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-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: [email protected]
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<SEC-DOCUMENT>0000730469-00-000002.txt : 20000411
<SEC-HEADER>0000730469-00-000002.hdr.sgml : 20000411
ACCESSION NUMBER: 0000730469-00-000002
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 19991231
FILED AS OF DATE: 20000329
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ALPHARMA INC
CENTRAL INDEX KEY: 0000730469
STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834]
IRS NUMBER: 222095212
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-08593
FILM NUMBER: 582353
BUSINESS ADDRESS:
STREET 1: ONE EXECUTIVE DR
STREET 2: P O BOX 1399
CITY: FORT LEE
STATE: NJ
ZIP: 07024
BUSINESS PHONE: 2019477774
FORMER COMPANY:
FORMER CONFORMED NAME: A L PHARMA
DATE OF NAME CHANGE: 19960513
FORMER COMPANY:
FORMER CONFORMED NAME: A L LABORATORIES INC
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<TEXT>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File No.1-8593
December 31, 1999
ALPHARMA INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2095212
(State of Incorporation) (I.R.S. Employer Identification No.)
One Executive Drive, Fort Lee, New Jersey 07024
(Address of principal executive offices) zip code
(201) 947-7774
(Registrant's Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on
Title of each Class which Registered
Class A Common Stock, New York Stock Exchange
$.20 par value
Subordinated Convertible Notes due 2005 New York Stock Exchange
Convertible Senior Subordinated Notes due 2006 New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for
such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. YES X NO .
Indicate by check mark 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 registrant's 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. ( )
The aggregate market value of the voting stock of the Registrant
(Class A Common Stock, $.20 par value) as of March 10, 2000 was
$762,249,000.
The number of shares outstanding of each of the Registrant's
classes of common stock as of March 10, 2000 was:
Class A Common Stock, $.20 par value - 20,122,736 shares;
Class B Common Stock, $.20 par value - 9,500,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 25, 2000 are incorporated by
reference into Part III of this report. Other documents
incorporated by reference are listed in the Exhibit index.
PART I
Item 1. Business
GENERAL
The Company is a multinational pharmaceutical company that
develops, manufactures and markets pharmaceutical products for
use in humans and animals. The Company manufactures and markets
approximately 620 pharmaceutical products for human use and 40
animal health products. The Company conducts business in more
than 60 countries and has approximately 3,300 employees at 40
sites in 22 countries. For the year ended December 31, 1999, the
Company generated revenue and operating income of over $742
million and $99 million, respectively.
Formation
The Company was originally organized as A.L. Laboratories,
Inc., a wholly owned subsidiary of Apothekernes Laboratorium
A.S., a Norwegian healthcare company (the predecessor company to
A.L. Industrier). In 1994, the Company acquired the complementary
human pharmaceutical and animal health business of its parent
company and subsequently changed its name to Alpharma Inc. to
operate worldwide as one corporate entity (the "Combination
Transaction").
Controlling Stockholder
A.L. Industrier beneficially owns all of the outstanding
shares of the Company's Class B Common Stock, or 32.1% of the
Company's total common stock outstanding at December 31, 1999. In
addition, A.L. Industrier holds $67.8 million of Convertible
Subordinated Notes due 2005 which may, under certain
circumstances, be converted into 2,372,896 shares of the
Company's Class B Common Stock. The Class B Common Stock bears
the right to elect more than a majority of the Company's Board of
Directors and to cast a majority of the votes in any vote of the
Company's stockholders. Mr. Einar Sissener, Chairman of the Board
of the Company and a controlling stockholder of A.L. Industrier,
and members of his immediate family, also beneficially own
328,667 shares of the Company's Class A Common Stock. As a
result, A.L. Industrier, and ultimately Mr. Sissener, can control
the Company.
Convertible Senior Subordinated Note Offering
In June, 1999, the Company sold $170 million principal
amount of 3% Convertible Senior Subordinated Notes due 2006 (the
"06 Notes"). The 06 Notes are convertible at an initial
conversion price of $32.11 per share into shares of the Company's
Class A Common stock. Substantially all of the Notes have been
registered with the Securities and Exchange Commission and are
listed on the New York Stock Exchange.
Class A Common Stock Offering
On November 12, 1999, the Company sold 2,000,000 shares of
its Class A Common Stock (the "Shares") for $31.30 per share to
Bear Stearns & Co. Inc. who then offered the Shares to third
parties. The Shares have been registered with the Securities and
Exchange Commission and are listed on the New York Stock
Exchange.
