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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended
June 30, 2010
OR
o
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
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
o
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
o
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Non-accelerated filer
o
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Smaller reporting company
x
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(Do not check if a smaller reporting company)
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Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes
o
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12B-12 of the Exchange Act).
Yes
o
No
x
Aggregate market value of common stock held by non-affiliates of the
registrant, as of December 31, 2009 was $60,310,315 based on the closing
price of the stock on the NYSE - AMEX.
As of September 17, 2010, there were 25,238,882 shares of the
registrants 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.
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PART I
ITEM 1.
DESCRIPTION
OF BUSINESS
Business Overview
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 branded pharmaceutical
products. We report financial
information on a quarterly and fiscal year basis with the most recent being the
fiscal year ended June 30, 2010.
All references herein to a fiscal year or Fiscal refer to the
applicable fiscal year ending June 30.
According
to data reported by IMS Health in August 2010, we are currently among the
top 20 companies, based on number of prescription transactions, for unbranded
generic products in the United States.
We intend to grow our business organically as well as through strategic
partnerships. Additionally, our
Levothyroxine Sodium tablets (Levo) were recognized by IMS Health as the 18
th
most prescribed pharmaceutical product,
including both branded and generic products, in the U.S. over the past year,
reaching approximately 23 million prescriptions through June 2010. This product line represents approximately
0.6% of the domestic prescription market.
Over the last year, we have experienced a 6% growth in prescriptions for
our products. In addition, Levo has experienced a 11% annual growth during that
period.
Over
the past five years, we have experienced a 95% growth in our revenues from
approximately $64 million in fiscal year 2006 to over $125 million in fiscal
year 2010. This rapid growth has been
achieved primarily through strategic partnerships and opportunities resulting
from certain difficulties that a number of our competitors have experienced
with regulatory compliance issues.
Competitive Strengths
Proven
Ability to Develop Successful Products and Achieve Scale in Production
. We believe
that our ability to select viable products for development, efficiently develop
such products, including obtaining any applicable regulatory approvals,
vertically integrate ourselves into certain specialty markets and achieve economies
in production are all critical for our success in the generic pharmaceutical
industry in which we operate. We intend
to focus on long-term profitability while seeking to secure market positions
with fewer challenges from competitors.
Two key examples are morphine sulfate oral solution and hydomorphone
tablets.
Efficient Development Systems and Manufacturing Expertise for New
Products
. We believe that our manufacturing expertise, low
overhead expenses and efficient product development, manufacturing and
marketing capabilities can help us remain competitive in the general
pharmaceutical market. We intend to dedicate significant capital toward
developing new products because we believe our success is linked to our ability
to continually introduce new generic products into the marketplace. Over time, if the market for a specific
product remains stable and consumer demand remains consistent, additional
generic manufacturing companies will seek to enter and participate in the
market by developing the product and seeking regulatory approval for its
sale. Competition from new and other
market participants for the manufacture and distribution of certain products
would likely harm our market share with respect to such products as well as
force us to reduce our selling price for such products due to their increased
availability. As a result, we believe
that our success depends on our ability to properly assess the competitive
effect of new products, including market share, the number of competitors and
the generic unit price erosion. We
intend to reduce our exposure to competitive influences that may negatively
affect our sales and profits, including the potential saturation of the market
for certain products, by continuing to emphasize maintenance of a strong
research and development (R&D) pipeline.
We believe that it is in our best interest to avoid becoming materially
dependent on the sale of a single product.
Mutually Beneficial Supply and Distribution Arrangements
. In 2004, we
entered into an exclusive distribution agreement with Jerome Stevens
Pharmaceuticals (JSP) covering four different product lines. Two of these product lines, Levo and Digoxin,
collectively accounted for approximately 58% of our net sales in fiscal year
2010 and both products have experienced significant growth in sales over the
past few years. Distribution agreements
with other manufacturers have also increased our net sales in recent years.
Dependable Supplier to our Customers
. We believe we are viewed
within the generic pharmaceutical industry as a strong, dependable supplier to
our customer base. We have cultivated
strong and dependable customer relationships by maintaining adequate inventory
levels, employing a responsive order filling system and prioritizing timely
fulfillment of those orders. A majority
of our orders are filled and shipped either on the day of, or the day
following, the date that we receive the order.
Strong Track Record of Obtaining Regulatory Approvals for New Products
. During the
past two fiscal years, we have received 5 approved Abbreviated New Drug
Applications (each, an ANDA) from the Food and Drug Administration (the FDA). We expect
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to
receive several more during the next fiscal year. These regulatory approvals will enable us to
manufacture and supply a broader portfolio of generic pharmaceutical products.
Reputation for Regulatory Compliance
.
We
have a strong track record of regulatory compliance and we believe that we have
strong effective regulatory compliance capabilities and practices through
hiring qualified individuals and implementing strong current Good Manufacturing
Practices (cGMP). During the last two fiscal years, at least three of our
competitors have experienced plant closures and product recalls due to FDA
inspections that found violations of cGMPs at their facilities. Two of our competitive strengths, our agility
in responding quickly to market events and a strong reputation for regulatory
compliance, positioned us to avail ourselves of these market opportunities.
In
addition, narcotics or controlled drugs are subject to a rigorous regulatory
compliance regimen. We are one of seven
companies in the U.S. that have been granted a license from the U.S. Drug
Enforcement Administration (DEA) to import raw poppy straw for conversion
into active pharmaceutical ingredients (API).
Such licenses are renewed annually, but non-compliance could result in a
license not being renewed. As a result,
we believe that our strong reputation for regulatory compliance allows us to
have a competitive edge in managing the production and distribution of narcotics
and controlled drugs.
Business
Strategies
Continue to Broaden our Product Lines Through Internal Development and
Strategic Partnerships
. We are focused on increasing our market
share in the generic pharmaceutical industry while concentrating additional
resources on the development of new products, including narcotics and
controlled drugs. We hope to continue
our efforts to improve our financial performance by expanding our line of
generic products, increasing unit sales to current customers and reducing
overhead and administrative costs.
We
have targeted three strategies for expanding our product offerings: (1) deploying
our experienced R&D staff to develop products in-house, (2) entering
into additional product development agreements or strategic partnerships with
third-party product developers and formulators and (3) purchasing ANDAs
from other generic manufacturers that no longer seek to manufacture a specific
product. We expect that each method will facilitate our identification,
selection and development of additional generic pharmaceutical products that we
may distribute through our existing network of customers.
We
have several existing supply and development agreements with both international
and domestic companies, and are currently in negotiations on similar agreements
with additional international companies, through which we can market and
distribute future products. We intend to capitalize on our strong customer
relationships to build our market share for such products.
Improve our Operating Profile in Certain Targeted Specialty Markets
. In certain
situations, we may increase our focus on certain specialty markets within the
generic pharmaceutical industry. By
narrowing our focus to specialty markets, we can provide increased product
alternatives in categories with relatively few other market participants. We plan to strengthen our relationships with
strategic partners, including providers of product development research, raw
materials, API and finished products. We
believe that mutually beneficial strategic relationships in such areas,
including potential financing arrangements, partnerships, joint ventures or
acquisitions, could enhance our competitive advantages in the generic
pharmaceutical market.
Leverage Ability to Vertically Integrate as a Manufacturer, Supplier
and Distributor of Narcotics and Controlled Substances
. We view our April 2007 acquisition of
Cody Laboratories, Inc. (Cody Labsor Cody) as an important step in
becoming a vertically integrated narcotics manufacturer and distributor by
allowing us to concentrate on developing and completing our dosage form
manufacturing in order to reduce our narcotic API costs. In July 2008, the
DEA granted Cody Labs a license to directly import raw poppy straw for
conversion into API and/or various pharmaceutical products. Only six other companies in the U.S. have been
granted this license to date. This
license allows us to avoid increased costs associated with buying narcotic API
from other manufacturers. We anticipate
that we can use this license to become a vertically integrated manufacturer of
narcotic products, as well as a supplier of API to the pharmaceutical
industry. We believe that the aging
domestic population may result in a higher demand for pain management
pharmaceutical products and that we will be well-positioned to take advantage
of this increased demand.
Cody
Labs manufacturing expertise in narcotic APIs will allow us to build a market
with limited domestic competition. We
anticipate that the demand for narcotics and controlled drugs will continue to
grow with the Baby Boomer generation demographics and that we are
well-positioned to take advantage of these opportunities by concentrating
additional resources in the narcotic area.
Key Products
All
of our products currently manufactured and/or sold are prescription
products. Of the products listed in the
table entitled Current Products below, those containing Levo, Digoxin,
Butalbital, Cocaine and Morphine Sulfate were our key products, collectively
accounting for approximately 75%, 71% and 74% of our net sales in fiscal years
2010, 2009 and 2008, respectively. In
fiscal year
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2006,
we began selling Sulfamethoxazole w/ Trimethoprim (SMZ/TMP). Because of a
market opportunity, our sales of SMZ/TMP increased from 3% of our net sales in
fiscal year 2006 to 19% of our net sales in fiscal year 2007, but declined to
9% of our net sales in fiscal year 2008. SMZ/TMP is not factored among our key
products because the applicable supply agreement expired in August 2008
and was not renewed. In fiscal year
2009, we began selling our prenatal vitamin, OB Natal One, which was the
generic version to a brand name prenatal vitamin. During the launch year of 2009, we sold
approximately $12.6 million in net sales of the product. During our fiscal year 2009, the brand
equivalent was withdrawn from the marketplace.
Since the brand company withdrew their detailing salesforce, we have
seen a significant drop in sales of our OB Natal One product. OB Natal One is not factored among our key
products because the Company expects to see continued declining sales for this
product as obstetricians prescribe other available prenatal vitamins.
Our
products containing Levo are produced and marketed with 12 varying
potencies. In addition to generic Levo
tablets, we also market and distribute Unithroid tablets, a branded version of
Levo, which is produced and marketed with 11 varying potencies. Both generic Levo tablets and Unithroid
tablets are manufactured by JSP. We
began buying generic Levo from JSP and selling it to our customers in April 2003. In September 2003, we began buying the
branded Unithroid tablets from JSP and selling them to our customers. Levo tablets are used to treat hypothyroidism
and other thyroid disorders. Levo
remains one of the most prescribed drugs in the U.S. and is used by over 13 million
patients of various ages and demographic backgrounds. Side effects from Levo are rare, but may
include allergic reactions, such as rash or hives. We signed a distribution agreement with JSP
in March 2004 that granted us exclusive distribution rights to Levo
tablets through March 2014 (the JSP Distribution Agreement). In June 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
to Synthroid
®
. Net sales of
this product have grown rapidly in recent years from approximately $35 million
in 2007 to almost $51 million in 2010.
In our distribution of these products, we compete with two branded Levo
productsAbbott Laboratories Synthroid
®
and Monarch
Pharmaceuticals Levoxyl
®
as well as
generic products from Mylan and Sandoz.
Digoxin
tablets are produced and marketed with two different potencies (0.125 and 0.25
milligrams (mg) per tablet). This
product is manufactured by JSP and we distribute it under the JSP Distribution
Agreement. We began buying this product
from JSP and selling it to our 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.
Net sales of this product have increased from approximately $4.7 million
in 2007 to $21.0 million in 2010.
We
distribute two products containing Butalbital.
We have manufactured and sold one of the products, Butalbital with
Aspirin and Caffeine capsules, for more than eighteen years. The other Butalbital product, Butalbital with
Aspirin, Caffeine and Codeine Phosphate capsules, is manufactured by JSP. We began buying this product from JSP and
selling it to our customers in December 2002. Both Butalbital 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. Although new innovator drugs
to treat migraine headaches have been introduced by brand name drug companies,
we believe that 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
®
, we expect to continue to
produce and sell our generic Butalbital products.
Morphine
Sulfate liquid oral solution is produced and marketed in three different size
containers (20 mgs per mL in 30, 120 and 240 mL bottles). We manufacture these liquid dosage forms at
our Cody Labs subsidiary and we are currently finishing the manufacturing
methods and capabilities to make the API form also at Cody. Sales of Morphine Sulfate approximated 5% of
Lannetts Net Sales during Fiscal 2010.
This drug is prescribed primarily for the management of pain in adults
where other products or delivery methods are not tolerable to the patient. Common side effects of this drug include
respiratory and circulatory depression.
As recently as March of 2009, seven different companies, including
Lannett, were manufacturing and/or distributing this product. As a result of recent actions by the FDA (see
Item 1. Government Regulation), at least five of those companies, including
Lannett, have left the market by July 2010. Only one company has an approved NDA for this
product and is currently selling it, and Lannett expects to become the second
approved manufacturer within the next several months. If the FDA approves our current NDA
application on Morphine Sulfate (see Item 1A. Risk Factors), Lannett will be
vertically integrated on this product line.
Cocaine
Topical Solution (C-Topical) is produced and marketed in two different
strengths and two different size containers. (4% per 4 and 10 ml bottles, and
10% per 4 and 10 ml bottles). We
manufacture these liquid dosage forms at our Cody Labs subsidiary and we expect
to complete finishing the manufacturing methods and capabilities to make the
API form also at Cody within the next fiscal year. Sales of C-Topical approximated 5% of Lannetts
Net Sales during Fiscal 2010. This drug is
utilized primarily for the
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anesthetization
of the patient during ear, nose or throat surgery. It also works as a vasoconstrictor during the
surgery. The only other company that was
marketing this product announced during our fiscal 2010 year that they were
withdrawing from the marketplace.
Validated Pharmaceutical Capabilities
Our
manufacturing facility consists of 31,000 square feet on an approximately
3.5-acre parcel of land that we own. In
addition, we own a 63,000 square foot building on approximately 3.0 acres
located within one mile of our manufacturing facility that houses packaging,
research and development and possibly additional manufacturing space in the
future. In June 2006, we leased a
third building located several miles from our manufacturing facility,
consisting of 66,000 square feet on approximately 7.3 acres. We purchased this building in October 2009
for approximately $3.8 million, plus the cost of fit out of approximately $2.0
million. A significant portion of the
purchase price and fit out costs are expected to be financed through a series
of loans with a bank and a Pennsylvania state run development agency.
Construction was substantially complete by June 30, 2010. The financing will be competed shortly. This
new facility is being used for certain administrative functions, warehouse
space, shipping and possibly additional manufacturing space in the future.
The
manufacturing facility of our wholly-owned subsidiary, Cody Labs, consists of
an approximately 73,000 square foot structure located on approximately 16 acres
in Cody, Wyoming. Cody Labs leases the
facility from Cody LCI Realty, LLC, Wyoming, which is 50% owned by us and 50%
by an officer of Cody Labs and his former spouse. Cody Labs manufacturing
facility currently has capacity for further expansion, both inside the existing
structure, as well as by building outside the current structure.
We
have adopted many FDA regulations relating to cGMPs in the last several years,
and we believe we are operating our facilities in material compliance with the
FDAs cGMP regulations. In designing our
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 we use.
In addition, our Quality Control laboratory facilities are equipped with
high precision instruments, such as automated high-pressure liquid
chromatographs, gas chromatographs, robots and laser particle size analyzers.
We
continue to pursue our comprehensive plan for improving and maintaining quality
control and quality assurance programs for our pharmaceutical development and
manufacturing facilities. The FDA periodically
inspects our production facilities to determine our compliance with the FDAs
manufacturing standards. Typically,
after completing its inspection, the FDA will issue us a report, entitled a Form 483,
containing observations of any possible violations of cGMPs. The FDAs
observations may be minor or severe in nature and the degree of severity is
generally determined by the time necessary to remediate the cGMP violation, any
consequences to the consumer of the products, and whether the observation is
subject to a Warning Letter from the FDA.
By strictly complying with cGMPs and the various FDA guidelines, and
Good Laboratory Practices (GLPs), as well as adherence to our Standard
Operating Procedures, we have successfully minimized the number of observations
in our FDA inspections in recent years.
Research
and Development Process
Over
the past several years, we have consistently devoted resources to R&D
projects, including new generic product offerings. The costs of these R&D efforts are
expensed during the periods incurred. We
believe that such investment expense may be recovered in future years when we
receive marketing approval from the FDA to distribute such products. In addition to using cash generated from our
operations, we have 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. We have
embarked on a plan to grow in future years.
In addition to organic growth to be achieved through our own R&D
efforts, we have also initiated marketing projects with other companies in
order to expand future revenue. We
expect that our growing list of generic products under development will drive
future growth. Over the past several
years, we have hired additional personnel in product development, production,
formulation and the R&D laboratory.
We also intend to use our R&D infrastructure to continually devote
resources to additional R&D projects.
The following steps outline the numerous stages in the generic drug
development process:
1.)
Formulation and Analytical Method
Development
. After a drug candidate is selected for future
sale, product development scientists 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 our subsequent development process. Various formulations are tested in the
laboratory to measure results against the innovator drug. During this time, we may use reverse
engineering methods on samples of the innovator drug to determine the type and
quantity of inactive ingredients. During
the formulation phase, our R&D chemists begin to develop an analytical,
laboratory testing method. The
successful development of this test method will allow us 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
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adopted for the generic drug candidate, will be
included as part of the Chemistry, Manufacturing and Controls section of the
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, we 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 dosages to be created during the production cycle. We attempt 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 our commercial
manufacturing facilities. During this
manufacturing process, we 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 our ANDA submitted to the FDA.
3.)
Clinical testing
. After a
successful scale-up of the generic drug batch, we schedule and perform
bioequivalency and in some cases 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 us to determine the success of
the generic drug product. Success, in
this context, means that we are able to demonstrate that our product is
comparable to the innovator product in dosage form, strength, route of
administration, quality, performance characteristics and intended use. Since bioequivalence (meaning that the
product performs in the same manner and in the same amount of time as the
innovator drug) and a stable formula are the primary requirements for a generic
drug approval (assuming the manufacturing plant is in compliance with the FDAs
cGMPs), lengthy and costly clinical trials proving safety and efficacy, which
are required by the FDA for innovator drug approvals, are typically unnecessary
for generic companies. If the results
are successful, we 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). The Hatch-Waxman Act amended the Federal
Food, Drug and Cosmetic Act (FDCA) to permit FDA to review and approve an
ANDA for a generic copy of a drug product, which previously received FDA
approval through its new drug approval process, without having the generic drug
company conduct costly clinical trials. An ANDA is a comprehensive submission
that contains, among other things, data and information pertaining to the
active pharmaceutical ingredient, drug product formulation, specifications and
stability of the generic drug, as well as analytical methods, manufacturing
process validation data, and quality control procedures.
According
to a June 2010 presentation given by the FDAs Office of Generic Drugs,
the current FDA review time for ANDAs exceeds 26 months. While we have received approval for some of
our ANDAs in 14 months, we have also waited longer than 3 years before
receiving approval. Subsequently, the
FDA advised that electronic submissions of applications may shorten the
approval process. We currently file our
ANDAs and NDAs electronically. ANDAs and
NDAs submitted for our products may not receive FDA approval on a timely basis,
if at all.
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, either (i) that no patent was filed for the listed drug (a paragraph
I certification), (ii) that the patent has expired (a paragraph II
certification), (iii) 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 (iv) 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 must be provided to each owner of
the patent that is the subject of the certification and to the holder of the
approved ANDA to which the ANDA refers.
A paragraph IV certification can trigger an automatic 30 month stay of
the ANDA if the innovator company files a claim which would delay the approval
of the generic companys ANDA.
Currently, we have filed no paragraph IV certifications with our ANDAs.
Sales and Customer Relationships
We
sell our 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, governmental entities and health maintenance
organizations. We promote our products
through direct sales, trade shows, trade publications and bids. We also license the marketing of our products
to other manufacturers and/or marketers in private label agreements.
8
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We
continue to expand our sales to major chain drug stores. Our policies of maintaining an adequate
inventory, employing a responsive order filling system and prioritizing timely
fulfillment of those orders have contributed to a strong reputation among our
customers as a dependable supplier of high quality generic
pharmaceuticals. In addition, our
subsidiary Cody Labs sells APIs to dosage form manufacturers.
Some
of our new generic products were developed and are manufactured by us while
other products were developed and manufactured by other companies. The products currently manufactured by us and
those manufactured by others are identified in the section entitled
Current
Products
in
Item 1 of this Form 10-K.
Management
We
have been focused on increasing the size and quality of our management team in
anticipation of continuing our growth.
We have hired experienced personnel from large, established, brand pharmaceutical
companies as well as competing generic companies to complement the skills and
knowledge of the existing management team.
As we continue to grow, additional personnel may need to be added to our
management team. We intend to hire the
best people available to expand the knowledge base and expertise within our
personnel ranks.
Current Products
As
of the date of this filing, we manufactured and/or distributed the following
products:
Name of Product
|
|
Medical Indication
|
|
Equivalent Brand
|
1
|
|
Acetazolamide
Tablets
|
|
Glaucoma
|
|
Diamox®
|
2
|
|
Amantadine
SoftGel Capsules
|
|
Parkinsons Disease
|
|
Symmetrel ®
|
3
|
|
Baclofen
Tablets
|
|
Muscle Relaxer
|
|
Lioresal®
|
4
|
|
Bethanechol
Chloride Tablets
|
|
Urinary Retention
|
|
Urecholine®
|
5
|
|
Butalbital,
Aspirin and Caffeine Capsules
|
|
Migraine Headache
|
|
Fiorinal®
|
6
|
|
Butalbital,
Aspirin, Caffeine with Codeine Phosphate Capsules
|
|
Migraine Headache
|
|
Fiorinal w/ Codeine #3®
|
7
|
|
Clindamycin
HCl Capsules
|
|
Antibiotic
|
|
Cleocin®
|
8
|
|
C-Topical
Solution
|
|
Anesthetic
|
|
N/A
|
9
|
|
Codeine
Sulfate Tablets
|
|
Pain Management
|
|
N/A
|
10
|
|
Danazol
Capsules
|
|
Endometriosis
|
|
Danocrine®
|
11
|
|
Dicyclomine
Tablets
|
|
Irritable Bowels
|
|
Bentyl®
|
12
|
|
Dicyclomine
Capsules
|
|
Irritable Bowels
|
|
Bentyl®
|
13
|
|
Digoxin
Tablets
|
|
Congestive Heart Failure
|
|
Lanoxin®
|
14
|
|
Dipyridamole
Tablets
|
|
Anticoagulant
|
|
Persantine ®
|
15
|
|
Doxycycline
Tablets
|
|
Antibiotic
|
|
Adoxa®
|
16
|
|
Doxycycline
Hyclate Tablets
|
|
Antibiotic
|
|
Periostat®
|
17
|
|
Esterified
Estrogen & Methyltestoterone Tablets
|
|
Hormone Replacement
|
|
Estratest®
|
18
|
|
Hydrochlorothiazide
Tablet
|
|
Diuretic
|
|
Hydrodiuril®
|
19
|
|
Hydromorphone
HCl Tablets
|
|
Pain Management
|
|
Dilaudid®
|
20
|
|
Levothyroxine
Sodium Tablets
|
|
Thyroid Deficiency
|
|
Levoxyl®/ Synthroid®
|
21
|
|
Morphine
Sulfate Oral Solution
|
|
Pain Management
|
|
Roxanol®
|
22
|
|
OB-Natal
® ONE SoftGel Capsules
|
|
Pregnancy
|
|
N/A
|
23
|
|
Oxycodone
HCl Oral Solution
|
|
Pain Management
|
|
Roxicodone®
|
24
|
|
Phentermine
HCl Tablets
|
|
Obesity
|
|
Adipex-P®
|
25
|
|
Phentermine
HCl Capsules
|
|
Obesity
|
|
Fastin®
|
26
|
|
Pilocarpine
HCl Tablets
|
|
Dryness of the Mouth
|
|
Salagen®
|
27
|
|
Primidone
Tablets
|
|
Epilepsy
|
|
Mysoline®
|
28
|
|
Probenecid
Tablets
|
|
Gout
|
|
Benemid®
|
29
|
|
Rifampin
Capsules
|
|
Antibiotic
|
|
Rifadin®
|
30
|
|
Terbutaline
Sulfate Tablets
|
|
Bronchospasms
|
|
Brethine®
|
31
|
|
Unithroid®
Tablet
|
|
Thyroid Deficiency
|
|
N/A
|
32
|
|
Ursodiol
Capsules
|
|
Gallstone
|
|
Actigall ®
|
Unlike
the branded, innovator companies, we do not develop new molecules. However, we
have filed and received two patents for APIs at our Cody, Wyoming manufacturing
facility, with an additional patent pending.
In
fiscal years 2010 and 2009, we received five and four ANDA approvals from the
FDA, respectively. The following summary contains more specific details
regarding our latest ANDA approvals.
Market data is obtained from Wolters Kluwer.
9
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In
March 2008, we received a letter from the FDA with approval to market and
launch Rifampin Capsules 150mg and 300mg. 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
Capsules 150mg and 300mg at AWP were $35 million in 2007.
In
April 2008, we received a letter from the FDA with approval to market and
launch Dipyridamole Tablets 25mg, 50mg and 75mg. 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 Tablets 25mg, 50mg and 75mg at AWP were $45 million in
2007.
In
August 2008, we received a letter from the FDA with approval to market and
launch Doxycycline Monohydrate Tablets, 75mg and 150 mg, the generic equivalent
of Adoxa® and used for the treatment of bacterial infections. According to Wolters Kluwer, combined sales
of generic Doxycycline Monohydrate Tablets, 75 mg and 150mg, were $25.8 million
in 2007.
In
December 2008, we received a letter from the FDA with approval to market and
launch Ursodiol 300 mg Capsules, the generic equivalent of Actigall® and
indicated for patients with radiolucent noncalcified gallbladder stones, and
for the prevention of gallstone formation in obese patients experiencing rapid
weight loss. According to Wolters
Kluwer, combined sales of generic and brand Ursodiol were $128.2 million for
the 12 months ending October 2008.
In
May 2009, we received a letter from the FDA with approval to market and launch
Pilocarpine HCI Tablets 7.5 mg, the generic equivalent of Salagen®. Pilocarpine HCI tablets are indicated for (1)
the treatment of symptoms of dry mouth from salivary gland hyprfunction caused
by radiotherapy for cancer of the head and neck and (2) the treatment of
symptoms of dry mouth in patients with Sjogrens syndrome. According to Wolters
Kluwer, combined sales of generic and brand Pilocarpine HCI Tablets 7.5mg at
AWP were $2.5 million in 2008.
In
December 2009, Lannett a letter from the FDA with approval to market and launch
Hydromorphone Hydrochloride Tablets USP, 2 mg, 4 mg and 8 mg, the generic
equivalent of Purdue Pharmaceuticals (formerly Abbotts) Dilaudid® Tablets 2
mg, 4 mg and 8 mg. According to Wolters Kluwer, U.S. sales in 2008 of both
generic and brand Hydromorphone Hcl Tablets, 2 mg, 4 mg and 8 mg were $170
million at Average Wholesale Price. Hydromorphone Hcl tablets are indicated for
the management of pain in patients where an opioid analgesic is appropriate.
In
April 2010, we received a letter from the FDA with approval to market and
launch Ondansetron Injection USP, 2 mg/mL, Multi-Dose Vials. Ondansetron
Injection USP, 2 mg/mL is the generic equivalent of GlaxoSmithKlines Zofran®
Injection, 2 mg/mL. Ondansetron Injection, USP 2 mg/mL is indicated for the
prevention of postoperative nausea and vomiting and for the prevention of
chemotherapy-induced nausea and vomiting.
For the 12 months ended December 2009 U.S. sales of Ondansetron
Injection USP, 2 mg/mL, were approximately $58 million at Average Wholesale
Price (AWP). A launch date for the product has not yet been set.
In
July 2010, we received a letter from the FDA with approval to market and launch
Phentermine Hydrochloride Blue/White Seed Capsules USP, 30 mg, the generic
equivalent of Sandoz, Inc.s Reference Listed Drug (RLD) Phentermine Hcl
Capsules USP, 30 mg. According to Wolters Kluwer, U.S. sales of Phentermine Hcl
Capsules USP, 30 mg in 2009 were approximately $36.5 million at Average
Wholesale Price (AWP). This does not include sales of Phentermine made directly
to consumers through clinics.
Phentermine Hcl is indicated as a short-term adjunct in a regimen of
weight reduction based on exercise, behavioral modification and caloric
restriction in the management of exogenous obesity for patients with an initial
body mass index
>
30 kg/m2, or
>
27 kg/m2 in the presence
of other risk factors (e.g., hypertension, diabetes, and hyperlipidemia).
In
August 2010, we received a letter from the FDA with approval to market and
launch Ondansetron Injection USP, 2 mg/mL, Single-Dose Vials. Ondansetron
Injection USP, 2 mg/mL is the generic version of GlaxoSmithKlines Zofran
Injection, 2 mg/mL. Ondansetron Injection, USP 2 mg/mL is indicated for the
prevention of postoperative nausea and vomiting and for the prevention of
chemotherapy-induced nausea and vomiting.
For the 12 months ended December 2009, Ondansetron Injection USP, 2
mg/mL had U.S. sales of approximately $58 million at Average Wholesale Price. A
launch date for the product has not been set.
We
have additional products 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. Our 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 that we are currently developing is dependent
on numerous factors, including but not limited to, the complexity of the active
ingredients chemical characteristics, the price of the raw materials and the
FDA-mandated requirement of bioequivalence studies (depending on the FDAs
Orange Book classification). The estimated cost to develop a new generic
product ranges from approximately $100,000 to $1.7 million.
10
Table of Contents
In
addition, as one of the oldest generic drug manufacturers in the country formed
in 1942, we currently own several ANDAs that are dormant on our records for
products which we do not manufacture and market. Occasionally, we review such ANDAs to
determine if the market potential for any of these older drugs has recently
changed to make it attractive for us to reconsider manufacturing and
selling. If we decide to introduce one
of these products into the consumer market, we must review the original ANDA
and related documentation to ensure that the approved product specifications,
formulation and other factors meet current FDA requirements for the marketing
of the applicable drug. Generally, in
these situations, we 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. We 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 our internal product development group, we have
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. We intend to ultimately transfer
the formulation technology and manufacturing process for all of these R&D
products to our own commercial manufacturing sites. We initiated these outsourced R&D efforts
to complement the progress of our own internal R&D efforts.
The
majority of our R&D projects are being developed in-house under our direct
supervision and with our own personnel.
Accordingly, we do not believe that our outside contracts for product
development or manufacturing supply are material in nature, nor are we
substantially dependent on the services rendered by such outside firms. Since we have no control over the FDA review
process, our 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 our 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 Form 10-K.
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
|
|
21
|
FDA
Review
|
|
ANDA supplement
|
|
10
|
Clinical
Testing
|
|
ANDA
|
|
5
|
Scale-Up
|
|
Preliminary Investigational New Drug
|
|
3
|
Scale-Up
|
|
ANDA supplement
|
|
3
|
Scale-Up
|
|
ANDA
|
|
4
|
Formulation/Method
Development
|
|
ANDA
|
|
35
|
We
incurred R&D expenses of approximately $11,251,000 in fiscal year 2010,
$8,427,000 in fiscal year 2009, and $5,173,000 in fiscal year 2008. The R&D spending includes spending on
bioequivalence studies, internal development resources as well as outsourced
development. While we manage all R&D
from our principal executive office in Philadelphia, we have also been taking
advantage of favorable development costs in other countries. We have strategic partnerships with various
companies that either act as contract research organizations or API suppliers
as well as dosage form manufacturers. In
addition, U.S.-based 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 $90,000 to $575,000 to
develop a drug. Development payments are
normally scheduled in advance, based on milestones.
11
Table of Contents
Raw Materials and Finished Goods Inventory Suppliers
Our
use of raw materials in the production process consists of using pharmaceutical
chemicals in various forms that 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 we purchase
for the production process, we purchase certain finished dosage inventories,
including capsule, tablet and oral liquid products. We sell these finished dosage products
directly to our customers along with the finished dosage products manufactured
in-house. If suppliers of a certain
material or finished product are limited, we will generally take certain
precautionary steps to avoid a disruption in supply, such as finding a
secondary supplier or ordering larger quantities.
Our
primary finished product inventory supplier is JSP in Bohemia, New York. Purchases of finished goods inventory from
JSP accounted for approximately 77% of our inventory purchases in fiscal year
2010, 71% in fiscal year 2009 and 71% in fiscal year 2008. On March 23, 2004,
we
entered into the JSP Distribution Agreement 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 our common stock. The products covered under the JSP
Distribution Agreement include Butalbital, Aspirin, Caffeine with Codeine
Phosphate Capsules, Digoxin Tablets and Levo Tablets, sold generically and
under the brand name Unithroid
®
. The initial
term of the JSP Distribution Agreement is ten years, beginning on March 23,
2004 and continuing through March 22, 2014.
