July 1, 2009. We are currently evaluating
the impact of FSP FAS 142-3.
Results
of Operations Fiscal 2008 compared to Fiscal 2007
Net sales decreased 12% from
$82,577,591 in Fiscal 2007 to $72,403,283 in Fiscal 2008. The decrease reflected increased competition
in the generic drug market which adversely affected Lannetts sales of certain
antibacterial drugs as well as sales of
drugs used in the treatment of epilepsy.
Prices of antibiotic drugs declined 34% from prior year levels due to
increased competition, which partly offset higher sales volumes. Prices of Lannetts heart failure drugs
increased slightly from prior year levels and
sales volumes increased 49% from the prior year level, largely due to
the impact of a product recall of one of Lannetts competitors during the
quarter ended June 30, 2008.
Thyroid medication, our largest product in terms of sales, showed
continued growth in both volume and in price.
The following table presents the percentage changes in prices and
volumes for the Companys products, by medical indication.
Medical indication
|
|
Sales volume
change %
|
|
Sales price
change %
|
|
Migraine Headache
|
|
18
|
%
|
(17
|
)%
|
Antibiotics
|
|
136
|
%
|
(34
|
)%
|
Epilepsy
|
|
(20
|
)%
|
(36
|
)%
|
Heart Failure
|
|
49
|
%
|
8
|
%
|
Thyroid
|
|
5
|
%
|
4
|
%
|
We plan to continue to
increase the number of products available for sale to our customers, although
FDA approvals are needed to achieve this growth.
The
Company sells its products to customers in various categories. The table below presents the Companys net
sales to each category.
Customer Category
|
|
Fiscal 2008 Net
Sales
|
|
Fiscal 2007 Net
Sales
|
|
Wholesaler/Distributor
|
|
$30.5 million
|
|
$49.4 million
|
|
Retail Chain
|
|
$37.1 million
|
|
$27.9 million
|
|
Mail-Order Pharmacy
|
|
$4.5 million
|
|
$5.1 million
|
|
Private Label
|
|
$0.3 million
|
|
$0.2 million
|
|
Total
|
|
$72.4 million
|
|
$82.6 million
|
|
Wholesaler/Distributor
sales decreased as a result of one of Lannetts major wholesalers withdrawing
from the one-stop program which used Lannett as a first call supplier. Retail chain sales increased significantly
as a result of an increase in the number of products available for sale and a
significant increase in the number of retail stores of one of our
customers. Mail order pharmacy sales
decreased from the prior year due mainly to the market shift toward retail
chains at the expense of mail order pharmacy sales. Private label sales increased slightly from
the prior year, although this channel is not expected to contribute
significantly to Lannetts sales in the future as we have decided not to
actively pursue additional private label customers because of the lower margins
for this business.
34
In
2006, prior to its acquisition by Lannett, Cody received an FDA warning letter,
and stopped operations to remediate their facility. This remediation
occurred from the months of August 2006 through February 2007.
Upon completion of the remediation, Cody requested an FDA inspection.
Subsequent FDA inspection resulted in relatively minor Form 483
observations, which have since been remediated. In March 2008 Cody
Labs recommenced manufacturing operations after management concluded that
certain regulatory deficiencies identified by the FDA prior to Lannetts
acquisition were substantially remediated.
Cost of sales (excluding amortization of intangible assets) decreased
6%, from $57,394,751 in Fiscal 2007 to $54,080,947 in Fiscal 2008. The decrease reflected the 12% decrease in
net sales, partly offset by the impact of normal inflationary pressures on
labor and material costs and expenses related to the Companys prenatal vitamin
with mineral product.
The amortization expense
relates to the March 23, 2004 exclusive marketing and distribution rights
agreement with Jerome Stevens Pharmaceutical.
For the remaining six years of the contract, the Company will incur
annual amortization expense of approximately $1,785,000.
Gross profit as a percent of net sales declined to 23% in Fiscal 2008
from 26% in Fiscal 2007, due in part to expenses related to the prenatal
multivitamin with mineral product, and price erosion for antibiotics, heart
failure products and epilepsy medications. While the Company is
continuously striving to keep product costs low, there can be no guarantee that
profit margins will decline in future periods due to pricing pressure from
competitors and costs of producing or purchasing new drugs. Changes in
the product mix may also occur which also affect gross could profit as a
percent of sales in future periods. The
Company has changed the presentation of amortization of intangibles and product
royalty expenses, in an effort to comply with the SECs Staff Accounting
Bulletin Topic 11-B (SAB 11-B). Accordingly, amortization of intangible
assets and product royalty expense is now presented before gross profit in order
to align the financial reporting with this SEC guidance, and prior periods have
been reclassified on order to be consistent with the current presentation.
Research and development
(R&D) expenses decreased 31% to $5,172,715 in Fiscal 2008 from $7,459,432
in Fiscal 2007. The decrease was primarily due to a decrease in the
production of drugs in development and preparation for submission to the
FDA. The Company expenses all production costs as R&D until the drug
is approved by the FDA. R&D expenses may fluctuate from period to
period, based on planned submissions to the FDA.
Selling
,
general and administrative expenses
increased 36% to $16,552, 859 in Fiscal 2008 from $12,161,187 in Fiscal 2007,
primarily due to the inclusion of a full year of general and administrative
expenses of Cody, which was acquired in the fourth quarter of Fiscal
2007. The remaining increase in expense reflects increased legal expenses
and higher professional fees. While the Company is focused on controlling
costs, increases in personnel costs may have an ongoing impact on the
administrative cost structure. Other costs are being incurred to
facilitate improvements in the Companys infrastructure.
On March 31, 2007, the
Company recorded an impairment charge of $7,775,890 on a note receivable owed
by Cody. On April 10, 2007, it was
decided to complete the acquisition of Cody by forgiving the remaining balance
of the receivable. See discussion below
in
Results of Operations Fiscal 2007 compared to
Fiscal 2006
.
Interest expense increased
to $383,267 in Fiscal 2008 from $273,633 in Fiscal 2007, reflecting full year
impact of the interest expense on a mortgage held by Cody Realty LLC. Effective with the acquisition of Cody labs
on April 10, 2007, the Company consolidated the operations of Lannett
Realty LLC, a variable interest entity that had been fully consolidated by Cody
Labs (see Note 13).
The
Company recorded an income tax benefit of $3,376,011 in Fiscal 2008 on a pretax
loss after minority interest of $5,694,070 as compared to tax expense of
$1,007,929 in Fiscal 2007 on a pretax loss of $5,921,079. The inclusion
of state income taxes, federal income tax credits, and a reduction in the
valuation allowance for deferred tax assets were the principal reasons for the
effective tax rate of $59.3% in fiscal 2008.
35
At
June 30, 2008, the Company has recognized a net deferred tax asset of
$21,198,706. The net deferred tax asset
is net of a valuation allowance of $2,314,498 for the specific total tax asset
of $2,106,798 related to the Cody notes receivable impairment incurred in
conjunction with the acquisition of Cody Labs and the $207,700 tax benefit
associated with the state income tax net operating loss carryforwards. The Company has provided for the valuation
allowance related to the notes receivable impairment as this benefit will be
realized only upon the disposition of Cody Labs. As the Company has no current plans to
dispose of its holdings in Cody, a full valuation allowance has been
established. The valuation allowance
related to the tax benefit of the state operating loss carryforwards has been
established as the Company does not expect these carryforwards to be utilized
due to the Companys tax planning strategies at the state and local
levels. The Company expects the
remaining net deferred tax assets to be fully realizable based on the Companys
history and future expectations of generating sufficient taxable income.
The
Company reported a net loss of $2,318,059 for Fiscal 2008, or $0.10 basic and
diluted loss per share, compared to net loss of $6,929,008 for Fiscal 2007, or
$0.29 basic and diluted loss per share.
Results
of Operations Fiscal 2007 compared to Fiscal 2006
Net sales increased by 29%
from $64,060,375 in Fiscal 2006 to $82,577,591 in Fiscal 2007. The increase was due in part from continued
improvement in sales of Levothyroxine Sodium (Levo), which increased $18.1
million, or 121% over the prior year sales, and Sulfamethoxazole with
Trimethoprim (SMZ) which increased $14.9 million, a 570% increase. These
increases were offset partially by decreases in other existing products, most
significantly Primidone tablets, of which sales declined $5,152,000. The Company is working to offset continued
declines in existing products through new product offerings. The increase in Levo sales was due entirely
to an increase in the quantity of bottles sold.
The increase in SMZ was due to quantity increases of nearly 390% and
price increases of 180%.
Overall, product sales quantities
increased 100% (including new products), leading to increased sales. Pricing pressure, due to increased
competition and new customer demands for lower prices offset the volume
increase, resulting in the 29% sales increase over Fiscal 2006. SMZ pricing benefited from the departure of a
competitor from the market. Such pricing
changes due to competition are not predictable.
For that reason, the Company must maintain its focus on developing new
products every year to expand the number of products available to supply to
customers. Net sales of new products are
often impacted by greater incentives to wholesalers. Excluding sales of SMZ in
Fiscal 2007, the Company experienced a decline in new product net sales in the
year. This is due to the Company
receiving fewer approvals from the FDA during the year. At June 30, 2007, the Company had 18
products, as ANDA and ANDA supplements, awaiting approval from the FDA as
compared to 10 at June 30, 2006.
The
Company sells its products to customers in various categories. The table below identifies the Companys net
sales to each category.
Customer Category
|
|
Fiscal 2007 Net
Sales
|
|
Fiscal 2006 Net
Sales
|
|
Wholesaler/Distributor
|
|
$49.4 million
|
|
$44.0 million
|
|
Retail Chain
|
|
$27.9 million
|
|
$10.6 million
|
|
Mail-Order Pharmacy
|
|
$5.1 million
|
|
$7.0 million
|
|
Private Label
|
|
$0.2 million
|
|
$2.5 million
|
|
Total
|
|
$82.6 million
|
|
$64.1 million
|
|
36
Wholesaler/distributor
sales increased due to a rebound in Levothyroxine Sodium sales and sales of new
products. Levo and SMZ sales increased as wholesalers began to reorder the
product in larger volumes in Fiscal 2006.
Retail Chain sales increased significantly due to a new significant
customer agreement signed during Fiscal 2007.
Mail order pharmacy sales decreased slightly from the prior year. Private label sales decreased due to our
largest private label customer, Qualitest, receiving FDA approval in late November 2005
to manufacture its own Primidone 50mg.
As disclosed previously, private label sales have continued to decline,
as Lannett does not actively pursue additional private label customers because
of the lower margins and product label inventories required to service the
category.
Cost of sales (excluding amortization of intangible assets) increased
69%, from $33,900,045 in Fiscal 2006 to $57,394,751 in Fiscal 2007. This
increase is due in part to higher production volumes to meet increased sales
demand, and increased purchases of finished products for sale. Gross
margins were 30% in 2007, a decline from 47% in 2006. In spite of the significant increase in net
sales, the Company has increasing sales of drugs made by other companies, and
distributed by Lannett. The margins on
these drugs are typically lower than margins on produced drugs. The Company also launched a greater amount of
new drugs in the prior year, and was able to take advantage of its new products
and the higher margin on these products in 2006. Depending on future market conditions for each
of the Companys products, changes in the future sales product mix may
occur. New drug approvals may increase
in future years. Currently, there are 18
products at the FDA review stage. These
changes may affect the gross profit percentage in future periods.
Research and development (R&D) expenses decreased by $643,033 or
8%. The decrease in R&D was
primarily due to a decrease in raw material consumption for production of
experimental batches.
Selling,
general and administrative expenses increased $2,334,382, or 20% from the prior
year. A significant portion of the
increase is due to expenses incurred in Fiscal 2007 that relate to marketing
agreements tied to sales of new generic products.
The
amortization expense relates to the March 23, 2004 exclusive marketing and
distribution rights agreement with JSP. For the remaining seven years of the
contract, the Company will incur annual amortization expense of approximately
$1,785,000.
On
March 31, 2007, the Company wrote down $7,775,890 of a note receivable
owed by Cody Laboratories, Inc. The
Company determined that the value of the note receivable was impaired, and on April 10,
2007, it was decided to complete the acquisition of Cody by forgiving a portion
of the loan. At that point, Cody owed
Lannett approximately $11.7 million, in the form of notes receivable and
prepayments on products and services.
The remaining value of the amounts owed, or $4.4 million was
approximately the net asset value of Cody at the time of the acquisition.