Forward-Looking Statements
This annual report contains "forward-looking statements," or
statements that are based on current expectations, estimates, and
projections rather than historical facts. The Company offers
forward-looking statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements may prove, in hindsight, to
have been inaccurate because of risks and uncertainties that are
difficult to predict. Many of the risks and uncertainties that
the Company faces are included under the caption "Risk Factors".
Financial Information About Industry Segments
The Company operates in the human and animal pharmaceutical
industries. It has five business segments within these
industries. The table that follows shows how much each of these
segments contributed to revenues and operating income in the past
three years.
($ in Millions) REVENUES OPERATING INCOME
(lOSS)
1999 1998 1997 1999 1998 1997
International
Pharmaceuticals
Division 303.3 193.1 134.1 35.6 8.0 11.0
U.S. Pharmaceutical
Division 197.3 178.8 155.4 16.6 11.1 4.1
Fine Chemicals 60.8 53.0 38.7 23.1 17.5 9.4
Division
Animal Health 169.2 166.3 158.4 42.3 37.8 32.0
Division
Aquatic Animal Health
Division 16.1 19.0 15.3 (2.5) 3.6 2.8
For additional financial information concerning the
Company's business segments see Note 21 of the Notes to the
Consolidated Financial Statements included in Item 8 of this
Report.
NARRATIVE DESCRIPTION OF BUSINESS
Human Pharmaceuticals
The Company's human pharmaceuticals business is comprised of
the International Pharmaceuticals Division, U.S. Pharmaceuticals
Division and Fine Chemicals Division. Each of these Divisions is
managed by a separate senior management team. The Company's human
pharmaceutical business had sales of approximately $561.4 million
in 1999, before elimination of intercompany sales, with operating
profit of approximately $75.3 million.
Generic pharmaceuticals which are the primary products of
the U.S. and International Pharmaceuticals Division, are the
chemical and therapeutic equivalents of brand-name drugs.
Although typically less expensive, they are required to meet the
same governmental standards as brand-name drugs and most must
receive approval from the appropriate regulatory authority prior
to manufacture and sale. A manufacturer cannot produce or market
a generic pharmaceutical until all relevant patents (and any
additional government-mandated market exclusivity periods)
covering the original brand-name product have expired.
International Pharmaceuticals Division ("IPD")
The Company's International Pharmaceuticals Division develops,
manufactures, and markets a broad range of pharmaceuticals for
human use. The Company believes that it is one of the largest
manufacturers and marketers of generic solid dose pharmaceuticals
in Europe including the United Kingdom, Germany, France, the
Nordic countries, the Netherlands and Portugal. IPD also has a
significant presence in Southeast Asia including a strong
presence in Indonesia.
Product Lines. The International Pharmaceuticals Division
manufactures approximately 305 products which are sold in
approximately 1,100 product presentations including tablets,
ointments, creams, liquids, suppositories and injectable dosage
forms.
Prescription Pharmaceuticals. The Division has a broad
range of products with a concentration on prescription drug
antibiotics, analgesics/antirheumatics, psychotropics and
cardiovascular products. The predominant
number of these products are sold on a generic basis.
OTC Products. The Division also has a broad range of
OTC products, such as those for skin care, gastrointestinal
care and pain relief, and including such products as
vitamins, fluoride tablets, adhesive bandages and surgical
tapes. Substantially all of these products are sold on a
branded basis.
On May 7, 1998, the Company acquired a substantial generic
pharmaceutical presence in the United Kingdom through the
purchase of all of the capital stock of Arthur H. Cox and Co.
Ltd. ("Cox") from Hoechst AG for a total purchase price of
approximately $198 million in cash. Cox's main operations (which
consist primarily of a manufacturing plant, warehousing
facilities and a sales organization) are located in Barnstaple,
England. Cox is a generic pharmaceutical manufacturer and
marketer of tablets, capsules, suppositories, liquids, ointments
and creams. Cox distributes its products to pharmacy retailers
and pharmaceutical wholesalers primarily in the United Kingdom.
In addition, in November 1998 and April 1999, in
substantially smaller transactions, the Company acquired generic
pharmaceutical product lines in Germany and France. All of the
products purchased in these transactions are manufactured under
contract by third parties.
Effective June 15, 1999, the Company acquired a leading market
presence in the German generic market through the purchase of all
of the capital stock of the ISIS group of companies from Schwarz
Pharma AG for a purchase price of approximately $153 million.
ISIS has a substantial marketing organization but no
manufacturing operations. All products are manufactured for ISIS
by third parties, including a substantial number under a Supply
Agreement with Schwarz Pharma. Approximately 80% of ISIS's sales
are of cardiovascular products, the most important of which is
the drug PentalongTM.