See note 17 to our consolidated financial statements for more
information on the terms, conditions and financial impact of the JSP
Distribution Agreement.
During
the term of the JSP Distribution Agreement, we are required to use commercially
reasonable efforts to purchase minimum dollar quantities of JSPs products that
we distribute. The minimum quantity to
be purchased in the first year of the JSP Distribution 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 JSP Distribution Agreement.
We have met each applicable minimum purchase requirement to date, but
there is no guarantee that we will be able to continue to do so in the future.
If we do not meet the minimum purchase requirements, JSPs sole remedy is to
terminate the JSP Distribution Agreement.
In
August 2005, we entered into a three year 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 1%, 14% and 23% of our costs of purchased inventory in fiscal
years 2009, 2008 and 2007, respectively.
Following its expiration on August 21, 2008, the agreement was not
renewed.
We
have entered into definitive supply and development agreements with certain
international companies, including Wintac of India, Orion Pharma of Finland,
Azad Pharma AG, Swiss Caps of Switzerland and Pharma 2B (formerly Pharmaseed)
and The GC Group of Israel, as well as certain domestic companies, including
Banner Pharmacaps, Cerovene and Inverness. We are currently in negotiations on
similar agreements with other international companies, through which we will
market and distribute future products manufactured in-house or by third
parties. We intend to capitalize on our
strong customer relationships to build our market share for such products.
Customers and Marketing
We
sell our products primarily to wholesale distributors, generic drug
distributors, mail-order pharmacies, group purchasing organizations, chain drug
stores and other pharmaceutical companies.
The pharmaceutical industrys largest wholesale distributors, McKesson,
Cardinal Health and Amerisource Bergen, accounted for 9%, 7%, and 11%,
respectively, of our net sales in fiscal year 2010 and 7%, 9% and 7%,
respectively, of our net sales in fiscal year 2009. Our largest chain drug store customer,
Walgreens, accounted for 26% and 28% of net sales in fiscal year 2010 and
fiscal year 2009, respectively. We
perform ongoing credit evaluations of our customers financial condition, and
have experienced no significant collection problems to date. Generally, we require no collateral from our
customers.
Sales
to 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. We enter into definitive agreements with our
indirect customers to establish pricing for certain covered products. Under such agreements, the indirect customers
independently select a wholesaler from which to purchase the products at these
agreed-upon prices. We 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, see 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 our books as sales to the wholesale customers.
We
believe 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, we believe that
consumer demand will be fulfilled by other wholesale or retail sources of
supply. As a result, we attempt to
develop and maintain strong relationships with most of the major retail chains,
wholesale
12
Table of Contents
distributors
and mail-order pharmacies in order to facilitate the supply of our products
through whatever channel the consumer prefers.
Although we have agreements with customers governing the transaction
terms of our sales, there are no minimum purchase quantities applicable to
these agreements.
We
promote our products through direct sales, trade shows and bids. We also market our products through private
label arrangements, under which we manufacture our products with a label
containing the name and logo of a customer.
This practice is commonly referred to as private label business. Private label business allows us to leverage
our internal sales efforts by using the marketing services from other
well-respected pharmaceutical dosage suppliers.
The focus of our sales efforts is the relationships we create with our
customer accounts. Strong and dependable
customer relationships have created a positive platform for us to increase our
sales volumes. Advertising in the
generic pharmaceutical industry is generally limited to trade publications,
read by retail pharmacists, wholesale purchasing agents and other
pharmaceutical decision-makers.
Historically and in fiscal years 2010, 2009 and 2008, our advertising
expenses were immaterial. When our sales
representatives make contact with a customer, we will generally offer to supply
the customer our 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 our supply of a product, the customer typically expects a high
standard of service, including timely receipt of products ordered, availability
of convenient, user-friendly and effective customer service functions and
maintaining open lines of communication.
Competition
The
manufacturing 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 strong and dependable customer service by
maintaining adequate inventory levels, employing a responsive order filling
system and prioritizing timely fulfillment of those orders. We ensure that our
products are available from national suppliers as well as our own warehouse.
The modernization of our facilities, hiring of experienced staff and
implementation of inventory and quality control programs have improved our
competitive cost position over the past five years.
We
compete with other manufacturers and marketers of generic and brand drugs. Each product manufactured and/or sold by us
has a different set of competitors. The
list below identifies the companies with which we primarily compete with
respect to each of our major products.
Product
|
|
Primary Competitors
|
|
|
|
Butalbital with Aspirin and Caffeine, with and without Codeine
Phosphate Capsules
|
|
Watson
and Breckenridge
|
|
|
|
C_Topical
Solution
|
|
None
|
|
|
|
Digoxin Tablets
|
|
GlaxoSmithKline,
Impax, Caraco and Westward
|
|
|
|
Doxycycline Hyclate and Monohydrate Tablets
|
|
Par,
Mylan, Sandoz and Ranbaxy
|
|
|
|
Levothyroxine Sodium Tablets
|
|
Abbott,
Monarch, Mylan, Sandoz and Forest
|
|
|
|
Morphine
Sulfate Liquid Oral Solution
|
|
Roxane
and Mallinckrodt
|
|
|
|
Primidone Tablets
|
|
Watson,
Qualitest, URL, Westward, Amneal and Impax
|
|
|
|
Rifampin Capsules
|
|
Sandoz
and Versapharm
|
|
|
|
Unithroid® Tablets
|
|
Abbott,
Monarch, Mylan and Sandoz
|
Government Regulation
Pharmaceutical
manufacturers are subject to extensive regulation by the federal government,
principally by the FDA, and, in cases of controlled drugs, the DEA, and to a
lesser extent, by other federal regulatory bodies and state governments. The FDCA, the Controlled Substance Act (the CSA)
and other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval, pricing,
advertising, and promotion of our generic drug products. Noncompliance with
applicable regulations can result in fines, recall and seizure of products,
total or partial suspension of production, personal and/or
13
Table of Contents
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 medical treatment. The FDA review
process for new drugs is very extensive and requires a substantial investment
to research and test the drug candidate.
However, less burdensome approval procedures may be used for generic
equivalents. Typically, the investment
required to develop a generic drug is less costly than the brand innovator
drug.
There are currently three ways to obtain FDA approval of a drug:
·
New
Drug Applications (NDA)
:
Unless one of the two procedures discussed in
the following paragraphs is available, a manufacturer must conduct and submit
to the FDA complete clinical studies to establish a drugs safety and efficacy.
The new drug approval process generally involves:
·
completion of
preclinical laboratory and animal testing in compliance with the FDAs GLP
regulations;
·
submission to
the FDA of an Investigational New Drug (IND) application for human clinical
testing, which must become effective before human clinical trials may begin;
·
performance of
adequate and well-controlled human clinical trials to establish the safety and
efficacy of the proposed drug product for each intended use;
·
satisfactory
completion of an FDA pre-approval inspection of the facility or facilities at
which the product is produced to assess compliance with the FDAs cGMP
regulations; and
·
submission to
and approval by the FDA of an NDA.
The
results of preclinical tests, together with manufacturing information and
analytical data, are submitted to the FDA as part of an IND, which must become
effective before human clinical trials may begin. Further, each clinical trial
must be reviewed and approved by an independent Institutional Review Board.
Human clinical trials are typically conducted in three sequential phases that
may overlap. These phases generally include:
·
Phase I, during
which the drug is introduced into healthy human subjects or, on occasion,
patients and is tested for safety, stability, dose tolerance, and metabolism;
·
Phase II,
during which the drug is introduced into a limited patient population to determine
the efficacy of the product in specific targeted indications, to determine
dosage tolerance and optimal dosage, and to identify possible adverse effects
and safety risks; and
·
Phase III,
during which the clinical trial is expanded to a larger and more diverse
patient group at geographically dispersed clinical trial sites to further
evaluate clinical efficacy, optimal dosage, and safety.
The
drug sponsor, the FDA, or the independent Institutional Review Board at each
institution at which a clinical trial is being performed may suspend a clinical
trial at any time for various reasons, including a belief that the subjects are
being exposed to an unacceptable health risk.
The
results of preclinical animal studies and human clinical studies, together with
other detailed information, are submitted to the FDA as part of the NDA. The
NDA also must contain extensive manufacturing information. The FDA may approve
or disapprove the NDA if applicable FDA regulatory criteria are not satisfied
or it may require additional clinical data. Once approved, the FDA may withdraw
the product approval if compliance with pre- and post-market regulatory
standards is not maintained or if problems occur or are identified after the
product reaches the marketplace. In addition, the FDA may require
post-marketing studies to monitor the effect of approved products and may limit
further marketing of the product based on the results of these post-marketing
studies. The FDA has broad post-market regulatory and enforcement powers, including
the ability to levy fines and civil penalties, suspend or delay issuance of
approvals, seize or recall products, and withdraw approvals.
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Satisfaction
of FDA new drug approval requirements typically takes several years, and the
actual time required may vary substantially based upon the type, complexity,
and novelty of the product or disease. Government regulation may delay or
prevent marketing of potential products for a considerable period of time and
impose costly procedures upon a manufacturers activities. Success in early
stage clinical trials does not assure success in later stage clinical trials.
Data obtained from clinical activities is not always conclusive and may be
subject to varying interpretations that could delay, limit, or prevent
regulatory approval. Even if a product receives regulatory approval, later
discovery of previously unknown problems with a product may result in
restrictions on the product or even complete withdrawal of the product from the
market.
·
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. The FDA will approve the generic product as
suitable for an ANDA application if it finds that the generic product does not
raise new questions of safety and effectiveness as compared to the innovator
product. A product is not eligible for ANDA approval if the FDA determines that
it is not equivalent to the referenced innovator drug, if it is intended for a
different use, or if it is not subject to an approved Suitability Petition.
However, such a product might be approved under an NDA, with supportive data
from clinical trials.
In
addition to establishing a new ANDA procedure, the Hatch-Waxman 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. Upon NDA
approval, the FDA lists in its Orange
Book the approved drug product and any patents identified by the NDA
applicant that relate to the drug product. Any applicant who files an ANDA
seeking approval of a generic equivalent version of a drug listed in the FDAs Orange Book before expiration of the
referenced patent(s), must certify to the FDA that (1) no patent information on
the drug product that is the subject of the ANDA has been submitted to the FDA;
(2) such patent has expired; (3) the date on which such patent expires; or (4) such
patent is invalid or will not be infringed upon by the manufacture, use, or
sale of the drug product for which the ANDA is submitted. This last
certification is known as a Paragraph IV certification. A notice of the
Paragraph IV certification must be provided to each owner of the patent that is
the subject of the certification and to the holder of the approved NDA to which
the ANDA refers. Before the enactment of the Medicare Prescription Drug
Improvement and Modernization Act of 2003 (the MMA), which amended the
Hatch-Waxman Act, if the NDA holder or patent owner(s) asserted a patent
challenge within 45 days of its receipt of the certification notice, the FDA
was prevented from approving that ANDA until the earlier of 30 months from the
receipt of the notice of the paragraph IV certification, the expiration of the
patent, when the infringement case concerning each such patent was favorably
decided in an ANDA applicants favor, or such shorter or longer period as may
be ordered by a court. This prohibition is generally referred to as the
30-month stay. In some cases, NDA owners and patent holders have obtained
additional patents for their products after an ANDA had been filed but before
that ANDA received final marketing approval, and then initiated a new patent
challenge, which resulted in more than one 30-month stay.
The
MMA amended the Hatch-Waxman Act to eliminate certain unfair advantages of
patent holders in the implementation of the Hatch-Waxman Act. As a result, the
NDA owner remains entitled to an automatic 30-month stay if it initiates a
patent infringement lawsuit within 45 days of its receipt of notice of a
paragraph IV certification, but only if the patent infringement lawsuit is
directed to patents that were listed in the FDAs Orange Book before the ANDA was filed. An ANDA applicant is now
permitted to take legal action to enjoin or prohibit the listing of certain of
these patents as a counterclaim in response to a claim by the NDA owner that
its patent covers its approved drug product.
If
an ANDA applicant is the first-to-file a substantially complete ANDA with a
paragraph IV certification and provides appropriate notice to the FDA, the NDA
holder, and all patent owner(s) for a particular generic product, the applicant
may be awarded a 180-day period of marketing exclusivity against other
companies that subsequently file ANDAs for that same product. A substantially
complete ANDA is one that contains all the information required by the
Hatch-Waxman Act and the FDAs regulations, including the results of any
required bioequivalence studies. The FDA may refuse to accept the filing of an
ANDA that is not substantially complete or may determine during substantive
review of the ANDA that additional information, such as an additional
bioequivalence study, is required to support approval. Such a determination may
affect an applicants first to file status and eligibility for a 180-day period
of marketing exclusivity for the generic product. The MMA also modified the rules
governing when the 180-day marketing exclusivity period is triggered or
forfeited and shared exclusivity. Prior to the legislation, the 180-day
marketing exclusivity period was triggered upon the first commercial
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marketing
of the ANDA or a court decision holding the patent invalid, unenforceable, or
not infringed. For ANDAs accepted for filing before March 2000, that court
decision had to be final and non-appealable (other than a petition to the U.S.
Supreme Court for a writ of certiorari). In March 2000, the FDA changed its
position in response to two court cases that challenged the FDAs original
interpretation of what constituted a court decision under the Hatch-Waxman Act.
Under the changed policy, the 180-day marketing exclusivity period began
running immediately upon a district court decision holding the patent at issue
invalid, unenforceable, or not infringed, regardless of whether the ANDA had
been approved and the generic product had been marketed. In codifying the FDAs
original policy, the MMA retroactively applies a final and non-appealable court
decision trigger for all ANDAs filed before December 8, 2003 leaving intact the
first commercial marketing trigger. As for ANDAs filed after December 8, 2003,
the marketing exclusivity period is only triggered upon the first commercial
marketing of the ANDA product, but that exclusivity may be forfeited under
certain circumstances, including, if the ANDA is not marketed within 75 days
after a final and non-appealable court decision by the first-to-file or other
ANDA applicant, or if the FDA does not tentatively approve the first-to-file
applicants ANDA within 30 months.
In
addition to patent exclusivity, the holder of the NDA for the listed drug may
be entitled to a period of non-patent market exclusivity, during which the FDA
cannot approve an ANDA. If the listed drug is a new chemical entity, the FDA
may not accept an ANDA for a bioequivalent product for up to five years
following approval of the NDA for the new chemical entity. If the listed drug
is not a new chemical entity but the holder of the NDA conducted clinical
trials essential to approval of the NDA or a supplement thereto, the FDA may
not approve an ANDA for a bioequivalent product before expiration of three
years. Certain other periods of exclusivity may be available if the listed drug
is indicated for treatment of a rare disease or is studied for pediatric indications.
·
Section 505(b)(2)
New Drug Applications:
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
where at least some of information required for approval comes from studies not
conducted by or for the applicant and for which the applicant has not obtained
a right of reference. The Hatch-Waxman
Act permits the applicant to rely upon certain preclinical or clinical studies
conducted for an approved product. 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 Section 505(b)(2)
applications have with the exception of Grandfathered drugs been diminished by the availability of the
ANDA process, as described above.
Additionally,
certain products, marketed prior to the Federal Food, Drug and Cosmetic Act may
be considered GRASE (Generally Recognized As Safe and Effective) 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. Recently, the FDA has increased
its efforts to force companies to file and seek FDA approval for these GRASE
products. Efforts have included granting
market exclusivity to approved GRASE products and issuing notices to companies
currently producing these products. One
such current FDA effort includes our currently marketed product, Morphine
Sulfate oral solution. Please see
additional discussion regarding our Morphine Sulfate Oral Solution product in
Item 1A. Risk Factors, Item 3, Legal Proceedings, and Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Manufacturing cGMP Requirements
Among
the requirements for new drug approval is the requirement that the prospective manufacturers
methods conform to the FDAs cGMP regulations to the satisfaction of the FDA
pursuant to a pre-approval inspection before the facility may be used to
manufacture the product. The cGMP
regulations must be followed at all times during which the approved drug is
manufactured and the manufacturing facilities are subject to periodic
inspections by the FDA and other authorities, including procedures and
operations used in the testing and manufacture of our products to assess our
compliance with application regulations.
FDAs cGMP regulations require among other things, quality control and
quality assurance as well as the corresponding maintenance of records and
documentation In complying with the standards set forth in the cGMP
regulations, we must continue to expend time, money, and effort in the areas of
production and quality control to ensure full technical compliance.
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Failure
to comply with statutory and regulatory requirements subjects a manufacturer to
possible legal or regulatory action, including but not limited to, the seizure
or recall of noncomplying drug products injunctions, consent decrees placing
significant restrictions on or suspending manufacturing operations, and/or
civil and criminal penalties. Adverse
experiences with the product must be reported to the FDA and could result in
the imposition of market restriction through labeling changes or in product
removal. Product approvals may be
withdrawn if compliance with regulatory requirements is not maintained or if
problems concerning safety or efficacy of the product occur following approval.
Other Regulatory Requirements
With
respect to post-market product advertising and promotion, the FDA imposes a
number of complex regulations on entities that advertise and promote
pharmaceuticals, which include, among others, standards for direct-to-consumer
advertising, off-label promotion, industry-sponsored scientific and educational
activities, and promotional activities involving the internet. The FDA has very
broad enforcement authority under the FFDCA, and failure to abide by these
regulations can result in penalties, including the issuance of a warning letter
directing entities to correct deviations from FDA standards, a requirement that
future advertising and promotional materials be pre-cleared by the FDA, and
state and/or federal civil and criminal investigations and prosecutions.
We
are also subject to various laws and regulations regarding laboratory
practices, the experimental use of animals, and the use and disposal of
hazardous or potentially hazardous substances in connection with our research.
In each of these areas, as above, the FDA has broad regulatory and enforcement
powers, including the ability to levy fines and civil penalties, suspend or
delay issuance of approvals, seize or recall products, and withdraw approvals,
any one or more of which could have a material adverse effect on us.
Outside
of the United States, our ability to market a product is contingent upon
receiving marketing authorization from the appropriate regulatory authorities.
The requirements governing marketing authorization, pricing, and reimbursement
vary widely from country to country. At present, foreign marketing
authorizations are applied for at a national level, although within the
European Union registration procedures are available to companies wishing to
market a product in more than one European Union member state. The regulatory
authority generally will grant marketing authorization if it is satisfied that
we have presented it with adequate evidence of safety, quality and efficacy.
DEA Regulation
We
maintain registrations with the DEA that enable us to receive, manufacture,
store, and distribute controlled substances in connection with our operations.
Controlled substances are those drugs that appear on one of five schedules promulgated
and administered by the DEA under the CSA. The CSA governs, among other things,
the distribution, recordkeeping, handling, security, and disposal of controlled
substances. We are subject to periodic and ongoing inspections by the DEA and
similar state drug enforcement authorities to assess our ongoing compliance
with DEAs regulations. Any failure to comply with these regulations could lead
to a variety of sanctions, including the revocation or a denial of renewal of
our DEA registration, injunctions, or civil or criminal penalties.
Fraud
and Abuse Laws
Because
of the significant federal funding involved in Medicare and Medicaid, Congress
and the states have enacted, and actively enforce, a number of laws whose
purpose is to eliminate fraud and abuse in federal health care programs. Our business is subject to compliance with
these laws.
Anti-Kickback Statutes and Federal False Claims Act
The
federal health care programs Anti-Kickback Statute prohibits persons from
knowingly and willfully soliciting, offering, receiving, or providing
remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual, or the furnishing or arranging for a good or
service, for which payment may be made under a federal health care program such
as Medicare or Medicaid. The definition
of remuneration has been broadly interpreted to include anything of value,
including for example gifts, certain discounts, the furnishing of free
supplies, equipment or services, credit arrangements, payment of cash and
waivers of payments. Several courts have
interpreted the statutes intent requirement to mean that if any one purpose of
an arrangement involving remuneration is to induce referrals of federal health
care covered business, the statute has been violated. Penalties for violations include criminal
penalties and civil sanctions such as fines, imprisonment, and possible
exclusion from Medicare, Medicaid, and other federal health care programs. In addition some kickback allegations have been
claimed to violate the Federal False Claims Act, discussed in more detail
below.
The
Anti-Kickback Statute is broad and prohibits many arrangements and practices
that are lawful in businesses outside of the health care industry. Recognizing that the Anti-Kickback Statute is
broad and may technically prohibit many innocuous or beneficial
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arrangements,
Congress authorized the Office of Inspector General of the U.S. Department of
Health and Human Services (OIG) to issue a series of regulations, known as safe
harbors. These safe harbors, issued by
the OIG beginning in July 1991, set forth provisions that, if all their
applicable requirements are met, will assure health care providers and other
parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement
to fit precisely within one or more safe harbors does not necessarily mean that
it is illegal or that prosecution will be pursued. However, conduct and business arrangements
that do not fully satisfy each applicable safe harbor may result in increased
scrutiny by government enforcement authorities such as OIG.
Many
states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to
referral of patients for health care items or services reimbursed by any
source, not only the Medicare and Medicaid programs.
Government
officials have focused their enforcement efforts on marketing of health care
services and products, among other activities, and recently have brought cases
against companies, and certain sales, marketing, and executive personnel, for
allegedly offering unlawful inducements to potential or existing customers in
an attempt to procure their business.
Another
development affecting the health care industry is the increased use of the
federal Civil False Claims Act, and in particular, action brought pursuant to
the False Claims Acts whistleblower or qui tam provisions. The False Claims Act imposes liability on any
person or entity who, among other things, knowingly presents, or causes to be
presented, a false or fraudulent claim for payment by a federal health care
program. The qui tam provisions of the
False Claims Act allow a private individual to bring actions on behalf of the
federal government alleging that the defendant has submitted a false claim to
the federal government, and to share in any monetary recovery. In recent years, the number of suits brought
against health care providers by private individuals has increased
dramatically. In addition, various
states have enacted false claims law analogous to the Civil False Claims Act,
although many of these state laws apply where a claim is submitted to any
third-party payor and not merely a federal health care program.
When
an entity is determined to have violated the False Claims Act, it may be
required to pay up to three times the actual damages sustained by the
government, plus civil penalties of between $5,500 to $11,000 for each separate
false claim. There are many potential
bases for liability under the False Claims Act.
Liability arises, primarily, when an entity knowingly submits, or causes
another to submit, a false claim for reimbursement to the federal
government. The federal government has
used the False Claims Act to assert liability on the basis of inadequate care,
kickbacks, and other improper referrals, and improper use of Medicare numbers
when detailing the provider of services, in addition to the more predictable
allegations as to misrepresentations with respect to the services
rendered. In addition, the federal
government has prosecuted companies under the False Claims Act in connection
with off-label promotion of products.
Our future activities relating to the reporting of wholesale or
estimated retail prices of our products, the reporting of discount and rebate
information and other information affecting federal, state, and third-party
reimbursement of our products, and the sale and marketing of our products may
be subject to scrutiny under these laws.
We are unable to predict whether we will be subject to actions under the
False Claims Act or a similar state law, or the impact of such actions. However, the costs of defending such claims,
as well as any sanctions imposed, could significantly affect our financial
performance.
HIPAA and Other Fraud and Privacy Regulations
Among
other things, the Health Insurance Portability and Accountability Act of 1996 (HIPAA)
created two new federal crimes: health care fraud and false statements relating
to health care matters. The HIPAA health
care fraud statute prohibits, among other things, knowing and willfully
executing, or attempting to execute, a scheme to defraud any health care
benefit program, including private payors.
A violation of this statute is a felony and may result in fines,
imprisonment, and/or exclusion from government-sponsored programs. The HIPAA false statements statute prohibits,
among other things, knowingly and willfully falsifying, concealing, or covering
up a material fact or making any materially false, fictitious, or fraudulent
statement or representation in connection with the delivery of or payment for health
care benefits, items, or services. A
violation of this statute is a felony and may result in fines and/or
imprisonment.
Pricing
In
the United States, our sales are dependent upon the availability of coverage
and reimbursement for our products from third-party payers, including federal
and state programs such as Medicare and Medicaid, and private organizations
such as commercial health insurance and managed care companies. Such third-party payers are increasingly
challenging the price of medical products and services and instituting cost
containment measures to control or significantly influence the purchase of
medical products and services. This
includes the placement of our pharmaceutical products on drug formularies or
lists of medications.
Over
the past several years, the rising costs of providing health care services has
triggered legislation to make certain changes to the way in which
pharmaceuticals, including our products, are covered and reimbursed,
particularly by governmental programs. For instance, recent federal legislation and
regulations have created a voluntary prescription drug benefit, Medicare
Part D, revised the
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formula
used to reimburse health care providers and physicians under Part B and
have imposed significant revisions to the Medicaid Drug Rebate Program. These
changes have resulted in, and may continue to result in, coverage and
reimbursement restrictions and increased rebate obligations by
manufacturers. in addition, there
continue to be legislative and regulatory proposals at the federal and state
levels directed at containing or lowering the cost of health care. Examples of how limits on drug coverage and
reimbursement in the United States may cause reduced payments for drugs in the
future include:
·
changing Medicare
reimbursement methodologies;
·
revising drug rebate
calculations under the Medicaid program;
·
reforming drug importation laws;
·
fluctuating decisions on which drugs to
include in formularies; and
·
requiring pre-approval of coverage for new or
innovative drug therapies.
We
cannot predict the likelihood or pace of such additional changes or whether
there will be significant legislative or regulatory reform impacting our
products. Nor can we predict with
precision what effect such governmental measures would have if they were
ultimately enacted into law. However, in
general, we believe that legislative and regulatory reform activity likely will
continue.
We
are also subject to federal, state and local laws of general applicability,
including laws regulating working conditions and the storage, transportation,
or discharge of items that may be considered hazardous substances, hazardous
waste, or environmental contaminants. We
monitor our compliance with all environmental laws. We are in substantial compliance with all
regulatory bodies.
As
a publicly-traded company, we are also subject to significant regulations and
laws, 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.
We
operate in a highly regulated environment and are responsible for maintaining
compliance with many regulatory requirements. The U.S. Department of
Justice, acting on behalf of the DEA, issued us a letter in August 2008
requesting additional information on certain record keeping matters regarding a
DEA inspection of our facilities. We fully complied with their request
and intend to fully comply with all requests for information that occur from
time to time as a normal course of business.
Employees
As
of June 30, 2010, we had 305 employees, comprised of 218 employees at
Lannett and 87 employees at Cody Labs.
Securities and Exchange Act Reports
We
maintain a website at
www.lannett.com
.
We make available on or through our website our current and periodic reports,
including any amendments to those reports, that are filed with the Securities
and Exchange Commission (the SEC) in accordance with the Securities Exchange
Act of 1934, as amended (the Exchange Act). These reports 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 our website free of charge as soon as reasonably practicable
after we electronically file the information with, or furnish it to, the SEC.
The contents of our website are not incorporated by reference in this
Form 10-K and shall not be deemed filed under the Exchange Act.
ITEM 1A. RISK FACTORS
We materially rely on an uninterrupted supply of finished
products from Jerome Stevens Pharmaceutical (JSP) for a majority of our
sales. If we were to experience an
interruption of that supply, our operating results would suffer.
Approximately
69% of our fiscal year 2010 sales are of distributed products, primarily
manufactured by JSP. Two of theses
products are Levo and Digoxin, which accounted for 41% and 17%, respectively,
of our Fiscal 2010 net sales, and 40% and 22%, respectively, of our net sales
for Fiscal 2009. If the supply of these
products is interrupted in any way by any form of temporary or permanent
business interruption to JSP, including but not limited to fire or other
naturally-occurring, damaging event to their physical plant and/or equipment,
condemnation of their facility, legislative or regulatory cease and desist
declaration regarding their operations,
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and
any interruption in their source of API for their products, our operating
results could be materially adversely affected. We do not have, at this
time, a second source for these products.
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, including the FDA and
in the case of controlled drugs, the DEA, and state government agencies.
The FDCA, the CSA and other federal statutes and regulations govern or
influence the development,
testing, manufacturing, packing, labeling, storing, record keeping, safety,
approval, advertising, promotion, sale and distribution of our products.
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. The FDA approval
process for a particular product candidate can take several years and requires
us to dedicate substantial resources to securing approvals, and we may not be
able to obtain regulatory approval for our product candidates in a timely
manner, or at all. In order to obtain approval for our generic product
candidates, we must demonstrate that our drug product is bioequivalent to a
drug previously approved by the FDA through the new drug approval process,
known as an innovator drug. Bioequivalency may be demonstrated in vivo or in
vitro by comparing the generic product candidate to the innovator drug product
in dosage form, strength, route of administration, quality, dissolution
performance characteristics, and intended use. The FDA may not agree that the
bioequivalence studies we submit in the ANDA applications for our generic drug
products are adequate to support approval. If it determines that an ANDA
application is not adequate to support approval, the FDA could deny our
application or request additional information, including clinical trials, which
could delay approval of the product and impair our ability to compete with
other versions of the generic drug product.
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. Furthermore, the FDA also has the authority
to revoke drug approvals previously granted and remove these products from the
market for a variety of reasons, including a failure to comply with applicable
regulations, the discovery of previously unknown problems with the product, or
because the ingredients in the drug are no longer approved by the FDA.
Recently,
the FDA has increased its
efforts to force companies to file and seek FDA approval for GRASE
products. Efforts have included granting
market exclusivity to approved GRASE products and issuing notices to companies
currently producing these products.
Lannett currently manufactures and markets several products that are
considered GRASE products, including Morphine Sulfate. The FDA is currently undertaking activities
to force all companies who manufacture Morphine Sulfate to file applications
and seek approval for this product or remove their product from the
market. As of July 24, 2010,
Lannett has stopped manufacturing and distributing Morphine Sulfate Oral
Solution and as of the date of this Form 10-K, the Company has
approximately $2 million of Morphine Sulfate Oral Solution finished goods
inventory. Lannett has filed such an
application and currently awaits FDA approval on the submission. The Company expects approval on this
application within the next seven months.
But, if the Company is rejected on its current application, or if the
current application takes significantly longer than seven months to be
approved, the Company is at risk of losing the $2 million of Morphine Sulfate
Oral Solution inventory recorded on its books as of July 24, 2010, and
approximately 5% to 8 % in future annual Net Sales.
In addition, Lannett, as well as many of our
significant suppliers of distributed product and raw materials, are subject to
periodic inspection of facilities, procedures and operations and/or the testing
of the finished products by the FDA, the DEA and other authorities, which
conduct periodic inspections to confirm that pharmaceutical companies are in
compliance with all applicable regulations.
The FDA conducts pre-approval and post-approval reviews and plant
inspections to determine whether systems and processes are in compliance with
cGMP, and other FDA regulations.
Following such inspections, the FDA may issue notices on Form 483
that could cause us or our suppliers 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. The DEA and comparable
state-level agencies also heavily regulate the manufacturing, holding,
processing, security, record-keeping, and distribution of drugs that are
considered controlled substances. Some of the pain management products we
manufacture contain controlled substances. The DEA periodically inspects
facilities for compliance with its rules and regulations. If our
manufacturing facilities or those of our suppliers fail to comply with
applicable regulatory requirements, it could result in regulatory action and
additional costs to us.
Our inability or the inability of our suppliers to
comply with applicable FDA and other regulatory requirements can result in,
among other things, delays in or denials of new product approvals, warning
letters, fines, consent decrees restricting or suspending
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manufacturing operations, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of sales,
and/or criminal prosecution., Any of these or other regulatory actions could
materially harm our operating results and financial condition. 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
.
Additionally, if the FDA were to undertake
additional enforcement activities with any of Lannetts GRASE products, their
actions could result in, among other things, removal of some of our products
from the market, seizure of products and total or partial suspension of
sales. Any of these regulatory actions
could materially harm our operating results and financial condition.
Our manufacturing operations as well as our suppliers
manufacturing are subject to licensing by the FDA and/or DEA. If we or our suppliers were unable to
maintain the proper agency licensing arrangements, our operating results would
be materially negatively impacted.
All of our manufacturing operations as well as those
of our suppliers rely on maintaining active licenses to produce and develop
generic drugs. Specifically, our Cody
Labs operations rely on a DEA license to directly import and convert raw opium
into several APIs or dosage forms. This
license is granted for a one year period and must be renewed successfully each
year in order for us to maintain Codys current operations and allow the
Company to continue to work towards becoming a fully integrated narcotics
supplier. If the Company were unable to
successfully renew its FDA and/or DEA licenses, the financial results of
Lannett would be negatively impacted.
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;
·
receiving requisite regulatory approvals for
such products in a timely manner;
·
the availability, on commercially reasonable
terms, of raw materials, including APIs 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 been issued and 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.
The generic 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.
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Table of Contents
The loss of Arthur P. Bedrosian or our other 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 Arthur P.