The
Note was determined to be uncollectible due to FDA reviews and operational
delays by Cody to return to operation.
In 2006, Cody received an FDA warning letter, and stopped operations to
remediate their facility. This
remediation occurred from the months of August 2006 through February 2007. Upon completion of the remediation, Cody
requested a future FDA inspection. The
timing of that inspection was, at that time, unknown, and Cody management was
unable to conclude as to the outcome of that inspection. With such a limited outlook, Cody management
suggested that the full note was not likely to be satisfied, and Lannett
management was not willing to loan further funds to Cody to keep it in
operation. Both companies agreed to
complete the acquisition for the value of the Codys net assets. The uncollected portion of debt was
extinguished prior to the acquisition.
Upon
acquisition, the fair value of Codys assets was added to the Companys
Consolidated Balance Sheets, and the results of operations were included in the
Consolidated Statements of Operations from the acquisition date forward. Due to the fact that most of the value of
Cody consisted of physical assets that were recently acquired as part of the
remediation, the fair value closely approximated the book value of net
assets. In accordance with the Financial
Accounting Standards Board Statement No. 141, Business Combinations,
measurement is based on the fair value of the consideration given or the fair
value of the asset (or net assets) acquired, whichever is more clearly evident
and, thus, more reliably measurable.
37
The Companys net loss for
Fiscal 2007 includes an income tax expense of $1,007,929, as compared to an
expense of $3,561,175 in Fiscal 2006. The Company has set up a valuation
allowance on the tax benefit from the write-off of a portion of the Cody loan described
above in Fiscal 2007. This has led to an
income tax expense despite of the net loss from operations.
The Company reported net
loss of $6,929,008 for Fiscal 2007, or $.29 basic and diluted loss per share,
compared to net income of $4,968,922 for Fiscal 2006, or $.21 basic and diluted
earnings per share.
Liquidity and Capital Resources
The
Company has historically financed its operations with cash flow generated from
operations, supplemented with borrowings from various government agencies and financial
institutions. At June 30, 2008,
working capital was $25,590,468, as compared to $22,034,947 at June 30,
2007, an increase of $3,555,521.
Net
cash provided by operating activities of $3,118,222 for the Fiscal year ended June 30,
2008 reflected cash provided from changes in operating assets and liabilities
of $3,855,513, partly offset by a net loss of $1,580,768 after adjusting
for non-cash items of $737,291. Significant changes in operating assets and
liabilities are comprised of:
1.
An increase
in trade accounts receivable (excluding the receivables related to the sales of
prenatal multivitamins with minerals) of $2,000,951 was due to a higher level
of sales at the end of Fiscal 2008, compared to the end of Fiscal 2007.
2.
A
decrease in inventory of $2,901,226 due to higher-than-usual inventories at June 30,
2007 reflecting purchases from Jerome
Stevens Pharmaceutical in the quarter ended June 30, 2007in response to
strong demand for Levothyroxine Sodium, Butalbital and Digoxin products.
3.
A decrease
in prepaid taxes of $1,594,748 due to the application of an overpayment of
taxes in Fiscal 2007 to taxes owed in Fiscal 2008.
4.
An
increase in accounts payable of $4,779,328 is due to the timing of payments at
the end of the month combined with increased spending on products for resale,
primarily Levothyroxine Sodium tablets.
5.
A
decrease in accrued expenses of $2,693,834 was due to a high level of accrual
for materials received at the end of Fiscal 2007 primarily related to
distributed products.
Net cash used in investing activities of $1,391,766 for the
twelve months ended June 30, 2008 reflected the purchase of property, plant and equipment
of $2,295,817, partially offset by $882,671 of net proceeds related to the sale
of the Companys marketable securities.
Net cash used in financing activities for the year ending June 30,
2008 was $662,085 primarily due to scheduled debt repayments of $701,131,
partially offset by $113,422 of proceeds from the issuance of stock in
connection with the Companys Employee Stock Purchase Plan. In addition, the Company withheld the
issuance of shares of stock with a fair value of $74,376 in connection with the
payment of withholding taxes owed by certain employees for vested restricted
stock.
During
Fiscal 2008, the Company issued restricted stock with a fair value of $300,090
to settle a liability for employee bonuses that had been earned during Fiscal
2007. This represented a non-cash transaction and is therefore not included on
the Consolidated Statement of Cash Flows for Fiscal 2008.
The Company has entered into agreements with various
government agencies and financial institutions to provide additional cash to
help finance the Companys operations.
These borrowing arrangements as of June 30, 2008 are as follows.
The Company had a $3,000,000 million line of credit
from Wachovia Bank, N.A. that bears interest at the prime interest rate less
0.25% (4.75% at June 30, 2008). The Company had $2,912,247 available under
this line of credit at June 30, 2008. The line of credit was renewed
and extended to November 30, 2009. The Company also
entered into a letter of credit in the amount of $917,000 of which $87,753 is
outstanding as of June 30, 2008.
38
The
Company borrowed $4,500,000 from the Philadelphia Industrial Development
Corporation (PIDC). The Company will pay a bi-annual interest payment at a rate
equal to two and one-half percent per annum. The outstanding principal
balance shall be due and payable 60 months from January 1, 2006.
The
Company borrowed $1,250,000 through the Pennsylvania Industrial Development
Authority (PIDA). The Company is required to make equal payments each
month for 180 months starting February 1, 2006 with interest of two and three-quarter
percent per annum. The PIDA Loan has
$1,075,732 outstanding as of June 30, 2008 with $73,132 currently due.
The
Company had borrowed $500,000 from the Pennsylvania Department of Community and
Economic Development Machinery and Equipment Loan Fund. The Company is required to make equal
payments for 60 months starting May 1, 2006 with interest of two and three
quarter percent per annum. As of June 30,
2008, $283,475 is outstanding and $100,614 is currently due.
In
April 1999, the Company entered into a loan agreement with the
Philadelphia Authority for Industrial Development (the Authority or PAID),
to finance future construction and growth projects of the Company. The
Authority issued $3,700,000 in tax-exempt variable rate demand and fixed rate
revenue bonds to provide the funds to finance such growth projects pursuant to
a trust indenture (the Trust Indenture).
A portion of the Companys proceeds from the bonds was used to pay for
bond issuance costs of approximately $170,000.
The Trust Indenture requires that the Company repay the Authority loan
through installment payments beginning in May 2003 and continuing through May 2014,
the year the bonds mature. The bonds bear interest at the floating variable
rate determined by the organization responsible for selling the bonds (the remarketing
agent). The interest rate fluctuates on
a weekly basis. The effective interest
rate at June 30, 2008 was 1.67%. At
June 30, 2008, the Company has $795,000 outstanding on the Authority loan,
of which $115,000 is classified as currently due. The remainder is classified as a long-term
liability. In April 1999, an irrevocable letter of credit of $3,770,000
was issued by Wachovia Bank, National Association (Wachovia) to secure payment
of the Authority Loan and a portion of the related accrued interest. At June 30, 2008, no portion of the
letter of credit has been utilized.
The
Company entered into agreements (the 2003 Loan Financing) with Wachovia to
finance the purchase of the Torresdale Avenue facility, the renovation and
setup of the building, and other anticipated capital expenditures. The Company, as part of the 2003 Loan
Financing agreement, is required to make equal payments of principal and
interest. The only portion of the loan
that remains outstanding at June 30, 2008 was the Equipment Loan which
consists of a term loan with a term of five years and had an outstanding
balance of $400,653. The terms of the
Equipment loan require that the Company meet certain financial covenants and
reporting standards, including the attainment of specific financial liquidity
and net worth ratios. As of June 30,
2008, the Company was not in compliance with one of these covenants, but
received a waiver from its lending institution with respect to that covenant as
of June 30, 2008. The Company shall
maintain and comply with a debt service coverage ratio of not less than 2 to 1
(to be measured quarterly). Debt service
coverage is defined as the ratio of earnings before interest, taxes,
depreciation and amortization (EBITDA) to the sum of interest expenses plus
scheduled current maturities of long-term debt and current capitalized lease
obligations. The terms of the waiver
require the Company shall at all times maintain deposit balances in excess of
$3,500,000 with the Bank. Additionally,
the Company shall now pay to the Bank an availability fee equal to 0.50% per
annum calculated daily, on the available but unused balance of the line of
credit instead of the previous 0.25% per annum rate. The financing facilities under the 2003 Loan
Financing bear interest at a variable rate equal to the LIBOR rate plus 150
basis points. We believe that it is
possible that we may not be able to comply with all of the covenants at each
measurement date during the twelve month period ending June 30, 2009;
therefore we reclassified the $80,132 long-term portion of the debt to current
portion of long-term debt. As of June 30,
2008, the interest rate for the 2003 Loan Financing (of which only the
Equipment loan remains) was 3.89%.
The
Company has executed Security Agreements with Wachovia, PIDA and PIDC in which
the Company has agreed to use substantially all of its assets to collateralize
the amounts due.
As
part of the acquisition of Cody Laboratories, the Company assumed the debt owed
to the Small Business Administration (SBA).
The loan requires fixed monthly payments through July 31,
2012.
39
The
effective interest rate at June 30, 2008 was 8.75%. As of June 30, 2008, $183,750 is
outstanding under the SBA loan, of which $54,025 is classified as currently
due. Cody has pledged inventory, accounts receivable and equipment as
collateral for this loan.
Also as a result of the
acquisition of Cody, the Company must now consolidate Cody LCI Realty, LLC, a
variable interest entity (VIE), for which Cody Labs is the primary
beneficiary. See Note 13 for Consolidation
of Variable Interest Entities. A
mortgage loan with First National Bank of Cody related to the purchase of land
and building by the VIE has also been consolidated in the Companys
consolidated balance sheets. The
mortgage has approximately 18 years of principal and interest payments
remaining, with monthly payments of $14,782, at a fixed rate of 7.5%, to be
made through June 2026. As of June 30,
2008, the Company has $1,740,224 outstanding under the mortgage loan, of which
$48,488 is classified as currently due.
In
July 2004, the Company received $500,000 of grant funding from the
Commonwealth of Pennsylvania, acting through the Department of Community and
Economic Development. The grant funding
program requires the Company to use the funds for machinery and equipment
located at their Pennsylvania locations, hire an additional 100 full-time
employees by June 30, 2006, operate its Pennsylvania locations a minimum
of five years and meet certain matching investment requirements. If the Company fails to comply with any of
the requirements above, the Company would be liable to repay the full amount of
the grant funding ($500,000). The
Company has recorded the unearned grant funds as a liability until the Company
complies with all of the requirements of the grant funding program As of June 30, 2008, the Company has had
preliminary discussions with the Commonwealth
of Pennsylvania to determine whether it will be required to repay any of
the funds provided under the grant funding program. Based on information available at June 30,
2008, the Company has recorded the grant funding as a long-term liability under
the caption of Unearned Grant Funds.
The following table
represents annual contractual obligations as of June 30, 2008:
|
|
Total
|
|
Less than 1
year
|
|
1-3 years
|
|
3-5 years
|
|
more than 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
$
|
8,978,834
|
|
$
|
711,780
|
|
$
|
5,401,420
|
|
$
|
562,026
|
|
$
|
2,303,608
|
|
Operating Leases
|
|
1,105,014
|
|
492,939
|
|
596,853
|
|
15,222
|
|
|
|
Purchase
Obligations
|
|
124,250,000
|
|
19,250,000
|
|
41,500,000
|
|
45,500,000
|
|
18,000,000
|
|
Interest on
Obligations
|
|
2,114,548
|
|
336,276
|
|
583,802
|
|
299,993
|
|
894,477
|
|
Total
|
|
$
|
136,448,396
|
|
$
|
20,790,995
|
|
$
|
48,082,075
|
|
$
|
46,377,241
|
|
$
|
21,198,085
|
|
The
amount of long-term debt due in less than one year in the above table is
$80,132 less than the current portion of long-term debt in the consolidated
balance sheet at June 30, 2008 because of our decision, as explained
above, to classify that amount as current.
Purchase
obligations relate to the Companys agreement with Jerome Stevens
Pharmaceuticals, Inc. See further
description in the Notes to the Consolidated Financial Statements.