The Company intends to continue the operations of Cox, ISIS
and the smaller German and French generic product lines to
achieve benefits from leveraging these new activities with the
other businesses of the International Pharmaceutical Division. In
addition, the Company plans to expand the scope of the acquired
operations by adding to the acquired product base certain other
pharmaceutical products of the Company. The Company is continuing
to review market expansion opportunities in Europe.
Facilities. The Company maintains five manufacturing
facilities for its international pharmaceutical products, all of
which also house administrative offices and warehouse space. The
Company's plants in Lier, Norway and Barnstaple, England, include
many technologically advanced applications for the manufacturing
of tablet, liquid and ointment products. The Company's plant in
Copenhagen, Denmark, which it shares with the Fine Chemical
Division, manufactures sterile products. In addition to the
Barnstaple, Copenhagen and Lier facilities, the Company also
operates plants in Vennesla, Norway, for bandages and surgical
tape products, and Jakarta, Indonesia, for tablets, ointments and
liquids. The Jakarta plant has received regulatory approval to
export certain products to Europe.
In 1998, the Company substantially completed the
implementation of a production rationalization plan which
included the transfer of all tablet, ointment and liquid
production from Copenhagen to Lier and the transfer of sterile
production from Norway to the Copenhagen facility. In addition to
increasing available capacity, the Company is recognizing
manufacturing efficiencies from this reorganization.
Competition. The Division operates in geographic areas that
are highly competitive. Many of the Company's competitors in this
area are substantially larger and have greater financial,
technical, and marketing resources than the Company. Most of the
Company's international pharmaceutical products compete with one
or more other products that contain the same active ingredient.
In European countries in recent years, sales of generic
pharmaceuticals have been increasing relative to sales of patent
protected pharmaceuticals. Generics are gaining market share
because, among other things, governments are attempting to reduce
pharmaceutical expenses by enacting regulations that promote
generic pharmaceuticals in lieu of original formulations. This
increased focus on pharmaceutical prices may lead to increased
competition and price pressure for suppliers of all types of
pharmaceuticals, including branded generics (see "Risk Factors").
The Company's international pharmaceutical products have also
been encountering price pressures from "parallel imports"
(i.e.,imports of identical products from lower priced markets
under EU laws of free movement of goods). (See "Risk Factors").
Geographic Markets. The principal geographic markets for the
Division's pharmaceutical products are the United Kingdom,
Germany, Netherlands, France, the Nordic and other Western
European countries, Indonesia, and the Middle East.
Sales and Distribution and Customers. Depending on the
characteristics of each geographic market, generic products are
predominantly marketed under either brand or generic names. OTC
products are typically marketed under brand names with
concentration on skin care, tooth cavity prevention, pain relief
and vitamins. The Division employs a specialized sales force of
363 persons, 134 and 143 of whom are in Indonesia and Germany
respectively, that markets and promotes products to doctors,
dentists, hospitals, pharmacies and consumers. In each of its
international markets, the Company uses wholesalers to distribute
its pharmaceutical products.
U.S. Pharmaceuticals Division ("USPD")
The U.S. Pharmaceuticals Division develops, manufactures,
and markets specialty generic prescription and over-the-counter
("OTC") pharmaceuticals for human use. With approximately 170
products, the Division is a market leader in generic liquid and
topical pharmaceuticals with what the Company believes to be
the broadest portfolio of manufactured products in the generic
industry. In addition, the Company believes it is the only major
U.S. generic liquid and topical prescription drug manufacturer
with a substantial presence in generic OTC pharmaceuticals. With
approximately 60 OTC products, the Company is increasing its
presence as a significant supplier to major retailers. The
Company believes that its broad product lines give the Company a
competitive advantage by providing large customers the ability to
buy a significant line of products from a single source.
Sales of generic pharmaceuticals have continued to increase.
The Company has identified four reasons for this trend: (i) laws
permitting and/or requiring pharmacists to substitute generics
for brand-name drugs; (ii) pressure from managed care and third
party payors to encourage health care providers and consumers to
contain costs; (iii) increased acceptance of generic drugs by
physicians, pharmacists, and consumers; and (iv) an increase in
the number of formerly patented drugs which have become available
to off-patent competition.
Product Lines. The Company's U.S. Pharmaceutical Division
(excluding its telemarketing operation) manufactures and/or
markets approximately 170 generic products, primarily in liquid,
cream and ointment, respiratory and suppository dosage forms.
Each product represents a different chemical entity. These
products are sold in over 300 product presentations under the
"Alpharma", "Barre" or "NMC" labels and private labels.
Liquid Pharmaceuticals. The U.S. Pharmaceuticals
Division is the leading U.S. manufacturer of generic
pharmaceutical products in liquid form with approximately
110 products. The experience and technical know-how of the
Division enables it to formulate therapeutic equivalent
drugs in liquid forms and to refine product characteristics
such as taste, texture, appearance and fragrance.