Bedrosian and our other key personnel.
If we lose the services of Mr. Bedrosian or our other key
personnel, or if he or they are unable to devote sufficient attention to our
operations for any other reason, our business may be significantly
impaired. 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 all of our senior executive officers to help prevent
the loss of our key personnel.
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.
Our
future results of operations, financial condition and cash flows depend to a
significant extent upon our product sales mix. Our sales of certain
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
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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 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.
Health
care initiatives and other third-party payor cost-containment pressures could
cause us to sell our products at lower prices, resulting in decreased revenues.
Some
of our products are purchased or
reimbursed by state and federal government authorities, private health insurers
and other organizations, such as health maintenance organizations, or HMOs, and
managed care organizations, or MCOs. Third-party payors increasingly challenge
pharmaceutical product pricing. There also continues to be a trend toward
managed health care in the United States. Pricing pressures by third-party
payors and the growth of organizations such as HMOs and MCOs could result in
lower prices and a reduction in demand for our products.
In addition, legislative and regulatory proposals
and enactments to reform health care and government insurance programs could
significantly influence the manner in which pharmaceutical products and medical
devices are prescribed and purchased.
We expect there will continue to be federal and state laws and/or
regulations, proposed and implemented, that could limit the amounts that
federal and state governments will pay for health care products and services.
The extent to which future legislation or regulations, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted
or what effect such legislation or regulation would have on our business
remains uncertain. For example, the American Recovery and Reinstatement Act of
2009, also known as the stimulus package, includes $1.1 billion in funding to
study the comparative effectiveness of health care treatments and strategies.
If the stimulus package is approved in its current form, this funding will be
used, among other things, to conduct, support or synthesize research that
compares and evaluates the risk and benefits, clinical outcomes, effectiveness
and appropriateness of products. Although Congress has indicated that this
funding is intended for improvement in quality of health care, it remains
unclear how the research will impact coverage, reimbursement or other
third-party payor policies. Such measures or other health care system reforms
that are adopted could have a material adverse effect on our industry generally
and our ability to successfully commercialize our products or could limit or
eliminate our spending on development projects and affect our ultimate
profitability.
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We may need to change our business practices to comply with
changes to fraud and abuse laws.
We are subject to various federal and state laws
pertaining to health care fraud and abuse, including the federal fraud and
abuse law (sometimes referred to as the Anti-Kickback Statute) which apply to
our sales and marketing practices and our relationships with physicians. At the
federal level, the Anti-Kickback Statute prohibits any person or entity from
knowingly and willfully soliciting, receiving, offering, or paying any
remuneration, including a bribe, kickback, or rebate, directly or indirectly,
in return for or to induce the referral of patients for items or services
covered by federal health care programs, or the furnishing, recommending, or
arranging for products or services covered by federal health care programs.
Federal health care programs have been defined to include plans and programs
that provide health benefits funded by the federal government, including
Medicare and Medicaid, among others. The definition of remuneration has been
broadly interpreted to include anything of value, including, for example,
gifts, discounts, the furnishing of supplies or equipment, credit arrangements,
payments of cash, and waivers of payments. Several courts have interpreted the
federal Anti-Kickback Statutes intent requirement to mean that if even one
purpose in an arrangement involving remuneration is to induce referrals or
otherwise generate business involving goods or services reimbursed in whole or
in part under federal health care programs, the statute has been violated. The
federal government has issued regulations, commonly known as safe harbors that
set forth certain provisions which, if fully met, will assure parties that they
will not be prosecuted under the federal Anti-Kickback Statute. The failure of
a transaction or arrangement to fit within a specific safe harbor does not
necessarily mean that the transaction or arrangement will be illegal or that
prosecution under the federal Anti-Kickback Statute will be pursued, but such
transactions or arrangements face an increased risk of scrutiny by government
enforcement authorities and an ongoing risk of prosecution. If our sales and
marketing practices or our relationships with physicians (such as physicians
serving on our Scientific Advisory Board) are considered by federal or state
enforcement authorities to be knowingly and willfully soliciting, receiving,
offering, or providing any remuneration in exchange for arranging for or
recommending our products and services, and such activities do not fit within a
safe harbor, then these arrangements could be challenged under the federal
Anti-Kickback Statute. If our operations are found to be in violation of the
federal Anti-Kickback Statute we may be subject to civil and criminal penalties
including fines of up to $25,000 per violation, civil monetary penalties of up
to $50,000 per violation, assessments of up to three times the amount of the
prohibited remuneration, imprisonment, and exclusion from participating in the
federal health care programs. In
addition, HIPAA and its implementing regulations created two new federal
crimes: health care fraud and false statements relating to health care
matters. The HIPAA health care fraud
statute prohibits, among other things, knowingly and willfully executing, or
attempting to execute, a scheme to defraud any health care benefit program,
including private payors. A violation of
this statue is a felony and may result in fines, imprisonment and/or exclusion
from government-sponsored programs. The
HIPAA false statements statute prohibits, among other things, knowingly and
willfully falsifying, concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement or representation in
connection with the delivery of or payment for health care benefits, items, or
services. A violation of this statute is
a felony and may result in fines and/or imprisonment. A number of states also have anti-fraud and anti-kickback
laws similar to the federal Anti-Kickback Statute that prohibit certain direct
or indirect payments if such arrangements are designed to induce or encourage
the referral of patients or the furnishing of goods or services. Some states
anti-fraud and anti-kickback laws apply only to goods and services covered by
Medicaid. Other states anti-fraud and anti-kickback laws apply to all health
care goods and services, regardless of whether the source of payment is
governmental or private. Due to the breadth of these laws and the potential for
changes in laws, regulations, or administrative or judicial interpretations, we
may have to change our business practices or our existing business practices
could be challenged as unlawful, which could materially adversely affect our
business.
Certain federal and state governmental agencies,
including the U.S. Department of Justice and the U.S. Department of Health and
Human Services, have been investigating issues surrounding pricing information
reported by drug manufacturers and used in the calculation of reimbursements as
well as sales and marketing practices. For example, many government and
third-party payors, including Medicare and Medicaid, reimburse doctors and
others for the purchase of certain pharmaceutical products based on the products
average wholesale price (AWP) reported by pharmaceutical companies. While
Lannett has only used Suggested Wholesale Prices since 2000, the federal
government, certain state agencies, and private payors are investigating and
have begun to file court actions related to pharmaceutical companies reporting
practices with respect to AWP, alleging that the practice of reporting prices
for pharmaceutical products has resulted in a false and overstated AWP, which
in turn is alleged to have improperly inflated the reimbursement paid by
Medicare beneficiaries, insurers, state Medicaid programs, medical plans, and
others to health care providers who prescribed and administered those products.
In addition, some of these same payors are also alleging that companies are not
reporting their best price to the states under the Medicaid program. We are
not currently subject to any such investigations or actions and having not used
AWP pricing since 2000 would not likely become subject to these investigations.
We may become subject to federal and state false claims
litigation brought by private individuals and the government.
We are subject to state and federal laws that govern
the submission of claims for reimbursement. The federal False Claims Act
imposes civil liability and criminal fines on individuals or entities that
knowingly submit, or cause to be submitted, false or
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fraudulent claims for payment to the government.
Violations of the False Claims Act and other similar laws may result in
criminal fines, imprisonment, and civil penalties for each false claim
submitted and exclusion from federally funded health care programs, including
Medicare and Medicaid. The False Claims Act also allows private individuals to
bring a suit on behalf of the government against an individual or entity for
violations of the False Claims Act. These suits, known as qui tam actions, may
be brought by, with only a few exceptions, any private citizen who has material
information of a false claim that has not yet been previously disclosed. These
suits have increased significantly in recent years because the False Claims Act
allows an individual to share in any amounts paid to the federal government in
fines or settlement as a result of a successful qui tam action. If our past or present operations are found
to be in violation of any of such laws or any other governmental regulations
that may apply to us, we may be subject to penalties, including civil and
criminal penalties, damages, fines, exclusion from federal health care
programs, and/or the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment,
or restructuring of our operations could adversely affect our ability to
operate our business and our financial results, action against us for violation
of these laws, even if we successfully defend against them, could cause us to
incur significant legal expenses and divert our managements attention from the
operation of 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 fiscal year ended June 30, 2010, our three largest customers accounted
for 26%, 11% and 9%, 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 that would
require them to purchase our products.
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 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, as well as the inability to obtain
certain insurance coverage for risks faced by Lannett, 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
coverage to mitigate these costs. These increases, and our increased risk
due to increased deductibles and reduced coverage, could have a negative impact
on our results of operations, financial condition and cash flows.
Additionally,
certain insurance coverages may not be available to Lannett for risks faced by
Lannett. Sometimes the coverages
obtained by Lannett for certain risks may not be adequate to fully reimburse
the amount of damage that Lannett could possibly sustain. Should either of these events occur, the lack
of insurance to cover the entire cost to the Company would adversely affect our
results of operations and financial condition.
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
25
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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.
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 (FTC)
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.
ITEM 2. DESCRIPTION OF PROPERTY
Lannett owns three
facilities in Philadelphia, Pennsylvania.
Certain administrative functions, manufacturing and production
facilities and our quality control laboratory are located in a 31,000 square
foot facility at 9000 State Road in Philadelphia. The second facility consists of 63,000 square
feet, and is located within one mile of the State Road location at 9001 Torresdale
Avenue in Philadelphia. Our research
laboratory and packaging functions are located in the second building, which
may be used for additional manufacturing space in the future.
In
June 2006, we leased a third building located several miles from our
manufacturing facility in Philadelphia, consisting of 66,000 square feet on
approximately 7.3 acres. We purchased
this building in October 2009 for approximately $3.8 million, plus the
cost of fit out of approximately $2.0 million.
A significant portion of the purchase price and fit out costs are
expected to be financed through a series of loans with a bank and a
Pennsylvania state run development agency. Construction was substantially
complete by June 30, 2010. The
financing will be competed shortly. This
new facility is being used for certain administrative functions, warehouse
space, shipping and possibly additional manufacturing space in the future.
Cody, a wholly-owned
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 officer of
Cody Laboratories and his former spouse.
ITEM 3. LEGAL PROCEEDINGS
In
January 2010, the Company initiated an arbitration proceeding against
Olive Healthcare (Olive) for damages arising out of Olives delivery of
defective soft-gel prenatal vitamin capsules.
The Company seeks damages in excess of $3.5 million. Olive has denied
liability and filed a counterclaim in February 2010 for breach of
contract.
In
June 2008, the Company filed a declaratory judgment suit in
the Federal District Court of Delaware (Civil Action No. 08-338 (JJF))
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. In March 2009, the Company and KV settled the
litigation. In light of the withdrawal
of KVs innovator prenatal product due to FDA enforcement actions, and the
resulting anticipated decline in sales and declining market for written
prescription, the Company decided it was pointless to continue the litigation
and entered into the settlement arrangement with KV. Pursuant to the settlement, the Company
received a license from KV and became an authorized generic provider. During the terms of the license, the Company
is to pay KV a royalty on all future sales of its Prenatal vitamin product. Lannett will cease offering its Prenatal
vitamin product if and when the brand is restored to the marketplace. In May 2010, the Company filed an action
for declaratory relief in the Delaware Superior Court against KV seeking a
declaration that KV breached its obligations under a settlement agreement
entered into with the
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Company
(the Binding Agreement). In June 2010,
KV filed a counterclaim to the complaint and asserted claims for breach of
contract, declaratory judgment, negligent misrepresentation and fraud in
connection with the Binding Agreement, alleging among other things that the
Company has improperly withheld royalties from KV arising out of its sales of a
pre-natal vitamin product.
In
or about July 2008, Albion International and Albion, Inc. filed suit in the
United States District Court, District of Utah (Case No. 2:08cv00515) 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 granted the motion and dismissed the
complaint but gave Albion leave to file an amended complaint. In January 2009, Albion filed an amended
complaint. Lannett filed an answer to
the complaint and counterclaim, asserting, among other things, that Albion tortuously
interfered with Lannetts contracts. Subsequent to the filing of the answer and
counterclaim, Lannett and Albion reached an agreement in principal to settle
the case. Under terms of the settlement,
the parties would each dismiss their claims against each other and provide
releases. In July 2009, the settlement
agreement was signed and the case was dismissed.
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 (now the NYSE AMEX). 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 2010 and 2009,
as quoted by the NYSE AMEX. Such
quotations reflect inter-dealer prices without retail mark-up, markdown, or
commission and may not represent actual transactions.
Fiscal Year Ended
June 30, 2010
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
9.67
|
|
$
|
6.70
|
|
|
|
|
|
|
|
Second quarter
|
|
$
|
8.19
|
|
$
|
4.95
|
|
|
|
|
|
|
|
Third quarter
|
|
$
|
6.45
|
|
$
|
4.17
|
|
|
|
|
|
|
|
Fourth quarter
|
|
$
|
5.12
|
|
$
|
4.23
|
|
Fiscal
Year Ended June 30, 2009
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
4.20
|
|
$
|
2.25
|
|
|
|
|
|
|
|
Second quarter
|
|
$
|
5.00
|
|
$
|
1.79
|
|
|
|
|
|
|
|
Third quarter
|
|
$
|
5.86
|
|
$
|
4.60
|
|
|
|
|
|
|
|
Fourth quarter
|
|
$
|
7.52
|
|
$
|
4.86
|
|
Holders
As
of September 17, 2010, there were approximately 249
holders
of record of the Companys common stock.
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Table
of Contents
Dividends
The Company did not pay cash dividends in Fiscal
2010 or Fiscal 2009. 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.
Share Repurchase Program
The following table sets forth certain information
with respect to the Companys Share Repurchase Program.
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
Period
|
|
(a) Total
Number of
Shares (or
Units)
Purchased
|
|
(b) Average
Price Paid
per Share (or
Unit)
|
|
(c) Total
Number of
Shares (or
Units)
Purchased as
Part of
Publicly
Announced
Plans or
Programs
|
|
(d) Maximum
Number (or
Approximate
Dollar Value)
of Shares (or
Units) that
May Yet Be
Purchased
Under the
Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
April 1 to April 30, 2010
|
|
8,799
|
|
$
|
4.47
|
|
8,799
|
|
$
|
4,348,587
|
|
May 1 to May 31, 2010
|
|
|
|
|
|
|
|
|
|
June 1 to June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,799
|
|
|
|
8,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 27, 2005, the Companys Board of
Directors approved a stock repurchase program which was reauthorized by the
Board of Directors on November 20, 2009.
Under the program, the Company is authorized to repurchase up to $5
million of its outstanding common stock.
As of June 30, 2010, the Company has repurchased 110,108 shares of
its common stock under the program at an aggregate purchase price of $651,413.
28
Table
of Contents
ITEM 6. SELECTED FINANCIAL DATA
The
following financial information as of and for the five years ended
June 30, 2010, has been derived from our consolidated financial
statements. This information should be read in conjunction with our
consolidated financial statements and related notes thereto included elsewhere
herein. The comparability of information
is affected by the items described below.
In
Fiscal 2008, we increased our returns reserve by $10.5 million, reflecting our
expectation that 100% of the shipments of Prenatal Multivitamin made in the
fourth quarter of Fiscal 2008 would be returned. Our expectation that all of the product would
be returned was based on our inability to have the product specified as a brand
equivalent, product complaints and information from our customers regarding
their intentions to return the product.
In
Fiscal 2007, the Company wrote-off of a portion of a note receivable due from
Cody Labs, and subsequently acquired Cody Labs (a provider of API). 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.
Lannett Company, Inc. and Subsidiaries
Financial Highlights
As of and for the Fiscal Year Ended June 30,
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Operating
Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
125,177,949
|
|
$
|
119,002,215
|
|
$
|
72,403,283
|
|
$
|
82,577,591
|
|
$
|
64,060,375
|
|
Gross Profit
|
|
$
|
41,339,807
|
|
$
|
45,244,469
|
|
$
|
16,301,071
|
|
$
|
21,424,987
|
|
$
|
28,375,665
|
|
Operating Income/(Loss)
|
|
$
|
13,030,019
|
|
$
|
10,780,869
|
|
$
|
(5,430,534
|
)
|
$
|
(5,964,409
|
)
|
$
|
8,453,918
|
|
Net Income/(Loss) Lannett Company, Inc.
|
|
$
|
7,821,067
|
|
$
|
6,534,245
|
|
$
|
(2,318,059
|
)
|
$
|
(6,929,008
|
)
|
$
|
4,968,922
|
|
Basic Earnings/(Loss) Per Share Lannett
Company, Inc.
|
|
$
|
0.32
|
|
$
|
0.27
|
|
$
|
(0.10
|
)
|
$
|
(0.29
|
)
|
$
|
0.21
|
|
Diluted Earnings/(Loss) Per Share Lannett
Company, Inc.
|
|
$
|
0.31
|
|
$
|
0.27
|
|
$
|
(0.10
|
)
|
$
|
(0.29
|
)
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
139,963,797
|
|
$
|
124,577,121
|
|
$
|
113,679,264
|
|
$
|
104,656,100
|
|
$
|
105,992,064
|
|
Total Debt
|
|
$
|
7,719,827
|
|
$
|
8,138,768
|
|
$
|
8,978,834
|
|
$
|
9,679,965
|
|
$
|
8,196,692
|
|
Long Term Debt, less Current Portion
|
|
$
|
2,868,549
|
|
$
|
7,703,382
|
|
$
|
8,186,922
|
|
$
|
8,987,846
|
|
$
|
7,649,806
|
|
Total Stockholders Equity
|
|
$
|
88,957,715
|
|
$
|
77,647,623
|
|
$
|
69,321,789
|
|
$
|
70,183,175
|
|
$
|
75,755,916
|
|
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 2011, 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
29
Table of
Contents
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.
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 estimates,
including 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 and chargebacks payable and
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, 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 Health 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, chargebacks and returns 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 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, chargebacks and returns payable account on the balance
sheet. When competitors enter the market
for existing products, shelf stock adjustments may be issued to maintain price
competitiveness.
30
Table
of Contents
The following tables identify the reserves for each major category of
revenue allowance and a summary of the activity for fiscal years 2010, 2009 and
2008. 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.
For the Year Ended June 30, 2010
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
Reserve Balance as of June 30, 2009
|
|
$
|
6,089,802
|
|
$
|
2,537,746
|
|
$
|
5,106,992
|
|
$
|
|
|
$
|
13,734,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales recorded in
prior fiscal years
|
|
(6,068,639
|
)
|
(2,537,746
|
)
|
(3,832,652
|
)
|
|
|
(12,439,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves or (reversals) charged during Fiscal
2010 related to sales in prior fiscal years
|
|
|
|
|
|
(401,203
|
)
|
|
|
(401,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves charged to net sales during Fiscal
2010 related to sales recorded in Fiscal 2010
|
|
48,539,403
|
|
16,353,467
|
|
4,528,118
|
|
1,226,614
|
|
70,647,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales recorded
in Fiscal 2010
|
|
(42,278,440
|
)
|
(12,787,436
|
)
|
|
|
(1,226,614
|
)
|
(56,292,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of June 30, 2010
|
|
$
|
6,282,127
|
|
$
|
3,566,031
|
|
$
|
5,401,254
|
|
$
|
|
|
$
|
15,249,412
|
|
For the Year Ended June 30, 2009
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
Reserve Balance as of June 30, 2008
|
|
$
|
4,049,407
|
|
$
|
632,314
|
|
$
|
13,642,589
|
|
$
|
2,107
|
|
$
|
18,326,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales recorded in
prior fiscal years
|
|
(3,954,794
|
)
|
(632,314
|
)
|
(12,853,342
|
)
|
|
|
(17,440,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves or (reversals) charged during Fiscal
2009 related to sales in prior fiscal years
|
|
|
|
|
|
2,107
|
|
(2,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves charged to net sales during Fiscal
2009 related to sales recorded in Fiscal 2009
|
|
35,391,475
|
|
12,141,204
|
|
4,315,638
|
|
204,119
|
|
52,052,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales recorded
in Fiscal 2009
|
|
(29,396,286
|
)
|
(9,603,458
|
)
|
|
|
(204,119
|
)
|
(39,203,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of June 30, 2009
|
|
$
|
6,089,802
|
|
$
|
2,537,746
|
|
$
|
5,106,992
|
|
$
|
|
|
$
|
13,734,540
|
|
31
Table
of Contents
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
|
|
Reserve
Activity 2010 vs. 2009
The total reserve for chargebacks, rebates, returns and other
adjustments increased from $13,734,540 at June 30, 2009 to $15,249,412 at June 30,
2010. The increase in total reserves was due to an increase in the rebates
reserve as a result of the timing of credits being processed by the customers
and by the Company, an increase in chargeback reserves due primarily to an
increase in inventory levels at wholesaler distribution centers, and an
increase in the return reserves due to an increase in overall sales.
During Fiscal 2010 approximately $424,000 of the original $10,545,000
return reserve recorded in the fourth quarter of Fiscal 2008 for the Prenatal
Multivitamin product was applied to accounts receivable for customers who had
returned the Prenatal Multivitamin product during 2010. In addition, the Company reversed
approximately $387,000 to net sales in the fourth quarter of Fiscal 2010 as a
result of new information that the Company had received regarding the amount of
Multivitamin product that remained to be returned to the Company. This
adjustment left a balance of approximately $17,000 of Multivitamin returns
reserve on the consolidated balance sheet at June 30, 2010.
The
following tables compare the year-end reserve balances in fiscal years 2010 and
2009 and the gross sales mix in Fiscal 2010 and Fiscal 2009.
|
|
Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
%
|
|
2009
|
|
%
|
|
Chargeback reserve
|
|
$
|
6,282,127
|
|
41
|
%
|
$
|
6,089,802
|
|
44
|
%
|
Rebate reserve
|
|
3,566,031
|
|
23
|
%
|
2,537,746
|
|
19
|
%
|
Return reserve
|
|
5,401,254
|
|
36
|
%
|
5,106,992
|
|
37
|
%
|
Other reserve
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
$
|
15,249,412
|
|
100
|
%
|
$
|
13,734,540
|
|
100
|
%
|
|
|
Fiscal Year ended June 30,
|
|
Fiscal Fourth Quarter
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Chain drug stores
|
|
32
|
%
|
37
|
%
|
31
|
%
|
33
|
%
|
Mail Order
|
|
4
|
%
|
4
|
%
|
4
|
%
|
3
|
%
|
Wholesalers
|
|
64
|
%
|
59
|
%
|
65
|
%
|
64
|
%
|
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
Reserve
Activity 2009 vs. 2008
The
total reserve for chargebacks, rebates, returns and other adjustments decreased
from $18,326,417 at June 30, 2008 to $13,734,540 at June 30,
2009. The decrease in the reserve
balance was primarily the result of our decision to record during the fourth
quarter of Fiscal 2008 a $10,545,000 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, product
complaints and information from our customers regarding their intentions to
return the product. Substantially all of
these products were returned in Fiscal 2009 leaving a balance of approximately
$828,000 in the Multivitamin return reserve at June 30, 2009. Partially offsetting this decrease was an
increase primarily due to an increase in sales volume in Fiscal 2009.
32
Table
of Contents
The
increase in chargeback and rebate reserves between June 30, 2008 and
June 30, 2009 was primarily due to an increase in sales volume in 2009, as
well as a change in our sales mix. The
following tables compare the year-end reserve balances in fiscal years 2009 and
2008 and the gross sales mix for the fourth quarters and full years in Fiscal
2009 and Fiscal 2008.
|
|
Fiscal Year Ended June 30,
|
|
|
|
2009
|
|
%
|
|
2008
|
|
%
|
|
Chargeback reserve
|
|
$
|
6,089,802
|
|
44
|
%
|
$
|
4,049,407
|
|
22
|
%
|
Rebate reserve
|
|
2,537,746
|
|
19
|
%
|
632,314
|
|
3
|
%
|
Return reserve
|
|
5,106,992
|
|
37
|
%
|
13,642,589
|
|
74
|
%
|
Other reserve
|
|
|
|
0
|
%
|
2,107
|
|
0
|
%
|
|
|
$
|
13,734,540
|
|
100
|
%
|
$
|
18,326,417
|
|
100
|
%
|
|
|
Fiscal Year ended June 30,
|
|
Fiscal Fourth Quarter
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Chain drug stores
|
|
37
|
%
|
34
|
%
|
33
|
%
|
35
|
%
|
Mail Order
|
|
4
|
%
|
4
|
%
|
3
|
%
|
4
|
%
|
Wholesalers
|
|
59
|
%
|
62
|
%
|
64
|
%
|
61
|
%
|
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
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 calculated 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 AR 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 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, 2010, 2009 and 2008:
Fiscal Year Ended June 30,
|
|
2010
|
|
2009
|
|
2008
|
|
Net DSO (in days)
|
|
77
|
|
55
|
|
65
|
|
Gross DSO (in days)
|
|
69
|
|
53
|
|
70
|
|
The level of net DSO at June 30,
2010 is slightly higher than the Companys expectation that DSO will be in the
60 to 70 day range based on 60 day payment terms for most customers. The increase is due to a higher percentage of
sales being shipped at the end of the quarter.
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.
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
33
Table of
Contents
consolidating
a VIE do not represent additional assets that could be used to satisfy claims
against our general assets. Reflected in the June 30, 2010 and 2009
balance sheets are consolidated VIE assets of $1.9 million and $1.9 million,
respectively, which is comprised mainly of land and a building. VIE liabilities primarily consist of a mortgage
on that property in the amount of $1.6 million and $1.7 million at
June 30, 2010 and 2009, 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.
New Accounting Pronouncements -
In
December 2007, the FASB issued authoritative guidance which significantly
changes 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
the guidance, 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. In April 2009, updated guidance was issued
to address application issues regarding the accounting and disclosure
provisions for contingencies. The authoritative guidance 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 this authoritative guidance on our
consolidated financial statements will depend on the nature and terms of any
business combinations that occur after the effective date.
In
December 2007, the FASB issued authoritative guidance 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. We adopted this authoritative guidance effective July 1,
2009. As a result of the adoption, the Company presents noncontrolling
interests as a component of equity on its consolidated balance sheets. Minority interest expense is now shown below
net income under the heading net income attributable to noncontrolling
interest. Prior year financial
statements have been reclassified to reflect the adoption of this
guidance. The adoption of this guidance
did not have any other significant impact on our consolidated financial
statements.
In
April 2008, the FASB issued authoritative guidance which amends the
factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset.
The guidance is intended to improve the consistency between the useful life of
a recognized intangible asset and the period of expected cash flows used to
measure the fair value of the asset. We adopted this authoritative guidance
effective July 1, 2009. The
adoption of this guidance did not have a significant impact on our consolidated
financial statements.
In
June 2009, the FASB issued authoritative guidance for determining whether
an entity is a variable interest entity and modifies the methods allowed for
determining the primary beneficiary of a variable interest entity. This
guidance requires an enterprise to perform an analysis to determine whether the
enterprises variable interest or interests give it a controlling financial
interest in a variable interest entity. It also requires ongoing reassessments
of whether an enterprise is the primary beneficiary of a variable interest
entity. The authoritative guidance is
effective for the annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and annual
reporting periods thereafter. We do not expect the adoption of this
authoritative guidance to have a significant impact on our consolidated
financial statements.
In
January 2010, the FASB issued authoritative guidance which requires
reporting entities to make new disclosures about recurring or nonrecurring fair
value measurements including significant transfers into and out of Level 1 and
Level 2 fair value measurements and information on purchases, sales, issuances,
and settlements on a gross basis in the reconciliation of Level 3 fair value
measurements. The authoritative guidance is effective for interim and annual
reporting periods beginning after December 15, 2009, except for Level 3
reconciliation disclosures which are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. We do
not anticipate that this update will have a material impact on our consolidated
financial statements.
34
Table
of Contents
Results
of Operations Fiscal 2010 compared to Fiscal 2009
Net
sales increased 5% from $119,002,215 in Fiscal 2009 to $125,177,949 in Fiscal
2010. The following factors contributed to the $6,175,734 increase in sales:
Medical indication
|
|
Sales volume
change %
|
|
Sales price
change %
|
|
Migraine Headache
|
|
(6
|
)%
|
9
|
%
|
Antibiotics
|
|
5
|
%
|
(5
|
)%
|
Prescription Vitamin
|
|
(47
|
)%
|
(15
|
)%
|
Pain Management
|
|
138
|
%
|
44
|
%
|
Epilepsy
|
|
(10
|
)%
|
26
|
%
|
Heart Failure
|
|
(19
|
)%
|
(1
|
)%
|
Thyroid Deficiency
|
|
9
|
%
|
0
|
%
|
Sales
of drugs used for pain management increased by approximately $9,974,000 for
Fiscal 2010 compared to Fiscal 2009.
This increase is due to an increased number of products offered as well
as a market withdrawal by one of our major competitors. Sales of drugs used in the treatment of
thyroid deficiency increased by approximately $4,485,000 as a result of a
continued shift away from branded drugs towards generic prescriptions. Partially offsetting these increases was a
decrease in sales of our prescription vitamins of approximately $6,929,000 due
to a lack of selling activities by the branded drug company. The overall
increase in sales was also affected by a decrease in sales of drugs for the
treatment of congestive heart failure by approximately $5,425,000 in Fiscal
2010 compared to Fiscal 2009. This
decrease was due to a prior year product recall by several of our major
competitors which increased our Fiscal 2009 revenues. Additional sales can also be attributed to
new drugs used for the treatment of gallstones totaling approximately
$2,190,000.
The
Company expects to continue increasing the number of products available for
sale to its customers, which will require additional FDA approvals. The Companys
receipt of several approvals by the FDA to offer new products has resulted in
more sales of new products in Fiscal 2010 compared to Fiscal 2009.The Company
sells its products to customers in various categories. The table below presents the Companys net
sales to each category.
Customer Category
|
|
Fiscal 2010 Net Sales
|
|
Fiscal 2009 Net Sales
|
|
|
|
|
|
|
|
Wholesaler/Distributor
|
|
$
|
58.2 million
|
|
$
|
53.8 million
|
|
|
|
|
|
|
|
Retail Chain
|
|
$
|
60.3 million
|
|
$
|
59.0 million
|
|
|
|
|
|
|
|
Mail-Order Pharmacy
|
|
$
|
6.7 million
|
|
$
|
5.8 million
|
|
|
|
|
|
|
|
Private Label
|
|
$
|
0.0 million
|
|
$
|
0.4 million
|
|
|
|
|
|
|
|
Total
|
|
$
|
125.2 million
|
|
$
|
119.0 million
|
|
The
sales to wholesaler/distributor and retail chain customer categories increased
significantly as a result of an increase in the demand for products for which
the Company is the major supplier and also an increase in the number of
products available for sale.
Cost
of sales increased 14% to $83,838,142 in Fiscal 2010 from $73,757,746 in Fiscal
2009. The increase reflected the impact
of the 5% increase in sales as well as additional royalties of approximately
$455,180 primarily related to the sale of the prescription vitamins, our
Amantadine product and the final payments under the Provell termination
agreement. Additionally, the increase in
cost of sales is attributable to two months of idle capacity costs at our Cody
Labs subsidiary being directly expensed to the income statement during the
second quarter of fiscal 2010. In March of
2009, the FDA issued a warning letter to nine companies including Lannett to
remove Morphine Sulfate Oral Solution from the market until someone could
submit an application and receive approval on such application. In April 2009, due to shortages of this
fairly necessary drug in the marketplace, the FDA reversed their position and
allowed all seven companies to continue manufacturing and/or marketing Morphine
Sulfate up until 180 days after someone received approval on a Morphine Sulfate
application. These actions by the FDA
caused the DEA to withhold purchasing and manufacturing quota from some or all
of these nine companies, including Lannett.
Although the Company had quota at the time and quota issues were
resolved by December 2009, the Cody Labs facility was left idle for the
months of October and November 2009 due to the lack of Morphine
Sulfate quota.
35
Table
of Contents
Amortization
expense primarily relates to the JSP Distribution Agreement. For the remaining term of the JSP Distribution
Agreement, the Company will incur annual amortization expense of approximately
$1,785,000.
Gross
profit margins for Fiscal 2010 and Fiscal 2009 were 33% and 38%, respectively.
Gross profit percentage decreased due to the decline in sales of the prescription
vitamin, the commencement of the related royalty and the Cody Labs idle
capacity costs discussed above. While
the Company is continuously striving to keep product costs low, there can be no
guarantee that profit margins will not fluctuate in future periods. Pricing pressure from competitors and costs
of producing or purchasing new drugs may also fluctuate in the future. Changes
in the future sales product mix may also occur. These changes may affect the gross
profit percentage in future periods.