Prospects for the Future
The
Company has several generic products under development. These products are all orally-administered,
topical and parenteral products designed to be generic equivalents to brand
named innovator drugs. The
40
Companys
developmental drug products are intended to treat a diverse range of
indications. As the oldest generic drug
manufacturer in the country, formed in 1942, Lannett currently owns several
ANDAs for products which it does not manufacture and market. These ANDAs are simply dormant on the Companys
records. Occasionally, the Company
reviews such ANDAs to determine if the market potential for any of these older
drugs has recently changed, so as to make it attractive for Lannett to
reconsider manufacturing and selling it.
If the Company makes the determination to introduce one of these
products into the consumer marketplace, it must review the ANDA and related
documentation to ensure that the approved product specifications, formulation
and other factors meet current FDA requirements for the marketing of that
drug. The Company would then redevelop
the product and submit it to the FDA for supplemental approval. The FDAs approval process for ANDA supplements
is similar to that of a new ANDA.
Generally, in these situations, the Company must file a supplement to
the FDA for the applicable ANDA, informing the FDA of any significant changes
in the manufacturing process, the formulation, or the raw material supplier of
the previously-approved ANDA.
A
majority of the products in development represent either previously approved
ANDAs that the Company is planning to reintroduce (ANDA supplements), or new
formulations (new ANDAs). The products
under development are at various stages in the development cycleformulation,
scale-up, and/or clinical testing.
Depending on the complexity of the active ingredients chemical
characteristics, the cost of the raw material, the FDA-mandated requirement of
bioequivalence studies, the cost of such studies and other developmental
factors, the cost to develop a new generic product varies and can range from
$100,000 to $1 million. Some of Lannetts
developmental products will require bioequivalence studies, while others will notdepending
on the FDAs Orange Book classification.
Since the Company has no control over the FDA review process, management
is unable to anticipate whether or when it will be able to begin producing and
shipping additional products.
In
addition to the efforts of its internal product development group, Lannett has
contracted with several outside firms for the formulation and development of
several new generic drug products. These
outsourced R&D products are at various stages in the development cycle formulation,
analytical method development and testing and manufacturing scale-up. These products are orally-administered solid
dosage products intended to treat a diverse range of medical indications. It is the Companys intention to ultimately
transfer the formulation technology and manufacturing process for all of these
R&D products to the Companys own commercial manufacturing sites. The Company initiated these outsourced
R&D efforts to complement the progress of its own internal R&D efforts.
Occasionally,
the Company will work on developing a drug product that does not require FDA
approval. Certain prescription drugs do
not require prior FDA approval before marketing. For instance, drugs listed as DESI drugs
(Drug Efficacy Study implementation) which are under evaluation by FDA,
Grandfathered Drugs, and prescription multivitamin drugs. A generic
manufacturer may sell products which are chemically equivalent to innovator
drugs, under FDA rules by simply performing and internally documenting the
normal research and development involved in bringing a new product to
market. Under this scenario, a generic
company can forego the time required for FDA ANDA approval.
More
specifically, certain products, marketed prior to the Federal Food, Drug, and
Cosmetic Act (FFDCA) may be considered GRASE or Grandfathered. GRASE products are those old drugs that do
not require prior approval from FDA in order to be marketed because they are
generally recognized as safe and effective based on published scientific literature. Similarly, Grandfathered products are those
which entered the market before the passage of the 1938 act or the 1962
amendments to the act. Under the
grandfather clause, such a product is exempted from the effectiveness
requirements [of the act] if its composition and labeling have not changed
since 1962 and if, on the day before the 1962 amendments became effective, it
was (1) used or sold commercially in the United States, (2) not a new
drug as defined by the act at that time, and (3) not covered by an
effective application.
The
Company signed supply and development agreements with Olive Healthcare, of
India; Orion Pharma, of Finland; Azad Pharma AG, of Switzerland, Unichem Inc.
of India, Wintac Limited of India, Pharmaseed of Israel and Banner Pharmacaps
and Catalent of the United States, and is in negotiations
41
with
companies in Israel and China for similar new product initiatives, in which
Lannett will market and distribute products manufactured by Lannett or by third
parties. Lannett intends to use its
strong customer relationships to build its market share for such products, and
increase future revenues and income.
The
majority of the Companys R&D projects are being developed in-house under
Lannetts direct supervision and with Company personnel. Hence, the Company does not believe that its
outside contracts for product development and manufacturing supply are material
in nature, nor is the Company substantially dependent on the services rendered
by such outside firms. Since the Company
has no control over the FDA review process, management is unable to anticipate
whether or when it will be able to begin producing and shipping such additional
products.
Lannett
may increase its focus on certain specialty markets in the generic
pharmaceutical industry. Such a focus is
intended to provide Lannett customers with increased product alternatives in
categories with relatively few market participants. While there is no guarantee that Lannett has
the market expertise or financial resources necessary to succeed in such a
market specialty, management is confident that such future focus will be well
received by Lannett customers and increase shareholder value in the long run.
The
Company plans to enhance relationships with strategic business partners,
including providers of product development research, raw materials, active
pharmaceutical ingredients as well as finished goods. Management believes that mutually beneficial
strategic relationships in such areas, including potential financing
arrangements, partnerships, joint ventures or acquisitions, could allow for
potential competitive advantages in the generic pharmaceutical market. The Company plans to continue to explore such
areas for potential opportunities to enhance shareholder value.
As
disclosed in Item 3. Legal Proceedings, the Company filed in June 2008
a declaratory judgment suit against KV Pharmaceuticals, DrugTech
Corp., and Ther-Rx Corp (collectively KV). The complaint sought declaratory
judgment for non-infringement and invalidity of certain patents owned by
KV. The complaint further sought declaratory judgment of anti-trust
violations and federal and state unfair competition violations for actions
taken by KV in securing and enforcing these patents. If KV were to prevail
in the litigation and the Company were subject to paying damages or were
prohibited from selling the Prenatal Multivitamin in the future, it could have
an adverse impact on the Company. Any
requirement to pay damages could adversely impact the companys cash flow and
results of operations.
ITEM
8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The
Consolidated Financial Statements and Report of the Independent Registered
Public Accounting Firm filed as a part of this Form 10-K are listed in the
Exhibit Index filed herewith.
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
42
ITEM
9A.
|
CONTROLS AND PROCEDURES
|
Disclosure
Controls and Procedures
We carried out an evaluation
under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, of the effectiveness
of the design and operation of our disclosure controls and procedures, as such
term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934 (the Exchange Act), as amended for financial reporting
as of June 30, 2008. Based on that evaluation, our chief executive officer
and chief financial officer concluded that these controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported as specified in Securities and Exchange Commission rules and
forms. There were no changes in these controls or procedures identified in
connection with the evaluation of such controls or procedures that occurred
during our last fiscal quarter, or in other factors that have materially
affected, or are reasonably likely to materially affect these controls or
procedures.
Our disclosure controls and
procedures are designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the rules and
forms of the Securities and Exchange Commission. These disclosure controls and
procedures include, among other things, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Managements
Report on Internal Control over Financial Reporting
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined
in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as
a process designed by, or under the supervision of, the chief executive officer
and chief financial officer and effected by the board of directors and
management 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 and
includes those policies and procedures that:
·
Pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
·
Provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance
with authorizations of our management and board of directors;
·
Provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
43
Our management assessed the
effectiveness of our internal control over financial reporting as of June 30,
2008. In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in
Internal Control-Integrated
Framework.
Based on our assessment, our
management believes that, as of June 30, 2008, our internal control over
financial reporting is effective.
ITEM 9B.
|
OTHER
INFORMATION
|
None.
44
PART III
ITEM
10.
|
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE
GOVERANCE
|
Directors and Executive Officers
The
directors and executive officers of the Company are set forth below:
|
|
Age
|
|
Position
|
Directors
:
|
|
|
|
|
William Farber
|
|
76
|
|
Chairman of the Board
|
Ronald A. West
|
|
74
|
|
Vice Chairman of the
Board, Director
|
Arthur P. Bedrosian
|
|
62
|
|
Director
|
Jeffrey Farber
|
|
48
|
|
Director, Interim Chairman
of the Board
|
Kenneth Sinclair
|
|
62
|
|
Director
|
Albert Wertheimer
|
|
66
|
|
Director
|
Myron Winkelman
|
|
70
|
|
Director
|
Officers:
|
|
|
|
|
Arthur P. Bedrosian
|
|
62
|
|
President and Chief
Executive Officer
|
Brian J. Kearns
|
|
42
|
|
Vice President of
Finance, Treasurer, Secretary and Chief Financial Officer
|
Bernard Sandiford
|
|
79
|
|
Vice President of
Operations
|
William Schreck
|
|
58
|
|
Vice President of
Logistics
|
Kevin Smith
|
|
48
|
|
Vice President of Sales
and Marketing
|
Ernest Sabo
|
|
60
|
|
Vice President of
Regulatory Affairs and Chief Compliance Officer
|
William Farber,
R.Ph.,
was elected as
Chairman of the Board of Directors in August 1991. On September 10, 2008, the Company
announced that William Farber has taken a temporary medical leave of absence
for health reasons. Jeffrey Farber has been appointed to serve as interim
chairman of the board. From April 1993
to the end of 1993, Mr. Farber was the President and a director of Auburn
Pharmaceutical Company. From 1990
through March 1993, Mr. Farber served as Director of Purchasing for
Major Pharmaceutical Corporation. From
1965 through 1990, Mr. Farber was the Chief Executive Officer of Michigan
Pharmacal Corporation. Mr. Farber
is a registered pharmacist in the State of Michigan.
Ronald A. West
was
elected a Director of the Company in January 2002. In September 2004,
Mr. West was elected Vice Chairman of the Board of Directors. Mr. West
is currently a Director of Beecher Associates, an industrial real estate
investment company. Prior to this, from 1983 to 1987, Mr. West,
member of the audit committee at Lannett, served as Chairman and Chief
Executive Officer of Dura Corporation, an original equipment manufacturer of
automotive products and other engineered equipment components. In 1987, Mr. West
sold his ownership position in Dura Corporation, at which time he retired from
active management
45
positions.
Mr. West was employed at Dura Corporation since 1969. Prior to this,
he served in various financial management positions with TRW, Inc., Marlin
Rockwell Corporation and National Machine Products Group, a division of
Standard Pressed Steel Company. Mr. West studied Business
Administration at Michigan State University and the University of Detroit.
Jeffrey Farber
was elected a Director of the Company in May 2006. On September 10, 2008, the Company
announced that William Farber has taken a temporary medical leave of absence
for health reasons. Jeffrey Farber has been appointed to serve as interim
chairman of the board. Jeffrey Farber
joined the Company in August 2003 as Secretary. For the past 13 years, Mr. Farber
has been President and the owner of Auburn Pharmaceutical (Auburn), a
national generic pharmaceutical distributor. Prior to starting Auburn, Mr. Farber
served in various positions at Major Pharmaceutical (Major), where he was
employed for over 15 years. At Major, Mr. Farber was involved in
sales, purchasing and eventually served as President of the mid-west division. Mr. Farber
also spent time working at Majors manufacturing division Vitarine
Pharmaceuticals where he served on its Board of Directors. Mr. Farber graduated from Western
Michigan University with a Bachelors of Science Degree in Business
Administration and participated in the Pharmacy Management Graduate Program at
Long Island University. Mr. Farber is the son of William Farber, the
Chairman of the Board of Directors and the principal shareholder of the
Company.
Kenneth Sinclair, Ph.D.
, was elected a Director of the Company in September 2005.
Dr. Sinclair is currently Professor of Accounting and Senior Advisor to
the College of Business and Economics Dean at Lehigh University, where he began
his academic career in 1972. Dr. Sinclair has been recognized for his
teaching innovation, held leadership positions with professional accounting
organizations and served on numerous academic and advisory committees. He has
received a number of awards and honors for teaching and service, and has
researched and written on a myriad of subjects related to accounting. Dr. Sinclair
earned a Bachelor of Business Administration degree in Accounting, a Master of
Science degree in accounting and a Doctorate Degree in Business Administration
from the University of Massachusetts.