Cough and cold remedies constitute a significant
portion of the Division's liquid pharmaceuticals business.
This business is seasonal in nature, and sales volume is
higher in the fall and winter months and is affected, from
year to year, by the incidence of colds, respiratory
diseases, and influenza.
Creams, Lotions and Ointments. The Division
manufactures approximately 40 cream, lotion and ointment
products for topical use. Most of these creams, lotions and
ointments are sold only by prescription.
Suppositories, Aerosols and Other Specialty Generic
Products. The Division also manufactures six suppository
products and markets certain other specialty generic
products, including two aerosols and two nebulizer products.
In 1999, the Company maintained its strategy of entering
into third party alliances to market certain of its U.S.
pharmaceutical products under licenses to third parties or under
third party brands. In addition, in February of 1999, the
Company reached an agreement with Ascent Pediatrics, Inc. to lend
that entity a maximum of $40 million; $12 million of which can be
used for working capital purposes and the remainder of $28
million to be used to execute projects reasonably designed for
intermediate term growth. As of February 2000 only the $12
million for working capital has been advanced. Additional loans
are subject to Ascent meeting a number of terms and conditions.
The Company also received an option to purchase all of the
capital stock of Ascent in 2003 for approximately 12.2 times
Ascent's 2002 operating earnings.
Facilities. The Company maintains two manufacturing
facilities for its U.S. pharmaceutical operations, a research and
development center, four telemarketing facilities and an
automated central distribution center. The Division's largest
manufacturing facility is located in Baltimore, Maryland and is
designed to manufacture high volumes of liquid pharmaceuticals.
The Company's facility in Lincolnton, North Carolina manufactures
creams, ointments and suppositories.
Competition. Although the Company is a market leader in the
U.S. in the manufacture and marketing of specialty generic
pharmaceuticals, it operates in a highly competitive market. The
Company competes with other companies that specialize in generic
products and with the generic drug divisions of major
international branded drug companies and encounters market entry
resistance from branded drug manufacturers.
Sales and Distribution. The Company maintains a professional
sales force to market the U.S. Pharmaceutical Division's
products. The Company supplements its sales effort through its
use of selected independent sales representatives. In addition,
the Company's advanced telemarketing operation, which employs
approximately 75 sales personnel, markets and distributes
products manufactured by third parties and, to a limited extent,
the Division. The Company has recently increased the use of its
telemarketing operations for the sale of its own products by
adding a dedicated facility for this expanded activity. This
business also provides certain custom marketing services, such as
order processing, and distribution, to the pharmaceutical and
certain other industries.
Customers. The Company has historically sold its U.S.
pharmaceutical products to pharmaceutical wholesalers,
distributors, mass merchandising and retail chains, and, to a
lesser extent, grocery stores, hospitals and managed care
providers. In response to the general trend of consolidation
among pharmaceutical customers and greater amount of products
sold through wholesalers, the Company is placing an increased
emphasis on marketing its products directly to managed care
organizations, purchasing groups, mass merchandisers and chain
drug stores to gain market share and enhance margins.
Fine Chemicals Division ("FCD")
The Company's Fine Chemicals Division develops, manufactures
and markets active pharmaceutical ingredients to the
pharmaceutical industry for use in finished dose products sold in
more than 50 countries and benefits from over four decades of
experience in the use of and development of fermentation and
purification technology. In addition, the Company's fermentation
expertise in the production of bulk antibiotics has a direct
technological application to the manufacture of products of the
Company's animal health business.
Product Lines. The Company's fine chemical products
constitute the active substances in certain pharmaceuticals for
the treatment of certain skin, throat, intestinal and systemic
infections. The Company is the world's leading producer of
bacitracin, bacitracin zinc and polymixin, and is a leading
producer of vancomycin; all of which are important pharmaceutical
grade antibiotics. The Company also manufactures other
antibiotics such as amphotericin B and colistin for use
systemically and in specialized topical and surgical human
applications. The Company has substantially expanded its
production capacity and sales of vancomycin as a result of the
1997 approval to sell vancomycin in the U.S., expanded capacity
at its Copenhagen facility, and the December 1998 acquisition of
a facility in Budapest, Hungary.