Research and development (R&D)
expenses increased 34% to $11,251,421 in Fiscal 2010 from $8,427,135 in Fiscal
2009. The increase was primarily due to an increase in the number of
drugs in development and preparation for submission to the FDA as well as
increased costs for biostudies. 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 R&D plans for submission to the
FDA.
Selling,
general and administrative (S, G & A) expenses decreased 33% to
$17,375,320 in Fiscal 2010 from $26,059,104 in Fiscal 2009. The decrease is primarily due to litigation
expenses in Fiscal 2009 related to the patent challenge with KV Pharmaceuticals
of approximately $6,537,000 which were not incurred in Fiscal 2010 as the
litigation was settled in March 2009. In the third quarter of Fiscal 2009,
the Company also incurred severance costs related to the departure of the
Companys former chief financial officer of approximately $452,000 which were
not incurred in Fiscal 2010. Most of the
remaining decrease in S, G &A expense is due to the reallocation of
personnel at Cody Labs during 2010 to production due to their transition during
this fiscal year into a more fully functional manufacturing facility. The costs incurred during fiscal 2009 of
getting the Cody facility compliant with FDA cGMP requirements, as well as the
personnel and related expenses incurred to set up laboratories and manufacturing
space, and writing and establishing all policies and procedures were expensed
to S, G &A. While the Company is focused on controlling costs,
increases in personnel costs may have an ongoing and longer lasting impact on
the administrative cost structure. Other
costs are being incurred to facilitate improvements in the Companys
infrastructure. These costs are expected
to be temporary investments in the future of the Company and may not continue
at the same level.
Interest
expense decreased to $275,870 in Fiscal 2010 from $321,751 in Fiscal 2009, due
to lower levels of long term debt.
Interest income decreased to $62,328 in Fiscal 2010 from $209,188 in
Fiscal 2009 due to lower interest earned on smaller investment securities
balances.
The
Company recorded income tax expense totaling $4,813,044 in Fiscal 2010 compared
to $4,090,716 in Fiscal 2009. The
effective tax rate for Fiscal 2010 was 37.5% compared to 38.3% for Fiscal
2009. The effective tax rate for Fiscal
2010 includes the impact of a change in Pennsylvania tax law which lowered the
Companys apportionment factor within this state. The impact of this change caused the Company
to reduce its deferred tax assets by approximately $650,000, and therefore
increased the effective tax rate by approximately 5% for Fiscal 2010. The increase in effective tax rate related to
this change in Pennsylvania tax law was essentially offset by the impact of the
settlement reached with the IRS related to its review of the federal income tax
return for Fiscal 2008. As a result of
the settlement, the Company recorded a refund receivable totaling approximately
$421,000 and reduced its liability for unrecognized tax benefits by
approximately $216,000. In addition, the
Company amended its Fiscal 2005 income tax return to claim additional federal
income tax credits, which was accepted as timely filed by the IRS. As a result, the Company reduced its income
taxes payable by approximately $528,000 related to this amended income tax
return.
At
June 30, 2010, the Company has recognized a net deferred tax asset of
$17,881,721. The net deferred tax asset
is net of a valuation allowance of $2,016,620 that is related to the Cody notes
receivable impairment incurred in conjunction with the acquisition of Cody
Labs. 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 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 net income attributable to Lannett of $7,821,067 for Fiscal
2010, or $0.32 basic and $0.31 diluted earnings per share, compared to net
income attributable to Lannett of $6,534,245 for Fiscal 2009, or $0.27 basic
and diluted earnings per share.
Results
of Operations Fiscal 2009 compared to Fiscal 2008
Net
sales increased 64% from $72,403,283 in Fiscal 2008 to $119,002,215 in Fiscal
2009. The increase was partly due to sales of approximately $12,569,000 of our
prescription vitamins during Fiscal 2009 which was the first year that the
Company has offered this product. In addition
to the sales of the prescription vitamins, the following factors contributed to
the $46,598,932 increase in sales:
36
Table of
Contents
Medical indication
|
|
Sales volume
change %
|
|
Sales price
change %
|
|
Migraine Headache
|
|
(3
|
)%
|
(4
|
)%
|
Antibiotics
|
|
51
|
%
|
(43
|
)%
|
Epilepsy
|
|
2
|
%
|
(53
|
)%
|
Heart Failure
|
|
159
|
%
|
36
|
%
|
Thyroid
|
|
28
|
%
|
(3
|
)%
|
The
increase in product sales can be attributed primarily to three products.
Sales of drugs for the treatment of congestive heart failure increased by
approximately $18,847,000 for Fiscal 2009 compared to Fiscal 2008 due to a
product recall by several of our major competitors. For Fiscal 2009, the
Company had sales of approximately $12,569,000 of the prescription vitamins,
which was the first year the Company offered this product. Sales of drugs used in the treatment of
thyroid deficiency increased by approximately $9,311,000. The main reason
for this increase was due to an increase in sales to one large existing retail
chain customer along with the addition of several new customers at our existing
prices.
The
Company expects to continue increasing the number of products available for
sale to its customers, which will require additional FDA approvals. The Companys
receipt of several approvals by the FDA to offer new products has resulted in
more sales of new products in Fiscal 2009 compared to Fiscal 2008.
The
Company sells its products to customers in various categories. The table below presents the Companys net
sales to each category.
Customer Category
|
|
Fiscal 2009 Net Sales
|
|
Fiscal 2008 Net Sales
|
|
|
|
|
|
|
|
Wholesaler/Distributor
|
|
$
|
53.8 million
|
|
$
|
30.5 million
|
|
|
|
|
|
|
|
Retail Chain
|
|
$
|
59.0 million
|
|
$
|
37.1 million
|
|
|
|
|
|
|
|
Mail-Order Pharmacy
|
|
$
|
5.8 million
|
|
$
|
4.5 million
|
|
|
|
|
|
|
|
Private Label
|
|
$
|
0.4 million
|
|
$
|
0.3 million
|
|
|
|
|
|
|
|
Total
|
|
$
|
119.0 million
|
|
$
|
72.4 million
|
|
The
sales to all customer categories except private label increased significantly
as a result of an increase in the demand for products for which the Company is
the major supplier and also an increase in the number of products available for
sale.
Cost
of sales increased 31%, from $56,102,212 in Fiscal 2008 to $73,757,746 in Fiscal
2009. The increase reflected the impact
of the 64% increase in net sales as well as the overall fixed nature of some
production costs.
Amortization
expense primarily relates to the JSP Distribution Agreement. For the remaining term of the JSP Distribution
Agreement, the Company will incur annual amortization expense of approximately
$1,785,000.
Gross
profit as a percent of net sales increased to 38% in Fiscal 2009 from 23% in
Fiscal 2008, due to strong profit margins on the new prescription vitamin, increased
margins for our congestive heart failure medication, and the overall fixed
nature of some production costs versus the 64% increase in revenues
.
While the Company is continuously striving to keep
product costs low, there can be no guarantee that profit margins will not
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 could affect gross profit as a percent of sales in future periods.
Research
and development (R&D) expenses increased 63% to $8,427,135 in Fiscal 2009
from $5,172,715 in Fiscal 2008. The increase was primarily due to a
increase 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 57% to $26,059,104 in Fiscal 2009
from $16,552,859 in Fiscal 2008. The increase is primarily due to litigation
expenses related to the patent challenge with KV Pharmaceuticals of
approximately $6,537,000,
37
Table of
Contents
incentive
compensation costs totaling approximately $4,200,000, and severance costs
related to the departure of the Companys former chief financial officer of
approximately $452,000. While the
Company is focused on controlling costs, increases in personnel costs may have
an ongoing and longer lasting impact on the administrative cost
structure. Other costs are being incurred to facilitate improvements in
the Companys infrastructure. These costs are expected to be temporary
investments in the future of the Company and may not continue at the same
level.
Interest
expense decreased to $321,751 in Fiscal 2009 from $383,267 in Fiscal 2008, due
to lower levels of long term debt.
Interest income increased to $209,188 in Fiscal 2009 from $170,040 in
Fiscal 2008 due to interest income received on an income tax refund as well as
interest earned on a higher level of investment securities.
The
Company recorded income tax expense of $4,090,716 in Fiscal 2009 on a pretax
income after noncontrolling interest of $10,624,961 as compared to an income
tax benefit of $3,376,011 in Fiscal 2008 on a pretax loss after noncontrolling
interest of $5,694,070. The inclusion of nondeductible expenses, state income
taxes, the effects of 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 38.3% in fiscal year 2009.
At
June 30, 2009, the Company has recognized a net deferred tax asset of
$18,054,474. The net deferred tax asset
is net of a valuation allowance of $2,097,175 that is related to the Cody notes
receivable impairment incurred in conjunction with the acquisition of Cody
Labs. 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 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 net income attributable to Lannett of $6,534,245 for Fiscal
2009, or $0.27 basic and diluted earnings per share, compared to a net loss
attributable to Lannett of $2,318,059 for Fiscal 2008, or $0.10 basic and
diluted loss 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,
2010, working capital was $40,104,705 as compared to $38,632,170 at
June 30, 2009, an increase of $1,472,535.
Net
cash provided by operating activities of $6,941,231 for the year ended
June 30, 2010 reflected net income of $8,008,028 after adjusting for
non-cash items of $6,787,846, as well as cash used by changes in operating
assets and liabilities of $7,854,643.
Significant changes in operating assets and liabilities are comprised
of:
·
An increase in
trade accounts receivable of approximately $8,802,000 primarily as a result of
increased sales in Fiscal 2010 as well as the timing of those shipments
resulting in a higher DSO at June 30, 2010. The change in the accounts
receivable balance from June 30, 2009 to June 30, 2010 includes a
non-cash decrease of approximately $424,000 related to the issuance of credits
for the returns of the multivitamin product received by the Company through
June 30, 2010.
·
An increase in
inventories of approximately $2,862,000 due to increased stocking levels at
both Lannett and Cody Labs for certain products as of June 30, 2010 that
are being carried in order to respond to the increased order volume we are
currently experiencing.
·
An increase in
income taxes payable of approximately $769,000 primarily related to federal tax
provisions in excess of estimated tax payments made in Fiscal 2010.
·
An increase in
prepaid expenses and other current assets of approximately $1,908,000 primarily
related to the Companys payment of $1,406,000 to the FDA that accompanied an
initial application for approval of a currently marketed GRASE product. The
Company is currently awaiting a response from the FDA as to whether part or all
of the fee is refundable. The FDA normally has up to six months from date of
submission in order to determine if any amounts are refundable. Accordingly the
Company is recording this amount in Other Current Assets. If any part of the
fee is not refundable, and the Company receives approval to market the related
product, the Company expects to record the amount as an intangible asset and
amortize it over the estimated product life. If this application is not
approved, the Company has the right to re-file an application for this specific
product with no additional fee due.
·
An increase in
accrued expenses of approximately $1,622,000 due to the timing of payments
related to biostudies and royalties.
38
Table of
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·
An increase in rebates,
chargebacks and returns payable of approximately $1,939,000 primarily due to an
increase in the rebates reserve as a result of the timing of credits being
processed by the customers and by the Company, an increase in chargeback
reserves due primarily to an increase in inventory levels at wholesaler
distribution centers, and an increase in the return reserves due to an increase
in overall sales, partially offset by the reversal of the multivitamin product
return reserve of approximately $387,000.
This increase was partly offset by a non-cash decrease of approximately
$424,000 related to the issuance of credits for the returns of the multivitamin
product received by the Company through June 30, 2010.
·
An increase in accrued payroll and payroll
related costs of approximately $1,913,000 primarily related to accrual of the
Fiscal 2010 incentive compensation costs partially offset by the payment in the
first half of Fiscal 2010 of the Fiscal 2009 accrued incentive compensation
costs totaling approximately $4,165,000.
Of this amount, approximately $759,000 was settled with the issuance of
restricted stock and is therefore excluded from the consolidated statement of
cash flows.
Net
cash used in investing activities of approximately $10,979,000 for the year
ended June 30, 2010 is mainly the result of purchases of property, plant
and equipment of approximately $11,187,000, primarily related to acquired land
and buildings to be used as the Companys administrative offices and additional
warehouse space, as well as the purchase of an intangible asset (product
rights) for $500,000. Partially
offsetting these amounts are proceeds from the sale of property, plant and
equipment totaling approximately $368,000 and proceeds from the sale of
investment securities totaling approximately $340,000.
Net
cash provided by financing activities of approximately $67,000 for Fiscal 2010
was primarily due to proceeds from the issuance of stock of approximately
$756,000 partially offset by the purchase of shares of treasury stock totaling
approximately $162,000. The Company also
made scheduled debt repayments of approximately $419,000 and a distribution to
noncontrolling interests totaling approximately $169,000.
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, 2010 are as follows:
The
Company has a $3,000,000 line of credit from Wells Fargo, N. A., formerly
Wachovia Bank, N.A. (Wells Fargo) that bears interest at the prime interest
rate less 0.25% (3.00% at June 30, 2010 and 2009, respectively). As of June 30,
2010 and 2009, the Company had $3,000,000 of availability under this line of
credit. The line of credit is
collateralized by substantially all of the Companys assets. The
agreement contains covenants with respect to working capital, net worth and certain
ratios, as well as other covenants. As
of June 30, 2010, the Company was in compliance with all financial
covenants under the agreement.
The
existing line of credit, which was scheduled to expire on November 30,
2009, was renewed and extended during the first quarter of Fiscal 2010 to
November 30, 2010. As part of the renewal agreement, the
Company is no longer required to maintain any minimum deposit balances with
Wells Fargo, and the availability fee on the unused balance of the line of
credit was reduced to 0.375%.
The
Company borrowed $4,500,000 from the Philadelphia Industrial Development
Corporation (PIDC). The Company pays a bi-annual interest payment at a rate
equal to two and one-half percent per annum. The outstanding principal
balance is due and payable on January 1, 2011.
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 $933,820 outstanding as of June 30, 2010 with $77,091
currently due.
The
Company 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, 2010, $88,141 is outstanding.
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, 2010 was 0.52%. At June 30, 2010, the Company has
$555,000 outstanding on
39
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the
Authority loan, of which $130,000 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 to secure payment of the Authority Loan and a portion of
the related accrued interest. At
June 30, 2010, no portion of the letter of credit has been utilized.
The
Company entered into agreements (the 2003 Loan Financing) with Wells Fargo 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 remained outstanding at June 30, 2009 was the Equipment Loan, which
had an outstanding balance of $80,130 at June 30, 2009. This loan was
fully repaid as of June 30, 2010.
The
Company has executed Security Agreements with Wells Fargo, PIDA and PIDC in
which the Company has pledged substantially all of its assets to collateralize
the amounts due.
As
a result of the acquisition of Cody, the Company consolidates Cody LCI Realty,
LLC, a variable interest entity (VIE), for which Cody Labs is the primary
beneficiary. See note 12 to our
Consolidated Financial Statements 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 requires monthly principal and
interest payments of $14,782, at a fixed rate of 7.5%, to be made through
June 2026. As of June 30,
2010, $1,642,866 is outstanding under the mortgage loan, of which $56,046 is
classified as currently due. The mortgage is collateralized by the land and
building.
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, 2010, 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, 2010, 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,
2010:
|
|
|
|
Less than 1
|
|
|
|
|
|
More than 5
|
|
|
|
Total
|
|
year
|
|
1-3 years
|
|
3-5 years
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
$
|
7,719,827
|
|
$
|
4,851,278
|
|
$
|
554,977
|
|
$
|
471,652
|
|
$
|
1,841,920
|
|
Operating Leases
|
|
111,176
|
|
50,100
|
|
61,076
|
|
|
|
|
|
Purchase Obligations
|
|
63,930,000
|
|
22,572,500
|
|
41,357,500
|
|
|
|
|
|
Interest on Obligations
|
|
1,435,553
|
|
259,213
|
|
278,996
|
|
244,012
|
|
653,332
|
|
Total
|
|
$
|
73,196,556
|
|
$
|
27,733,091
|
|
$
|
42,252,549
|
|
$
|
715,664
|
|
$
|
2,495,252
|
|
Purchase
obligations primarily relate to the JSP Distribution Agreement. See note 17 to our Consolidated Financial
Statements for more information on the terms, conditions and financial impact
of the JSP Distribution Agreement.
Prospects for the Future
Generic
pharmaceutical manufacturers and distributors are constantly faced by pricing
pressure in the marketplace as competitors attempt to lure business from
distributors, wholesalers and chain retailers by offering lower prices than the
incumbent supplier. Lannett tries to
differentiate itself in the marketplace by complementing its lower cost
offerings with higher levels of customer service and quality of the
products. But as Lannett enters Fiscal
Year 2011, there in an increasing number of competitors on our key products
that are attempting to supplant Lannett as the preferred vendor. Lannett will continue to evaluate each event
as it arises, but any reductions in either volumes or pricing will have a
negative impact on the gross profit margins of the Company.
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 Companys
developmental drug products are intended to treat a diverse range of
indications. As one of the oldest
generic drug manufacturers in the country, formed in 1942, Lannett currently
owns several ANDAs for products which it does not manufacture and market. These ANDAs are dormant on the Companys
records. Occasionally, the Company
reviews such ANDAs to determine if the market potential for any of these older
40
Table of
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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.
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 $1.7 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.
The
Company views its April 2007 acquisition of Cody Laboratories, Inc. (Cody
Labs or Cody) as an important step in becoming a vertically integrated
narcotics manufacturer and distributor by allowing it to concentrate on
developing and completing its dosage form manufacturing in order to reduce
narcotic API costs. In July 2008, the DEA granted Cody Labs a license to
directly import raw poppy straw for conversion into API and/or various
pharmaceutical products. Only six other
companies in the U.S. have been granted this license to date. This license allows the Company to avoid increased
costs associated with buying narcotic API from other manufacturers. The Company anticipates that it can use this
license to become a vertically integrated manufacturer of narcotic products, as
well as a supplier of API to the pharmaceutical industry. The Company believes that the aging domestic
population may result in a higher demand for pain management pharmaceutical
products and that it will be well-positioned to take advantage of this
increased demand.
Cody
Labs manufacturing expertise in narcotic APIs will allow Lannett to build a
market with limited domestic competition.
The Company anticipates that the demand for narcotics and controlled
drugs will continue to grow with the Baby Boomer generation demographics and
that it is well-positioned to take advantage of these opportunities by
concentrating additional resources in the narcotic area. The sale of pain
management products approximated 12% of Net Sales for the third quarter of FY
2010 and 11% of Net Sales for the full year Fiscal 2010. Additionally, the API and dosage form
production of these products were performed at our Cody Labs operations and,
due to the increased volumes of sales on these products, allowed Cody to be
profitable during the Companys third and fourth quarters of 2010.
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, topical or parenterals intended to
treat a diverse range of medical indications.
We intend to ultimately transfer the formulation technology and
manufacturing process for all of these R&D products to our 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. They include, 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 approval.
More
specifically, certain products, marketed prior to the Federal Food, Drug and
Cosmetic Act 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. Recently, the FDA has increased its efforts to force
companies to file and seek FDA approval for these GRASE products. Efforts have included granting market
exclusivity to approved GRASE products and issuing notices to companies
currently producing these products.
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The
Company has entered supply and development agreements with certain
international companies, including Wintac of India, Orion Pharma of Finland,
Azad Pharma AG and Swiss Caps of Switzerland, Pharma 2B (formerly Pharmaseed)
of Israel and the GC Group, as well as certain domestic companies, including
Jerome Stevens, Banner Pharmacaps, Cerovene, Summit Bioscience LLC and
Inverness. The Company is currently in
negotiations on similar agreements with other international companies, through
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.
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.
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.
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,
2010. 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.
42
Table
of Contents
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.
Our
management assessed the effectiveness of our internal control over financial
reporting as of June 30, 2010. 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, 2010, our
internal control over financial reporting is effective.
Changes in Internal Control over Financial Reporting
During
the quarter ended June 30, 2010, there were no changes in the Companys
internal control over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act) that materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.
Registered Public Accounting Firm Report on Internal Control
over Financial Reporting
This
Annual Report on Form 10-K does not include an attestation report of the
Companys independent registered public accounting firm regarding internal
control over financial reporting.
Managements report was not subject to attestation by the Companys
independent registered public accounting firm pursuant to an exemption for
smaller reporting companies under Section 989G of the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
ITEM 9B.
|
OTHER INFORMATION
|
None.
43
Table of
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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
|
|
78
|
|
Chairman of the Board
|
|
|
|
|
|
Ronald
A. West
|
|
76
|
|
Vice Chairman of the Board, Director
|
|
|
|
|
|
Arthur
P. Bedrosian
|
|
64
|
|
Director
|
|
|
|
|
|
Jeffrey
Farber
|
|
49
|
|
Director
|
|
|
|
|
|
Kenneth
Sinclair Ph.D.
|
|
63
|
|
Director
|
|
|
|
|
|
Albert I. Wertheimer, Ph.D.
|
|
67
|
|
Director
|
|
|
|
|
|
Myron
Winkelman
|
|
72
|
|
Director
|
|
|
|
|
|
Officers:
|
|
|
|
|
|
|
|
|
|
Arthur
P. Bedrosian
|
|
64
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
Keith
R. Ruck
|
|
49
|
|
Vice
President of Finance and Chief Financial Officer
|
|
|
|
|
|
Stephen
J. Kovary
|
|
53
|
|
Vice
President of Operations
|
|
|
|
|
|
William
F. Schreck
|
|
61
|
|
Senior
Vice President and General Manager
|
|
|
|
|
|
Kevin
R. Smith
|
|
50
|
|
Vice
President of Sales and Marketing
|
|
|
|
|
|
Ernest
J. Sabo
|
|
62
|
|
Vice
President of Regulatory Affairs and Chief Compliance Officer
|
William
Farber
was elected as Chairman of the Board of Directors in
August 1991. 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
was previously a registered pharmacist in the State of Michigan for more than
40 years until his retirement from active employment in the pharmaceutical
industry.
The
Nominating and Governance Committee concluded that Mr. Farber is qualified
and should continue to serve, due, in part, to his long and very successful
career in generic drug distribution, having built and managed one of the
Countrys leading generic distribution companies. His skills include cost
controls and material handling.
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
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.
44
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The
Nominating and Governance Committee concluded that Mr. West is qualified
and should continue to serve, due, in part, because of his long and successful
career in the manufacturing sector, both as a senior executive and as a
financial manager. In addition to his financial analytic skills, he is a
natural leader with solid experience in corporate governance.
Jeffrey
Farber
was elected a Director of the Company in May 2006. Jeffrey Farber joined the Company in
August 2003 as Secretary. For the past 14 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.
The
Nominating and Governance Committee concluded that Mr. Farber is qualified
and should continue to serve, due, in part, to his significant experience in
the generic drug industry and his ongoing role as the owner of a highly
regarded and successful generic drug distributor. His skills include a thorough
knowledge of the generic drug marketplace and drug supply chain management.
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 had
served as Chair of Lehighs Accounting Department from 1988 to 1994 and 1998 to
2007. He has taught a variety of
accounting courses, including financial and managerial accounting at both the
undergraduate and graduate level. He 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. He has also been heavily involved with strategic planning at both
the College and Department level at Lehigh.
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 with a concentration in Accounting from the University
of Massachusetts.
The
Nominating and Governance Committee concluded that Dr. Sinclair is
qualified and should continue to serve, due, in part to his long and
distinguished career as an Accounting Academic and his deep understanding of
accounting and financial reporting. His
skills also include organizational planning and interpersonal relations.
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 28 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 Health Services
Research
; 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.
The
Nominating and Governance Committee concluded that Dr. Wertheimer is
qualified and should continue to serve, due, in part to his deep understanding
of all aspects of pharmacy practice, including retail and manufacturing. His skills include business planning and a
sound knowledge of drug regulation and distribution.
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 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
45
Table of
Contents
and
the Michigan Pharmacy Association. Mr. Winkelman is a registered
pharmacist and holds a Bachelor of Science Degree in Pharmacy from Wayne State
University.
The
Nominating and Governance Committee concluded that Mr. Winkelman is
qualified and should continue to serve, due, in part to his experiences with
and knowledge of Pharmacy Benefit Administration and Mail Order Pharmacy. His skills include a deep understanding of
government pharmacy benefits and the drug supply chain.
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.
The
Nominating and Governance Committee concluded that Mr. Bedrosian is
qualified to serve as a director, in part, because his experience as our
President and Chief Executive Officer has been instrumental in the companys
growth and provides the board with a compelling understanding of
our operations, challenges and opportunities. In addition, his 42-year
background in the generic pharmaceutical industry that encompasses a broad
background and knowledge in the underlying scientific, sales, marketing and
supply chain management brings special expertise to the board in developing our
business strategies. His recent qualification to FINRAs list of
arbitrators recognizes his expertise and experience.
Keith
R. Ruck
joined the Company in September 2008
as Corporate Controller.
On March 23, 2009, the Company named Mr. Ruck Interim Chief
Financial Officer. Effective
October 13, 2009, Mr. Ruck was appointed and assumed the duties as
the Companys Vice President of Finance and Chief Financial Officer. Mr. Ruck, a Certified Public Accountant
(CPA), has more than 27 years of public company financial management
experience. Prior to joining Lannett, he served as Corporate Controller of
Optium Corporation from April 2007 to September 2008. From 2000 to 2007, he was Vice President -
Finance of MAAX KSD Corporation and from 1998 to 2000, he served as Vice
President of Finance and Chief Financial Officer of Total
Containment, Inc. Mr. Ruck earned a Bachelor of Science degree in
business administration and a Master of Finance degree from LaSalle University.
Stephen J. Kovary
R. Ph. joined the Company in September 2009 as Vice
President of Operations.
Prior to
joining Lannett, Mr. Kovary was the Vice President, Plant Manager for PF
Laboratories, a division of Purdue Pharma, LP, since 2003. Formerly, Mr. Kovary held senior level
management positions at Pliva, Inc, Abbott Laboratories, Knoll
Pharmaceuticals and Parke-Davis.
Mr. Kovary holds a Bachelor of Science in Pharmacy from the Rutgers
University Ernest Mario School of Pharmacy and a Masters in Business
Administration in Management from Fairleigh Dickenson University. Mr. Kovary is a member of the American
and New Jersey Pharmaceutical Associations, the International Society of
Pharmaceutical Engineers and the Parenteral Drug Association. Mr. Kovary is a registered pharmacist in
the State of New Jersey and a member of the Alumni Association of the Rutgers
University Ernest Mario School of Pharmacy.
Ernest
J. 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 Chief 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 Trenton State College (now known as The College of New Jersey).
William F. Schreck
joined the Company in
January 2003 as Materials Manager.
In May 2004, he was promoted to Vice President of Logistics. In
August 2009, Mr. Schreck has been promoted to Senior Vice President
and General Manager. 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 R. 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
46
Table of
Contents
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 distributors.
Mr. Smith has a Bachelor of Science Degree in Business
Administration from Gettysburg 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 2010, 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 for
certain Form 4s that were filed late related to certain stock option and
restricted share grants made to the officers of Lannett in the current and
prior years, and except for certain Form 4s related to Mr. William
Farbers gifting of approximately 528,000 shares in October 2009 to a
family trust whose beneficiaries are his grandchildren that were 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 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. Sinclair, current director of
Lannett as well as current 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, is the audit committee financial expert as defined in
section 3(a)(58) of the Exchange Act and the related rules of the
Commission.
47
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 2010, Fiscal 2009 and Fiscal 2008.
|
|
|
|
|
|
|
|
|
|
Non-equity
|
|
|
|
|
|
Name and Principal
|
|
Fiscal
|
|
|
|
Stock
|
|
Options
|
|
incentive plan
|
|
All Other
|
|
|
|
Position
|
|
Year
|
|
Salary
|
|
Awards
|
|
Awards
|
|
compensation
|
|
Compensation
|
|
Total
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(i)
|
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur
P. Bedrosian
|
|
2010
|
|
$
|
407,410
|
|
$
|
359,384
|
|
$
|
297,390
|
|
$
|
269,750
|
|
$
|
22,367
|
|
$
|
1,356,301
|
|
President
and Chief Executive Officer
|
|
2009
|
|
367,202
|
|
|
|
42,381
|
|
244,365
|
|
43,796
|
|
697,744
|
|
|
|
2008
|
|
324,825
|
|
122,234
|
|
158,303
|
|
|
|
22,099
|
|
627,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keith
R. Ruck (1)
|
|
2010
|
|
189,293
|
|
89,550
|
|
243,090
|
|
123,500
|
|
11,257
|
|
656,690
|
|
Vice
President of Finance and Chief Financial Officer
|
|
2009
|
|
128,854
|
|
|
|
22,163
|
|
60,617
|
|
1,234
|
|
212,868
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
J. Kovary (2)
|
|
2010
|
|
156,923
|
|
|
|
97,248
|
|
105,069
|
|
22,548
|
|
381,788
|
|
Vice
President of Operations
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Schreck
|
|
2010
|
|
196,681
|
|
177,791
|
|
302,729
|
|
130,000
|
|
28,159
|
|
835,360
|
|
Senior
Vice President and General
|
|
2009
|
|
180,722
|
|
|
|
22,603
|
|
118,947
|
|
18,341
|
|
340,613
|
|
Manager
|
|
2008
|
|
170,670
|
|
68,022
|
|
105,535
|
|
|
|
18,044
|
|
362,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin
Smith
|
|
2010
|
|
206,564
|
|
179,455
|
|
198,260
|
|
135,019
|
|
21,985
|
|
741,283
|
|
Vice
President of Sales and Marketing
|
|
2009
|
|
200,180
|
|
|
|
22,603
|
|
130,825
|
|
21,502
|
|
375,110
|
|
|
|
2008
|
|
192,005
|
|
61,490
|
|
105,535
|
|
|
|
21,495
|
|
380,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Mr. Ruck was hired on September 8, 2008 as Corporate Controller. Mr. Ruck assumed the title of Interim
Chief Financial Officer on March 23, 2009. Effective October 13,
2009, Mr. Ruck was appointed and assumed the duties as the Companys Vice
President of Finance and Chief Financial Officer.
(2)
Mr. Kovary was hired on September 8, 2009 as Vice President of
Operations.