Albert I. Wertheimer, Ph.D.,
was elected a Director of the Company in September 2004. Dr. Wertheimer has a long and
distinguished career in various aspects of pharmacy, health care, education and
pharmaceutical research. Since 2000, Dr. Wertheimer
has been a professor at the School of Pharmacy at Temple University, and
director of its Center for Pharmaceutical Health Services Research. From 1997 to 2000, Dr. Wertheimer was
Director of Outcomes Research and Management at Merck & Co., Inc. In addition to his academic responsibilities,
he is the author of 26 books and more than 380 journal articles. Dr. Wertheimer also provides consulting
services to institutions in the pharmaceutical industry. Dr. Wertheimers academic experience
includes professorships and other faculty and administrative positions at
several educational institutions, including the Medical College of Virginia,
St. Josephs University, Philadelphia College of Pharmacy and Science and the
University of Minnesota. Dr. Wertheimers
previous professional experience includes pharmacy services in commercial and
non-profit environments. Professor
Wertheimer is a licensed pharmacist in five states, and is a member of several
health associations, including the American Pharmacists Association and the
American Public Health Association. Dr. Wertheimer
is the editor of the Journal of Pharmaceutical Finance, Economic and Policy;
and he has been on the editorial board of the Journal of Managed Pharmaceutical
Care, Medical Care, and other healthcare journals. Dr. Wertheimer has a Bachelor of Science
Degree in Pharmacy from the University of Buffalo, a Master of Business
Administration from the State University of New York at Buffalo, a Doctorate
from Purdue University and a Post Doctoral Fellowship from the University of
London, St. Thomas Medical School.
Myron Winkelman, R.Ph.,
was elected a Director of the Company in June 2003. Mr. Winkelman has significant career
experience in various aspects of pharmacy and health care. He is currently President of Winkelman
Management Consulting (WMC), which provides consulting services to both
commercial and governmental clients. He
has served in this position since 1994. Mr. Winkelman
has recently managed multi-state drug purchasing initiatives for both Medicaid
and state entities. Prior to creating
WMC, he was a senior executive with ValueRx, a large pharmacy benefits manager,
and served for many years as a
46
senior
executive for the Revco, Rite Aid and Perry Drug chains. While at ValueRx, Mr. Winkelman
served on the Board of Directors of the Pharmaceutical Care Management
Association. He belongs to a number of
pharmacy organizations, including the Academy of Managed Care Pharmacy and the
Michigan Pharmacy Association. Mr. Winkelman is a registered pharmacist
and holds a Bachelor of Science Degree in Pharmacy from Wayne State University.
Arthur P. Bedrosian, J.D.
was promoted to President of the Company in May 2002 and CEO in January of
2006. Prior to this, he served as the
Companys Vice President of Business Development from January 2002 to April 2002. Mr. Bedrosian was elected as a Director
in February 2000 and served to January 2002. Mr. Bedrosian was re-elected a Director
in January 2006. Mr. Bedrosian
has operated generic drug manufacturing, sales, and marketing businesses in the
healthcare industry for many years.
Prior to joining the Company, from 1999 to 2001, Mr. Bedrosian
served as President and Chief Executive Officer of Trinity Laboratories, Inc.,
a medical device and drug manufacturer. Mr. Bedrosian
also operated Pharmaceutical Ventures Ltd, a healthcare consultancy, Pharmeral, Inc.
a drug representation company selling generic drugs and Interal Corporation, a
computer consultancy to Fortune 100 companies.
Mr. Bedrosian holds a Bachelor of Arts Degree in Political Science
from Queens College of the City University of New York and a Juris Doctorate
from Newport University in California.
Brian
J. Kearns
joined the
Company in March 2005 as Vice President of Finance, Treasurer and Chief
Financial Officer of the Company and was appointed Secretary in May 2005. Prior to joining the Company, Mr. Kearns
served as the Executive Vice President, Treasurer and Chief Financial Officer
of MedQuist Inc., a healthcare information management company, from 2000
through 2004. Prior to joining MedQuist,
Mr. Kearns was Vice President and Senior Health Care IT analyst at Banc of
America Securities from 1999 trough 2000.
Mr. Kearns also held various positions with Salomon Smith Barney
from 1994 through 1998, including Senior Analyst of Business Services Equity
Research. Prior to that, Mr. Kearns
held several financial management positions during his seven years at Johnson &
Johnson. Mr. Kearns holds a
Bachelor of Science degree in Finance from Lehigh University and a Master of
Business Administration degree from Rider University, where he matriculated
with distinction.
Bernard Sandiford
joined the Company in November 2002 as Vice President of
Operations. Prior to this, from 1998 to
2002, he was the President of Sandiford Consultants, a firm specializing in
providing consulting services to drug manufacturers for Good Manufacturing
Practices and process validations. His
previous employment included senior operating positions with Halsey Drug
Company, Barr Laboratories, Inc., Duramed Pharmaceuticals, Inc., and
Revlon Health Care Group. In addition to
these positions, Mr. Sandiford performed various consulting assignments
regarding Good Manufacturing Practices for several companies in the pharmaceutical
industry. Mr. Sandiford has a
Bachelor of Science Degree in Chemistry from Long Island University.
William Schreck
joined the Company in January 2003 as Materials Manager. In May 2004, he was promoted to Vice
President of Logistics. Prior to this,
from 1999 to 2001, he served as Vice President of Operations at Natures
Products, Inc., an international nutritional and over-the-counter drug
product manufacturing and distribution company; from 2001 to 2002 he served as
an independent consultant for various companies. Mr. Schrecks prior experience also
includes executive management positions at Ivax Pharmaceuticals, Inc., a
division of Ivax Corporation, Zenith-Goldline Laboratories and Rugby-Darby
Group Companies, Inc. Mr. Schreck
has a Bachelor of Arts Degree from Hofstra University.
Kevin Smith
joined the Company in January 2002 as Vice President of Sales and
Marketing. Prior to this, from 2000 to
2001, he served as Director of National Accounts for Bi-Coastal Pharmaceutical, Inc.,
a pharmaceutical sales representation company.
Prior to this, from 1999 to 2000, he served as National Accounts Manager
for Mova Laboratories Inc., a pharmaceutical manufacturer. Prior to this, from 1991 to 1999, Mr. Smith
served as National Sales Manager at Sidmak Laboratories, a pharmaceutical
manufacturer. Mr. Smith has
extensive experience in the generic sales market, and brings to the Company a
vast network of customers, including retail chain pharmacies, wholesale
distributors, mail-order wholesalers and generic
47
distributors. Mr. Smith has a Bachelor of Science
Degree in Business Administration from Gettysburg College.
Ernest
Sabo
joined Lannett
in March 2005 as Director of Quality Assurance. In May 2008, Mr. Sabo
was promoted to Vice President of Regulatory Affairs and Corporate Compliance
Officer. Prior to this, he served at Wyeth Pharmaceuticals as Manager of QA
Compliance from 2001 to 2003 and as Associate Director of QA Compliance from
2003 to 2005. Mr. Sabo held former positions as Director of Validation,
Quality Assurance, Quality Control and R&D at Delavau/Accucorp, Inc.
from 1993 thru 2001. He has over 30 years experience in the pharmaceutical
industry, his background spans from Quality Assurance, Quality Control,
Cleaning/Process Validation and Manufacturing turn-key operations. Mr. Sabo
holds a Bachelor of Arts in Biology from New Jersey State College.
To
the best of the Companys knowledge, there have been no events under any
bankruptcy act, no criminal proceedings and no judgments or injunctions that
are material to the evaluation of the ability or integrity of any director,
executive officer, or significant employee during the past five years.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of
the Securities Exchange Act of 1934 requires the Companys directors, officers,
and persons who own more than 10% of a registered class of the Companys equity
securities to file with the SEC reports of ownership and changes in ownership
of common stock and other equity securities of the Company. Officers, directors and greater-than-10%
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
Based
solely on review of the copies of such reports furnished to the Company or
written representations that no other reports were required, the Company
believes that during Fiscal 2008, all filing requirements applicable to its
officers, directors and greater-than-10% beneficial owners under Section 16(a) of
the Exchange Act were complied with, except that Form 4s
with respect to the September 18, 2007 restricted stock and
option grants to the named executive officers Directors
were filed late, and Form 4s with respect to a June 9, 2008 gift of
stock from William Farber and his wife Audrey Farber to their grandchildren was
filed late.
Code of Ethics and Financial Expert
The
Company has adopted the Code of Professional Conduct (the code of ethics), a
code of ethics that applies to the Companys Chief Executive Officer, Chief
Financial Officer, and Corporate Controller, and other finance organization
employees. The code of ethics is
publicly available on our website at www.lannett.com. If the Company makes any substantive amendments
to the finance code of ethics or grant any waiver, including any implicit
waiver, from a provision of the code to our Chief Executive Officer, Chief
Financial Officer, or Corporate Controller, we will disclose the nature of such
amendment or waiver on our website or in a report on Form 8-K.
The
Board of Directors has determined that Mr. West, current director of
Lannett as well as director of Beecher Associates, an industrial real estate
investment company, R&M Resources, an investment and consulting services
company and North East Staffing, Inc., an employee services company and
previously the Chief Executive Officer of Dura Corporation, is the audit
committee financial expert as defined in section 3(a)(58) of the Exchange Act
and the related rules of the Commission.
48
Table
of Contents
ITEM 11. EXECUTIVE COMPENSATION
The following table
summarizes all compensation paid to or earned by the named executive officers
of the Company for Fiscal 2008, Fiscal 2007 and Fiscal 2006.
Name and Principal
Position
(a)
|
|
Fiscal Year
(b)
|
|
Salary
(c)
|
|
Stock Awards
(e)
|
|
Option
Awards
(f)
|
|
Non-equity
incentive plan
compensation
(g)
|
|
All Other
Compensation
(i)
|
|
Total
(j)
|
|
Arthur P. Bedrosian (1)
|
|
2008
|
|
$
|
324,825
|
|
$
|
|
|
$
|
42,381
|
|
$
|
|
|
$
|
22,099
|
|
$
|
389,305
|
|
President
and Chief
Executive Officer
|
|
2007
|
|
301,016
|
|
122,234
|
|
158,303
|
|
43,358
|
|
34,159
|
|
659,070
|
|
|
|
2006
|
|
264,267
|
|
|
|
222,465
|
|
338,880
|
|
17,834
|
|
843,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Kearns
|
|
2008
|
|
210,361
|
|
|
|
28,254
|
|
|
|
18,460
|
|
$
|
257,075
|
|
Chief
Financial
Officer, Treasurer
|
|
2007
|
|
202,678
|
|
83,021
|
|
161,830
|
|
27,719
|
|
22,841
|
|
498,089
|
|
|
|
2006
|
|
185,480
|
|
|
|
|
|
240,000
|
|
9,685
|
|
435,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard Sandiford
|
|
2008
|
|
166,547
|
|
|
|
2,825
|
|
|
|
17,493
|
|
$
|
186,865
|
|
Vice
President of
Operations
|
|
2007
|
|
154,525
|
|
64,799
|
|
161,830
|
|
16,628
|
|
41,888
|
|
439,670
|
|
|
|
2006
|
|
143,016
|
|
|
|
34,877
|
|
145,000
|
|
41,014
|
|
363,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Schreck
|
|
2008
|
|
170,670
|
|
|
|
22,603
|
|
|
|
18,044
|
|
$
|
211,317
|
|
Vice
President of
Logistics
|
|
2007
|
|
162,871
|
|
68,021
|
|
161,830
|
|
16,724
|
|
25,334
|
|
434,780
|
|
|
|
2006
|
|
157,192
|
|
|
|
34,877
|
|
160,000
|
|
18,819
|
|
370,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Smith
|
|
2008
|
|
192,005
|
|
|
|
22,603
|
|
|
|
21,495
|
|
$
|
236,103
|
|
Vice
President of
Sales and Marketing
|
|
2007
|
|
183,230
|
|
61,490
|
|
161,830
|
|
18,814
|
|
24,076
|
|
449,440
|
|
|
|
2006
|
|
175,853
|
|
|
|
34,877
|
|
180,000
|
|
22,269
|
|
412,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Mr. Bedrosian
was promoted to President and Chief Executive Officer on January 3, 2006.