Facilities. The Company manufactures its fine chemical
products in its plants in Oslo, Norway (which also manufactures
products for the Animal Health Division), Copenhagen, Denmark
(which it shares with the International Pharmaceuticals
Division)and Budapest, Hungary. Each plant includes fermentation,
specialized recovery and purification equipment. The Budapest
facility is presently undergoing a material upgrade in
manufacturing processes and capacity. All these facilities have
been approved as a manufacturer of certain sterile and non-
sterile bulk antibiotics by the FDA and by the health authorities
of certain European countries. (See "Environmental Matters" for a
discussion of an administrative action related to the Budapest
facility)
Competition. The bulk antibiotic industry is highly
competitive and many of the Company's competitors in this area
are substantially larger and have greater financial, technical,
and marketing resources than the Company. Sales are made to
relatively few large customers with prices and quality as the
determining sales factors. In sales to smaller customers, price,
quality and service are the determining factors. The Company
believes its fermentation and purification expertise and
established reputation provide it with a competitive advantage in
these antibiotic products.
Geographic Markets and Sales and Distribution. U.S. sales of
fine chemical products represent approximately 50% of the revenue
from these products with significant additional sales in Europe,
Asia and Latin America. The Company distributes and sells its
fine chemical products in the U.S. and Europe using its own sales
force. Sales in other parts of the world are primarily through
the use of local agents and distributors.
Animal Pharmaceuticals
The animal pharmaceutical business is comprised of the Animal
Health Division and the Aquatic Animal Health Division. Each of
these divisions is managed by a separate senior management team.
In 1999, the Company had animal health product sales of
approximately $185.0 million, before elimination of intercompany
sales, with operating profit of approximately $40.0 million.
Animal Health Division ("AHD")
The Company develops, manufactures and markets
pharmaceutical products for animals raised for commercial food
production worldwide. The Company believes that its animal health
business is a leading manufacturer and marketer of feed additives
to the worldwide poultry and swine industries.
Product Lines. The Company's principal animal health
products are: (i) BMDT, a bacitracin based feed additive used to
promote growth and feed efficiency and prevent or treat diseases
in poultry and swine; (ii) Albac(TM), a bacitracin based feed
additive to promote growth and feed efficiency and prevent or
treat diseases in poultry, swine and calves; (iii) 3-Nitro(R),
Histostat(TM), Zoamix(R), anticoccidials, and chloromax ("CTC"),
feed grade antibiotics, all of which are commonly used in
combination or sequentially with BMD; (iv) Deccox, a feed
additive used to prevent and control diseases that affect growth
in cattle and calves; (v) Vitamin D3, a feed additive which is an
essential nutrient for growth in poultry and swine and (vi)
soluble antibiotics and vitamins. Based upon its fermentation
experience and a strong marketing presence, the Company is the
market leader in the manufacture and sale of bacitracin-based
feed additives which are marketed under the brand names Albac and
BMD. In addition, the Company believes that it has a significant
market share with several other of its feed additives, including
those sold under the Company's 3-Nitro brands.
In 1997, the Company acquired the Deccox brand name and
certain related assets from Rhone-Poulenc's Animal Nutrition
Division. Under the agreement pursuant to which Deccox was
acquired, Rhone-Poulenc will continue to manufacture this product
for sale by the Company for a period of 15 years. Deccox is used
to prevent and control coccidiosis (a parasite that adversely
affects growth)in cattle. The acquisition of the Deccox brand has
provided the Company with its initial entry into the cattle and
calf market. In addition to Deccox sales, this has offered the
opportunity to market to the cattle industry several of the
Company's established products which have historically been sold
only in the swine and poultry markets.
In 1999 the Company purchased I.D. Russell Company
Laboratories, a manufacturer of a line of soluble antibiotics and
vitamins and acquired exclusive marketing rights to an animal
fertility testing system. In addition, during 1999 the Company
acquired exclusive marketing rights to Reporcin (a performance
and meat quality improvement product for injectable use in
swine). Sales of Reporcin are ongoing in certain limited
countries; however the full realization of the potential for PST
is dependant upon governmental license approvals, and market
acceptance, in numerous other countries, including the United
States. The agreement granting the Company rights to PST requires
the Company to make a maximum of $65 million in additional
product payments upon receipt of product licenses in certain
specified countries and to expend additional funds to build or
lease a plant to manufacture Reporcin.
The Company believes that the number of products it has
approved to be used in combination with other products is a
significant competitive advantage. FDA regulations require animal
health products to be approved for use in combination with other
products in animal feeds. Therefore, it is generally difficult to
gain market acceptance for new products unless such products are
approved for use with other existing products. The approval for
use of a new product in combination with other products generally
requires the cooperation of the manufacturer of such other
products. When seeking such cooperation from other manufacturers,
the Company believes it is a competitive advantage to have
products with which other manufacturers desire to obtain
combination approval. To date, the Company has been successful in
its ability to obtain the cooperation of third parties in seeking
combination approval for its products. There can be no assurance,
however, that the Company will continue to obtain such
cooperation from others. Presently, the Company has a total of
271 combination approvals in the U.S.