48
Table of Contents
(i)
Supplemental All Other Compensation Table
The following table summarizes the components of column
(i) of the Summary Compensation Table:
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Match
|
|
|
|
Pay in
|
|
|
|
|
|
|
|
|
|
Name and Principal
|
|
Fiscal
|
|
Contributions
|
|
Auto
|
|
Lieu of
|
|
Housing
|
|
Excess Life
|
|
Sign On
|
|
|
|
Position
|
|
Year
|
|
401(k) Plan
|
|
Allowance
|
|
Vacation
|
|
Allowance
|
|
Insurances
|
|
Bonus
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur
P. Bedrosian
|
|
2010
|
|
$
|
8,219
|
|
$
|
13,500
|
|
$
|
|
|
$
|
|
|
$
|
648
|
|
$
|
|
|
$
|
22,367
|
|
President
and Chief Executive Officer
|
|
2009
|
|
8,823
|
|
13,500
|
|
20,993
|
|
|
|
480
|
|
|
|
43,796
|
|
|
|
2008
|
|
8,195
|
|
13,500
|
|
|
|
|
|
404
|
|
|
|
22,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keith
R. Ruck
|
|
2010
|
|
2,499
|
|
8,668
|
|
|
|
|
|
90
|
|
|
|
11,257
|
|
Vice
President of Finance and Chief Financial Officer
|
|
2009
|
|
1,182
|
|
|
|
|
|
|
|
52
|
|
|
|
1,234
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
J. Kovary
|
|
2010
|
|
4,000
|
|
8,474
|
|
|
|
|
|
74
|
|
10,000
|
|
22,548
|
|
Vice
President of Operations
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Schreck
|
|
2010
|
|
7,918
|
|
10,800
|
|
9,030
|
|
|
|
411
|
|
|
|
28,159
|
|
Senior
Vice President and
|
|
2009
|
|
7,114
|
|
10,800
|
|
|
|
|
|
427
|
|
|
|
18,341
|
|
General
Manager
|
|
2008
|
|
6,872
|
|
10,800
|
|
|
|
|
|
372
|
|
|
|
18,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin
Smith
|
|
2010
|
|
8,371
|
|
13,500
|
|
|
|
|
|
114
|
|
|
|
21,985
|
|
Vice
President of Sales and
|
|
2009
|
|
7,905
|
|
13,500
|
|
|
|
|
|
97
|
|
|
|
21,502
|
|
Marketing
|
|
2008
|
|
7,889
|
|
13,500
|
|
|
|
|
|
106
|
|
|
|
21,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Equity Incentive Plan Awards
|
|
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
|
|
Name
|
|
Grant Date
|
|
Threshold
($)
|
|
Target
($)
|
|
Maximum
($)
|
|
Threshold
($)
|
|
Target
($)
|
|
Maximum
($)
|
|
Stocks or
Units (#)
|
|
Underlying
Options (#)
|
|
Awards
($/sh)
|
|
Options
Awards
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
(i)
|
|
(j)
|
|
(k)
|
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur
P. Bedrosian
|
|
10/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
$
|
6.94
|
|
$
|
297,390
|
|
President
and Chief Executive Officer
|
|
10/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
$
|
208,200
|
|
|
|
11/10/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,259
|
|
|
|
|
|
$
|
151,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keith
R. Ruck
|
|
10/13/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
$
|
7.98
|
|
$
|
183,612
|
|
Vice
President of Finance and Chief Financial Officer
|
|
10/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
$
|
6.94
|
|
$
|
59,478
|
|
|
|
10/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
$
|
69,400
|
|
|
|
11/10/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,100
|
|
|
|
|
|
$
|
20,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
J. Kovary
|
|
9/14/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
$
|
8.48
|
|
$
|
97,248
|
|
Vice
President of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Schreck
|
|
10/27/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
$
|
7.53
|
|
$
|
64,817
|
|
Senior Vice President
and General Manager
|
|
10/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
$
|
6.94
|
|
$
|
237,912
|
|
|
|
10/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
$
|
104,100
|
|
|
|
11/10/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,337
|
|
|
|
|
|
$
|
73,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin
Smith
|
|
10/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
$
|
6.94
|
|
$
|
198,260
|
|
Vice
President of Sales and Marketing
|
|
10/29/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
$
|
104,100
|
|
|
|
11/10/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,593
|
|
|
|
|
|
$
|
75,355
|
|
49
Table of Contents
OUTSTANDING EQUITY AWARDS
AT JUNE 30, 2010
Option Awards
|
|
Stock Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexericised
Options (#)
Exercisable
|
|
Number of
Securities
Underlying
Unexericised
Options (#)
Unexercisable
|
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexericised
Unearned
Options (#)
|
|
Option
Exercise
Price ($)
|
|
Option
Expiration
Date
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
|
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
|
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
(#)
|
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
($)
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
(i)
|
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur P. Bedrosian
|
|
18,000
|
|
|
|
|
|
$
|
4.63
|
|
7/23/2012
|
|
|
|
|
|
|
|
|
|
President and Chief Executive Officer
|
|
96,900
|
|
|
|
|
|
$
|
7.97
|
|
10/28/2012
|
|
|
|
|
|
|
|
|
|
|
33,000
|
|
|
|
|
|
$
|
17.36
|
|
10/24/2013
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
$
|
16.04
|
|
5/11/2014
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
$
|
8.00
|
|
1/18/2016
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
$
|
6.89
|
|
11/28/2016
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
25,000
|
|
|
|
$
|
4.03
|
|
9/18/2017
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
20,000
|
|
|
|
$
|
2.80
|
|
9/18/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
$
|
6.94
|
|
10/29/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,534
|
|
$
|
162,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keith R. Ruck
|
|
5,000
|
|
10,000
|
|
|
|
$
|
2.79
|
|
10/17/2018
|
|
|
|
|
|
|
|
|
|
Vice President of Finance and Chief Financial Officer
|
|
|
|
40,000
|
|
|
|
$
|
7.98
|
|
10/13/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
$
|
6.94
|
|
10/29/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
$
|
45,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen J. Kovary
|
|
|
|
20,000
|
|
|
|
$
|
8.48
|
|
9/14/2019
|
|
|
|
|
|
|
|
|
|
Vice President of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Schreck
|
|
17,745
|
|
|
|
|
|
$
|
11.27
|
|
2/18/2013
|
|
|
|
|
|
|
|
|
|
Senior Vice President and General Manager
|
|
12,000
|
|
|
|
|
|
$
|
5.18
|
|
10/25/2015
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
$
|
6.89
|
|
11/28/2016
|
|
|
|
|
|
|
|
|
|
|
|
33,333
|
|
16,667
|
|
|
|
$
|
4.03
|
|
9/17/2017
|
|
|
|
|
|
|
|
|
|
|
|
5,333
|
|
10,667
|
|
|
|
$
|
2.80
|
|
9/18/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
$
|
7.53
|
|
10/27/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
$
|
6.94
|
|
10/29/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,100
|
|
$
|
82,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Smith
|
|
38,760
|
|
|
|
|
|
$
|
7.97
|
|
10/28/2012
|
|
|
|
|
|
|
|
|
|
Vice President of Sales and Marketing
|
|
13,000
|
|
|
|
|
|
$
|
17.36
|
|
10/24/2013
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
$
|
16.04
|
|
5/11/2014
|
|
|
|
|
|
|
|
|
|
|
|
12,000
|
|
|
|
|
|
$
|
5.18
|
|
10/25/2015
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
$
|
6.89
|
|
11/28/2016
|
|
|
|
|
|
|
|
|
|
|
|
33,333
|
|
16,667
|
|
|
|
$
|
4.03
|
|
9/18/2017
|
|
|
|
|
|
|
|
|
|
|
|
5,333
|
|
10,667
|
|
|
|
$
|
2.80
|
|
9/18/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
$
|
6.94
|
|
10/29/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,100
|
|
$
|
82,717
|
|
|
|
|
|
The options above were granted ten years prior to
the option expiration date and vest over three years from that grant date.
50
Table
of Contents
Employment Agreements
The
Company has entered into employment agreements with Arthur P. Bedrosian,
President and Chief Executive Officer, Keith R. Ruck, Vice President of Finance
and Chief Financial Officer, Kevin Smith, Vice President of Sales and
Marketing, William Schreck, Senior Vice President and General Manager, Ernest
Sabo, Vice President of Regulatory Affairs and Chief Compliance Officer and
Stephen Kovary, Vice President of Operations. Each of the agreements
provide for an annual base salary and eligibility to receive a bonus. The
salary and bonus amounts of these executives are determined by the Board of
Directors. Additionally, these executives are eligible to receive stock
options and restricted stock awards, which are granted at the discretion of the
Board of Directors, and in accordance with the Companys policies regarding
stock option and restricted stock grants.
Under the agreements, these 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 these executives of between 18 months and three years.
During
the third quarter of Fiscal Year 2009, the Companys former Vice President of
Finance, Treasurer, Secretary and Chief Financial Officer resigned. As part of his separation agreement, the
Company was obligated to pay to him approximately $670,000 to settle any
outstanding obligations from his employment agreement, including any salary,
bonus, vacation, stock options and medical benefits. Of this amount, $300,440 was paid in Fiscal
2009 with $165,000 designated for the payment of pro rated bonus, and $11,440
was designated for the payment of accrued but unused paid time off. As part of the settlement, $124,000 was
designated as the portion of the settlement related to the repurchase of his
outstanding stock options. The Company therefore charged this amount to
Additional Paid in Capital, as it represents the fair value of the options
repurchased on the repurchase date.
Additional payments totaling $369,000 for severance and benefits will be
paid in Fiscal 2011 pursuant to the separation agreement.
Compensation of Directors
DIRECTOR COMPENSATION
|
|
Fees
Earned
|
|
Stock
Awards
|
|
Options
Awards
|
|
Non-Equity
Incentive Plan
Compensation
|
|
Change in
Pension Value
and Nonqualified
Deferred
Compensation
|
|
All Other
Compensation
|
|
Total
|
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Farber
|
|
$
|
46,000
|
|
$
|
48,375
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
94,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald A. West
|
|
70,500
|
|
48,375
|
|
|
|
|
|
|
|
|
|
118,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey Farber
|
|
49,000
|
|
48,375
|
|
|
|
|
|
|
|
|
|
97,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth Sinclair
|
|
66,000
|
|
48,375
|
|
|
|
|
|
|
|
|
|
114,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Albert Wertheimer
|
|
70,500
|
|
48,375
|
|
|
|
|
|
|
|
|
|
118,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Myron Winkelman
|
|
64,000
|
|
48,375
|
|
|
|
|
|
|
|
|
|
112,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
51
Table of
Contents
·
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 Lannett.
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 NYSE-AMEX 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 13200 Townsend Road, Philadelphia, Pennsylvania 19154.
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 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. 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 Committee annually reviews recommendations from their outside
consultant, and makes recommendations to the Board about the compensation of
non-employee directors. During fiscal
years 2008 and 2009, Lannett used Mercer Consulting Inc. as its
consultant. During fiscal year 2010,
Lannett used Compensation Resources Inc. as its consultant.
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
individuals who served as Chief Executive Officer and Chief Financial Officer
during Fiscal 2010, as well as the other individuals included in the Summary
Compensation Table on page 48, are referred to as the named executive
officers.
Risk
Assessment
The
criteria used for the bonus program of operating performance, research and
development inclusive of ANDA/NDA submissions, acceptances of ANDA/NDAs,
launches of approved ANDA/NDAs, individual performance goals, along with the
weighting of each element, were assembled by the Company for our industry and
were found to be reasonable for the nature of our business. The Compensation
Committee reviews this criteria and a gives final approval to the senior
management. It is then presented to the
Board of Directors for final approval.
Operating
performance ties in directly with shareholder value. There is no bonus
opportunity for management if they do not create value, so management interests
and shareholder value are aligned. The risk of diluting the Companys operating
cash positions through the awarding of excessive bonus awards is controlled by
the imposition of a bonus cash award limit equal to 20% of adjusted operating
income as calculated from its fiscal year-end financial statements.
The
R&D component of the criteria looks to the sustainability and growth of the
organization. While it could be argued that there is risk associated with the
choice of which products to submit for approval, there is no indication that
those risks would be outside what would be considered normal and reasonable in
the course of doing business. The ultimate goal is to be able to sell a product
that positively impacts operating performance, which cannot occur unless the
process of submission, approval, and launch is followed. If submissions do not
make it to the approval stage, and if the approved products are not
successfully launched, they cannot positively
52
Table of
Contents
affect
operating performance. Since there is a minimum operating performance
(operating profit) level that must be attained before any payments are made
through the bonus plan, there is a check and balance to prevent what could be
viewed as a portfolio of risky submittals. The impact on operating
performance is created over a period of time based on the total sales, so there
needs to be sustainability with any new launch.
The
achievement of individual goals as part of the bonus is subject to review and
approval by senior management with the CEO being the final review and approval.
This multi-level process reduces the risk of having goals that are not linked
to the overall objectives of the Company and its success. The awarding of a CEO
discretionary portion, currently at 5% of the total of the bonus, also requires
the same oversight. The total impact on bonus payout of these parts of the
bonus program is significantly less than the operating performance and R&D
parts. Again, there is no bonus payout unless the operating performance
(operating profit) minimum goals are attained.
We
believe our bonus program, along with the other elements of our executive
compensation program, provides appropriate rewards and incentives to our
executives to achieve our financial, business, and strategic goals. We also
believe the structure and oversight of these programs provides a setting that
does not encourage them to take excessive risks in their business decisions.
Our Fiscal 2010 Compensation Program
In
Fiscal 2010, 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 objective
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 2010 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 2010 operating income, other targeted
corporate goals and individual or departmental objectives,
·
various forms of equity
compensation, including some grants based upon Fiscal 2010 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 2010 Compensation
Elements
The
table below provides detailed information regarding each element of the Fiscal
2010 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 2010, 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.
|
|
|
|
|
|
|
|
401(k) Plan
Executives
may participate in Lannetts 401(k) retirement savings plan, which is
available to all employees. Lannett matches contributions to the Plan, 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.
|
54
Table of Contents
|
|
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.
|
|
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.
|
|
|
|
|
|
|
|
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
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.
55
Table
of Contents
Market Data and Our Peer Group
In
determining 2009 and 2010 compensation for the named executive officers, the
Committee relied on market data provided by its consultants. This information
was principally related to two groups of peer companies similar in size to
Lannett with revenues one-half (1/2) to double (2x) that of Lannett. Companies
were also added that were deemed business peers. One peer group (Peer Group A)
consists of twenty-nine (29) pharmaceutical companies on a national scale. The
other peer group (Peer Group B) consists of twelve (12) pharmaceutical
companies in the Philadelphia and Northeast Region. 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 Groups
were:
Peer Group A
|
|
Peer
Group B
|
|
|
|
Akorn
Inc.
|
|
Auxilium
Pharma Inc
|
Balchem
Corp.
|
|
BMP
Sunstone Corp
|
Barr
Pharmaceuticals Inc
|
|
Cambrex
Corp
|
Bentley
Pharmaceuticals
|
|
Emergent
Biosolutions Inc.
|
Biomarin
Pharmaceuticals Inc.
|
|
Enzon
Pharmaceuticals Inc.
|
Bradley
Pharmaceuticals Inc.
|
|
Hi Tech Pharmacal Co. Inc.
|
Caraco
Pharmaceutical Labs
|
|
Interpharm
Holdings Inc.
|
Chattem
Inc
|
|
NPS
Pharmaceuticals Inc.
|
Cubist
Pharmaceuticals Inc.
|
|
Orasure
Technologies Inc.
|
Impax
Laboratories Inc.
|
|
Osi
Pharmaceuticals Inc.
|
Indevus
Pharmaceuticals Inc.
|
|
Par
Pharmaceutical Cos. Inc.
|
Inspire
Pharmaceuticals Inc.
|
|
Sucampo
Pharmaceuticals Inc.
|
Intermune
Inc.
|
|
|
Ista
Pharmaceuticals Inc.
|
|
|
Kensey
Nash Corp.
|
|
|
Mattrix
Initiatives Inc.
|
|
|
Medicines
Co.
|
|
|
Nektar
Therapeutics
|
|
|
Neogen
Corp.
|
|
|
Noven
Pharmaceuticals Inc.
|
|
|
Obagi
Medical
|
|
|
Pain
Therapeutics Inc.
|
|
|
Pozen
Inc.
|
|
|
Questcor
Pharmaceuticals Inc.
|
|
|
Salix
Pharmaceuticals Ltd.
|
|
|
Santarus
Inc.
|
|
|
Valeant
Pharmaceuticals Intl.
|
|
|
Vertex
Pharmaceuticals Inc.
|
|
|
Vivus
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.
Base
salary increases were granted to Mr. Bedrosian for $34,490 effective on
August 31, 2009, Mr. Smith for $6,050 effective on August 31,
2009, and Mr. Schreck for $17,289 effective on August 31, 2009, based
on their performance. Mr. Ruck was
promoted to Vice President of Finance and Chief Financial Officer from
Corporate Controller effective on October 13, 2009 and received a salary
increase of $40,000 in connection with such promotion. Mr. Kovary was hired on
September 8, 2009 as Vice President of Operations and therefore did not
receive a salary increase.
56
Table of Contents
Fiscal 2010 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 2010 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
|
|
Keith
Ruck
|
|
Stephen
Kovary
|
|
William
Schreck
|
|
Kevin
Smith
|
Superior
Level
|
|
120-150%
|
|
120-150%
|
|
120-150%
|
|
120-150%
|
|
120-150%
|
Goal
Level
|
|
100-120%
|
|
100-120%
|
|
100-120%
|
|
100-120%
|
|
100-120%
|
Threshold
Level
|
|
50-100%
|
|
50-100%
|
|
50-100%
|
|
50-100%
|
|
50-100%
|
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 2010
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 2010 and taking into account the
expectations of our annual plan. The Fiscal 2010 operating income and other
corporate goals AIBP targets approved by the Committee are detailed in the
table below.
Objective
|
|
Superior
|
|
Goal
|
|
Target
|
|
Operating Profit*
|
|
$
|
17.5
|
M
|
$
|
13.5
|
M
|
$
|
9.45
|
M
|
R&D Submissions
|
|
10
|
|
8
|
|
6
|
|
R&D Acceptances
|
|
9
|
|
7
|
|
5
|
|
R&D Launches
|
|
8
|
|
6
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Operating Profit is defined as Operating
Income plus adding back Bonus Expense.
For purposes of determining achievement of the AIBP targets, these
measures can exclude certain categories of non-recurring items that the
Committee believes do not reflect the performance of Lannetts core continuing
operations. There were no adjustments made in Fiscal 2010 for non-recurring
items.
All
payouts to the named executive officers under the 2010 AIBP were contingent
upon the Committees review and certification of the degree to which Lannett
achieved the 2010 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 (as defined by the AIBP) attained by Lannett.
The
2010 AIBP program provided that the Committee could, in its discretion: modify,
amend, suspend or terminate the Plan at any time.
Results
In
September 2010, the Committee reviewed and certified Lannetts Fiscal 2010
results for purposes of the AIBP program, determining that the objectives for
operating income and other corporate objectives achieved the Superior goals set
at the beginning of the year, which represented 50% and 25% of the named
executive officer total bonus amounts, respectively.
The
Committee also reviewed and certified the performance of the named executive
officer individual objectives, which represented 20% of their total bonus
amounts, determining that these objectives were achieved as described below.
Mr. Bedrosians
objectives were to oversee the expansion and profitability of the Cody
Laboratories subsidiary and increase the manufacturing of additional APIs,
achieve overall cGMP and other agency regulatory compliance, achieve
operational efficiency, monitor headcount, identify new market and product
opportunities, increase the response time for Board of Director requests and
keep them abreast of changes in director regulatory compliance, and seek out
potential acquisitions, alliances and joint ventures.
57
Table of Contents
Mr. Schrecks
objectives were to reduce verified shipping errors, maintain inventory control
measures, and complete the fit out and personnel move to the Companys recently
acquired Townsend Road facility.
Mr. Smiths
objectives were to improve market share of products, increase net sales to at
least $123.0 million, decrease obsolete finished goods inventory through
various short date promotions, and improve forecasts for production planning
purposes..
Mr. Rucks
objectives were to achieve a more cohesive accounting department, deliver
accurate and timely month-end financial reports to senior management and the
Board of Directors, reduce outside auditor and accounting professional fees and
transition into the role of CFO from his interim role.
Mr. Kovarys
objectives were to assess and reorganize the overall organizational structure,
evaluate, improve and track the Companys facility and equipment requirements
through a more formal capital investment plan, and review and enhance policies
and procedures to ensure regulatory compliance.
In
addition, all named executive officers received their 5% CEO discretionary
bonus amount.
In
calculating the 2010 bonus payments to the named executives as well as the
other employees, it was determined that the Superior Level bonuses could not be
paid because the accumulated total of payments to all employees would exceed
20% of the actual operating income achieved by the Company in Fiscal 2010 (20%
cap). The Committee, in its discretion, altered the 2010 bonus payments
in two ways as a one-time adjustment: First, the Committee lowered the
overall calculation of the payout to the high end of the Goal Level.
Second, it decided to grant unrestricted shares of stock that would make up the
difference between the 20% cap and the amount that employees would have
received if the 20% cap were not in place. These unrestricted shares will
immediately vest upon grant, which is anticipated to occur in
November 2010. The total value of the 2010 bonus payouts, including the
unrestricted stock grant is expected to approximate 27.5% of the pre-bonus
actual operating profit for the 2010 Fiscal Year. The Company reviewed
and altered its current compensation structure, including the AIBP program by
the fall of 2010 so that fair compensation can be paid to its employees
starting in Fiscal 2011 and beyond while still respecting the 20% bonus cap
requirement.
2010 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. The Committee has not yet determined the amount of both stock
options and restricted stock to be granted to executives for this year, but
expects to complete these grants by the second quarter of Fiscal 2011. But when these grants are determined, each will
be designed to emphasize particular elements of the Companys immediate and
long-term objectives and to retain key executives. We will refer to these
grants collectively as the 2010 Long Term Incentive Awards (LTIA). The types of
grants will be:
·
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,
and
·
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.
Stock Options and Restricted Stock
The
stock options and restricted stock granted as part of the 2010 LTIA will
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 will 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 will be
58
Table of Contents
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.
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.
Lannett
matches contributions to the 401(k) plan on a fifty cents on the dollar
basis up to 8% of the contributing employees base salary, subject to
limitations of the Plan and applicable law.
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
$15,000/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, 2010, 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 for Fiscal 2010 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.
59
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
|
|
|
|
|
|
Myron
Winkelman (Chair)
|
|
|
Albert
Wertheimer
|
|
|
Ronald
West
|
60
Table of Contents
ITEM 12
.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth, as of July 31, 2010, 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. Although grants of restricted stock under the
Companys 2006 Long Term Incentive Plan (2006 LTIP) generally vest equally
over a three year period from the grant date, the restricted shares are
included below because the voting rights with respect to such restricted stock
are acquired immediately upon grant.
|
|
|
|
Excluding Options
|
|
Including Options (*)
|
|
Name and Address of
Beneficial Owner
|
|
Office
|
|
Number of
Shares
|
|
Percent of
Class
|
|
Number of
Shares
|
|
Percent of
Class
|
|
Directors/Executive
Officers
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Farber
13200 Townsend Road
Philadelphia, PA 19154
|
|
Chairman of the
Board
|
|
8,162,487
|
(1)
|
32.34
|
%
|
8,254,987
|
(1),(2)
|
32.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald A. West
13200 Townsend Road
Philadelphia, PA 19154
|
|
Vice Chairman of
the Board, Director
|
|
16,810
|
(3)
|
0.07
|
%
|
71,758
|
(3),(4)
|
0.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey Farber
13200 Townsend Road
Philadelphia, PA 19154
|
|
Director
|
|
5,703,562
|
(5)
|
22.60
|
%
|
5,751,062
|
(5),(6)
|
22.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth Sinclair
13200 Townsend Road
Philadelphia, PA 19154
|
|
Director
|
|
17,500
|
(7)
|
0.07
|
%
|
42,500
|
(7),(8)
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Albert Wertheimer
13200 Townsend Road
Philadelphia, PA 19154
|
|
Director
|
|
18,500
|
(9)
|
0.07
|
%
|
43,500
|
(9),(10)
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Myron Winkelman
13200 Townsend Road
Philadelphia, PA 19154
|
|
Director
|
|
18,500
|
(11)
|
0.07
|
%
|
58,500
|
(11),(12)
|
0.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur P. Bedrosian
13200 Townsend Road
Philadelphia, PA 19154
|
|
President and
Chief Executive Officer
|
|
592,358
|
(13)
|
2.35
|
%
|
920,258
|
(13),(14)
|
3.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
William Schreck
13200 Townsend Road
Philadelphia, PA 19154
|
|
Senior Vice
President and General Manager
|
|
38,168
|
(15)
|
0.15
|
%
|
143,580
|
(15),(16)
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Smith
13200 Townsend Road
Philadelphia, PA 19154
|
|
Vice President
of Sales and Marketing
|
|
39,313
|
(17)
|
0.16
|
%
|
198,740
|
(17),(18)
|
0.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Ernest Sabo
13200 Townsend Road
Philadelphia, PA 19154
|
|
Vice President
of Regulatory Affairs and Chief Compliance Officer
|
|
22,604
|
(19)
|
0.09
|
%
|
63,031
|
(19),(20)
|
0.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
David Farber
6884 Brook Hollow Ct West
Bloomfield, MI 48322
|
|
|
|
5,705,050
|
(21)
|
22.61
|
%
|
5,727,550
|
(21),(22)
|
22.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Keith R. Ruck
13200 Townsend Road
Philadelphia, PA 19154
|
|
Vice President
of Finance and Chief Financial Officer
|
|
14,734
|
(23)
|
0.06
|
%
|
19,734
|
(23),(24)
|
0.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Farber Properties
1775 John R Road Troy, MI 48083
|
|
|
|
5,000,000
|
(25)
|
19.81
|
%
|
5,000,000
|
|
19.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Farber Family LLC
1775 John R Road Troy, MI 48083
|
|
|
|
528,142
|
(26)
|
2.09
|
%
|
528,142
|
|
2.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Farber Investment LLC
1775 John R Road Troy, MI 48083
|
|
|
|
38,000
|
(27)
|
0.15
|
%
|
38,000
|
|
0.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen Kovary
13200 Townsend Road
Philadelphia, PA 19154
|
|
Vice President
of Operations
|
|
1,899
|
(28)
|
0.01
|
%
|
8,566
|
(28),(29)
|
0.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and
executive officers as a group
(12 persons)
|
|
|
|
14,646,435
|
|
58.03
|
%
|
15,576,214
|
|
59.53
|
%
|
61
Table of Contents
(1) Includes 197,825 shares owned by William Farbers spouse,
Audrey Farber; 14,000 shares owned by William Farbers brother, Gerald G.
Farber, and 132,212 shares held by William Farber as custodian for his seven
grandchildren. Includes 26,250 shares
held in William Farbers IRA account.
Includes 5,000 shares received pursuant to a restricted stock award
granted in September 2007.
(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 per share, 25,000 vested options to
purchase common stock at an exercise price of $16.04 per share, and 5,000
vested options to purchase common stock at an exercise price of $6.89 per
share.
(3)
Includes 5,000
shares received pursuant to a restricted stock award granted in September 2007.
(4) 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 5,000 vested options to purchase common stock at an exercise price of
$6.89.
(5) Includes 5,000,000 shares held by
Farber Properties Group LLC (FPG). FPG
is managed and jointly owned by Jeffrey Farber and David Farber. David Farber and Jeffrey Farber each disclaim
beneficial ownership of 2,500,000 shares held by FPG. Includes 528,142 shares held by Farber Family
LLC (FFLLC) which is managed by Jeffrey and David Farber. David Farber and
Jeffrey Farber each disclaim beneficial ownership of these shares. Includes 150
shares held by Jeffrey Farber as custodian for his son and 10,800 shares held
by William Farber as custodian for his children. Also includes 9,500 shares held by Farber
Investment Company (FIC), which holds 38,000 shares of common stock. Jeffrey Farber and David Farber each
beneficially owns 25% of FIC and each disclaims beneficial ownership of all but
9,500 shares held by FIC. Also includes
5,000 shares received pursuant to a restricted stock award granted in September 2007.
(6) 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, 20,000 vested
options to purchase common stock at an exercise price of $4.55, and 5,000
vested options to purchase common stock at an exercise price of $6.89.
(7)
Includes 5,000
shares received pursuant to a restricted stock award granted in September 2007.
(8) Includes 20,000 vested options to
purchase common stock at an exercise price of $4.55 per share and 5,000 vested
options to purchase common stock at an exercise price of $6.89 per share.
(9) Includes 5,000 shares received
pursuant to a restricted stock award granted in September 2007.
(10) Includes 20,000 vested options to
purchase common stock at an exercise price of $9.02 per share and 5,000 vested
options to purchase common stock at an exercise price of $6.89 per share.
(11) Includes 5,000 shares received pursuant
to a restricted stock award granted in September 2007.
(12) 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 5,000 vested options
to purchase common stock at an exercise price of $6.89 per share.
(13) Includes 33,150 shares owned by Arthur
Bedrosians wife and 1,000 shares owned by his daughter. Mr. Bedrosian
disclaims beneficial ownership of these shares.
Includes 14,745 shares received pursuant to a restricted stock award
granted in September 2007 and 30,000 shares received pursuant to a
restricted stock award granted in October 2009. Also includes 30,074 shares of common stock
held through employee stock purchase plan.
(14) 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
per share, 30,000 vested options to purchase common stock at an exercise price
of $16.04 per share, 25,000 vested options to purchase common stock at an
exercise price of $8.00 per share, 30,000 vested options to purchase common
stock at an exercise price of $6.89 per share, 75,000 vested options to
purchase common stock at an exercise price of $4.03 per share, and 20,000
vested options to purchase common stock at an exercise price of $2.80.
62
Table of Contents
(15) Includes 7,247 shares received pursuant
to a restricted stock award granted in September 2007, and 15,000 shares
received pursuant to a restricted stock award granted in October 2009.
(16) Includes 17,745 vested options to
purchase common stock at an exercise price of $11.27 per share, 12,000 vested
options to purchase common stock at an exercise price of $5.18 per share and
15,000 vested options to purchase common stock at an exercise price of $6.89
per share, 50,000 vested options to purchase common stock at an exercise price
of $4.03 per share, and 10,667 vested options to purchase common stock at an
exercise price of $2.80 per share.
(17) Includes 8,263 shares received pursuant
to a restricted stock award granted in September 2007, and 15,000 shares
received pursuant to a restricted stock award granted in October 2009.
(18) 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, 12,000 vested options to purchase common stock at an exercise price
of $5.18 per share, 15,000 vested options to purchase common stock at an
exercise price of $6.89 per share, 50,000 vested options to purchase common
stock at an exercise price of $4.03 per share, and 10,667 vested options to
purchase common stock at an exercise price of $2.80.
(19) Includes 5,337 shares received pursuant
to a restricted stock award granted in September 2007, and 15,000 shares
received pursuant to a restricted stock award granted in October 2009.
(20) Includes 3,260 vested options to
purchase common stock at an exercise price of $7.48 per share, 4,000 vested
options to purchase common stock at an exercise price of $5.18 per share, 7,500
vested options to purchase common stock at an exercise price of $6.89 per
share, 15,000 vested options to purchase common stock at an exercise price of $4.03
per share, and 10,667 vested options to purchase common stock at an exercise
price of $2.80 per share.
(21) Includes 5,000,000 shares held by
FPG. FPG is managed and jointly owned by
Jeffrey Farber and David Farber. David
Farber and Jeffrey Farber each disclaim beneficial ownership of 2,500,000
shares held by FPG. Includes 528,142
shares held by FFLLC which is managed by Jeffrey and David Farber. David Farber
and Jeffrey Farber each disclaim beneficial ownership of these shares. Indirect
shares include 7,488 shares held by David Farber as custodian for his children,
16,200 shares held by William Farber as custodian for his children and 2,850
shares held by David Farbers spouse.
Also includes 9,500 shares held by FIC, which holds 38,000 shares of common
stock. Jeffrey Farber and David Farber
each beneficially owns 25% of FIC and each disclaims beneficial ownership of
all but 9,500 shares held by FIC.
(22) 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.
(23) Includes 10,000 shares received
pursuant to a restricted stock award granted in October 2009 and 1,634
shares of common stock held through employee stock purchase plan.
(24) Includes 5,000 vested options to
purchase common stock at an exercise price of $2.79 per share.
(25)
Farber
Properties Group, LLC is managed and jointly owned by Jeffrey Farber and David
Farber.
(26)
Farber Family
LLC is managed by Jeffrey Farber and David Farber as trustees.
(27)
Farber
Investment LLC is beneficially owned 25% each by Jeffrey and David Farber and
50% by Larry Farber.
(28) Includes 1,899 shares of common stock
held through employee stock purchase plan.
(29) Includes 6,667 vested options to
purchase common stock at an exercise price of $8.48 per share.
*
Assumes that all options exercisable within sixty days have been exercised
which results in 26,167,392 shares outstanding.
63
Table
of Contents
Equity Compensation Plan Information
The
following table summarizes the equity compensation plans as of June 30,
2010:
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
|
|
2,058,851
|
|
$
|
7.45
|
|
2,561,068
|
|
|
|
|
|
|
|
|
|
Equity Compensation plans not approved by
security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2,058,851
|
|
$
|
7.45
|
|
2,561,068
|
|
ITEM 13
.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The Company had sales of approximately $679,000, $786,000, and $787,000
during the fiscal years ended June 30, 2010, 2009 and 2008, respectively,
to a generic distributor, Auburn Pharmaceutical Company (Auburn). 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. Accounts receivable
includes amounts due from the related party of approximately $161,000 and
$125,000 at June 30, 2010 and 2009, 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. (Pharmeral) owned the ANDA. In Fiscal 2008, the Company obtained FDA
approval to use the proprietary rights.
Accordingly, the Company originally capitalized this purchased product
right as an indefinite lived intangible asset and tested this asset for
impairment on a quarterly basis. During
the fourth quarter of Fiscal 2009, it was determined that this intangible asset
no longer has an indefinite life. No
impairment existed because the estimated fair value exceeded the carrying
amount on that date. Accordingly, the $100,000 carrying amount of this
intangible asset will be amortized on a straight line basis prospectively over
its 10 year remaining estimated useful life.
Arthur Bedrosian, President and Chief Executive Officer of the
Company, Inc. currently owns 100% of Pharmeral. 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. In May 2008,
Mr. Bedrosian and Pharmeral waived their rights to any royalty payments on
the sales of the drug by Lannett under Lannetts current ownership
structure. Should Lannett undergo a
change in control where a third party is involved, this royalty would be
reinstated. The registered trademark OB-Natal® was transferred to Lannett for
one dollar from Mr. Bedrosian.
During
Fiscal Year 2010, Lannett Company, Inc. paid a management consultant, who
is related to Mr. Bedrosian, $115,700 in fees and $16,803 in reimbursable
expenses. This consultant provided
management, construction planning, laboratory set up and administrative
services in regards to the Companys initial set up of its Bio-study laboratory
in a foreign country. It is expected
that this consultant will continue to be utilized into Fiscal 2011. In the
Companys opinion, the fee rates paid to this consultant and the expenses
reimbursed to him were not more favorable than what would have been paid to a
non-related party.