(i)
Supplemental All Other Compensation Table
The
following table summarizes the components of column (i) of the Summary
Compensation Table:
Name and Principal
Position
|
|
Fiscal Year
|
|
Company
Matched
Contributions to
401(k) Plan
|
|
Auto
Allowance
|
|
Pay in Lieu of
Vacation
|
|
Housing
Allowance
|
|
Excess Life
Insurance
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur P. Bedrosian
|
|
2008
|
|
$
|
8,195
|
|
$
|
13,500
|
|
$
|
|
|
$
|
|
|
$
|
404
|
|
$
|
22,099
|
|
President and Chief
|
|
2007
|
|
10,935
|
|
13,265
|
|
9,540
|
|
|
|
419
|
|
34,159
|
|
Executive Officer
|
|
2006
|
|
3,003
|
|
10,888
|
|
3,486
|
|
|
|
457
|
|
17,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Table of Contents
Brian Kearns
|
|
2008
|
|
7,590
|
|
10,800
|
|
|
|
|
|
70
|
|
18,460
|
|
Chief Financial
|
|
2007
|
|
12,222
|
|
10,559
|
|
|
|
|
|
60
|
|
22,841
|
|
Officer, Treasurer
|
|
2006
|
|
1,526
|
|
8,091
|
|
|
|
|
|
68
|
|
9,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard Sandiford
|
|
2008
|
|
6,693
|
|
10,800
|
|
|
|
|
|
|
|
17,493
|
|
Vice President of
|
|
2007
|
|
9,212
|
|
10,601
|
|
11,258
|
|
10,817
|
|
|
|
41,888
|
|
Operations
|
|
2006
|
|
5,146
|
|
10,214
|
|
5,226
|
|
20,428
|
|
|
|
41,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Schreck
|
|
2008
|
|
6,872
|
|
10,800
|
|
|
|
|
|
372
|
|
18,044
|
|
Vice President of
|
|
2007
|
|
9,382
|
|
10,589
|
|
5,095
|
|
|
|
268
|
|
25,334
|
|
Logistics
|
|
2006
|
|
6,604
|
|
9,000
|
|
2,942
|
|
|
|
273
|
|
18,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Smith
|
|
2008
|
|
7,889
|
|
13,500
|
|
|
|
|
|
106
|
|
21,495
|
|
Vice President of
|
|
2007
|
|
9,309
|
|
13,188
|
|
1,486
|
|
|
|
93
|
|
24,076
|
|
Sales and Marketing
|
|
2006
|
|
6,212
|
|
13,062
|
|
2,895
|
|
|
|
100
|
|
22,269
|
|
Aggregated
Options/SAR Exercises and Fiscal Year-end Options/SAR Values
GRANTS OF PLAN-BASED AWARDS
|
|
|
|
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
|
|
Estimated Future Payouts Under
|
|
All Other
Stock
Awards:
Number of
Shares of
|
|
All Other
Option
Awards:
Number of
Securities
|
|
Exercise
or Base
Price of
Option
|
|
Grant Date
Fair Value
of Stock and
|
|
|
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Equity Incentive Plan Awards
|
|
Stocks or
|
|
Underlying
|
|
Awards
|
|
Options
|
|
Name
|
|
Grant Date
|
|
($)
|
|
($)
|
|
($)
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Units (#)
|
|
Options (#)
|
|
($/sh)
|
|
Awards
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
(i)
|
|
(j)
|
|
(k)
|
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur P.
Bedrosian
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
$
|
4.03
|
|
$
|
105,535
|
|
President and Chief Executive Officer
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$
|
4.03
|
|
$
|
52,768
|
|
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,600
|
|
|
|
|
|
$
|
66,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Kearns
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$
|
4.03
|
|
$
|
52,768
|
|
Chief Financial Officer and Treasurer
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$
|
4.03
|
|
$
|
52,768
|
|
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,300
|
|
|
|
|
|
$
|
37,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard Sandiford
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$
|
4.03
|
|
$
|
52,768
|
|
Vice President of Operations
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$
|
4.03
|
|
$
|
52,768
|
|
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,300
|
|
|
|
|
|
$
|
37,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Schreck
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$
|
4.03
|
|
$
|
52,768
|
|
Vice President of Logistics
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$
|
4.03
|
|
$
|
52,768
|
|
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,300
|
|
|
|
|
|
$
|
37,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Smith
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$
|
4.03
|
|
$
|
52,768
|
|
Vice President of Sales and Marketing
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
$
|
4.03
|
|
$
|
52,768
|
|
|
|
9/18/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,300
|
|
|
|
|
|
$
|
37,479
|
|
Employment
Agreements
The
Company has entered into employment agreements with Arthur P. Bedrosian,
President and Chief Executive Officer, Brian Kearns, Chief Financial Officer
and Treasurer, Kevin Smith, Vice President of Sales and Marketing, and William
Schreck, Vice President of Logistics, (the Named Executives). Each of
the agreements provide for an annual base salary and eligibility to receive a
bonus. The salary and bonus amounts of the Named Executives are
determined by the Board of Directors.
50
Table
of Contents
Additionally,
the Named Executives are eligible to receive stock options, which are granted
at the discretion of the Board of Directors, and in accordance with the
Companys policies regarding stock option grants.
Under
the agreements, the Named Executive employees may be terminated at any time
with or without cause, or by reason of death or disability. In certain
termination situations, the Company is liable to pay severance compensation to
the Named Executive of between one year and three years.
Compensation
of Directors
DIRECTOR COMPENSATION
|
|
Fees
Earned
|
|
Stock
Awards
|
|
Options
Awards
|
|
Non-Equity
Incentive Plan
Compensation
|
|
Change in
Pension Value
and Nonqualified
Deferred
Compensation
|
|
All Other
Compensation
|
|
Total
|
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Farber
|
|
$
|
6,000
|
|
$
|
5,000
|
|
$
|
5,942
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
16,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald A. West
|
|
26,500
|
|
5,000
|
|
5,942
|
|
|
|
|
|
|
|
37,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey Farber
|
|
9,000
|
|
5,000
|
|
21,897
|
|
|
|
|
|
|
|
35,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth Sinclair
|
|
24,500
|
|
5,000
|
|
21,897
|
|
|
|
|
|
|
|
51,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Albert Wertheimer
|
|
28,000
|
|
5,000
|
|
18,839
|
|
|
|
|
|
|
|
51,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Myron Winkelman
|
|
16,000
|
|
5,000
|
|
5,942
|
|
|
|
|
|
|
|
26,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPENSATION
DISCUSSION AND ANALYSIS
Overview of
Our Compensation Program
A fundamental goal of our
compensation program is to maximize stockholder value. In order to accomplish
this goal, we must attract and retain talented and capable executives, and we
must provide those executives with incentives that motivate and reward them for
achieving Lannetts short and longer-term goals. To this end, our executive
compensation is guided by the following key principles:
·
that executive
compensation should depend upon group and individual performance factors;
·
that the
interests of executives should be closely aligned with those of stockholders
through equity-based compensation; and
·
that
compensation should be appropriate and fair in comparison to the compensation
provided to similarly situated executives within the pharmaceutical industry
and within other publicly-traded companies similar in market capitalization to
Lannetts.
Important to our
compensation program are the decisions of, and guidance from, the Compensation
Committee of our Board of Directors. The Compensation Committee (which we refer
to, for purposes of this analysis, as the Committee) is composed entirely of
directors who are independent of Lannett under the independence standards
established by the
51
Table of Contents
American Stock Exchange, the
securities exchange where our common stock is traded. The Committee operates
pursuant to a written charter adopted by the Board. If you would like to review
the Committees charter, it is available to any stockholder who requests a copy
from our Chief Financial Officer, at 9000 State Road, Philadelphia,
Pennsylvania 19136.
The Committee has the
authority and responsibility to establish and periodically review our executive
compensation principles, described above. Importantly, the Committee also has
sole responsibility for approving the corporate goals and objectives upon which
the compensation of the chief executive officer (the CEO) is based, for
evaluating the CEOs performance in light of these goals and objectives, and
for determining the CEOs compensation, including his equity-based
compensation.
The Committee also reviews
and approves the recommendations of the CEO with regard to the compensation and
benefits of other executive officers. In accomplishing this responsibility, the
Committee meets regularly with the CEO, approves cash and equity incentive
objectives of the executive officers, reviews with the CEO the accomplishment
of these objectives and approves the base salary and other elements of
compensation for the executive officers. The Committee has full discretion to
modify the recommendations of the CEO in the course of its approval of
executive officer compensation.
The Committee also annually
reviews recommendations from their consultant, and makes recommendations to the
Board about, the compensation of non-employee directors.
During Fiscal 2007, the
Committee recommended the adoption of a new Incentive Plan to supplement our
existing stock option plans. The Incentive Plan was approved by our
stockholders in January 2007. The Incentive Plan provides for the grant of
various equity awards, including stock options and restricted stock, to Lannett
employees and directors. The Committee is responsible for administering this
Plan and it has sole authority to make grants to the CEO or any other executive
officer.
In conjunction with its
responsibilities related to executive compensation, the Committee also oversees
the management development process, reviews plans for executive officer
succession and performs various other functions.
The Committee consults as
needed with an outside compensation consulting firm retained by the Committee.
As it makes decisions about executive compensation, the Committee obtains data
from its consultant regarding current compensation practices and trends among
United States companies in general and pharmaceutical companies in particular,
and reviews this information with its consultant. During Fiscal 2007, the
Committee was advised by Mercer Human Resources Consulting, a global human
resources consulting firm. In the future, the Committee is expected to use
Mercer or a similar firm as a consultant as needed. In addition, the Chairman
of the Committee is in contact with management outside of Committee meetings
regarding matters being considered or expected to be considered by the Committee.
The individuals who served
as Chief Executive Officer and Chief Financial Officer during Fiscal 2008, as
well as the other individuals included in the Summary Compensation Table on page 48,
are referred to as the named executive officers.
Our Fiscal
2008 Compensation Program
In Fiscal 2008, the
Committees approach to compensation was intended to focus our executives on
accomplishing our short and longer-term objectives, and it had as its ultimate
object sustained growth in stockholder value. This approach was intended to
compensate executives at levels at or near the median levels of compensation
offered by other pharmaceutical companies similar in size to Lannett and with
whom we compete.
In making decisions about
the elements of Fiscal 2008 compensation, the Committee not only considered
available market information about each element but also considered aggregate
compensation for each executive. Base salary provided core compensation to
executives, but it was accompanied by:
·
the potential
for incentive-based cash compensation based upon our attainment of Fiscal 2008
operating income, other targeted corporate goals and individual or departmental
objectives,
52
Table of Contents
·
various forms
of equity compensation, including some grants based upon Fiscal 2008 sales
growth results and upon our return on invested capital results,
·
various
benefits and perquisites, and
·
the potential
for post-termination compensation under certain circumstances.
Summary of Fiscal 2008 Compensation Elements
The
table below provides detailed information regarding each element of the Fiscal
2007 compensation program.
|
|
Compensation Element Overview
|
|
Purpose of the Compensation Element
|
|
|
|
|
|
Base
Salary
|
|
Base salary pays for
competence in the executive role. An executives salary level depends on the
decision making responsibilities, experience, work performance, achievement
of key goals and team building skills of each position, and the relationship
to amounts paid to other executives at peer companies.
|
|
To provide competitive
fixed compensation based on sustained performance in the executives role and
competitive market practice.
|
|
|
|
|
|
Short-
Term
Incentives
|
|
Annual
Incentive Bonus Plan (AIBP)
The AIBP program rewards with cash awards for annual achievement of
overall corporate objectives, and specific individual or departmental
operational objectives. In Fiscal 2008, objectives for the Officers
were tied to Lannetts achievement of operating income targets, other
targeted corporate goals and individual objectives.
|
|
To motivate and focus our
executive team on the achievement of our annual performance goals.
|
53
Table of Contents
|
|
Compensation Element Overview
|
|
Purpose of the Compensation Element
|
|
|
|
|
|
Long-
Term Incentives
|
|
Stock
Options
Stock options
reward sustained stock price appreciation and encourage executive retention
during a three-year vesting term and a ten-year option life.
Restricted
Stock
Restricted stock
rewards sustained stock price appreciation and encourages executive retention
during its three-year vesting term.
The value of participants
restricted stock increases and decreases according to Lannetts stock price
performance during the vesting period and thereafter.
|
|
We strive to deliver a
balanced long- term incentive portfolio to executives, focusing on
(a) share price appreciation, (b) retention, and (c) internal
financial objectives.