The Company believes that features of BMD have enhanced the
Company's competitive position in the animal health business.
Generally, FDA regulations do not permit animals to be sold for
food production unless their feed has been free of additives that
are absorbed into animal tissue for a certain period of time as
required by FDA rules. BMD is not absorbed into animal tissue,
and therefore need not be withdrawn from feed prior to the
marketing of the food animals. This attribute of BMD allows
producers to avoid the burden of removing these additives from
feed in order to meet the FDA requirement.
Facilities. The Company produces its animal health products
in state-of-the-art manufacturing facilities. The Animal Health
Division produces BMD at its Chicago Heights, Illinois facility,
which contains a modern fermentation and recovery plant. Albac is
manufactured at the Oslo facility shared with the Fine Chemicals
Division. Soluble antibiotics and vitamins are formulated in the
division's Longmont, Colorado facility and PST is produced at the
Company's plant in Melbourne, Australia. CTC is purchased from
foreign suppliers and blended domestically at the Company's
facility in Lowell, Arkansas and at independent blending
facilities. The 3-Nitro product line is manufactured in
accordance with a ten year agreement using the Company's
technology at an unrelated company's facility. The contract
requires the Company to purchase minimum yearly quantities on a
cost plus basis. Blending of 3-Nitro is done at the Company's
Lowell plant.
Competition. The animal health industry is highly
competitive and includes a large number of companies with greater
financial, technical, and marketing resources than the Company.
These companies offer a wide range of products with various
therapeutic and production enhancing qualities. Due to the
Company's strong market position in antibiotic feed additives and
its experience in obtaining requisite FDA approvals for
combination therapies, the Company believes it enjoys a
competitive advantage in commercializing FDA-approved combination
animal feed additives.
Geographic Markets. The Company presently sells a major
portion of its animal health products in the U.S. With the
opening of sales offices in Canada, Latin America, and the Far
East, the Animal Health Division has expanded its international
sales capability consistent with its strategy for internal
growth.
Sales and Distribution. The Company's animal health products
in the U.S., Canada, Mexico, Brazil, Australia and certain other
selected markets are sold through a staff of technically trained
sales and service employees. The Company has sales offices in
Norway, Canada, Mexico, Singapore, the People's Republic of
China, Brazil, France and Belgium and, in 1999, added sales
offices in Australia. The Company anticipates establishing
additional foreign sales offices. Sales of the Animal Health
Division's products in the remainder of the world are made
primarily through the use of distributors and sales companies. In
January of 1999, the Company combined its wholly-owned U.S.
distribution company with two similar third party distribution
businesses to form a joint venture 50% owned by the Company. The
new entity is a regional distributor of animal health products in
the Central South West and Eastern regions of the U.S.
Customers. Sales are made principally to commercial animal
feed manufacturers and integrated swine and poultry producers.
Although the Division is not dependent on any one customer, the
customer base for animal health products is in a consolidation
phase. Therefore, as consolidation continues, the Company may
become more dependent on certain individual customers as such
customers increase their size and market share.
Aquatic Animal Health Division ("AAHD")
The Company believes it is a leader in the development,
manufacture and marketing of vaccines for use in immunizing
farmed fish against disease. While third parties may, from time
to time, have products which they deem to be superior, the
Company believes it has been, and expects to continue as, a
leading innovator with respect to the research and development of
vaccines to combat newly developing forms of aquatic disease.
The Company's vaccines for fish are used by fish farms to
control disease in densely populated, artificial growth
environments. The Company believes that the market for vaccines
will continue to grow along with the growth of fish farms as the
worldwide demand for fish continues to increase beyond what can
be supplied from the natural fish habitat.
In November 1999 the Company purchased Vetrepharm Ltd., the
United Kingdom distributor of AAHD products and certain products
of unaffiliated manufacturers for cash consideration of
approximately $2.5 million.
Product Lines. The Aquatic Animal Health Division is the
leading supplier of injectable vaccines for farm raised salmon.
In addition the Division is a pioneer in the development of
vaccines for trout, sea bass, sea bream, yellowtail and other
commercially important farm species.
Facilities. The Company manufactures its fish vaccine
products at its Overhalla, Norway facility. Contract
manufacturing is utilized to provide certain raw materials for
vaccine production. In 1999, the Company closed its Bellevue,
Washington production facility and transferred substantially all
of the products manufactured at that plant to Overhalla.