Provell
Pharmaceuticals, LLC (Provell) was a joint venture to distribute
pharmaceutical products through mail order outlets. In exchange for access to Lannetts drug
providers, Lannett initially received a 33% ownership interest in this
venture. Lannetts ownership interest
subsequently decreased to 25% due to the additional issuance of shares by
Provell in which Lannett did not participate.
The investment was valued at zero, due to losses incurred through that
date by Provell. During June 2009,
the Company terminated its participation in this joint venture. In connection
with the termination agreement, the Company was required to pay Provell ten
percent of net sales of certain products for a period of up to twenty-four
months. Accounts receivable includes
amounts due from Provell of zero and approximately $55,000 at June 30,
2010 and 2009, respectively. The Company recognized revenues of zero and
approximately $29,000 and $141,000 during the fiscal years ended June 30,
2010, 2009 and 2008, respectively.
64
Table of Contents
ITEM 14
. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Grant Thornton LLP served as the independent auditors of the Company
during Fiscal 2010, 2009 and 2008. 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 2010, 2009 and
2008.
|
|
Audit Fees
|
|
Audit-Related (1)
|
|
Tax Fees (2)
|
|
All Other Fees (3)
|
|
Total Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010:
|
|
$
|
352,760
|
|
$
|
|
|
$
|
190,401
|
|
$
|
7,574
|
|
$
|
550,735
|
|
Fiscal 2009:
|
|
$
|
295,084
|
|
$
|
|
|
$
|
179,677
|
|
$
|
10,932
|
|
$
|
485,693
|
|
Fiscal 2008:
|
|
$
|
335,894
|
|
$
|
5,900
|
|
$
|
78,880
|
|
$
|
49,964
|
|
$
|
470,638
|
|
(1) Audit-related fees include fees paid for preparation of an S-8
filing during Fiscal 2008.
(2) Tax fees include fees paid for preparation of annual federal,
state and local income tax returns, quarterly estimated income tax payments,
and various tax planning services.
(3) Other fees include:
Fiscal 2010 Fees paid for review of various SEC correspondences.
Fiscal 2009 Fees paid for review of various SEC correspondences.
Fiscal 2008 Fees paid for review of various SEC correspondences.
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.
PART IV
ITEM 15
.
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
(a)
Consolidated Financial Statements and Supplementary Data
(1) The following financial statements are included herein:
(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
65
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 23,
2010
|
|
By:
|
/
s / Arthur P. Bedrosian
|
|
|
|
|
Arthur
P. Bedrosian,
|
|
|
|
|
President
and Chief Executive Officer
|
|
|
|
|
|
Date:
|
September 23,
2010
|
|
By:
|
/
s / Keith R. Ruck
|
|
|
|
|
Keith
R. Ruck
|
|
|
|
|
Vice
President of Finance 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 23,
2010
|
|
By:
|
/
s / William Farber
|
|
|
|
|
William
Farber,
|
|
|
|
|
Chairman
of the Board of Directors
|
|
|
|
|
|
Date:
|
September 23,
2010
|
|
By:
|
/
s / Ronald West
|
|
|
|
|
Ronald
West,
|
|
|
|
|
Director,
Vice Chairman of the Board,
|
|
|
|
|
Lead
Outside Director
|
|
|
|
|
|
Date:
|
September 23,
2010
|
|
By:
|
/
s / Arthur P Bedrosian
|
|
|
|
|
Arthur
P. Bedrosian,
|
|
|
|
|
Director,
President and Chief Executive Officer
|
|
|
|
|
|
Date:
|
September 23,
2010
|
|
By:
|
/
s / Jeffrey Farber
|
|
|
|
|
Jeffrey
Farber,
|
|
|
|
|
Director
|
|
|
|
|
|
Date:
|
September 23,
2010
|
|
By:
|
/
s / Kenneth Sinclair
|
|
|
|
|
Kenneth
Sinclair,
|
|
|
|
|
Director,
Chairman of Audit Committee
|
|
|
|
|
|
Date:
|
September 23,
2010
|
|
By:
|
/
s / Albert Wertheimer
|
|
|
|
|
Albert
Wertheimer,
|
|
|
|
|
Director,
Chairman of Strategic Planning Committee
|
|
|
|
|
|
Date:
|
September 23,
2010
|
|
By:
|
/
s / Myron Winkelman
|
|
|
|
|
Myron
Winkelman,
|
|
|
|
|
Director,
Chairman of Compensation Committee
|
66
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Shareholders
Lannett
Company, Inc. and Subsidiaries
We
have audited the accompanying balance sheets of Lannett Company, Inc. (a
Delaware corporation) and Subsidiaries (collectively, the Company) as of June 30,
2010 and 2009, and the related consolidated statements of operations, changes
in shareholders equity, and statement of cash flows for each of three fiscal
years in the period ended June 30, 2010. Our audits of the basic financial
statements included the financial statement schedule listed in the index
appearing under Item 15. These financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financing
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Lannett Company, Inc.
and Subsidiaries as of June 30, 2010 and 2009, and the consolidated
results of its operations and its cash flows for each of the three fiscal years
in the period ended June 30, 2010 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/
GRANT THORNTON LLP
Philadelphia,
Pennsylvania
September 24,
2010
67
Table of Contents
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
June 30, 2010
|
|
June 30, 2009
|
|
ASSETS
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,895,648
|
|
$
|
25,832,456
|
|
Investment securities - available for sale
|
|
604,464
|
|
347,921
|
|
Trade accounts receivable (net of allowance of
$123,192 and $132,000, respectively)
|
|
38,324,258
|
|
29,945,748
|
|
Inventories, net
|
|
19,056,868
|
|
16,195,361
|
|
Interest receivable
|
|
9,631
|
|
90,425
|
|
Deferred tax assets
|
|
5,337,391
|
|
4,296,929
|
|
Other current assets
|
|
2,506,114
|
|
602,335
|
|
Total Current Assets
|
|
87,734,374
|
|
77,311,175
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
50,160,114
|
|
41,431,158
|
|
Less accumulated depreciation
|
|
(21,531,845
|
)
|
(18,533,773
|
)
|
|
|
28,628,269
|
|
22,897,385
|
|
|
|
|
|
|
|
Construction in progress
|
|
2,939,898
|
|
591,685
|
|
Investment securities - available for sale
|
|
183,742
|
|
801,748
|
|
Intangible assets (product rights) - net of
accumulated amortization
|
|
7,785,298
|
|
9,118,710
|
|
Deferred tax assets
|
|
12,544,330
|
|
13,757,545
|
|
Other assets
|
|
147,886
|
|
98,873
|
|
Total Assets
|
|
$
|
139,963,797
|
|
$
|
124,577,121
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS
EQUITY
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,280,675
|
|
$
|
16,805,468
|
|
Accrued expenses
|
|
3,464,181
|
|
1,842,434
|
|
Accrued payroll and payroll related
|
|
6,304,465
|
|
5,150,104
|
|
Income taxes payable
|
|
1,479,658
|
|
711,073
|
|
Current portion of long-term debt
|
|
4,851,278
|
|
435,386
|
|
Rebates, chargebacks and returns payable
|
|
15,249,412
|
|
13,734,540
|
|
Total Current Liabilities
|
|
47,629,669
|
|
38,679,005
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
2,868,549
|
|
7,703,382
|
|
Unearned grant funds
|
|
500,000
|
|
500,000
|
|
Other long-term liabilities
|
|
7,864
|
|
47,111
|
|
Total Liabilities
|
|
51,006,082
|
|
46,929,498
|
|
Commitment and Contingencies, See notes 9 and 10
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
Common stock - authorized 50,000,000 shares, par
value $0.001; issued and outstanding, 24,882,123 and 24,517,696 shares,
respectively
|
|
24,882
|
|
24,518
|
|
Additional paid in capital
|
|
79,862,940
|
|
76,250,309
|
|
Retained earnings
|
|
9,564,632
|
|
1,743,565
|
|
Noncontrolling interest
|
|
111,982
|
|
93,654
|
|
Accumulated other comprehensive income
|
|
44,692
|
|
24,751
|
|
|
|
89,609,128
|
|
78,136,797
|
|
Less: Treasury stock at cost - 110,108 and 82,228
shares, respectively
|
|
(651,413
|
)
|
(489,174
|
)
|
TOTAL SHAREHOLDERS EQUITY
|
|
88,957,715
|
|
77,647,623
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
|
|
$
|
139,963,797
|
|
$
|
124,577,121
|
|
The accompanying notes to consolidated financial statements are an
integral part of these statements
.
68
Table of Contents
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
125,177,949
|
|
$
|
119,002,215
|
|
$
|
72,403,283
|
|
Cost of sales
|
|
80,890,575
|
|
71,272,859
|
|
54,080,947
|
|
Amortization of intangible assets
|
|
1,794,667
|
|
1,787,167
|
|
1,784,664
|
|
Product royalties
|
|
1,152,900
|
|
697,720
|
|
236,601
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
41,339,807
|
|
45,244,469
|
|
16,301,071
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
11,251,421
|
|
8,427,135
|
|
5,172,715
|
|
Selling, general, and administrative expenses
|
|
17,375,320
|
|
26,059,104
|
|
16,552,859
|
|
(Gain) loss on sale of investments
|
|
(1,623
|
)
|
(53,524
|
)
|
4,338
|
|
(Gain) loss on sale of assets
|
|
(315,330
|
)
|
30,885
|
|
1,693
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
13,030,019
|
|
10,780,869
|
|
(5,430,534
|
)
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Foreign currency gain
|
|
4,595
|
|
|
|
|
|
Interest income
|
|
62,328
|
|
209,188
|
|
170,040
|
|
Interest expense
|
|
(275,870
|
)
|
(321,751
|
)
|
(383,267
|
)
|
|
|
(208,947
|
)
|
(112,563
|
)
|
(213,227
|
)
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit)
|
|
12,821,072
|
|
10,668,306
|
|
(5,643,761
|
)
|
Income tax expense (benefit)
|
|
4,813,044
|
|
4,090,716
|
|
(3,376,011
|
)
|
Consolidated net income (loss)
|
|
8,008,028
|
|
6,577,590
|
|
(2,267,750
|
)
|
Less net income attributable to noncontrolling
interest
|
|
(186,961
|
)
|
(43,345
|
)
|
(50,309
|
)
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Lannett
Company, Inc.
|
|
$
|
7,821,067
|
|
$
|
6,534,245
|
|
$
|
(2,318,059
|
)
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share - Lannett
Company, Inc.
|
|
$
|
0.32
|
|
$
|
0.27
|
|
$
|
(0.10
|
)
|
Diluted income (loss) per common share - Lannett
Company, Inc.
|
|
$
|
0.31
|
|
$
|
0.27
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares
outstanding
|
|
24,743,902
|
|
24,447,016
|
|
24,227,181
|
|
Diluted weighted average number of shares
outstanding
|
|
25,199,373
|
|
24,587,378
|
|
24,227,181
|
|
The accompanying notes to consolidated financial statements are an
integral part of these statements.
69
Table of Contents
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
|
|
Earnings /
|
|
|
|
|
|
Accum.
|
|
|
|
|
|
Shares
|
|
|
|
Paid-in
|
|
(accumulated
|
|
Treasury
|
|
Noncontrolling
|
|
Other Comp.
|
|
Shareholders
|
|
|
|
Issued
|
|
Amount
|
|
Capital
|
|
deficit)
|
|
Stock
|
|
Interests
|
|
Income (loss)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2007
|
|
24,171,217
|
|
$
|
24,171
|
|
$
|
73,053,778
|
|
$
|
(2,472,621
|
)
|
$
|
(394,570
|
)
|
$
|
|
|
$
|
(27,583
|
)
|
$
|
70,183,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with employee stock purchase plan
|
|
38,282
|
|
38
|
|
138,592
|
|
|
|
|
|
|
|
|
|
138,630
|
|
Share
based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock
|
|
|
|
|
|
134,794
|
|
|
|
|
|
|
|
|
|
134,794
|
|
Stock
options
|
|
|
|
|
|
869,921
|
|
|
|
|
|
|
|
|
|
869,921
|
|
Shares
issued in connection with restricted stock grant
|
|
74,464
|
|
75
|
|
300,015
|
|
|
|
|
|
|
|
|
|
300,090
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
(74,376
|
)
|
|
|
|
|
(74,376
|
)
|
Other
comprehensive income, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,305
|
|
37,305
|
|
Net
income (loss)
|
|
|
|
|
|
|
|
(2,318,059
|
)
|
|
|
50,309
|
|
|
|
(2,267,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
24,283,963
|
|
$
|
24,284
|
|
$
|
74,497,100
|
|
$
|
(4,790,680
|
)
|
$
|
(468,946
|
)
|
$
|
50,309
|
|
$
|
9,722
|
|
$
|
69,321,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
10,800
|
|
11
|
|
45,801
|
|
|
|
|
|
|
|
|
|
45,812
|
|
Shares
issued in connection with employee stock purchase plan
|
|
49,331
|
|
49
|
|
114,905
|
|
|
|
|
|
|
|
|
|
114,954
|
|
Share
based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock
|
|
|
|
|
|
172,028
|
|
|
|
|
|
|
|
|
|
172,028
|
|
Stock
options
|
|
|
|
|
|
930,878
|
|
|
|
|
|
|
|
|
|
930,878
|
|
Employee
stock purchase plan
|
|
|
|
|
|
81,871
|
|
|
|
|
|
|
|
|
|
81,871
|
|
Shares
issued in connection with restricted stock grant
|
|
68,602
|
|
69
|
|
101,331
|
|
|
|
|
|
|
|
|
|
101,400
|
|
Shares
issued for Contingent Consideration for Cody Labs Acquisition
|
|
105,000
|
|
105
|
|
430395
|
|
|
|
|
|
|
|
|
|
430,500
|
|
Stock
options repurchased
|
|
|
|
|
|
(124,000
|
)
|
|
|
|
|
|
|
|
|
(124,000
|
)
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
(20,228
|
)
|
|
|
|
|
(20,228
|
)
|
Other
comprehensive income, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,029
|
|
15,029
|
|
Net
income
|
|
|
|
|
|
|
|
6,534,245
|
|
|
|
43,345
|
|
|
|
6,577,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009
|
|
24,517,696
|
|
$
|
24,518
|
|
$
|
76,250,309
|
|
$
|
1,743,565
|
|
$
|
(489,174
|
)
|
$
|
93,654
|
|
$
|
24,751
|
|
$
|
77,647,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
125,600
|
|
126
|
|
566,659
|
|
|
|
|
|
|
|
|
|
566,785
|
|
Shares
issued in connection with employee stock purchase plan
|
|
41,602
|
|
41
|
|
189,217
|
|
|
|
|
|
|
|
|
|
189,258
|
|
Share
based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock
|
|
|
|
|
|
522,374
|
|
|
|
|
|
|
|
|
|
522,374
|
|
Stock
options
|
|
|
|
|
|
1,172,656
|
|
|
|
|
|
|
|
|
|
1,172,656
|
|
Employee
stock purchase plan
|
|
|
|
|
|
52,564
|
|
|
|
|
|
|
|
|
|
52,564
|
|
Shares
issued in connection with restricted stock grant
|
|
197,225
|
|
197
|
|
1,048,765
|
|
|
|
|
|
|
|
|
|
1,048,962
|
|
Shares
issued for Contingent Consideration for Cody Labs Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit on stock options exercised
|
|
|
|
|
|
60,396
|
|
|
|
|
|
|
|
|
|
60,396
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
(162,239
|
)
|
|
|
|
|
(162,239
|
)
|
Distribution
to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
(168,633
|
)
|
|
|
(168,633
|
)
|
Other
comprehensive income, net of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,941
|
|
19,941
|
|
Net
income
|
|
|
|
|
|
|
|
7,821,067
|
|
|
|
186,961
|
|
|
|
8,008,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010
|
|
24,882,123
|
|
$
|
24,882
|
|
$
|
79,862,940
|
|
$
|
9,564,632
|
|
$
|
(651,413
|
)
|
$
|
111,982
|
|
$
|
44,692
|
|
$
|
88,957,715
|
|
The accompanying notes to consolidated financial statements are an
integral part of these statements.
70
Table
of Contents
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,008,028
|
|
$
|
6,577,590
|
|
$
|
(2,267,750
|
)
|
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
4,888,015
|
|
5,099,108
|
|
5,229,358
|
|
Deferred tax expense (benefit)
|
|
182,075
|
|
2,983,538
|
|
(4,743,854
|
)
|
Stock compensation expense
|
|
2,037,844
|
|
1,286,177
|
|
1,029,923
|
|
(Gain) loss on sale of assets
|
|
(315,330
|
)
|
30,885
|
|
1,693
|
|
(Gain) loss on sale of investments
|
|
(1,623
|
)
|
(53,524
|
)
|
4,338
|
|
Other noncash (income) expenses
|
|
(3,135
|
)
|
15,110
|
|
9,001
|
|
Changes in assets and liabilities which provided
(used) cash:
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
(8,802,182
|
)
|
(5,548,253
|
)
|
(14,641,004
|
)
|
Inventories
|
|
(2,861,507
|
)
|
(4,578,103
|
)
|
2,901,226
|
|
Prepaid and income taxes payable
|
|
768,585
|
|
2,310,010
|
|
1,594,748
|
|
Prepaid expenses and other assets
|
|
(1,908,110
|
)
|
46,917
|
|
(69,679
|
)
|
Accounts payable
|
|
(524,793
|
)
|
3,719,696
|
|
1,968,824
|
|
Accrued expenses
|
|
1,621,747
|
|
34,806
|
|
563,992
|
|
Rebates, chargebacks and returns payable
|
|
1,938,544
|
|
5,125,610
|
|
12,640,053
|
|
Accrued payroll and payroll related
|
|
1,913,073
|
|
4,505,949
|
|
(447,322
|
)
|
Deferred revenue
|
|
|
|
(982,668
|
)
|
(655,325
|
)
|
Net cash provided by operating activities
|
|
6,941,231
|
|
20,572,848
|
|
3,118,222
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
(including construction in progress)
|
|
(11,186,833
|
)
|
(1,604,114
|
)
|
(2,295,817
|
)
|
Proceeds from sale of property, plant and
equipment
|
|
368,463
|
|
1,500
|
|
21,380
|
|
Purchase of intangible asset (product rights)
|
|
(500,000
|
)
|
|
|
|
|
Proceeds from sale of investment securities -
available for sale
|
|
339,782
|
|
7,408,295
|
|
2,023,616
|
|
Purchase of investment securities - available for
sale
|
|
|
|
(5,979,257
|
)
|
(1,140,945
|
)
|
Net cash used in investing activities
|
|
(10,978,588
|
)
|
(173,576
|
)
|
(1,391,766
|
)
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Repayments of debt
|
|
(418,941
|
)
|
(840,066
|
)
|
(701,131
|
)
|
Proceeds from issuance of stock
|
|
756,043
|
|
160,766
|
|
113,422
|
|
Tax benefit on stock options exercised
|
|
60,396
|
|
|
|
|
|
Purchase of treasury stock
|
|
(162,239
|
)
|
(20,228
|
)
|
(74,376
|
)
|
Repurchase of stock options
|
|
|
|
(124,000
|
)
|
|
|
Distribution to noncontrolling interests
|
|
(168,633
|
)
|
|
|
|
|
Net cash provided by (used in) financing
activities
|
|
66,626
|
|
(823,528
|
)
|
(662,085
|
)
|
|
|
|
|
|
|
|
|
Effect of foreign currency rates on cash and cash
equivalents
|
|
33,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
|
|
(3,936,808
|
)
|
19,575,744
|
|
1,064,371
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
25,832,456
|
|
6,256,712
|
|
5,192,341
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
21,895,648
|
|
$
|
25,832,456
|
|
$
|
6,256,712
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
180,186
|
|
$
|
217,463
|
|
$
|
270,691
|
|
Income taxes paid
|
|
$
|
3,801,987
|
|
$
|
250,000
|
|
$
|
|
|
Lannett stock issued - Fiscal 2009 accrued
incentive compensation
|
|
$
|
758,712
|
|
$
|
|
|
$
|
|
|
Lannett stock issued - contingent consideration -
Cody Labs acquistion
|
|
$
|
|
|
$
|
581,175
|
|
$
|
|
|
The accompanying notes to consolidated financial statements are an
integral part of these statements.
71
Table of Contents
LANNETT COMPANY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note 1. Summary of Significant
Accounting Policies
Lannett Company, Inc.,
a Delaware corporation, and subsidiaries (the Company or Lannett), develop,
manufacture, package, market, and distribute active pharmaceutical ingredients
as well as pharmaceutical products sold under generic chemical names. The Company manufactures solid oral dosage
forms, including tablets and capsules, topical and oral solutions, and is
pursuing partnerships and research contracts for the development and production
of other dosage forms, including ophthalmic, nasal and injectable products.
The
Company is engaged in an industry which is subject to considerable government
regulation related to the development, manufacturing and marketing of
pharmaceutical products. In the normal
course of business, the Company periodically responds to inquiries or engages
in administrative and judicial proceedings involving regulatory authorities,
particularly the Food and Drug Administration (FDA) and the Drug Enforcement
Agency (DEA).
Use of Estimates
- The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
Principles of Consolidation
- The consolidated
financial statements include the accounts of the operating parent company,
Lannett Company, Inc., and its wholly owned subsidiaries, as well as the
consolidation of Cody LCI Realty, LLC, a variable interest entity. See
Note 12 regarding the consolidation of this variable interest entity. All intercompany accounts and transactions
have been eliminated.
Foreign Currency Translation
- The local currency is the
functional currency of its newly created foreign subsidiary. Assets and
liabilities of the foreign subsidiary are translated into U.S. dollars at the
period-end currency exchange rate and revenues and expenses are translated at
an average currency exchange rate for the period. The resulting translation
adjustment is recorded in a separate component of shareholders equity and
changes to such are included in comprehensive income. Exchange adjustments
resulting from transactions denominated in foreign currencies are recognized in
the consolidated statements of operations.
Reclassifications
Certain prior year
amounts have been reclassified to conform to the current year financial
statement presentation.
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 estimates, including 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 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, 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 NDC Health,
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.
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
72
Table of Contents
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 product mix. The
Company continually monitors the reserve for chargebacks and makes adjustments
when management believes that expected chargebacks on actual sales may differ
from actual 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
certain wholesale and retail customers increase. However, since these rebate programs are not
identical for all customers, the size of the reserve will depend on the mix of
customers that are eligible to receive rebates.
Returns
Consistent with industry
practice, the Company has a product returns policy that allows customers to
return product within a specified period before and after 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 principally on historical experience. However, the Company continually monitors the
provisions for returns and makes adjustments when management believes that
future product returns may differ from historical experience. Generally, the reserve for returns increases
as net sales increase. During our fiscal
year 2008 we increased our estimated returns reserve approximately $3.0
million, of which $1.5 million occurred in the fourth quarter, This adjustment
was based on an analysis of our historical returns experience, the average lag
time between sales and returns and an evaluation of changing buying and
inventory trends of both our direct and indirect customers. 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 GAAP. The reserve for returns is included in the rebates, chargebacks and
returns 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 the 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 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, chargebacks and returns payable account on the balance
sheet.
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, 2010, 2009 and 2008:
For the Year Ended June 30, 2010
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
Reserve Balance as of June 30, 2009
|
|
$
|
6,089,802
|
|
$
|
2,537,746
|
|
$
|
5,106,992
|
|
$
|
|
|
$
|
13,734,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales recorded in
prior fiscal years
|
|
(6,068,639
|
)
|
(2,537,746
|
)
|
(3,832,652
|
)
|
|
|
(12,439,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves or (reversals) charged during Fiscal
2010 related to sales in prior fiscal years
|
|
|
|
|
|
(401,203
|
)
|
|
|
(401,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves charged to net sales during Fiscal 2010
related to sales recorded in Fiscal 2010
|
|
48,539,403
|
|
16,353,467
|
|
4,528,118
|
|
1,226,614
|
|
70,647,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales recorded in
Fiscal 2010
|
|
(42,278,440
|
)
|
(12,787,436
|
)
|
|
|
(1,226,614
|
)
|
(56,292,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of June 30, 2010
|
|
$
|
6,282,127
|
|
$
|
3,566,031
|
|
$
|
5,401,254
|
|
$
|
|
|
$
|
15,249,412
|
|
73
Table of Contents
For the Year Ended June 30, 2009
Reserve Category
|
|
Chargebacks
|
|
Rebates
|
|
Returns
|
|
Other
|
|
Total
|
|
Reserve Balance as of June 30, 2008
|
|
$
|
4,049,407
|
|
$
|
632,314
|
|
$
|
13,642,589
|
|
$
|
2,107
|
|
$
|
18,326,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales recorded in
prior fiscal years
|
|
(3,954,794
|
)
|
(632,314
|
)
|
(12,853,342
|
)
|
|
|
(17,440,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves or (reversals) charged during Fiscal
2009 related to sales in prior fiscal years
|
|
|
|
|
|
2,107
|
|
(2,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves charged to net sales during Fiscal 2009
related to sales recorded in Fiscal 2009
|
|
35,391,475
|
|
12,141,204
|
|
4,315,638
|
|
204,119
|
|
52,052,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual credits issued related to sales recorded in
Fiscal 2009
|
|
(29,396,286
|
)
|
(9,603,458
|
)
|
|
|
(204,119
|
)
|
(39,203,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Balance as of June 30, 2009
|
|
$
|
6,089,802
|
|
$
|
2,537,746
|
|
$
|
5,106,992
|
|
$
|
|
|
$
|
13,734,540
|
|
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
|
|
The total reserve for chargebacks, rebates, returns and other
adjustments increased from $13,734,540 at June 30, 2009 to $15,249,412 at June 30,
2010. The increase in total reserves was due to an increase in the
rebates reserve as a result of the timing of credits being processed by the
customers and by the Company, an increase in chargeback reserves due primarily
to an increase in inventory levels at wholesaler distribution centers, and an
increase in the return reserves due to an increase in overall sales.
During Fiscal 2010, approximately $424,000 of the original $10,545,000
return reserve recorded in Fiscal 2008 for Prenatal Multivitamin was applied to
accounts receivable for customers who had returned the Prenatal Multivitamin
product during 2010. In addition, the
Company reversed approximately $387,000 to net sales in the fourth quarter of
Fiscal 2010 as a result of new information that the Company received regarding
the amount of Multivitamin product that remained to be returned to the
Company. This adjustment left a balance
of approximately $17,000 of Multivitamin returns reserve on the consolidated
balance sheet at June 30, 2010.
The
Company ships its products to the warehouses of its wholesale and retail chain
customers. When the Company and a
customer enter into an agreement for the supply of a product, the customer will
generally continue to purchase the product, stock its warehouse(s), and resell
the product to its own customers. The Companys
customer will reorder the product as its warehouse is depleted. The Company generally has no minimum size
orders for its customers. Additionally,
most warehousing customers prefer not to stock excess inventory levels due to
the additional carrying costs and inefficiencies created by holding excess
inventory. As such, the Companys
customers continually reorder the Companys products. It is common for the Companys customers to
order the same products on a monthly basis.
For generic pharmaceutical manufacturers, it is critical to ensure that
customers warehouses are adequately stocked with its products. This is important due to the fact that
multiple generic competitors may compete for the consumer demand for a given
product. Availability of inventory
ensures that a manufacturers product is considered. Otherwise, retail prescriptions would be
filled with competitors products. For
this reason, the Company periodically offers incentives to its customers to
purchase its products. These incentives
are generally up-front discounts off its standard prices at the beginning of a
generic campaign launch for a newly-approved or newly-introduced product, or
when a customer purchases a Lannett product for the first time. Customers generally inform the Company that
such purchases represent an estimate of expected resale for a period of
time.
74
Table of Contents
This
period of time is generally up to three months.
The Company records this revenue, net of any discounts offered and
accepted by its customers at the time of shipment. The Companys products generally have either
24 months or 36 months of shelf-life at the time of manufacture. The Company monitors its customers
purchasing trends to attempt to identify any significant lapses in purchasing
activity. If the Company observes a lack
of recent activity, inquiries will be made to such customer regarding the
success of the customers resale efforts.
The Company attempts to minimize any potential return (or shelf life
issues) by maintaining an active dialogue with the customers.
The
products that the Company sells are generic versions of brand named drugs. The consumer markets for such drugs are
well-established markets with many years of historically-confirmed consumer
demand. Such consumer demand may be
affected by several factors, including alternative treatments and costs, etc. However, the effects of changes in such
consumer demand for the Companys products, like generic products manufactured
by other generic companies, are gradual in nature. Any overall decrease in consumer demand for
generic products generally occurs over an extended period of time. This is because there are thousands of
doctors, prescribers, third-party payers, institutional formularies and other
buyers of drugs that must change prescribing habits and medicinal practices
before such a decrease would affect a generic drug market. If the historical data the Company uses and
the assumptions management makes to calculate its estimates of future returns,
chargebacks, and other credits do not accurately approximate future activity,
its net sales, gross profit, net income and earnings per share could change. However, management believes that these
estimates are reasonable based upon historical experience and current
conditions.
Cash and cash equivalents
The Company considers all
highly liquid securities purchased with original maturities of 90 days or less
to be cash equivalents. Cash equivalents
are stated at cost, which approximates market value, and consist of
certificates of deposit that are readily converted to cash. The Company
maintains cash and cash equivalents with several major financial institutions.
Such amounts frequently exceed Federal Deposit Insurance Corporation (FDIC)
limits.
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.
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 fluctuate, in which case
estimated required reserves for excess and obsolete inventory may increase or
decrease. If the Companys inventory is
determined to be overvalued, the Company recognizes 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 recognize such additional operating income at the
time of sale.
Property, Plant and Equipment
- Property, plant and
equipment are stated at cost.
Depreciation is provided for by the straight-line method for financial
reporting purposes over the estimated useful lives of the assets. Depreciation expense for the fiscal years
ended June 30, 2010, 2009, and 2008 was approximately $3,055,000,
$3,275,000 and $3,444,000, respectively.
Investment Securities
The Companys investment
securities consist of marketable debt securities, primarily in U.S. government
and agency obligations. All of the
Companys marketable debt securities are classified as available-for-sale and
recorded at fair value, based on quoted market prices. Unrealized holding gains and losses are
recorded, net of any tax effect, as a separate component of accumulated other
comprehensive income (loss). No gains or
losses on marketable debt securities are realized until they are sold or a
decline in fair value is determined to be other-than-temporary. The Company reviews its marketable securities
and determines whether the investments are other-than-temporarily impaired. If
the investments are deemed to be other-than-temporarily impaired, the
investments are written down to their then current fair market value with a new
cost basis being established. There were no securities determined by management
to be other-than-temporarily impaired for the fiscal years ended June 30,
2010, 2009 and 2008.
Shipping and Handling Costs
The cost of shipping
products to customers is recognized at the time the products are shipped, and
is included in cost of sales.
Research and Development
Research and development
costs are charged to expense as incurred.
Intangible Assets
In March 2004,
the
Company entered into an agreement with Jerome Stevens
Pharmaceuticals, Inc. (JSP) for the exclusive marketing and 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. As a result of the JSP agreement, the Company
recorded an intangible asset for
75
Table of Contents
the exclusive marketing and distribution rights obtained from JSP. As of June 30, 2010 and 2009, management
concluded the carrying value of the intangible asset was less than its fair
value and, therefore, no impairment was required. The Company will incur annual amortization
expense of approximately $1,785,000 for the JSP intangible asset over the
remaining term of the agreement.
On April 10, 2007, the Company entered into a Stock Purchase
Agreement to acquire Cody by purchasing all of the remaining shares of common
stock of Cody. The consideration for the April 10, 2007 acquisition was
approximately $4,438,000, which represented the fair value of the tangible net
assets acquired. The agreement also required Lannett to issue to the sellers up
to 120,000 shares of unregistered common stock of the Company contingent upon
the receipt of a license from a regulatory agency. This license was subsequently received in
July 2008 and triggered the payment of 105,000 shares (87.5% of the
120,000 shares as the Company already owned 12.5%) of Lannett stock to the
former owners of Cody Labs, which was completed in October 2008. Therefore, the Company recorded an intangible
asset related to the acquisition of a drug import license in the original
amount of $581,175 and recorded a corresponding deferred tax liability of
approximately $150,700 due to the non-deductibility of the amortization for tax
purposes. The Company has assigned a 15
year life to this intangible asset based on average life cycles of Lannett
products.