The primary objectives of
the overall design are:
to align management
interests with those of stockholders
to increase managements
potential for stock ownership opportunities (all awards are earned in shares)
to attract and retain
excellent management talent, and
to reward growth of the
business, increased profitability, and sustained stockholder value.
|
|
|
|
|
|
|
|
Compensation Element Overview
|
|
Purpose of the Compensation Element
|
|
|
|
|
|
Benefits
|
|
In
General
Executives
participate in employee benefit plans available to all employees of Lannett,
including health, life insurance and disability plans. The cost of these
benefits is partially borne by the employee, but mostly paid by the Company.
|
|
These benefits are
designed to attract and retain employees and provide security for their
health and welfare needs. We believe that these benefits are reasonable,
competitive and consistent with Lannetts overall executive compensation
program.
|
54
Table of Contents
|
|
401(k) Plan
Executives may
participate in Lannetts 401(k) retirement savings plan, which is
available to all employees. In calendar 2006, the Company matched employees
contributions to the plan, on a dollar for dollar basis, up to 3% of their
base salary, subject to regulatory limits. Beginning in calendar 2007,
Lannett began matching contributions, at a rate of $.50 on the dollar up to
8% of base salary.
Life
Insurance
Lannett provides
life insurance benefits to all employees. The coverage amount for executives
is one times base compensation up to a limit of $115,000 and premiums paid
for coverage above $50,000 are treated as imputed income to the executive.
Disability
Insurance
Lannett provides short-term and long-term disability insurance to employees
which would, in the event of disability, pay an employee 60% of his or her
base salary with limits.
|
|
|
|
|
Compensation Element Overview
|
|
Purpose of the Compensation Element
|
|
|
|
|
|
Perquisites
|
|
Lannett does not utilize
perquisites or personal benefits extensively. The few perquisites that are
provided complement other compensation vehicles and enable the Company to
attract and retain key executives. These perquisites include
automobile allowances in various amounts to
key executives.
|
|
We believe these benefits
better allow us to attract and retain superior employees for key positions.
|
|
|
Compensation Element Overview
|
|
Purpose of the Compensation Element
|
|
|
|
|
|
Post-Termination
Pay
|
|
Severance
Plan
Lannetts Severance
Pay Plan is designed to pay severance benefits to an executive for a
qualifying separation. For the Chief Executive Officer, the Severance Pay
Plan provides for a payment of three times the sum of base salary plus a pro rated
annual cash bonus for the current year calculated as if all targets and goals
are achieved. For the other named executive officers, the Severance Pay Plan
provides for a payment of eighteen months of base salary plus a pro rated
annual cash bonus for the current year calculated as if all targets and goals
are achieved.
|
|
The Severance Pay Plan is
intended (1) to allow executives to concentrate on making decisions in
the best interests of Lannett (or any successor organization in the event
that a change of control is to occur), and (2) generally alleviate an
executives concerns about the loss of his or her position without cause.
|
55
Table of Contents
The use of the above
compensation tools enables Lannett to reinforce its pay for performance
philosophy as well as to strengthen its ability to attract and retain high-performing
executive officers. The Committee believes that this combination of programs
provides an appropriate mix of fixed and variable pay, balances short-term
operational performance with long-term stockholder value creation, and
encourages executive recruitment and retention in a high-performance culture.
Market Data and Our Peer Group
In determining 2008
compensation for the named executive officers, the Committee relied on market
data provided by its consultant. This information was principally related to a
group of 13 peer companies similar in size to Lannett with median revenues of
$40 million to $133 million (we refer to this group of companies as the Peer
Group). Information on these companies was derived from two sources: (1) the
consultant and broader market survey data analysis, and (2) publicly-available
information appearing in the proxy statements of these companies. The members
of the Peer Group were:
Bradley Pharmaceutical
|
|
|
|
|
|
|
|
|
|
Savient Pharm. Inc.
|
|
|
|
|
|
|
|
|
|
Hi Tech Pharm. Co. Inc.
|
|
|
|
|
|
|
|
|
|
Quigley Corp.
|
|
|
|
|
|
|
|
|
|
Noven Pharmaceuticals Inc.
|
|
|
|
|
|
|
|
|
|
Viropharma Inc.
|
|
|
|
|
|
|
|
|
|
Balchem Corp.
|
|
|
|
|
|
|
|
|
|
Orasure Technologies Inc.
|
|
|
|
|
|
|
|
|
|
Interpharm Holdings Inc
|
|
|
|
|
|
|
|
|
|
Able Laboratories Inc
|
|
|
|
|
|
|
|
|
|
Caraco Pharm. Labs
|
|
|
|
|
|
|
|
|
|
Neogen Corp.
|
|
|
|
|
|
|
|
|
|
Akorn Inc.
|
|
|
|
|
The Committee plans to
evaluate the Peer Group periodically and revise it as necessary to ensure that
it continues to be appropriate for benchmarking our executive compensation
program.
Base
Salary
Base salaries for the named
executive officers are intended, in general, to approach median salaries for
similarly situated executives among Peer Group companies. A number of
additional factors are considered, however, in determining base salary, such as
the executives individual performance, his or her experience, competencies,
skills, abilities, contribution and tenure, internal compensation consistency,
the need to attract new, talented executives, and the Companys overall annual
budget. Base salaries are generally reviewed on an annual basis.
* The 2008 salaries for
Arthur Bedrosian, Lannetts CEO, and for Brian Kearns, Lannetts CFO, were
lower than the median for comparable positions among members of the Peer Group
and the survey data. Base salaries for all remaining named executive officers
were lower than the median for comparable positions among members of the Peer
Group, but higher than the median for the survey data.
56
Table of Contents
Base salary increases were
granted to Mr. Bedrosian for $14,310 effective on January 1, 2008, Mr. Kearns
for $8,742 effective on September 2, 2007, Mr. Smith for $9,935
effective on September 2, 2007, Mr. Schreck for $8,831 effective on September 2,
2007, and Mr. Sandiford for $4,878 effective on September 2, 2007,
based on their performance.
Fiscal 2008 Annual Incentive Bonus Plan
Design
In November 2006, the
Committee approved the 2007 Annual Incentive Bonus Plan (or AIBP) program.
This program allowed executive officers the opportunity to earn cash awards
upon the accomplishment of the Fiscal 2008 operating income goal, other
targeted corporate goals and a number of individual objectives. The relative
weighting of these objectives for each executive was fifty percent (50%) for
operating income, twenty-five percent (25%) for other targeted corporate goals,
twenty percent (20%) for individual objectives and five percent (5%) based on
CEO and Committee discretion. For the CEO, the five percent (5%)
discretionary portion will be determined by the Committee.
Based on market data
provided by its consultant, and considering the relatively low base salaries of
the named executive officers, the Committee formulated potential AIBP awards
which exceeded the 50th percentile among Peer Group companies, expressed
as percentages of base salary. Actual payouts depended upon the degree to which
objectives were accomplished as well as the weight accorded to each objective,
as described above. The table below shows the potential payout amounts for each
of the named executive officers, expressed as percentages of base salary.
Performance
Level
|
|
Arthur
Bedrosian
|
|
Brian
Kearns
|
|
Bernard
Sandiford
|
|
William
Schreck
|
|
Kevin
Smith
|
|
Superior Level
|
|
120-150%
|
|
120-150%
|
|
100-125%
|
|
100-125%
|
|
100-125%
|
|
Goal Level
|
|
100-120%
|
|
100-120%
|
|
75-100%
|
|
75-100%
|
|
75-100%
|
|
Threshold Level
|
|
50-100%
|
|
50-100%
|
|
30-75%
|
|
30-75%
|
|
30-75%
|
|
The Committee also
determined that, if results for any objectives were between the minimum and
maximum of the ranges, the Committee would determine appropriate payout
percentage.
As discussed above, each
named executive officers objectives for Fiscal 2008 included Company operating
income targets and other targeted corporate goals. The Committee reviewed and
approved these targets following discussions with management, a review of our
historical results, consideration of the various circumstances facing the
Company during Fiscal 2008 and taking into account the expectations of our
annual plan. The Fiscal 2008 operating income and other corporate goals AIBP
targets approved by the Committee are detailed in the table below.
Objective
|
|
Superior
|
|
Goal
|
|
Target
|
|
Operating Income*
|
|
$3.5 M
|
|
$3.0 M
|
|
$2.5 M
|
|
R&D Submissions
|
|
11
|
|
10
|
|
9
|
|
R&D Acceptances
|
|
9
|
|
8
|
|
7
|
|
R&D Launches
|
|
8
|
|
7
|
|
6
|
|
*
For purposes of determining achievement of the AIBP targets, these
measures exclude certain categories of non-recurring items that the Committee
believes do not reflect the performance of Lannetts core continuing
operations.
Operational objectives for Mr. Bedrosian
related to finalizing a production and sales contract with acceptable returns
and a successful launch of a specific new product. Mr. Kearnss objectives
related to achieving cash flow targets, establishing internal controls,
developing and achieving SAP implementation. Objectives for Mr. Smith
included achieving sales targets and margin targets in addition to obtaining
new customers in new channels and reducing short dated goods in inventory. For Mr. Schreck,
the objectives included reducing obsolete inventory and utilizing SAP more
efficiently along with the
57
Table of Contents
warehouse relocation. Mr. Sandifords
objectives related to assisting Cody achieve Divisional goals, zero 483
deficiencies and no batch rejections.
All payouts to executive
officers under the 2008 AIBP were contingent upon the Committees review and
certification of the degree to which Lannett achieved the 2008 AIBP objectives,
and upon the Committees certification of the degree to which individual
objectives had been achieved. The program provided that payout for any
objective would be limited to 20% of the actual operating income attained by
Lannett.
The 2008 AIBP program
provided that the Committee could, in its discretion: modify, amend, suspend or
terminate the Plan at any time. The Committee did not take any of these actions
in connection with the 2008 AIBP program.
Results
In September 2008, the
Committee reviewed and certified Lannetts Fiscal 2008 results for purposes of
the AIBP program, determining that the objectives for operating income and other
corporate objectives were not met at the goal level. The Committee also
reviewed and certified the performance of the executive officer individual
objectives, determining that these objectives were achieved to varying degrees.
The named executive officers received no awards in connection with the 2008
AIBP program.
2008 Long Term Incentive Awards (LTIA)
Design
The Committee believes that
long-term equity incentives are an important part of a complete compensation
package because they focus executives on: increasing the value of the assets
that are entrusted to them by the stockholders, achieving Lannetts long-term
goals, aligning the interests of executives with those of stockholders,
encouraging sustained stock performance and helping to retain executives.
Prior to the approval of the
Incentive Plan by stockholders in 2007, Lannetts equity grants consisted only
of stock options. The Incentive Plan expanded the types of equity vehicles
which the Committee could grant to executives by including restricted stock. In
September 2008, the Committee granted both stock options and restricted
stock to executives, each designed to emphasize particular elements of the
Companys immediate and long-term objectives and to retain key executives. We
refer to these grants collectively as the 2008 Long Term Incentive Awards
(LTIA). The types of grants were:
·
stock options,
becoming exercisable over three years (approximately one-third increments on
each anniversary) from the date of the grant and having a total term of ten
years,
·
shares of
restricted stock, vesting over three years (approximately one-third increments
on each anniversary) from the date of grant,
The Committee assessed the
appropriate overall value of these equity grants to executives by reviewing
survey results and other market data provided by its consultant. This
information included the value of equity grants made to similarly situated
executives among the Peer Group. The overall value of LTIA grants for each
executive was determined by the Committee with assistance from their
consultant.
In determining the overall
value of LTIA grants, the Committee also considered the potential value of
equity compensation relative to other elements of compensation for each named
executive officer. It likewise assessed the appropriate distribution of equity
value among the grant types, as well as the corporate objectives each type of
grant was intended to encourage.
58
Table of Contents
Stock Options and Restricted Stock
The stock options and
restricted stock granted as part of the 2008 LTIA were designed to reward
sustained stock price appreciation and to encourage executive retention during
a three-year vesting term and, in the case of stock options, a ten-year option
life. Stock option and restricted stock awards are intended to align
executives motivation with stockholders best interests. Grants of stock
options were not contingent upon any conditions. They are to be granted
independent of organizational performance. Stock options become exercisable
approximately in one-third increments on the first three anniversaries of the
date of grant. Restricted stock was contingent upon Lannett achieving annual
sales growth and return on invested capital goals. Restricted stock will
vest in approximately one-third increments on the first three anniversaries of
the date of the grant. The Committee determined for each executive
officer a target number of options and restricted shares and those targets
appear in the tables below.