Competition. While the Company has few competitors in the
aquatic animal health industry, the industry is subject to rapid
technological change. Competitors could develop new techniques
and products that would render the Company's aquatic animal
health products obsolete if the Company was unable to match the
improvements quickly. In this regard, the Company is presently
developing a new salmon vaccine to reverse a decline in market
share caused by the market perception that a competing product
may provide better disease protection.
Geographic Markets. The Company sells its aquatic animal
health products in Norway, the United Kingdom, Canada, the U.S.,
Greece and Turkey.
Sales and Distribution. The Company sells its aquatic animal
health products through its own technically oriented sales staff
in Norway and the United Kingdom. In other markets, the Company
operates through distributors. The Company sells its products to
fish farms, usually under a contract which extends for at least
one growing season. There are relatively few customers for the
Division's products.
Information Applicable to all Business Segments
External Growth Strategy
An important element of the Company's long term strategy is
to pursue acquisitions that in general will broaden global reach
and/or augment the product portfolios of the Company. In this
regard the Company is currently evaluating and, in some instances
actively considering, several possible acquisition candidates.
Subsequent to December 31, 1999 the Company executed a non-
binding letter of intent with respect to one such business.
Filings were made and clearance received under the Hart-
Scott-Rodino Anti-trust Improvements Act and the Company is
currently negotiating definitive agreements and reviewing certain
data, including recently received financial information. If
consummated, this acquisition would be material to the operations
and financial position of the Company and would require funding
in addition to that presently available under the Company's
banking arrangements. There can be no assurance that such
activities will result in the consummation of any transaction.
Research, Product Development and Technical Activities
Scientific development is important to each of the Company's
business segments. The Company's research, product development
and technical activities in the Human Pharmaceuticals business
within the U.S., Norway and Denmark concentrate on the
development of generic equivalents of established branded
products as well as discovering creative uses of existing drugs
for new treatments. The Company's research, product development
and technical activities also focus on developing proprietary
drug delivery systems, patent circumvention development (in the
U.S.) and on improving existing delivery systems, fermentation
technology and packaging and manufacturing techniques. In view of
the substantial funds which are generally required to develop new
chemical drug entities, the Company does not anticipate
undertaking such activities.
The Company's technical development activities for Animal
Pharmaceuticals involve extensive product development and testing
for the primary purpose of establishing clinical support for new
products and additional uses for or variations of existing
products and seeking related FDA and analogous governmental
approvals.
Generally, research and development are conducted on a
divisional basis. The Company conducts its technical product
development activities at its facilities in Copenhagen, Denmark;
Oslo, Norway; Baltimore, Maryland; and Chicago Heights, Illinois,
as well as through independent research facilities in the U.S.
and Europe.
Research and development expenses were approximately $40.2
million, $36.0 million, and $32.1 million in 1999, 1998, and
1997, respectively.
Government Regulation
General. The research, development, manufacturing and
marketing of the Company's products are subject to extensive
government regulation by either the FDA or the USDA, as well as
by the DEA, FTC, CPSC, and by comparable authorities in the EU,
Norway, Indonesia and other countries. Although Norway is not a
member of the EU, it is a member of the European Economic
Association and, as such, has accepted all EU regulations with
respect to pharmaceuticals except in the area of feed
antibiotics. Government regulation includes detailed inspection
of and controls over testing, manufacturing, safety, efficacy,
labeling, storage, recordkeeping, approval, advertising,
promotion, sale and distribution of pharmaceutical products.
Noncompliance with applicable requirements can result in civil or
criminal fines, recall or seizure of products, total or partial
suspension of production and/or distribution, debarment of
individuals or the Company from obtaining new generic drug
approvals, refusal of the government to approve new products and
criminal prosecution. Such government regulation substantially
increases the cost of producing human pharmaceutical and animal
health products.
The evolving and complex nature of regulatory requirements,
the broad authority and discretion of the FDA and analogous
foreign agencies, and the generally high level of regulatory
oversight results in a continuing possibility that from time to
time the Company will be adversely affected by regulatory actions
despite its ongoing efforts and commitment to achieve and
maintain full compliance with all regulatory requirements. As a
result of actions the Company has taken to respond to the
progressively more demanding regulatory environment in which it
operates, the Company has spent, and will continue to spend,
significant funds and management time on regulatory compliance.