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 May 2008, the Company and Pharmeral waived their rights to any
royalty payments on the sales of the drug by Lannett, under Lannetts current
ownership structure. Should Lannett
undergo a major change in control where a third party is involved, this royalty
will be reinstated. In Fiscal 2008, the
Company obtained FDA approval to use these proprietary rights. Accordingly, the Company has capitalized this
purchased product right as an indefinite lived intangible asset which is tested
for impairment at least on an annual basis.
During the fourth quarter of fiscal 2009, it was determined that this
intangible asset no longer has an indefinite life. No impairment existed because the estimated
fair value exceeded the carrying amount on that date. Accordingly, the $100,000
carrying amount of this intangible asset will be amortized on a straight line
basis prospectively over its 10 year remaining estimated useful life. See Note 16
In
August 2009, the Company acquired eight new ANDAs covering three separate
product lines from another generic drug manufacturer for a purchase price of
$500,000. It is expected that the
Company will be able to produce these products by the first half of Fiscal
2011. Amortization will begin when the
Company starts shipping these products.
An intangible asset that is not subject to amortization shall be tested
for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. An impairment loss is measured as the excess
of the assets carrying value over its fair value, calculated using a
discounted future cash flow method. Our
discounted cash flow models are highly reliant on various assumptions which are
considered level 3 inputs, including estimates of future cash flow
(including long-term growth rates), discount rate, and expectations about
variations in the amount and timing of cash flows and the probability of
achieving the estimated cash flows. As
of June 30, 2010, no impairment existed.
For
the fiscal years ended June 30, 2010, 2009 and 2008, the Company incurred
amortization expense of approximately $1,833,000, $1,824,000, and $1,785,000,
respectively.
Future
annual amortization expense consists of the following:
Fiscal Year Ending June 30,
|
|
Annual Amortization Expense
|
|
2011
|
|
$
|
1,833,412
|
|
2012
|
|
1,833,412
|
|
2013
|
|
1,833,412
|
|
2014
|
|
1,387,245
|
|
2015
|
|
48,745
|
|
Thereafter
|
|
349,072
|
|
|
|
$
|
7,285,298
|
|
The
amounts above do not include the ANDAs purchased in August 2009 for
$500,000, as amortization will begin when the Company starts shipping these
products
Advertising Costs
- The Company charges
advertising costs to operations as incurred.
Advertising expense for the fiscal years ended June 30, 2010, 2009
and 2008 was approximately $30,000, $48,000, and $9,000, respectively.
76
Table of Contents
Income Taxes
- The Company uses the liability method to
account for income taxes. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred
tax expense/(benefit) is the result of changes in deferred tax assets and
liabilities. The Company may recognize
the tax benefit from an uncertain tax position claimed on a tax return only if
it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement. The authoritative standards issued by the FASB also
provide guidance on de-recognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures.
Segment Information
The Company operates one business
segment - generic pharmaceuticals; accordingly the Company has one reporting
segment. The Company aggregates its
financial information for all products and reports as one operating segment. The following table identifies the Companys
approximate net product sales by medical indication for the fiscal years ended
June 30, 2010, 2009 and 2008:
|
|
For the Fiscal Year Ended June 30,
|
|
Medical Indication
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Migraine Headache
|
|
$
|
9,854,717
|
|
$
|
9,553,143
|
|
$
|
10,302,868
|
|
Epilepsy
|
|
2,020,371
|
|
1,777,820
|
|
3,811,963
|
|
Prescription Vitamin
|
|
5,640,136
|
|
12,569,304
|
|
|
|
Heart Failure
|
|
20,996,057
|
|
26,421,467
|
|
7,574,240
|
|
Thyroid Deficiency
|
|
52,224,711
|
|
47,740,204
|
|
38,429,663
|
|
Antibiotic
|
|
6,448,704
|
|
6,440,470
|
|
3,449,429
|
|
Pain Management
|
|
14,128,982
|
|
4,155,176
|
|
580,192
|
|
Other
|
|
13,864,271
|
|
10,344,631
|
|
8,254,928
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
125,177,949
|
|
$
|
119,002,215
|
|
$
|
72,403,283
|
|
Concentration of Market and Credit Risk
Six of the
Companys products, defined as generics containing the same active ingredient
or combination of ingredients, accounted for approximately 42%, 17%, 8%, 5%,
5%, and 5% of net sales for the fiscal year ended June 30, 2010. Those same products accounted for 40%, 22%,
8%, 2%, 11%, and 0%, respectively, of net sales for the fiscal year ended
June 30, 2009, and 52%, 10%, 14%, 0%, 0%, and 0%, respectively, for the
fiscal year ended June 30, 2008.
Four
of the Companys customers accounted for 26%, 11%, 9%, and 8%, respectively, of
net sales for the fiscal year ended June 30, 2010; 28%, 7%, 7%, and 7%,
respectively, of net sales for the fiscal year ended June 30, 2009; and
36%, 5%, 6%, and 8%, respectively, of net sales for the fiscal year ended
June 30, 2008. At June 30,
2010, four customers accounted for 69% of the Companys accounts receivable
balances. At June 30, 2009, four
customers accounted for 63% of the Companys accounts receivable balances.
Credit
terms are offered to customers based on evaluations of the customers financial
condition. Generally, collateral is not required from customers. Accounts receivable payment terms vary and
are stated in the financial statements at amounts due from customers net of an
allowance for doubtful accounts.
Accounts remaining outstanding longer than the payment terms are
considered past due. The Company
determines its allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, the Companys previous
loss history, the customers current ability to pay its obligation to the
Company, and the condition of the general economy and the industry as a
whole. The Company writes-off accounts
receivable when they become uncollectible.
Share-based Payments
- The Company recognizes
compensation cost for share-based compensation issued to or purchased by
employees, net of estimated forfeitures, under share-based compensation plans
using a fair value method. Compensation cost related to share-based
payments is included in the income statement in the same line item as the
related other compensation costs.
At
June 30, 2010, the Company had three stock-based employee compensation
plans (the Old Plan, the 2003 Plan, and the Long-term Incentive Plan, or LTIP).
During
the fiscal year ended June 30, 2010, the Company awarded 45,000 shares of
restricted stock to non-management Board members under the LTIP which vested
immediately. Stock compensation expense
of $290,250 was recognized during the fiscal year ended June 30, 2010,
related to these shares of restricted stock.
77
Table of
Contents
During
the fiscal year ended June 30, 2010, the Company awarded 237,500 shares of
restricted stock to management employees under the LTIP which vest in equal
portions on October 29, 2010, 2011 and 2012. Stock compensation expense
of $350,346 was recognized during the fiscal year ended June 30, 2010
related to these shares of restricted stock.
During
the fiscal year ended June 30, 2010, the Company awarded 116,725 shares of
restricted stock to management employees under the LTIP which vested
immediately in partial settlement of Fiscal 2009 accrued incentive compensation
costs totaling $758,712.
During
the fiscal year ended June 30, 2009, the Company awarded 30,000 shares of
restricted stock to non-management Board members under the LTIP which vested
immediately. Stock compensation expense
of $101,400 was recognized during the fiscal year ended June 30, 2009,
related to these shares of restricted stock.
During
the fiscal year ended June 30, 2008, the Company awarded 209,264 shares of
restricted stock to management employees under the LTIP, of which 74,464 of
these shares vested 100% on January 1, 2008, and the remainder vest in
equal portions on September 18, 2008, 2009 and 2010. Stock
compensation expense of $172,028, $172,028 and $134,794 was recognized during
the fiscal years ended June 30, 2010, 2009 and 2008, respectively, related
to these shares of restricted stock.
The
Company measures share-based compensation cost for options using the
Black-Scholes option pricing model. The following table presents the
weighted average assumptions used to estimate fair values of the stock options
granted during the years ended June 30 and the estimated annual forfeiture
rates used to recognize the associated compensation expense:
|
|
Incentive
Stock
Options
FY 2010
|
|
Non-
qualified
Stock
Options
FY 2010
|
|
Incentive
Stock
Options
FY 2009
|
|
Non-
qualified
Stock
Options
FY 2009
|
|
Incentive
Stock
Options
FY 2008
|
|
Non-
qualified
Stock
Options
FY 2008
|
|
Risk-free interest rate
|
|
2.44
|
%
|
2.43
|
%
|
2.46
|
%
|
2.52
|
%
|
4.15
|
%
|
4.21
|
%
|
Expected volatility
|
|
67
|
%
|
67
|
%
|
61
|
%
|
56
|
%
|
56
|
%
|
56
|
%
|
Expected dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Forfeiture rate
|
|
5.0
|
%
|
5.0
|
%
|
5.0
|
%
|
5.0
|
%
|
5.0
|
%
|
5.0
|
%
|
Expected term (in years)
|
|
5.0 years
|
|
5.0 years
|
|
5.0 years
|
|
5.0 years
|
|
5.0 years
|
|
5.0 years
|
|
Weighted average fair value
|
|
$
|
3.98
|
|
$
|
4.00
|
|
$
|
2.20
|
|
$
|
1.41
|
|
$
|
2.11
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2010, there were 2,058,851 options outstanding. Of those,
1,032,925 were options issued under the LTIP, 820,693 were issued under the
2003 Plan, and 205,233 under the Old Plan. There are no further shares
authorized to be issued under the Old Plan. 1,125,000 shares were
authorized to be issued under the 2003 Plan, with 49,365 shares under option
having already been exercised under that plan. 2,500,000 shares were
authorized to be issued under the LTIP, with 94,725 shares under option having
already been exercised under that plan.
Expected
volatility is based on the historical volatility of the price of our common
shares since the date we commenced trading on the NYSE - Amex, April 2002,
or a historical period equal to the expected term of the option, whichever is
shorter. We use historical information
to estimate expected term within the valuation model. The expected term
of awards represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the expected life of
the option is based on the U.S. Treasury yield curve in effect at the time of
grant. Compensation cost is recognized using a straight-line method over
the vesting or service period and is net of estimated forfeitures.
The
forfeiture rate assumption is the estimated annual rate at which unvested
awards are expected to be forfeited during the vesting period. This assumption
is based on our historical forfeiture rate. Periodically, management will
assess whether it is necessary to adjust the estimated rate to reflect changes
in actual forfeitures or changes in expectations. For example, adjustments may
be needed if, historically, forfeitures were affected mainly by turnover that
resulted from a business restructuring that is not expected to recur. The
forfeiture rate used to calculate compensation expense was 5% for fiscal years
2010, 2009 and 2008. The Company will
incur additional expense if the actual forfeiture rate is lower than originally
estimated. A recovery of prior expense will be recorded if the actual rate is
higher than originally estimated.
78
Table of Contents
The
following table presents all share-based compensation costs recognized in our
statements of income, substantially all of which is reflected in the selling,
general and administrative expense line:
|
|
Twelve months ended June 30,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Share based compensation
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
1,172,656
|
|
$
|
930,878
|
|
$
|
869,921
|
|
Employee stock purchase plan
|
|
$
|
52,564
|
|
$
|
81,871
|
|
$
|
25,208
|
|
Restricted stock
|
|
$
|
812,624
|
|
$
|
273,428
|
|
$
|
134,794
|
|
Tax benefit at effective rate
|
|
$
|
79,611
|
|
$
|
79,560
|
|
$
|
108,127
|
|
During
Fiscal 2009 as part of the former CFOs resignation, the Company repurchased
all of his 185,000 outstanding stock options. Therefore, the Company recorded,
as incremental stock compensation expense, the previously unrecognized
compensation cost totaling approximately $83,000 related to options for which
the requisite service period had not been rendered as of the repurchase
date. See Note 10 for additional
information.
Options
outstanding that have vested and are expected to vest as of June 30, 2010
are as follows:
|
|
Awards
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Options vested
|
|
1,141,934
|
|
$
|
8.52
|
|
$
|
208,664
|
|
5.1
|
|
Options expected to vest
|
|
871,071
|
|
$
|
6.10
|
|
$
|
217,453
|
|
8.9
|
|
Total vested and expected to vest
|
|
2,013,005
|
|
$
|
7.48
|
|
$
|
426,117
|
|
6.7
|
|
A
summary of nonvested restricted stock awards as of June 30, 2010, 2009,
and 2008 and changes during the fiscal years then ended, is presented below:
|
|
Awards
|
|
Weighted
Average Grant -
date Fair Value
|
|
Nonvested at June 30, 2007
|
|
|
|
$
|
|
|
Granted
|
|
209,264
|
|
843,334
|
|
Vested
|
|
(74,464
|
)
|
(300,090
|
)
|
Forfeited
|
|
(10,000
|
)
|
(40,300
|
)
|
Nonvested at June 30, 2008
|
|
124,800
|
|
502,944
|
|
Granted
|
|
30,000
|
|
101,400
|
|
Vested
|
|
(68,602
|
)
|
(256,966
|
)
|
Forfeited
|
|
(9,000
|
)
|
(36,270
|
)
|
Nonvested at June 30, 2009
|
|
77,198
|
|
311,108
|
|
Granted
|
|
399,225
|
|
2,697,213
|
|
Vested
|
|
(197,225
|
)
|
(1,192,028
|
)
|
Forfeited
|
|
(9,300
|
)
|
(37,479
|
)
|
Nonvested at June 30, 2010
|
|
269,898
|
|
$
|
1,778,814
|
|
79
Table of
Contents
A
summary of stock option award activity under the Plans as of June 30,
2010, 2009 and 2008 and changes during the years then ended, is presented
below:
|
|
Incentive Stock Options
|
|
Nonqualified Stock Options
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual
|
|
|
|
Awards
|
|
Price
|
|
Value
|
|
Life
|
|
Awards
|
|
Price
|
|
Value
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 1, 2009
|
|
958,909
|
|
$
|
5.60
|
|
|
|
|
|
626,772
|
|
$
|
10.52
|
|
|
|
|
|
Granted
|
|
507,142
|
|
$
|
6.96
|
|
|
|
|
|
152,658
|
|
$
|
6.99
|
|
|
|
|
|
Exercised
|
|
(111,796
|
)
|
$
|
4.46
|
|
$
|
298,605
|
|
|
|
(13,804
|
)
|
$
|
4.97
|
|
$
|
57,108
|
|
|
|
Forfeited, expired or repurchased
|
|
(45,001
|
)
|
$
|
8.75
|
|
|
|
|
|
(16,029
|
)
|
$
|
16.67
|
|
|
|
|
|
Outstanding at June 30, 2010
|
|
1,309,254
|
|
$
|
6.11
|
|
$
|
348,964
|
|
7.5
|
|
749,597
|
|
$
|
9.77
|
|
$
|
88,599
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010 and not yet
vested
|
|
720,699
|
|
$
|
6.07
|
|
$
|
179,684
|
|
8.9
|
|
196,218
|
|
$
|
6.20
|
|
$
|
49,215
|
|
.9.0
|
|
Exercisable at June 30, 2010
|
|
588,555
|
|
$
|
6.16
|
|
$
|
170,699
|
|
5.9
|
|
553,379
|
|
$
|
11.03
|
|
$
|
39,384
|
|
4.2
|
|
|
|
Incentive Stock Options
|
|
Nonqualified Stock Options
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual
|
|
|
|
Awards
|
|
Price
|
|
Value
|
|
Life
|
|
Awards
|
|
Price
|
|
Value
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
July 1, 2008
|
|
991,267
|
|
$
|
5.76
|
|
|
|
|
|
703,064
|
|
$
|
10.16
|
|
|
|
|
|
Granted
|
|
187,102
|
|
$
|
4.03
|
|
|
|
|
|
37,998
|
|
$
|
2.80
|
|
|
|
|
|
Exercised
|
|
(10,800
|
)
|
$
|
4.24
|
|
$
|
11,799
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited, expired or
repurchased
|
|
(208,660
|
)
|
$
|
5.06
|
|
|
|
|
|
(114,290
|
)
|
$
|
5.75
|
|
|
|
|
|
Outstanding at
June 30, 2009
|
|
958,909
|
|
$
|
5.60
|
|
$
|
1,844,125
|
|
7.4
|
|
626,772
|
|
$
|
10.52
|
|
$
|
430,739
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
June 30, 2009 and not yet vested
|
|
478,551
|
|
$
|
4.27
|
|
$
|
1,234,175
|
|
8.6
|
|
120,893
|
|
$
|
4.23
|
|
$
|
317,515
|
|
8.2
|
|
Exercisable at
June 30, 2009
|
|
480,358
|
|
$
|
6.91
|
|
$
|
609,950
|
|
6.2
|
|
505,879
|
|
$
|
12.02
|
|
$
|
113,224
|
|
4.9
|
|
|
|
Incentive Stock Options
|
|
Nonqualified Stock Options
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual
|
|
|
|
Exercise
|
|
Intrinsic
|
|
Contractual
|
|
|
|
Awards
|
|
Price
|
|
Value
|
|
Life
|
|
Awards
|
|
Price
|
|
Value
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 1, 2007
|
|
501,349
|
|
$
|
7.48
|
|
|
|
|
|
617,982
|
|
$
|
11.00
|
|
|
|
|
|
Granted
|
|
496,818
|
|
$
|
4.03
|
|
|
|
|
|
85,082
|
|
$
|
4.03
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
(6,900
|
)
|
$
|
5.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
991,267
|
|
$
|
5.76
|
|
$
|
6,300
|
|
8.0
|
|
703,064
|
|
$
|
10.16
|
|
$
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008 and not yet
vested
|
|
660,538
|
|
$
|
4.54
|
|
$
|
|
|
9.0
|
|
183,651
|
|
$
|
5.05
|
|
$
|
|
|
8.7
|
|
Exercisable at June 30, 2008
|
|
330,729
|
|
$
|
8.21
|
|
$
|
6,300
|
|
6.1
|
|
519,413
|
|
$
|
11.96
|
|
$
|
|
|
5.8
|
|
Options
with a fair value of approximately $749,000 completed vesting during 2010. As of June 30, 2010, there was
approximately $3,495,000 of total unrecognized compensation cost related to
non-vested share-based compensation awards granted under the Plans. That
cost is expected to be recognized over a weighted average period of 1.7
years. The Company issues new shares
when stock options are exercised.
Unearned Grant Funds
The Company
records all grant funds received as a liability until the Company fulfills all
the requirements of the grant funding program.
80
Table of
Contents
Earnings per Common Share
A dual presentation of
basic and diluted earnings per share is required on the face of the Companys
consolidated statement of operations as well as a reconciliation of the
computation of basic earnings per share to diluted earnings per share. Basic earnings per share excludes the
dilutive impact of common stock equivalents and is computed by dividing net
income by the weighted-average number of shares of common stock outstanding for
the period. Diluted earnings per share
include the effect of potential dilution from the exercise of outstanding
common stock equivalents into common stock using the treasury stock
method. A reconciliation of the Companys
basic and diluted earnings per share follows:
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
Net Income
Attributable to
Lannett
|
|
Shares
|
|
Net Income
Attributable to
Lannett
|
|
Shares
|
|
Net Loss
Attributable to
Lannett
|
|
Shares
|
|
|
|
(Numerator)
|
|
(Denominator)
|
|
(Numerator)
|
|
(Denominator)
|
|
(Numerator)
|
|
(Denominator)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings/(loss) per share factors
|
|
$
|
7,821,067
|
|
24,743,902
|
|
$
|
6,534,245
|
|
24,447,016
|
|
$
|
(2,318,059
|
)
|
24,227,181
|
|
Effect of potentially dilutive options
|
|
|
|
455,471
|
|
|
|
140,361
|
|
|
|
|
|
Diluted earnings/(loss) per share factors
|
|
$
|
7,821,067
|
|
25,199,373
|
|
$
|
6,534,245
|
|
24,587,378
|
|
$
|
(2,318,059
|
)
|
24,227,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings/(loss) per share
|
|
$
|
0.32
|
|
|
|
$
|
0.27
|
|
|
|
$
|
(0.10
|
)
|
|
|
Diluted earnings/(loss) per share
|
|
$
|
0.31
|
|
|
|
$
|
0.27
|
|
|
|
$
|
(0.10
|
)
|
|
|
Dilutive
shares have been excluded in the weighted average shares used for the
calculation of earnings per share in periods of net loss because the effect of
such securities would be anti-dilutive.
The number of anti-dilutive shares that have been excluded in the
computation of diluted earnings per share for the fiscal years ended
June 30, 2010, 2009 and 2008 were 1,281,364, 980,781, and 1,949,131,
respectively.
Note 2.
New Accounting Standards
In
December 2007, the FASB issued authoritative guidance which significantly
changes 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
the guidance, 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. In April 2009, updated guidance was issued
to address application issues regarding the accounting and disclosure
provisions for contingencies. The authoritative guidance 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 this authoritative guidance on our
consolidated financial statements will depend on the nature and terms of any
business combinations that occur after the effective date.
In
December 2007, the FASB issued authoritative guidance 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. We adopted this authoritative guidance effective July 1,
2009. As a result of the adoption, the Company presents noncontrolling
interests as a component of equity on its consolidated balance sheets. Minority interest expense is now shown below
net income under the heading net income attributable to noncontrolling
interest. Prior year financial
statements have been reclassified to reflect the adoption of this
guidance. The adoption of this guidance
did not have any other significant impact on our consolidated financial
statements.
In
April 2008, the FASB issued authoritative guidance which amends the
factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset.
The guidance is intended to improve the consistency between the useful life of
a recognized intangible asset and the period of expected cash flows used to
measure the fair value of the asset. We adopted this authoritative guidance
effective July 1, 2009. The
adoption of this guidance did not have a significant impact on our consolidated
financial statements.
In
June 2009, the FASB issued authoritative guidance for determining whether
an entity is a variable interest entity and modifies the methods allowed for
determining the primary beneficiary of a variable interest entity. This
guidance requires an enterprise to perform an analysis to determine whether the
enterprises variable interest or interests give it a controlling financial
interest in a variable interest entity. It also requires ongoing reassessments
of whether an enterprise is the primary beneficiary of a variable interest
entity. The authoritative guidance is
effective for the annual reporting period that begins after November 15,
2009. We do not expect the
81
Table of
Contents
adoption
of this authoritative guidance to have a significant impact on our consolidated
financial statements.
In
January 2010, the FASB issued authoritative guidance which requires reporting
entities to make new disclosures about recurring or nonrecurring fair-value
measurements including significant transfers into and out of Level 1 and Level
2 fair-value measurements and information on purchases, sales, issuances, and
settlements on a gross basis in the reconciliation of Level 3 fair- value
measurements. The authoritative guidance is effective for annual reporting
periods beginning after December 15, 2009, except for Level 3 reconciliation
disclosures which are effective for annual periods beginning after December 15,
2010. We do not anticipate that this update will have a material impact on our
consolidated financial statements.
Note
3. Inventories
Inventories
at June 30, 2010 and 2009 consist of the following:
|
|
2010
|
|
2009
|
|
Raw Materials
|
|
$
|
5,183,735
|
|
$
|
5,755,982
|
|
Work-in-process
|
|
2,375,396
|
|
2,846,600
|
|
Finished Goods
|
|
10,527,630
|
|
6,664,193
|
|
Packaging Supplies
|
|
970,106
|
|
928,586
|
|
|
|
$
|
19,056,868
|
|
$
|
16,195,361
|
|
The
preceding amounts are net of inventory obsolescence reserves of $2,481,810 and
$2,744,305 at June 30, 2010 and 2009, respectively.
Note 4. Property, Plant and Equipment
Property, plant and equipment at June 30, 2010 and 2009 consist of
the following:
|
|
Useful Lives
|
|
2010
|
|
2009
|
|
Land
|
|
|
|
$
|
1,375,103
|
|
$
|
918,314
|
|
Building and improvements
|
|
10 - 39 years
|
|
23,101,751
|
|
17,048,351
|
|
Machinery and equipment
|
|
5 - 15 years
|
|
24,638,754
|
|
22,573,324
|
|
Furniture and fixtures
|
|
5 - 7 years
|
|
1,044,506
|
|
891,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,160,114
|
|
41,431,158
|
|
Less accumulated depreciation
|
|
|
|
(21,531,845
|
)
|
(18,533,773
|
)
|
Total
|
|
|
|
$
|
28,628,269
|
|
$
|
22,897,385
|
|
Note 5. Investment Securities -
Available-for-Sale
On
July 1, 2008, the Company adopted the authoritative guidance which
clarifies the definition of fair value, establishes a framework for measuring
fair value, and expands the disclosures on fair value measurements. Fair value
is defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. The authoritative guidance also
establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. Three levels of inputs were established that may be used to measure
fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities. The Company does not have any Level 1
available-for-sale securities as of June 30, 2010 or June 30, 2009.
Level 2
Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices for identical or similar
instruments in markets that are not active; or model-derived valuations whose
inputs are observable or whose significant value drivers are observable. The
Companys Level 2 assets and liabilities primarily include debt securities
with quoted prices that are traded less frequently than exchange-traded
instruments, corporate bonds, U.S. government and agency securities and
certain mortgage-backed and asset-backed securities whose values are determined
using pricing models with inputs that are observable in the market or can be
derived principally from or corroborated by observable market data. The fair value of the Companys
available-for-sale securities in the table below are derived solely from Level
2 inputs.
Level 3
Unobservable inputs that are supported by little or no market activity and
that are financial instruments whose values are determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as
instruments for which the
82
Table of
Contents
determination
of fair value requires significant judgment or estimation. The Company does not
have any Level 3 available-for-sale securities as of June 30, 2010 or
June 30, 2009.
If
the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest
level input that is significant to the fair value measurement of the
instrument.
The amortized cost, gross unrealized gains and losses, and fair value
of the Companys available-for-sale securities as of June 30, 2010 and
June 30, 2009:
June 30, 2010
Available-for-Sale
|
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency
|
|
$
|
590,751
|
|
$
|
13,713
|
|
$
|
|
|
$
|
604,464
|
|
Corporate Bonds
|
|
179,507
|
|
4,235
|
|
|
|
183,742
|
|
|
|
$
|
770,258
|
|
$
|
17,948
|
|
$
|
|
|
$
|
788,206
|
|
June 30, 2009
Available-for-Sale
|
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Agency
|
|
$
|
928,910
|
|
$
|
40,352
|
|
$
|
|
|
$
|
969,262
|
|
Asset-Backed Securities
|
|
179,507
|
|
900
|
|
|
|
180,407
|
|
|
|
$
|
1,108,417
|
|
$
|
41,252
|
|
$
|
|
|
$
|
1,149,669
|
|
The amortized cost and fair value of the Companys current
available-for-sale securities by contractual maturity at June 30, 2010 and
June 30, 2009 are summarized as follows:
|
|
June 30, 2010
|
|
June 30, 2009
|
|
|
|
Available for Sale
|
|
Available for Sale
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Due in one year or less
|
|
$
|
590,751
|
|
$
|
604,464
|
|
$
|
338,159
|
|
$
|
347,921
|
|
Due after one year through five years
|
|
179,507
|
|
183,742
|
|
770,258
|
|
801,748
|
|
Due after five years through ten years
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
770,258
|
|
788,206
|
|
1,108,417
|
|
1,149,669
|
|
Less current portion
|
|
590,751
|
|
604,464
|
|
338,159
|
|
347,921
|
|
Long-term available-for-sale securities
|
|
$
|
179,507
|
|
$
|
183,742
|
|
$
|
770,258
|
|
$
|
801,748
|
|
The Company uses the specific identification method to determine the
cost of securities sold. For the fiscal years 2010 and 2009, the Company had
realized gains of $1,623 and $53,524, respectively, whereas for fiscal year
2008, the Company had realized losses of $4,338.
As of June 30, 2010 and 2009, there were no securities held from a
single issuer that represented more than 10% of shareholders equity. As of June 30, 2010, there were no
individual securities in a continuous unrealized loss position.
Note
6. Bank Line of Credit
The
Company has a $3,000,000 line of credit from Wells Fargo, N. A., formerly
Wachovia Bank, N.A. (Wells Fargo) that bears interest at the prime interest
rate less 0.25% (3.00% at June 30, 2010 and 2009, respectively). As of June 30,
2010 and 2009, the Company had $3,000,000 of availability under this line of
credit. The line of credit is
collateralized by substantially all of the Companys assets. The
agreement contains covenants with respect to working capital, net worth and
certain ratios, as well as other
83
Table of
Contents
covenants. As of June 30, 2010, the Company was in
compliance with all financial covenants under the agreement.
The
existing line of credit, which was scheduled to expire on November 30, 2009,
was renewed and extended during the first quarter of Fiscal 2010 to
November 30, 2010. As part of the renewal agreement, the
Company is no longer required to maintain any minimum deposit balances with
Wells Fargo, and the availability fee on the unused balance of the line of
credit was reduced to 0.375%.
Note 7. Unearned Grant Funds
In
July 2004, the Company received $500,000 of grant funding from the
Commonwealth of Pennsylvania (the Commonwealth), 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 failed 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 is recording the unearned grant funds as a liability until the Company
reaches a formal agreement with the Commonwealth as to whether it complied with
all of the requirements of the grant funding program. As of June 30, 2010, the Company has had
preliminary discussions with the Commonwealth 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, 2010, the Company has recorded the grant funding as a long-term
liability under the caption of Unearned Grant Funds.
Note
8. Long-Term Debt
Long-term
debt consists of the following:
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
PIDC Regional Center, LP III loan
|
|
$
|
4,500,000
|
|
$
|
4,500,000
|
|
Pennsylvania Industrial Development Authority loan
|
|
933,820
|
|
1,002,607
|
|
Pennsylvania Department of Community &
Economic Development loan
|
|
88,141
|
|
182,831
|
|
Tax-exempt bond loan (PAID)
|
|
555,000
|
|
680,000
|
|
Equipment loan
|
|
|
|
80,130
|
|
SBA loan
|
|
|
|
|
|
First National Bank of Cody mortgage
|
|
1,642,866
|
|
1,693,200
|
|
|
|
|
|
|
|
Total debt
|
|
7,719,827
|
|
8,138,768
|
|
Less current portion
|
|
4,851,278
|
|
435,386
|
|
|
|
|
|
|
|
Long term debt
|
|
$
|
2,868,549
|
|
$
|
7,703,382
|
|
Current
Portion of Long Term Debt
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
PIDC Regional Center, LP III loan
|
|
$
|
4,500,000
|
|
$
|
|
|
Pennsylvania Industrial Development Authority loan
|
|
77,091
|
|
75,017
|
|
Pennsylvania Department of Community &
Economic Development loan
|
|
88,141
|
|
103,100
|
|
Tax-exempt bond loan (PAID)
|
|
130,000
|
|
125,000
|
|
Equipment loan
|
|
|
|
80,130
|
|
SBA loan
|
|
|
|
|
|
First National Bank of Cody mortgage
|
|
56,046
|
|
52,139
|
|
|
|
|
|
|
|
Total current portion of long term debt
|
|
$
|
4,851,278
|
|
$
|
435,386
|
|
The
Company financed $4,500,000 through the Philadelphia Industrial Development
Corporation (PIDC). The Company pays a bi-annual interest payment at a rate
equal to two and one-half percent per annum.
The outstanding principal balance is due and payable January 1,
2011. The Company intends to refinance this loan prior to its maturity date.
The
Company financed $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.
84
Table of Contents
An
additional $500,000 was financed through 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.
In
April 1999, the Company entered into a loan agreement (the Agreement)
with a governmental authority, 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, 2010 and 2009 was 0.52% and
0.62%, respectively.
The
Company entered into agreements (the 2003 Loan Financing) with Wells Fargo 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 remained
outstanding at June 30, 2009 was the Equipment Loan which had an
outstanding balance of $80,130 at June 30, 2009. This loan was fully
repaid as of March 31, 2010.
The
Company has executed Security Agreements with Wells Fargo, PIDA and PIDC in
which the Company has agreed to pledge substantially all of its assets to
collateralize the amounts due.
As
part of the Cody acquisition, the Company became primary beneficiary to a
variable interest entity (VIE) called Cody LCI Realty, LLC. See Note
12, Consolidation of Variable Interest Entity for additional description.
The VIE owns land and a building which is being leased to Cody. A mortgage
loan with First National Bank of Cody has been consolidated in the Companys
financial statements, along with the related land and building. Principal
and interest payments of $14,782, at a fixed interest rate of 7.5%, are being
made on a monthly basis through June 2026. The mortgage loan is
collateralized by the land and building.
Long-term
debt amounts are due as follows:
Fiscal Year Ending
|
|
Amounts Payable
|
|
June 30,
|
|
to Institutions
|
|
|
|
|
|
2011
|
|
$
|
4,851,278
|
|
2012
|
|
274,434
|
|
2013
|
|
280,543
|
|
2014
|
|
310,036
|
|
2015
|
|
161,616
|
|
Thereafter
|
|
1,841,920
|
|
|
|
|
|
|
|
$
|
7,719,827
|
|
Some
of the Companys debt instruments are fixed rate, with a lower interest rate
than the prevailing market rates. The Company has been able to obtain favorable
rates through the Philadelphia and Pennsylvania Industrial Development
Authorities.