Restricted Stock Targets:
Performance Level
|
|
Bedrosian
|
|
Kearns
|
|
Sandiford
|
|
Schreck
|
|
Smith
|
|
Superior
|
|
16,600
|
|
8,300
|
|
8,300
|
|
8,300
|
|
8,300
|
|
Goal
|
|
12,500
|
|
6,600
|
|
6,600
|
|
6,600
|
|
6,600
|
|
Threshold
|
|
8,300
|
|
5,000
|
|
5,000
|
|
5,000
|
|
5,000
|
|
Stock Option Targets:
Range
|
|
Bedrosian
|
|
Kearns
|
|
Sandiford
|
|
Schreck
|
|
Smith
|
|
High
|
|
50,000
|
|
25,000
|
|
25,000
|
|
25,000
|
|
25,000
|
|
Medium
|
|
37,500
|
|
20,000
|
|
20,000
|
|
20,000
|
|
20,000
|
|
Low
|
|
25,000
|
|
15,000
|
|
15,000
|
|
15,000
|
|
15,000
|
|
Results
In September 2008, the Committee reviewed
and certified the Fiscal 2008 financial results for purposes of the Restricted
Share Grants and determined that the performance levels required for award
grant purposes had not been achieved and therefore no Restricted Share Grants
would be awarded. The Lannett Long Term Incentive Plan includes a provision for
the granting of Stock Options, on a Committee discretionary basis, as an
executive retention and incentive instrument. As a result of the Committees
review, the Committee granted stock options totaling 100,000 shares to be
apportioned in the following manner;
Stock Option Awards:
Awards
|
|
Bedrosian
|
|
Kearns
|
|
Sandiford
|
|
Schreck
|
|
Smith
|
|
Options
|
|
30,000
|
|
20,000
|
|
2,000
|
|
16,000
|
|
16,000
|
|
Restricted Shares
|
|
|
|
|
|
|
|
|
|
|
|
Perquisites and Other Benefits
We provide named executive
officers with perquisites and other personal benefits that we believe are
reasonable and consistent with our overall compensation program to better
enable us to attract and retain superior employees for key positions. The
Committee periodically reviews the levels of perquisites and other personal
benefits provided to named executive officers.
During calendar year 2006,
Lannett matched employees contributions to the Lannett Company, Inc. 401(k) Retirement
Savings Plan on a dollar for dollar basis up to 3% of an employees base
salary, subject to regulatory limits. Contributions by the named executive
officers were matched in this way, subject to the limitations of the Plan and
applicable law. Beginning in calendar year 2007 and continuing to present,
Lannett matched contributions to the 401(k) plan on a fifty cents
59
Table of Contents
on the dollar basis up to 8%
of the contributing employees base salary. The named executive officers are
also provided with car allowances, for which the taxes are also paid by the
Company.
Lannett provides life
insurance for executive officers which would, in the event of death, pay
$115,000 to designated beneficiaries. Premiums paid for coverage above $50,000
are treated as imputed income to the executive. Lannett also provides
short-term and long-term disability insurance which would, in the event of
disability, pay the executive officer sixty percent (60%) of his base salary up
to the plan limits of $2,000/week for short term disability and $10,000/month
for long term disability. Executive officers participate in other qualified
benefit plans, such as medical insurance plans, in the same manner as all other
employees.
Attributed costs of the
personal benefits available to the named executive officers for the fiscal year
ended June 30, 2008, are included in column (i) of the Summary
Compensation Table on page 48.
Severance
and Change of Control Benefits
We believe that reasonable
severance and change in control benefits are necessary in order to recruit and
retain qualified senior executives and are generally required by the
competitive recruiting environment within our industry and the marketplace in
general. These severance benefits reflect the fact that it may be difficult for
such executives to find comparable employment within a short period of time,
and are designed to alleviate an executives concerns about the loss of his or
her position without cause. We also believe that a change in control
arrangement will provide an executive security that will likely reduce the
reluctance of an executive to pursue a change in control transaction that could
be in the best interests of our stockholders. Lannetts Severance Pay Plan is
designed to pay severance benefits to an executive for a qualifying separation.
For the Chief Executive Officer, the Severance Pay Plan provides for a payment
of three times the sum of base salary plus a pro rated annual cash bonus for
the current year calculated as if all targets and goals are achieved. For the
other named executive officers, the Severance Pay Plan provides for a payment
of eighteen months of base salary plus a pro rated annual cash bonus for the
current year calculated as if all targets and goals are achieved.
Timing of
Committee Meetings and Grants; Option and Share Pricing
The Committee typically
holds four regular meetings each year, and the timing of these meetings is
generally established during the year. The Committee holds special meetings
from time to time as its workload requires. Historically, annual grants of
equity awards have typically been accomplished at a meeting of the Committee in
September of each year. Individual grants (for example, associated with
the hiring of a new executive officer or promotion to an executive officer
position) may occur at any time of year. We expect to coordinate the timing of
equity award grants to be made within thirty (30) days of Lannetts earnings
release announcement following the completion of the fiscal year. The exercise
price of each stock option and restricted share awarded to our executive
officers is the closing price of our common stock on the date of grant.
Tax and
Accounting Implications
Deductibility
of Executive Compensation
Section 162(m) of
the Internal Revenue Code of 1986, as amended, precludes the deductibility of
an executive officers compensation that exceeds $1.0 million per year unless
the compensation is paid under a performance-based plan that has been approved
by stockholders. The Committee believes that it is generally preferable to
comply with the requirements of Section 162(m) through, for example,
the use of our Incentive Plan. However, to maintain flexibility in compensating
executive officers in a manner that attracts, rewards and retains high quality
individuals, the Committee may elect to provide compensation outside of those
requirements when it deems appropriate. The Committee believes that stockholder
interests are best served by not restricting the Committees discretion in this
regard, even though such compensation may result in non-deductible compensation
expenses to the Company.
60
Table
of Contents
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee has reviewed and discussed the Compensation
Discussion and Analysis set forth above with management. Taking this review and
discussion into account, the undersigned Committee members recommended to the
Board of Directors that the Compensation Discussion and Analysis be included in
this annual report on Form 10-K.
The Compensation Committee
Ronald West (Chair)
Albert Wertheimer
Myron Winkelman
61
Table
of Contents
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth, as of June 30, 2008, information regarding the
security ownership of the directors and certain executive officers of the
Company and persons known to the Company to be beneficial owners of more than
five (5%) percent of the Companys common stock:
|
|
|
|
Excluding Options
|
|
Including Options (*)
|
|
Name and Address of
Benefical Owner
|
|
Office
|
|
Number of
Shares
|
|
Percent of
Class
|
|
Number of
Shares
|
|
Percent of
Class
|
|
Directors/Executive Officers
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Farber
9000 State Road
Philadelphia, PA 19136
|
|
Chairman of the Board
|
|
8,605,029
|
(1)
|
35.44
|
%
|
8,694,196
|
(2)
|
34.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald A.
West
9000 State Road
Philadelphia, PA 19136
|
|
Vice Chairman of the
Board, Director
|
|
7,310
|
|
0.03
|
%
|
58,925
|
(3)
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
Farber
9000 State Road
Philadelphia, PA 19136
|
|
Interim Chairman of the
Board, Director
|
|
5,157,920
|
(4)
|
21.24
|
%
|
5,195,420
|
(5)
|
20.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth
Sinclair
9000 State Road
Philadelphia, PA 19136
|
|
Director
|
|
0
|
|
0.00
|
%
|
15,000
|
(6)
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Albert
Wertheimer
9000 State Road
Philadelphia, PA 19136
|
|
Director
|
|
1,000
|
|
0.00
|
%
|
22,667
|
(7)
|
0.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Myron
Winkelman
9000 State Road
Philadelphia, PA 19136
|
|
Director
|
|
1,000
|
|
0.00
|
%
|
37,667
|
(8)
|
0.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur
Bedrosian
9000 State Road
Philadelphia, PA 19136
|
|
President and Chief
Executive Officer
|
|
507,783
|
(9)
|
2.09
|
%
|
712,349
|
(10)
|
2.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Kearns
9000 State Road
Philadelphia, PA 19136
|
|
Chief Financial Officer
|
|
6,727
|
|
0.03
|
%
|
111,727
|
(11)
|
0.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard
Sandiford
9000 State Road
Philadelphia, PA 19136
|
|
Vice President of
Operations
|
|
4,388
|
|
0.02
|
%
|
55,268
|
(12)
|
0.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Schreck
9000 State Road
Philadelphia, PA 19136
|
|
Vice President of
Logistics
|
|
4,584
|
|
0.02
|
%
|
35,329
|
(13)
|
0.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Smith
9000 State Road
Philadelphia, PA 19136
|
|
Vice President of Sales
and Marketing
|
|
3,933
|
|
0.02
|
%
|
88,693
|
(14)
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
David Farber
6884 Brook Hollow Ct
West Bloomfield, MI 48322
|
|
|
|
5,167,408
|
(15)
|
21.28
|
%
|
5,189,908
|
(16)
|
20.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Farber
Properties
1775 John R Road
Troy, MI 48083
|
|
|
|
5,000,000
|
(17)
|
20.59
|
%
|
5,000,000
|
|
19.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
All
directors and
executive officers as a group
(11 persons)
|
|
|
|
14,450,882
|
|
59.51
|
%
|
15,049,741
|
|
60.12
|
%
|
62
Table
of Contents
(1) Includes 207,870 shares owned jointly
by William Farber and his spouse Audrey Farber.
(2) Includes 37,500 vested options to
purchase common stock at an exercise price of $7.97 per share, 25,000 vested
options to purchase common stock at an exercise price of $17.36, 25,000 vested
options to purchase common stock at an exercise price of $16.04 and 1,667
vested options to purchase common stock at an exercise price of $6.89.
(3) Includes 9,948 vested options to
purchase common stock at an exercise price of $7.97 per share, 15,000 vested
options to purchase common stock at an exercise price of $17.36 per share,
25,000 vested options to purchase common stock at an exercise price of $16.04
and 1,667 vested options to purchase common stock at an exercise price of
$6.89.
(4)
Includes
5,000,000 shares held by Farber Properties Group LLC. Farber Properties Group, LLC is managed and
jointly owned by Jeffrey Farber and David Farber. Also includes 10,800 shares owned by Jeffrey
Farbers children. Jeffrey Farber
disclaims beneficial ownership of these shares.
(5)
Includes
10,000 vested options to purchase common stock at an exercise price of $17.36
per share, 12,500 vested options to purchase common stock at an exercise price
of $16.04, 13,334 vested options to purchase common stock at an exercise price
of $4.55, and 1,666 vested options to purchase common stock at an exercise
price of $6.89.
(6) Includes 13,333 vested options to
purchase common stock at an exercise price of $4.55 per share and 1,667 vested
options to purchase common stock at an exercise price of $6.89 per share.
(7) Includes 20,000 vested options to
purchase common stock at an exercise price of $9.02 per share and 1,667 vested
options to purchase common stock at an exercise price of $6.89 per share.
(8) Includes 15,000 vested options to
purchase common stock at an exercise price of $17.36, 20,000 vested options to
purchase common stock at an exercise price of $16.04 and 1,667 vested options
to purchase common stock at an exercise price of $6.89 per share.
(9)
Includes
33,150 shares owned by Arthur Bedrosians wife, Shari, and 19,602 shares owned
by his daughter Talin. Mr. Bedrosian disclaims beneficial ownership of
these shares.
(10)
Includes
18,000 vested options to purchase common stock at an exercise price of $4.63
per share, 96,900 vested options to purchase common stock at an exercise price
of $7.97 per share, 33,000 vested options to purchase common stock at an
exercise price of $17.36, 30,000 vested options to purchase common stock at an
exercise price of $16.04, 16,666 vested options to purchase common stock at an
exercise price of $8.00 per share and 10,000 vested options to purchase common
stock at an exercise price of $4.03 per share.
(11) Includes 100,000 vested options to
purchase common stock at an exercise price of $6.75 per share and 5,000 vested
options to purchase common stock at an exercise price of $6.89 per share.
(12)
Includes
38,760 vested options to purchase common stock at an exercise price of $7.97
per share, 13,000 vested options to purchase common stock at an exercise price
of $17.36 per share, 20,000 vested options to purchase common stock at an
exercise price of $16.04 per share, 8,000 vested options to purchase common
stock at an exercise price of $5.18 per share and 5,000 vested options to
purchase common stock at an exercise price of $6.89 per share.
63
Table of Contents
(13)
Includes
17,745 vested options to purchase common stock at an exercise price of $11.27
per share, 8,000 vested options to purchase common stock at an exercise price
of $5.18 per share and 5,000 vested options to purchase common stock at an
exercise price of $6.89 per share.