Product Marketing Authority. In the U.S., the FDA
regulatory procedure applicable to the Company's generic
pharmaceutical products depends on whether the branded drug is:
(1) the subject of an approved New Drug Application which has
been reviewed for both safety and effectiveness; (2) marketed
under an NDA approved for safety only; (3) marketed without an
NDA; or (4) marketed pursuant to over-the-counter monograph
regulations. If the drug to be offered as a generic version of a
branded product is the subject of an NDA approved for both safety
and effectiveness, the generic product must be the subject of an
Abbreviated New Drug Application ("ANDA") and be approved by the
FDA prior to marketing. Drug products which are generic copies
of the other types of branded products may be marketed in
accordance with either an FDA enforcement policy or the over-the-
counter drug review monograph process and currently are not
subject to ANDA filings and approval prior to market
introduction. While the Company believes that all of our current
pharmaceutical products are legally marketed under the applicable
FDA procedure, its marketing authority is subject to revocation
by the agency. All applications for regulatory approval of
generic drug products subject to ANDA requirements must contain
data relating to product formulation, raw material suppliers,
stability, manufacturing, packaging, labeling and quality
control. Those subject to an ANDA under the Drug Price
Competition and Patent Term Restoration Act of 1984 (the "Waxman-
Hatch Act") also must contain bioequivalency data. Each product
approval limits manufacturing to a specifically identified site.
Supplemental filings for approval to transfer products from one
manufacturing site to another also require review and approval.
Certain of the Company's animal health products are
regulated by the FDA, as described above, while other animal
health products are regulated by the USDA.
An EU Directive requires that medical products must have a
marketing authorization before they are placed on the market in
the EU. The criteria upon which grant of an authorization is
assessed are quality, safety and efficacy. Demonstration of
safety and efficacy in particular requires clinical trials on
human subjects and the conduct of such trials is subject to the
standards codified in the EU guideline on Good Clinical Practice.
In addition, the EU requires that such trials be preceded by
adequate pharmacological and toxicological tests in animals, that
stability tests are also carried out and that clinical trials
should use controls, be carried out double blind and capable of
statistical analysis by using specific criteria wherever
possible, rather than relying on a large sample size. The
working party on the Committee of Proprietary Medicinal Products
has also made various recommendations in this area. Analogous
governmental and agency approvals are similarly required in other
countries where we conduct business. There can be no assurance
that new product approvals will be obtained in a timely manner,
if ever. Failure to obtain such approvals, or to obtain them
when expected, could have a material adverse effect on the
Company's business, financial condition and results of
operations.
The European union and five non-EU countries have banned the
use of four antibiotics effective July 1, 1999. While three of
these products were not manufactured or sold by the Company,
bacitracin zinc, a feed antibiotic growth promoter for livestock
which is manufactured by the Company, is included in the ban. The
Company is attempting to reverse or limit the EU action which
affects our Albac product. See "Risk Factors".
Facility Approvals. The Company's manufacturing operations
(in the U.S. as well as three of its European facilities that
manufacture products for export to the U.S.) are required to
comply with current Good Manufacturing Practices ("cGMP") as
interpreted by the FDA and EU regulations. cGMP encompasses all
aspects of the production process, including validation and
record keeping, and involves changing and evolving standards.
Consequently, continuing compliance with cGMP can be a
particularly difficult and expensive part of regulatory
compliance. There are similar regulations in other countries
where the Company has manufacturing operations. The EU requires
that before a medicinal product can be manufactured and
assembled, each company who carries out such an operation must
hold a manufacturer's license, a product license must be held by
the person responsible for the composition of the product, and
the manufacture and assembly must be in accordance with the
product license and good manufacturing practice ("GMP") as set
out in an EU Directive relating to Good Manufacturing Practice
which makes compliance with the principles of GMP compulsory
throughout the EU.
Potential Liability for Current Products. Continuing
studies of the proper utilization, safety, and efficacy of
pharmaceuticals and other health care products are being
conducted by the industry, government agencies and others. Such
studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and
efficacy of previously marketed products and in some cases have
resulted, and may in the future result, in the discontinuance of
their marketing and, in certain countries, give rise to claims
for damages from persons who believe they have been injured as a
result of their use.
Extended Protection for Branded Products. The Waxman-Hatch
Act amended both the Patent Code and the Federal Food, Drug and
Cosmetics Act (the "FDC Act"). The Waxman-Hatch Act codified and
expanded application procedures for obtaining FDA approval for
generic forms of brand-name pharmaceuticals which are off-patent
or whose market exclusivity has expired. The Waxman-Hatch Act
also provides patent extension and market exclusivity provisions
for innovator drug manufacturers which preclude the submission or
delay the approval of a competing ANDA under certain conditions.
One such provision allows a five year market exclusivity period
for NDAs involving new chemical compounds and a three year market
exclusivity period for NDAs containing new clinical
investigations essential to the approval of such application.
The market exclusivity provisions apply equally to patented and
non-patented drug products. Another provision authorizes the
extension of patent terms for up to five years as compensation
for reduction of the effective life of the patent as a result of
time spent in testing for, and FDA review of, an application for