Note
9. Contingencies
In
January 2010, the Company initiated an arbitration proceeding against Olive
Healthcare (Olive) for damages arising out of Olives delivery of defective
soft-gel prenatal vitamin capsules. The
Company seeks damages in excess of $3.5 million. Olive has denied liability and
filed a counterclaim in February 2010 for breach of contract.
In
June 2008, the Company filed a declaratory judgment suit in
the Federal District Court of Delaware (Civil Action No. 08-338 (JJF))
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
85
Table of
Contents
other
monetary relief, preliminary and permanent injunctive relief, attorneys fees
and a finding of willful infringement. In March 2009, the Company and KV
settled the litigation. In light of the
withdrawal of KVs innovator prenatal product due to FDA enforcement actions,
and the resulting anticipated decline in sales and declining market for written
prescription, the Company decided it was pointless to continue the litigation
and entered into the settlement arrangement with KV. Pursuant to the settlement, the Company
received a license from KV and became an authorized generic provider. During the terms of the license, the Company
is to pay KV a royalty on all future sales of its Prenatal vitamin
product. Lannett will cease offering its
Prenatal vitamin product if and when the brand is restored to the
marketplace. In May 2010, the Company
filed an action for declaratory relief in the Delaware Superior Court against
KV seeking a declaration that KV breached its obligations under a settlement
agreement entered into with the Company (the Binding Agreement). In June 2010, KV filed a counterclaim to the
complaint and asserted claims for breach of contract, declaratory judgment,
negligent misrepresentation and fraud in connection with the Binding Agreement,
alleging among other things that the Company has improperly withheld royalties
from KV arising out of its sales of a pre-natal vitamin product.
In
or about July 2008, Albion International and Albion, Inc. filed suit
in the United States District Court, District of Utah (Case
No. 2:08cv00515) 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 granted the motion and dismissed the complaint
but gave Albion leave to file an amended complaint. In January 2009,
Albion filed an amended complaint. Lannett filed an answer to the
complaint and counterclaim, asserting, among other things, that
Albion tortuously interfered with Lannetts contracts. Subsequent to
the filing of the answer and counterclaim, Lannett and
Albion reached an agreement in principal to settle the case.
Under terms of the settlement, the parties would each dismiss their claims against
each other and provide releases. In July
2009, the settlement agreement was signed and the case was dismissed.
Note 10. Commitments
Leases
In
June 2006, Lannett signed a lease agreement on a 66,000 square foot
facility located on approximately seven acres in Philadelphia. The Company purchased this building in
October 2009 for approximately $3.8 million plus the cost of fit out of
approximately $2.0 million. A
significant portion of the purchase price and fit out costs are expected to be
financed through a series of loans with a bank and a Pennsylvania state run
development agency. Construction was substantially complete by June 30,
2010. The financing will be competed
shortly. This new facility is being used
for certain administrative functions, warehouse space, shipping and possibly
additional manufacturing space in the future.
Lannetts subsidiary, Cody
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, a
Wyoming limited liability company which is 50% owned by Lannett. See Note 12.
Rental
and lease expense for the years ended June 30, 2010, 2009 and 2008 was
approximately $156,000, $449,000, and $449,000, respectively.
Contractual Obligations
The
following table represents annual contractual obligations as of June 30,
2010:
|
|
|
|
Less than 1
|
|
|
|
|
|
More than 5
|
|
|
|
Total
|
|
year
|
|
1-3 years
|
|
3-5 years
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
$
|
7,719,827
|
|
$
|
4,851,278
|
|
$
|
554,977
|
|
$
|
471,652
|
|
$
|
1,841,920
|
|
Operating Leases
|
|
111,176
|
|
50,100
|
|
61,076
|
|
|
|
|
|
Purchase Obligations
|
|
63,930,000
|
|
22,572,500
|
|
41,357,500
|
|
|
|
|
|
Interest on Obligations
|
|
1,435,553
|
|
259,213
|
|
278,996
|
|
244,012
|
|
653,332
|
|
Total
|
|
$
|
73,196,556
|
|
$
|
27,733,091
|
|
$
|
42,252,549
|
|
$
|
715,664
|
|
$
|
2,495,252
|
|
The
purchase obligations above are primarily due to the agreement with Jerome
Stevens Pharmaceuticals, Inc. (JSP). If the minimum purchase requirement
is not met, JSP has the right to terminate the contract within 60 days of
Lannetts failure to meet the requirement.
If JSP terminates the contract, Lannett does not pay any fee, but could
lose its exclusive distribution rights in the United States. If Lannetts management believes that it is
not in the Companys best interest to fulfill the minimum purchase
requirements, it can also terminate the contract without any penalty. If either party were to terminate the
purchase agreement, there would be a significant impact on the operating cash
flows of the Company from the termination.
86
Table of
Contents
Employment Agreements
The
Company has entered into employment agreements with Arthur P. Bedrosian, President
and Chief Executive Officer, Keith R. Ruck, Vice President of Finance and Chief
Financial Officer, Kevin Smith, Vice President of Sales and Marketing, William
Schreck, Senior Vice President and General Manager, Ernest Sabo, Vice President
of Regulatory Affairs and Chief Compliance Officer and Stephen Kovary, Vice
President of Operations. Each of the agreements provide for an annual
base salary and eligibility to receive a bonus. The salary and bonus
amounts of these executives are determined by the Board of Directors.
Additionally, these 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, these 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 these executives of between 18 months
and three years.
During
the third quarter of Fiscal Year 2009, the Companys then current Vice
President of Finance, Treasurer, Secretary and Chief Financial Officer
resigned. As part of his separation
agreement, the Company was obligated to pay to him approximately $670,000 to
settle any outstanding obligations from his employment agreement, including any
salary, bonus, vacation, stock options and medical benefits. Of this amount, $300,440 was paid in Fiscal
2009 with $165,000 designated for the payment of pro rated bonus, and $11,440
was designated for the payment of accrued but unused paid time off. As part of the settlement, $124,000 was
designated as the portion of the settlement related to the repurchase of his
outstanding stock options. The Company therefore charged this amount to
Additional Paid in Capital, as it represents the fair value of the options
repurchased on the repurchase date.
Additional payments totaling approximately $369,000 for severance and
benefits will be paid in Fiscal 2011 pursuant to the separation agreement.
Note 11. Comprehensive Income
(Loss)
The Companys other comprehensive income (loss) is comprised of
unrealized gains (losses) on investment securities classified as
available-for-sale as well as foreign currency translation adjustments. There is no other comprehensive income (loss)
attributable to the noncontrolling interest.
The components of comprehensive income (loss) and related taxes
consisted of the following as of June 30, 2010, 2009 and 2008:
|
|
For Fiscal Year Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
8,008,028
|
|
$
|
6,577,590
|
|
$
|
(2,267,750
|
)
|
Foreign currency translation adjustments
|
|
33,923
|
|
|
|
|
|
Unrealized holding (loss) gain on securities
|
|
(23,304
|
)
|
25,049
|
|
62,174
|
|
Tax effect
|
|
9,322
|
|
(10,020
|
)
|
(24,869
|
)
|
|
|
|
|
|
|
|
|
Total Other Comprehensive Income
|
|
19,941
|
|
15,029
|
|
37,305
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income (Loss)
|
|
$
|
8,027,969
|
|
$
|
6,592,615
|
|
$
|
(2,230,445
|
)
|
Note 12. Consolidation of Variable Interest Entity
Lannett
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 each of the June 30, 2010 and 2009 balance sheets are consolidated
VIE assets of approximately $1.9 million and $1.9 million, respectively, which
are comprised mainly of land and a building.
VIE liabilities consist primarily of a mortgage on that property in the
amount of $1.6 million and $1.7 million at June 30, 2010 and 2009,
respectively.
Cody
LCI Realty LLC (Realty) is the only VIE that is consolidated. Realty had been consolidated by Cody prior to
its acquisition by Lannett. Realty is a
50/50 joint venture with a former shareholder of Cody. Its purpose was to acquire the facility used
by Cody. Until the acquisition of Cody
in April 2007, Lannett had not consolidated the VIE because Cody had been
the primary beneficiary of the VIE. The
risks associated with our interests in this VIE is limited to a decline in the
value of the land and building as compared to the balance of the mortgage note
on that property, up to Lannetts 50% share of the venture. Realty owns the land and building, and Cody
leases the building and property from Realty for $20,000 per month effective
October 2009, when the lease increased from $15,000 per month. All intercompany rent expense is eliminated
upon consolidation with Cody. The
Company is not involved in any other VIE.
87
Table of Contents
Note 13. Employee Benefit Plan
The
Company has a defined contribution 401k plan (the Plan) covering
substantially all employees. Pursuant to the Plan provisions, the Company
is required to make matching contributions equal to 50% of each employees
contribution, but not to exceed 4% of the employees compensation for the Plan
year. Contributions to the Plan
during the years ended June 30, 2010, 2009 and 2008 were approximately
$395,000, $330,000, and $350,000, respectively.
Note 14. Employee Stock Purchase Plan
In
February 2003, the Companys shareholders approved an Employee Stock
Purchase Plan (ESPP). Employees
eligible to participate in the ESPP may purchase shares of the Companys stock
at 85% of the lower of the fair market value of the common stock on the first
day of the calendar quarter, or the last day of the calendar quarter. Under the ESPP, employees can authorize the
Company to withhold up to 10% of their compensation during any quarterly
offering period, subject to certain limitations. The ESPP was implemented on April 1,
2003 and is qualified under Section 423 of the Internal Revenue Code. The Board of Directors authorized an
aggregate total of 1,125,000 shares of the Companys common stock for issuance
under the ESPP. As of June 30,
2010, 217,193 shares have been issued under the ESPP. Compensation expense of $52,564, $81,871, and
$25,208 was recognized in fiscal years 2010, 2009 and 2008, respectively,
relating to the ESPP.
Note
15. Income Taxes
The
provision (benefit) for income taxes consists of the following for the fiscal years
ended June 30:
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Current Income Taxes
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,056,458
|
|
$
|
1,074,723
|
|
$
|
1,367,843
|
|
State and Local Taxes
|
|
574,511
|
|
32,455
|
|
|
|
Total
|
|
4,630,969
|
|
1,107,178
|
|
1,367,843
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes
|
|
|
|
|
|
|
|
Federal
|
|
(795,969
|
)
|
3,151,911
|
|
(3,986,449
|
)
|
State and Local Taxes
|
|
978,044
|
|
(168,373
|
)
|
(757,405
|
)
|
Total
|
|
182,075
|
|
2,983,538
|
|
(4,743,854
|
)
|
Total
|
|
$
|
4,813,044
|
|
$
|
4,090,716
|
|
$
|
(3,376,011
|
)
|
A
reconciliation of the differences between the effective rates and federal
statutory rates is as follows:
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Federal income tax at statutory rate
|
|
34.0
|
%
|
34.0
|
%
|
35.0
|
%
|
State and local income tax, net
|
|
3.7
|
%
|
(0.4
|
)%
|
2.4
|
%
|
Nondeductible expenses
|
|
2.1
|
%
|
2.3
|
%
|
(3.5
|
)%
|
Change in valuation allowance
|
|
(0.6
|
)%
|
(0.7
|
)%
|
6.2
|
%
|
Income tax credits
|
|
(8.2
|
)%
|
(1.6
|
)%
|
15.3
|
%
|
Change in tax laws
|
|
5.0
|
%
|
|
%
|
|
%
|
Other
|
|
1.5
|
%
|
4.7
|
%
|
3.9
|
%
|
Income tax expense
|
|
37.5
|
%
|
38.3
|
%
|
59.3
|
%
|
The
principal types of differences between assets and liabilities for financial
statement and tax return purposes are accruals, reserves, impairment of
intangibles, accumulated amortization, accumulated depreciation and stock
compensation expense. A deferred tax
asset is recorded for the future benefits created by the timing of accruals and
reserves and the application of different amortization lives for financial
statement and tax return purposes. A
deferred tax asset valuation allowance was established based on the likelihood
that it is more likely than not that the Company will be unable to realize
certain of the deferred tax assets. A
deferred tax liability is recorded for the future liability created by
different depreciation methods for financial statement and tax return purposes.
88
Table of Contents
As
of June 30, 2010 and 2009, temporary differences which give rise to
deferred tax assets and liabilities are as follows:
|
|
2010
|
|
2009
|
|
Deferred tax assets:
|
|
|
|
|
|
Accrued expenses
|
|
$
|
474,679
|
|
$
|
118,965
|
|
Stock compensation expense
|
|
928,133
|
|
740,687
|
|
Unearned grant funds
|
|
186,653
|
|
194,109
|
|
Reserve for returns
|
|
2,016,324
|
|
1,982,629
|
|
Reserves for accounts receivable and inventory
|
|
3,485,512
|
|
2,748,381
|
|
Intangible impairment
|
|
10,324,148
|
|
11,929,502
|
|
State net operating loss
|
|
|
|
74,255
|
|
Federal net operating loss
|
|
1,093,056
|
|
1,156,131
|
|
Impairment on Cody note receivable
|
|
2,016,620
|
|
2,097,175
|
|
Accumulated amortization on intangible asset
|
|
2,017,657
|
|
1,977,804
|
|
|
|
|
|
|
|
|
|
22,542,782
|
|
23,019,638
|
|
Valuation allowance
|
|
(2,016,620
|
)
|
(2,097,175
|
)
|
Total
|
|
20,526,162
|
|
20,922,463
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Prepaid expenses
|
|
70,904
|
|
69,199
|
|
Property, plant and equipment
|
|
2,539,961
|
|
2,756,793
|
|
Other
|
|
33,576
|
|
41,997
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
17,881,721
|
|
$
|
18,054,474
|
|
On
April 10, 2007, the Company entered into a Stock Purchase Agreement to
acquire Cody by purchasing all of the remaining shares of common stock of Cody.
The consideration for the April 10, 2007 acquisition was approximately
$4,438,000, which represented the fair value of the tangible net assets
acquired. The agreement also required Lannett to issue to the sellers up to
120,000 shares of unregistered common stock of the Company contingent upon the
receipt of a license from a regulatory agency.
This license was subsequently received in July 2008 and triggered
the payment of 105,000 shares of Lannett stock to the former owners of Cody
Labs, which was completed in October 2008.
Therefore, the Company recorded an intangible asset related to the
acquisition of a drug import license in the original amount of $581,175 and
recorded a corresponding deferred tax liability in the amount of $150,675 due
to the non-deductibility of the amortization for tax purposes.
In
the third quarter of Fiscal 2008, the Company adjusted the original purchase
price allocation for Cody, as a result of a study and additional analysis of
assets acquired. The result of this study was to increase the deferred tax
assets by $1,255,065 and decrease the value of Codys property, plant and
equipment by the same amount. The
increase in deferred tax assets related to Codys federal net operation loss
(NOL) carry forwards totaling approximately $3,774,000 at the date of
acquisition with $1,902,000 expiring in 2026 and $1,872,000 in 2027. At June 30, 2010, the remaining gross
deferred tax asset is $3,214,870. The
income tax benefit associated with the NOL carry forwards has been recognized
in accordance with Section 382 of the Internal Revenue Code of 1986.
The
Company may recognize the tax benefit from an uncertain tax position claimed on
a tax return only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate settlement. The
authoritative standards issued by the FASB also provide guidance on
de-recognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, and income tax disclosures.
89
Table of Contents
A
reconciliation of the beginning and ending amount of gross unrecognized tax
benefits (exclusive of interest and penalties) is as follows:
Balance at June 30, 2008
|
|
$
|
|
|
Additions for tax positions of the current year
|
|
65,033
|
|
Additions for tax positions of prior years
|
|
232,630
|
|
Reductions for tax positions of prior years
|
|
|
|
Settlements
|
|
|
|
Lapse of statute of limitations
|
|
|
|
Balance at June 30, 2009
|
|
$
|
297,663
|
|
|
|
|
|
Additions for tax positions of the current year
|
|
24,295
|
|
Additions for tax positions of prior years
|
|
292,695
|
|
Reductions for tax positions of prior years
|
|
|
|
Settlements
|
|
(215,619
|
)
|
Lapse of statute of limitations
|
|
|
|
Balance at June 30, 2010
|
|
$
|
399,034
|
|
As
of June 30, 2010 and 2009, the Company reported total unrecognized
benefits of $399,034 and $297,663, respectively. As a result of the positions taken during the
period, the Company has not recorded any interest and penalties for the period
ended June 30, 2010 in the statement of operations and no cumulative
interest and penalties have been recorded either in the Companys statement of
financial position as of June 30, 2010 and 2009. The Company will
recognize interest accrued on unrecognized tax benefits in interest expense and
any related penalties in operating expenses.
The Company does not believe that the total unrecognized tax benefits
will significantly increase or decrease in the next twelve months.
The
Company files income tax returns in the United States federal jurisdiction,
Pennsylvania, New Jersey and California. The Companys tax returns for
Fiscal 2005 and prior generally are no longer subject to review as such years
generally are closed. The IRS has completed its review of the federal income
tax return for Fiscal 2008. The Company recorded a refund receivable
totaling approximately $421,000 and reduced its liability for unrecognized tax
benefits by approximately $216,000 as a result of the settlement agreement
reached with the IRS. In addition, the
Company amended its Fiscal 2005 income tax return to claim additional federal
income tax credits, which was accepted as timely filed by the IRS. As a result, the Company reduced it income
taxes payable by approximately $528,000 related to this amended income tax
return. The Company believes that an unfavorable resolution for open tax years
would not be material to the financial position of the Company.
Note
16. Related Party Transactions
The Company had sales of approximately $679,000, $786,000, and $787,000
during the fiscal years ended June 30, 2010, 2009 and 2008, respectively,
to a generic distributor, Auburn Pharmaceutical Company (Auburn). Jeffrey Farber (the related party), who is
a current 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. Accounts receivable includes
amounts due from the related party of approximately $161,000 and $125,000 at
June 30, 2010 and 2009, 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. (Pharmeral) owned the ANDA. In Fiscal 2008, the Company obtained FDA
approval to use the proprietary rights.
Accordingly, the Company originally capitalized these rights as an
indefinite lived intangible asset and tested this asset for impairment at least
on an annual basis. During the fourth
quarter of Fiscal 2009, it was determined that this intangible asset no longer
has an indefinite life. No impairment
existed because the estimated fair value exceeded the carrying amount on that
date. Accordingly, the $100,000 carrying amount of this intangible asset will
be amortized on a straight line basis prospectively over its 10 year remaining
estimated useful life. Arthur Bedrosian,
President and Chief Executive Officer currently owns 100% of Pharmeral. 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. In
May 2008, Mr. Bedrosian and Pharmeral waived their rights to any
royalty payments on the sales of the drug by Lannett under Lannetts current
ownership structure. Should Lannett
undergo a change in control where a third party is involved, this royalty would
be reinstated. The registered trademark OB-Natal® was transferred to Lannett
for one dollar from Mr. Bedrosian.
During
Fiscal Year 2010, Lannett Company, Inc. paid a management consultant, who
is related to Mr. Bedrosian,
$115,700 in fees and $16,803 in reimbursable expenses. This consultant
provided management, construction planning, laboratory set up and
90
Table of Contents
administrative
services in regards to the Companys initial set up of its Bio-study laboratory
in a foreign country. It is expected
that this consultant will continue to be utilized into Fiscal 2011. In the
Companys opinion, the fee rates paid to this consultant and the expenses
reimbursed to him were not more favorable than what would have been paid to a
non-related party.
Provell
Pharmaceuticals, LLC (Provell) was a joint venture to distribute
pharmaceutical products through mail order outlets. In exchange for access to Lannetts drug
providers, Lannett initially received a 33% ownership interest in this
venture. Lannetts ownership interest
subsequently decreased to 25% due to the additional issuance of shares by
Provell in which Lannett did not participate.
The investment was valued at zero, due to losses incurred through that
date by Provell. During June 2009,
the Company terminated its participation in this joint venture. In connection
with the termination agreement, the Company was required to pay Provell ten
percent of net sales of certain products for a period of up to twenty four
months. Accounts receivable includes
amounts due from Provell of zero and approximately $55,000 at June 30,
2010 and 2009, respectively. The Company
recognized revenues of zero and approximately $29,000 and $141,000 during the
fiscal years ended June 30, 2010, 2009 and 2008, respectively.
Note 17. Material Contracts
with Suppliers
Jerome
Stevens Pharmaceuticals agreement:
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 77% of the Companys inventory purchases in
Fiscal 2010 and 71% in Fiscal 2009 and 2008.
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. Both Lannett and
JSP have the right to terminate the contract if one of the parties does not
cure a material breach of the contract within thirty (30) days of notice from
the non-breaching party.
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 is $15.0
million. Thereafter, the minimum
quantity to be purchased increases by $1.0 million per year up to $24.0 million
for the last year of the ten-year contract.
The Company has met the minimum purchase requirement for the first six
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.
Under
the agreement, JSP is entitled to nominate one person to serve on the Companys
Board of Directors (the Board) provided, however, that the Board shall have
the right to reasonably approve any such nominee in order to fulfill its
fiduciary duty by ascertaining that such person is suitable for membership on
the board of a publicly traded corporation. Suitability is determined by, but
not limited to, the requirements of the Securities and Exchange Commission, the
American Stock Exchange, and other applicable laws, including the
Sarbanes-Oxley Act of 2002. As of
June 30, 2010, JSP has not exercised the nomination provision of the
agreement.
The
Companys financial condition, as well as its liquidity resources, are very dependent
on an uninterrupted supply of product from JSP.
Should there be an interruption in the supply of product from JSP for
any reason, this event would have a material impact to the financial condition
of Lannett.
Other
agreements:
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.
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. Purchases of finished goods inventory
from this provider accounted for approximately 1% of the Companys
costs of purchased inventory in Fiscal 2009 and 14% in Fiscal 2008.
Note
18. Fair Value of Financial Instruments
The
Companys financial instruments consist primarily of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses and debt obligations.
The carrying values of these assets and liabilities approximate fair value
based upon the short-term nature of these instruments. The Company has
estimated that the fair value of long-term debt associated with the 20 year
mortgage on its land and building in Cody, Wyoming approximates the discounted
amount of future payments to the mortgage-holder.
91
Table of Contents
Note
19. Quarterly Financial Information (Unaudited)
Lannetts
quarterly consolidated results of operations are shown below:
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Fiscal 2010
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
33,760,023
|
|
$
|
31,266,224
|
|
$
|
28,716,713
|
|
$
|
31,434,989
|
|
Cost of Goods Sold
|
|
22,428,694
|
|
20,868,954
|
|
20,639,735
|
|
19,900,759
|
|
Gross Profit
|
|
11,331,329
|
|
10,397,270
|
|
8,076,978
|
|
11,534,230
|
|
Other Operating Expenses
|
|
7,014,146
|
|
7,725,372
|
|
6,779,268
|
|
6,791,002
|
|
Operating Income
|
|
4,317,183
|
|
2,671,898
|
|
1,297,710
|
|
4,743,228
|
|
Other Expense
|
|
(57,124
|
)
|
(42,310
|
)
|
(62,199
|
)
|
(47,314
|
)
|
Income Tax Expense
|
|
1,288,071
|
|
527,327
|
|
1,169,996
|
|
1,827,650
|
|
Less net income attributable to noncontrolling
interest
|
|
155,737
|
|
9,407
|
|
10,923
|
|
10,894
|
|
Net Income Lannett Company, Inc.
|
|
$
|
2,816,251
|
|
$
|
2,092,854
|
|
$
|
54,592
|
|
$
|
2,857,370
|
|
Earnings Per Share Lannett Company, Inc.
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
$
|
0.08
|
|
$
|
0.00
|
|
$
|
0.12
|
|
Diluted
|
|
$
|
0.11
|
|
$
|
0.08
|
|
$
|
0.00
|
|
$
|
0.11
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
35,448,874
|
|
$
|
28,761,316
|
|
$
|
29,224,372
|
|
$
|
25,567,653
|
|
Cost of Goods Sold
|
|
21,835,563
|
|
17,154,288
|
|
18,201,534
|
|
16,566,361
|
|
Gross Profit
|
|
13,613,311
|
|
11,607,028
|
|
11,022,838
|
|
9,001,292
|
|
Other Operating Expenses
|
|
9,722,714
|
|
9,434,449
|
|
8,489,249
|
|
6,817,188
|
|
Operating Income
|
|
3,890,597
|
|
2,172,579
|
|
2,533,589
|
|
2,184,104
|
|
Other (Expense) Income
|
|
(69,110
|
)
|
2,537
|
|
(25,548
|
)
|
(20,442
|
)
|
Income Tax Expense
|
|
1,393,983
|
|
851,310
|
|
925,433
|
|
919,990
|
|
Less net income attributable to noncontrolling
interest
|
|
6,968
|
|
9,324
|
|
9,546
|
|
17,507
|
|
Net Income Lannett Company, Inc.
|
|
$
|
2,420,536
|
|
$
|
1,314,482
|
|
$
|
1,573,062
|
|
$
|
1,226,165
|
|
Earnings Per Share Lannett Company, Inc.
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
0.05
|
|
Diluted
|
|
$
|
0.10
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
0.05
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
20,748,799
|
|
$
|
16,579,512
|
|
$
|
17,534,942
|
|
$
|
17,540,030
|
|
Cost of Goods Sold
|
|
17,878,596
|
|
12,682,018
|
|
13,107,326
|
|
12,434,272
|
|
Gross Profit
|
|
2,870,203
|
|
3,897,494
|
|
4,427,616
|
|
5,105,758
|
|
Other Operating Expenses
|
|
5,553,598
|
|
5,739,007
|
|
5,201,499
|
|
5,231,858
|
|
Operating Loss
|
|
(2,683,395
|
)
|
(1,841,513
|
)
|
(773,883
|
)
|
(126,100
|
)
|
Other (Expense)
|
|
(98,691
|
)
|
(29,786
|
)
|
(43,647
|
)
|
(46,746
|
)
|
Income Tax (Benefit)
|
|
(2,554,889
|
)
|
(615,454
|
)
|
(159,983
|
)
|
(45,685
|
)
|
Less net income attributable to noncontrolling
interest
|
|
50,309
|
|
|
|
|
|
|
|
Net Loss Lannett Company, Inc.
|
|
$
|
(277,506
|
)
|
$
|
(1,255,845
|
)
|
$
|
(657,547
|
)
|
$
|
(127,161
|
)
|
Loss Per Share Lannett Company, Inc.
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
$
|
(0.05
|
)
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.05
|
)
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
In
the second quarter of Fiscal 2010 gross profit margins were 28%. The gross
profit percentage decreased due to the decline in sales of prescription
vitamins and two months of idle capacity costs at our Cody Labs subsidiary
being directly expensed to the income
92
Table of Contents
statement. In March 2009, the FDA issued a warning
letter to seven companies including Lannett to remove Morphine Sulfate oral
solution from the market until someone could submit an application and receive
approval on such application. In April 2009,
due to shortages of this fairly necessary drug in the marketplace, the FDA
reversed their position and allowed all seven companies to continue
manufacturing and/or marketing Morphine Sulfate up until 180 days after someone
received approval on a Morphine Sulfate application. These actions by the FDA caused the DEA to
withhold purchasing and manufacturing quota from some or all of these seven
companies, including Lannett. Although
the Company had quota at that time, and quota issues were resolved by December 2009,
the Cody Labs facility was left idle for the months of October and November 2009
due to the lack of Morphine Sulfate quota.
The effective tax rate in the second quarter of Fiscal 2010 was 95% due
primarily to a change in Pennsylvania tax law which lowered the Companys
apportionment factor within this state.
The impact of this change caused the Company to reduce its deferred tax
assets by approximately $650,000, and therefore increased the effective tax
rate by 11% for the six months ended December 31, 2009, which in turn, had
a significant impact on the second quarter of Fiscal 2010.
The Company recorded income tax expense of $527,000 in the third
quarter of Fiscal 2010 resulting in an effective tax rate of 20% due primarily
to the settlement reached with the IRS related to its review of the federal
income tax return for Fiscal 2008. As a
result of the settlement, the Company recorded a refund receivable totaling
approximately $421,000. The Company also
reduced its liability for unrecognized tax benefits by approximately $216,000
as a result of the IRS settlement.
In the fourth quarter of Fiscal 2008 net sales increased largely due to
a product recall of one of Lannetts competitors. Also during the fourth quarter of Fiscal
2008, the Company increased its returns reserve by $10.5 million, reflecting
its expectation that 100% of the shipments of Prenatal Multivitamin made in the
fourth quarter would be returned. The
Companys expectation that all of the product would be returned was based on
its inability to have the product specified as a brand equivalent, product
complaints and information from its customers regarding their intentions to
return the product. Through June 30,
2010, approximately $10.1 million of the Multivitamin product had been
returned. In the fourth quarter of
Fiscal 2010, the Company reversed approximately $387,000 to net sales as a
result of new information that the Company received regarding the amount of
Multivitamin product that remained to be returned to the Company. This adjustment left a balance of
approximately $17,000 of Multivitamin returns reserve on the consolidated
balance sheet at June 30, 2010.
In addition, the Company increased the returns reserve in the fourth
quarter of Fiscal 2008 by approximately $1.5 million based on an analysis of
its historical returns experience, the average lag time between sales and
returns and an evaluation of changing buying and inventory trends of both its
direct and indirect customers. As this
change resulted from new information that the Company had received regarding
the amount of Multivitamin product that remained to be returned to the
Company. The Company considers this to
be a change in estimate as defined by the FASBs authoritative guidance.
93
Table of Contents
Schedule II -
Valuation and Qualifying Accounts
For the years ended June 30:
Description
|
|
Balance at
Beginning of
Fiscal Year
|
|
Charged to
(reduction of)
Expense
|
|
Deductions
|
|
Balance at
End of Fiscal
Year
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
132,000
|
|
$
|
|
|
$
|
8,808
|
|
$
|
123,192
|
|
2009
|
|
207,151
|
|
(87,913
|
)
|
(12,762
|
)
|
132,000
|
|
2008
|
|
250,000
|
|
48,284
|
|
91,133
|
|
207,151
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Valuation
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
2,744,305
|
|
$
|
1,279,781
|
|
$
|
1,542,276
|
|
$
|
2,481,810
|
|
2009
|
|
1,642,668
|
|
2,004,403
|
|
902,767
|
|
2,744,305
|
|
2008
|
|
923,920
|
|
2,679,902
|
|
1,961,154
|
|
1,642,668
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Asset Valuation Allowance
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
2,097,175
|
|
$
|
(80,555
|
)
|
$
|
|
|
$
|
2,016,620
|
|
2009
|
|
2,314,498
|
|
(217,323
|
)
|
|
|
2,097,175
|
|
2008
|
|
2,667,550
|
|
(353,052
|
)
|
|
|
2,314,498
|
|
94
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
|
|
Employment
Agreement with Kevin Smith
|
|
Incorporated
by reference to Exhibit 10.6 to the Annual Report on 2003
Form 10-KSB
|
|
|
|
|
|
10.7
|
|
Employment
Agreement with Arthur Bedrosian
|
|
Incorporated
by reference to Exhibit 10 to the Quarterly Report on Form 10-Q
dated May 12, 2004.
|
|
|
|
|
|
10.9 (Note A)
|
|
Agreement
between Lannett Company, Inc and Siegfried (USA), Inc.
|
|
Incorporated
by reference to Exhibit 10.9 to 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
|
|
|
|
|
|
10.11
|
|
Terms
of Employment Agreement with Stephen J. Kovary
|
|
Incorporated
by reference to Exhibit 10.11 to the Annual Report on 2009 Form 10-K
|
|
|
|
|
|
10.12
|
|
Agreement
of Sale Between Anvil Construction Company, Inc. and Lannett
Company, Inc.
|
|
Incorporated
by reference to Exhibit 10.12 to the Annual Report on 2009
Form 10-K
|
|
|
|
|
|
10.13
|
|
2007
Long Term Incentive Plan
|
|
Incorporated
by reference to the Proxy Statement dated January 5, 2007
|
95
Table of Contents
Exhibit
Number
|
|
Description
|
|
Method of Filing
|
|
|
|
|
|
10.14
|
|
Employment
Agreement with Keith R. Ruck
|
|
Incorporated
by reference to Exhibit 10.1 on Form 8-K dated October 13, 2009
|
|
|
|
|
|
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
|
96
London Clubs (AMEX:LCI)
過去 株価チャート
から 6 2024 まで 7 2024
London Clubs (AMEX:LCI)
過去 株価チャート
から 7 2023 まで 7 2024