(14)
Includes
15,380 vested options to purchase common stock at an exercise price of $11.27
per share, 10,000 vested options to purchase common stock at an exercise price
of $17.36 per share, 12,500 vested options to purchase common stock at an
exercise price of $16.04 per share, 8,000 vested options to purchase common
stock at an exercise price of $5.18 per share and 5,000 vested options to
purchase common stock at an exercise price of $6.89 per share.
(15)
Indirect shares total includes 23,688 shares held as custodian for
David Farbers children and 2,850 shares held by David Farbers spouse. David Farber disclaims beneficial ownership
of these shares. Indirect share total
also includes 5,000,000 shares held by Farber Properties Group LLC. Farber Properties Group, LLC is managed and
jointly owned by Jeffrey Farber and David Farber.
(16)
Includes
10,000 vested options to purchase common stock at an exercise price of $17.36
per share and 12,500 vested options to purchase common stock at an exercise
price of $16.04 per share.
(17)
Farber
Properties Group, LLC is managed and jointly owned by Jeffrey Farber and David
Farber.
*
Assumes that all options exercisable within sixty days have been exercised,
which results in 25,034,030 shares outstanding.
Equity Compensation Plan
Information
The following table
summarizes the equity compensation plans as of June 30, 2008:
Plan Category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
|
|
Weighted average
exercise price of
outstanding
options, warrants
and rights
(b)
|
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
|
|
Equity Compensation plans approved by
security holders
|
|
1,694,331
|
|
$
|
7.59
|
|
3,146,338
|
|
|
|
|
|
|
|
|
|
Equity Compensation plans not approved by
security holders
|
|
|
|
|
|
|
|
Total
|
|
1,694,331
|
|
$
|
7.59
|
|
3,146,338
|
|
64
Table
of Contents
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE
The
Company had sales of approximately $787,000, $763,000, and $1,143,000 during
the fiscal years ended June 30, 2008, 2007 and 2006, respectively, to a
generic distributor, Auburn Pharmaceutical Company. Jeffrey Farber (the
related party), a board member and the son of the Chairman of the Board of
Directors and principal shareholder of the Company, William Farber, is the
owner of Auburn Pharmaceutical Company.
Accounts receivable includes amounts due from the related party of
approximately $305,000 and $109,000 at June 30, 2008 and 2007,
respectively. In the Companys opinion,
the terms of these transactions were not more favorable to the related party
than would have been to a non-related party.
In January 2005, Lannett
Holdings, Inc. entered into an agreement in which the Company purchased
for $100,000 and future royalty payments the proprietary rights to manufacture
and distribute a product for which Pharmeral, Inc. owned the ANDA. In Fiscal 2008, the Company obtained FDA
approval to use the proprietary rights.
Accordingly, the Company has capitalized this purchased product right as
an indefinite lived intangible asset and will test this asset for impairment on
a quarterly basis. Arthur Bedrosian,
President of the Company, Inc. was formerly the President and Chief
Executive Officer of Phameral Inc. and currently owns 100% of Pharmeral, Inc. This transaction was approved by the Board of
Directors of the Company and in their opinion the terms were not more favorable
to the related party than they would have been to a non-related party.
At
June 30, 2008, the Company had approximately $983,000 of deferred revenue
as a result of prepayments on inventory received from Provell Pharmaceuticals,
LLC (Provell). The Company recognized
revenues of approximately $141,000 during the fiscal year ended June 30,
2008. Accounts receivable includes
amounts due from Provell of approximately $60,000 at June 30, 2008. Provell is a joint venture to distribute
pharmaceutical products through mail order outlets. In exchange for access to Lannetts drug
providers, Lannett received a 33% ownership of this venture. After June 30, 2008, Lannetts ownership
portion of this venture decreased to 25% due to outside investment in the venture
from a third party. The investment is
valued at zero, due to losses incurred to date by Provell.
65
Table
of Contents
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Grant Thornton LLP served as the independent auditors of the Company
during Fiscal 2008, 2007 and 2006. No relationship exists other than the usual
relationship between independent public accountant and client. The following table identifies the fees
incurred for services rendered by Grant Thornton LLP in Fiscal 2008, 2007 and
2006.
|
|
Audit Fees
|
|
Audit-Related (1)
|
|
Tax Fees (2)
|
|
All Other Fees (3)
|
|
Total Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008:
|
|
$
|
335,894
|
|
$
|
5,900
|
|
$
|
78,880
|
|
$
|
49,964
|
|
$
|
470,638
|
|
Fiscal 2007:
|
|
$
|
338,660
|
|
$
|
|
|
$
|
36,528
|
|
$
|
70,300
|
|
$
|
445,460
|
|
Fiscal 2006:
|
|
$
|
180,418
|
|
$
|
|
|
$
|
52,942
|
|
$
|
135,248
|
|
$
|
368,608
|
|
(1) Audit-related fees include fees paid for preparation of S-8
filing.
(2) Tax fees include fees paid for preparation of annual federal,
state and local income tax returns, quarterly estimated income tax payments,
Cody tax issues, sales and use tax review and various tax planning
services. Fiscal 2006 fees paid to Grant
Thornton for services rendered during an IRS audit.
(3) Other fees include:
Fiscal 2008 Fees paid for review of various SEC correspondences.
Fiscal 2007 Fees paid for review of various SEC correspondences,
disclosures, and fixed asset review.
Fiscal 2006 Fees paid for services rendered in connection with
quarterly reviews of the Companys SEC filings, fixed asset review, a cost
segregation study and review of various SEC correspondence.
The
non-audit services provided to the Company by Grant Thornton LLP were
pre-approved by the Companys audit committee.
Prior to engaging its auditor to perform non-audit services, the
Companys audit committee reviews the particular service to be provided and the
fee to be paid by the Company for such service and assesses the impact of the
service on the auditors independence.
66
Table
of Contents
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)
Consolidated
Financial Statements and Supplementary Data
(1) The following financial statements
are included herein:
Consolidated Balance Sheets as of June 30, 2008 and 2007
Consolidated Statements of Operations for each of the three years in
the period ended June 30, 2008
Consolidated Statements of Changes in Shareholders Equity for each of
the three years in the period ended June 30, 2008
Consolidated Statements of Cash Flows for each of the three years in
the period ended June 30, 2008
Supplementary Data
(2)
The following financial statement schedule is included herein
Schedule
II Valuation and Qualifying Accounts
(b)
A list of the exhibits required by Item 601
of Regulation S-K to be filed as of this Form 10-K is shown on the Exhibit Index
filed herewith. All other schedules have been omitted because they are not
applicable or not required, or because the required information is included in
the Consolidated Financial Statements or Notes thereto.
67
Table
of Contents
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
|
LANNETT
COMPANY, INC.
|
|
|
|
Date:
|
September 29,
2008
|
|
By:
|
/
s / Arthur P. Bedrosian
|
|
|
|
Arthur
P. Bedrosian,
|
|
|
|
President
and
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
Date:
|
September 29,
2008
|
|
|
By:
|
/
s / Brian Kearns
|
|
|
|
Brian
Kearns,
|
|
|
|
Vice
President of Finance, Treasurer, and
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date:
|
September 29,
2008
|
|
By:
|
/
s /
William Farber
|
|
|
|
William
Farber,
|
|
|
|
Chairman
of the Board of Directors
|
|
|
|
|
Date:
|
September 29,
2008
|
|
By:
|
/
s /
Ronald West
|
|
|
|
Ronald
West,
|
|
|
|
Director,
Vice Chairman of the Board,
|
|
|
|
Chairman
of Compensation Committee
|
|
|
|
|
Date:
|
September 29,
2008
|
|
By:
|
/
s /
Arthur P Bedrosian
|
|
|
|
Arthur
P. Bedrosian,
|
|
|
|
Director,
President and Chief Executive Officer
|
|
|
|
|
Date:
|
September 29,
2008
|
|
By:
|
/
s /
Jeffrey Farber
|
|
|
|
Jeffrey
Farber,
|
|
|
|
Director
|
|
|
|
|
Date:
|
September 29,
2008
|
|
By:
|
/
s /
Kenneth Sinclair
|
|
|
|
Kenneth
Sinclair,
|
|
|
|
Director,
Chairman of Audit Committee
|
|
|
|
|
Date:
|
September 29,
2008
|
|
By:
|
/
s /
Albert Wertheimer
|
|
|
|
Albert
Wertheimer,
|
|
|
|
Director
|
|
|
|
|
Date:
|
September 29,
2008
|
|
By:
|
/
s /
Myron Winkelman
|
|
|
|
Myron
Winkelman,
|
|
|
|
Director,
Chairman of Strategic Plan Committee
|
|
|
|
|
|
|
68
Table of Contents
Exhibit Index
Exhibit
Number
|
|
Description
|
|
Method
of Filing
|
|
|
|
|
|
3.1
|
|
Articles
of Incorporation
|
|
Incorporated
by reference to the Proxy Statement filed with respect to the Annual Meeting
of Shareholders held on December 6, 1991 (the 1991 Proxy Statement).
|
|
|
|
|
|
3.2
|
|
By-Laws,
as amended
|
|
Incorporated
by reference to the 1991 Proxy Statement.
|
|
|
|
|
|
4
|
|
Specimen
Certificate for Common Stock
|
|
Incorporated
by reference to Exhibit 4(a) to Form 8 dated April 23, 1993
(Amendment No. 3 to Form 10-KSB for Fiscal 1992) (Form 8)
|
|
|
|
|
|
10.1
|
|
Line
of Credit Note dated March 11, 1999 between the Company and First Union
National Bank
|
|
Incorporated
by reference to Exhibit 10(ad) to the Annual Report on 1999
Form 10-KSB
|
|
|
|
|
|
10.2
|
|
Philadelphia
Authority for Industrial Development Taxable Variable Rate Demand/Fixed Rate
Revenue Bonds, Series of 1999
|
|
Incorporated
by reference to Exhibit 10(ae) to the Annual Report on 1999
Form 10-KSB
|
|
|
|
|
|
10.3
|
|
Philadelphia
Authority for Industrial Development Tax-Exempt Variable Rate Demand/Fixed
Revenue Bonds (Lannett Company, Inc. Project) Series of 1999
|
|
Incorporated
by reference to Exhibit 10(af) to the Annual Report on 1999
Form 10-KSB
|
|
|
|
|
|
10.4
|
|
Letter
of Credit and Agreements supporting bond issues between the Company and First
Union National Bank
|
|
Incorporated
by reference to Exhibit 10(ag) to the Annual Report on 1999
Form 10-KSB
|
|
|
|
|
|
10.5
|
|
2003
Stock Option Plan
|
|
Incorporated
by reference to the Proxy Statement for Fiscal Year Ending June 30, 2002
|
|
|
|
|
|
10.6
|
|
Terms
of Employment Agreement with Kevin Smith
|
|
Incorporated
by reference to Exhibit 10.6 to the Annual Report on 2003
Form 10-KSB
|
|
|
|
|
|
10.7
|
|
Terms
of Employment Agreement with Arthur Bedrosian
|
|
Incorporated
by reference to Exhibit 10 to the Quarterly Report on Form 10-Q
dated May 12, 2004.
|
|
|
|
|
|
10.8
|
|
Terms
of Employment Agreement with Brian Kearns
|
|
Incorporated
by reference to Exhibit 10.1 of the Form
8-K dated March 21, 2005.
|
|
|
|
|
|
10.9 (Note A)
|
|
Agreement
between Lannett
|
|
Incorporated
by reference to Exhibit 10.9 to
|
69
Table of Contents
Exhibit
Number
|
|
Description
|
|
Method
of Filing
|
|
|
|
|
|
|
|
Company,
Inc and Siegfried (USA), Inc.
|
|
the
Annual Report on 2003 Form 10-KSB
|
|
|
|
|
|
10.10 (Note A)
|
|
Agreement
between Lannett Company, Inc and Jerome Stevens, Pharmaceutical, Inc.
|
|
Incorporated
by reference to Exhibit 2.1 to Form 8-K dated April 20, 2004
|
|
|
|
|
|
13
|
|
Annual
Report on Form 10-K
|
|
Filed
Herewith
|
|
|
|
|
|
21
|
|
Subsidiaries
of the Company
|
|
Filed
Herewith
|
|
|
|
|
|
23.1
|
|
Consent
of Grant Thornton, LLP
|
|
Filed
Herewith
|
|
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
Filed
Herewith
|
|
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
Filed
Herewith
|
|
|
|
|
|
32
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Filed
Herewith
|
70
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