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-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000730469-99-000001.txt : 19990329
<SEC-HEADER>0000730469-99-000001.hdr.sgml : 19990329
ACCESSION NUMBER: 0000730469-99-000001
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990326
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: 99573856
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, 1998
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 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, 1999 was
$734,958,000.
The number of shares outstanding of each of the Registrant's
classes of common stock as of March 10, 1999 was:
Class A Common Stock, $.20 par value - 17,763,347 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 June 10, 1999 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 specialty human pharmaceutical
and animal health products. The Company manufactures and markets
approximately 600 pharmaceutical products for human use and 40
animal health products. The Company conducts business in more
than 60 countries and has approximately 3,000 employees at 38
sites in 22 countries. For the year ended December 31, 1998, the
Company generated revenue and operating income of over $600
million and $65 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 35.2% of the
Company's total common stock outstanding at December 31, 1998.
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 346,668 shares of the
Company's Class A Common Stock. (See "Purchase of Outstanding
Warrants"). As a result, A.L. Industrier, and ultimately Mr.
Sissener, can control the Company. In addition, A.L. Industrier
may, under certain circumstances, convert the Company's Class B
Notes into 2,372,896 shares of the Company's Class B Common Stock
(see "Convertible Subordinated Note Offering").
Convertible Subordinated Note Offering
On March 30, 1998, the Company sold $125,000,000 and
$67,850,000 of Convertible Subordinated Notes convertible at
$28.59375 per share into shares of the Company's Class A and
Class B Common Stock, respectively (the "Class A and Class B
Notes"). A.L. Industrier purchased all of the Class B Notes.
The Class A Notes were sold to unaffiliated parties and,
substantially all of the Class A Notes have been registered with
the Securities and Exchange Commission and listed on the New York
Stock Exchange. The Class B Notes are automatically convertible
into Class B Common Stock on or after March 30, 2001 if at least
75% of the Class A Notes have been converted into Class A Common
Stock.
Purchase of Outstanding Warrants
In connection with the Combination Transaction, the Company
issued warrants which allowed the holders to purchase 3,819,600
shares of the Company's Class A Common Stock at an exercise price
of $20.69 with an expiration date of January 3, 1999 (the
"Warrants"). On October 21, 1998, the Company offered to
exchange the Warrants for newly issued shares of the Company's
Class A Common Stock based upon an exchange formula which
approximated $1.00 plus the "spread" between the $20.69 warrant
exercise price and the market price of the Company's stock for
the ten days immediately after the Company filed its Form 10-Q
for the quarter ended September 30, 1998. Based upon this
formula, 3,345,921 warrants to purchase shares were tendered to
the Company for which 1,230,448 shares of the Company's Class A
Common Stock were issued. Of this amount, 346,668 shares were
issued to Mr. Sissener, members of his immediate family or other
entities under his control. This is Mr. Sissener's initial
ownership of Class A Common Stock. Additionally, warrants for
237,680 shares were exercised prior to January 3, 1999 in
accordance with the original warrant terms.
Forward-Looking Statements
This annual report contains "forward-looking statements," or
statements that are based on current expectations, estimates, and
projections rather than historical facts. The Company offers
forward-looking statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements may prove, in hindsight, to
have been inaccurate because of risks and uncertainties that are
difficult to predict. Many of the risks and uncertainties that
the Company faces are included under the caption "Risk Factors"
in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Financial Information About Industry Segments
The Company operates in the human pharmaceutical and animal
health industries. It has five business segments within these
industries. The table that follows shows how much each of these
segments contributed to revenues and operating income in the past
three years.
($ in Millions) REVENUES OPERATING INCOME
(lOSS)
1998 1997 1996 1998 1997 1996
U.S. Pharmaceutical
Division 178.8 155.4 152.3 11.1 4.1 (19.2)
International
Pharmaceuticals
Division 193.1 134.1 142.0 8.0 11.0 2.5
Fine Chemicals 53.0 38.7 36.0 17.5 9.4 8.5
Division
Animal Health 166.3 158.4 146.0 37.8 32.0 21.0
Division
Aquatic Animal Health
Division 19.0 15.3 12.2 3.6 2.8 (.3)
For additional financial information concerning the
Company's business segments see Note 20 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 U.S. Pharmaceuticals Division, International 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 $424.9 million
in 1998, before elimination of intercompany sales, with operating
profit of approximately $36.6 million.
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 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 gives the Company a competitive
advantage by providing large customers the ability to buy a
significant line of products from a single source.
Generic pharmaceuticals 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 FDA 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.
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 50 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 five suppository
products and markets certain other specialty generic
products, including two aerosols and two nebulizer products.
In 1998, the Company continued the 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 with the remainder to be used
to execute projects reasonably designed for intermediate term
growth. The Company also received an option to purchase all of
the capital stock of Ascent in 2002 for approximately 12.2 times
Ascent's 2001 operating earnings. Except for $4 million of the
aforesaid loan presently advanced, the Ascent transaction is
subject to the approval of a majority of Ascent's stockholders.
Ascent would add a branded pediatric product line to the U.S.
Pharmaceuticals Division along with a strong direct sales force
dedicated to the pediatric market.
Facilities. The Company maintains two manufacturing
facilities for its U.S. pharmaceutical operations, a research and
development center, three 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. Pursuant to the Company's
plan to reduce manufacturing costs and improve efficiencies, the
Company closed two facilities in New York and New Jersey and
transferred the operations conducted at those facilities to its
facility in Lincolnton. The Company's Lincolnton facility's
production was increased and its operations have become more
efficient as a result of production consolidation plans announced
in May 1996.
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 sales force
of approximately ten sales professionals 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 third 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.
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 has a leading market
position for branded generic pharmaceuticals in the Nordic
countries, the United Kingdom, and the Netherlands with a strong
presence in Indonesia.
Product Lines. The International Pharmaceuticals Division
manufactures approximately 290 products which are sold in
approximately 670 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,
cardiovascular and oral healthcare 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 including
direct costs of acquisition 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 and the Netherlands.
In addition, in November, 1998, the Company acquired, in a
substantially smaller transaction, a generic pharmaceutical
product line in Germany. All of the products purchased in this
transaction are manufactured under contract by third parties.
The Company intends to continue the operations of Cox and the
acquired German generic product line to achieve benefits from
leveraging these new activities with the other European
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 commenced in 1996 and
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 expects to recognize
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 the Nordic countries and certain other 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-Government Regulations Affecting the
Company"). 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-Generic Pharmaceutical Industry").
Geographic Markets. The principal geographic markets for the
Division's pharmaceutical products are the United Kingdom,
Netherlands, 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
approximately 310 persons, 150 of whom are in Indonesia, 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.
Fine Chemicals Division ("FCD")
The Company's Fine Chemicals Division develops, manufactures
and markets bulk antibiotics 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. The
Division develops, manufactures and sells active ingredients in
bulk quantities for use in human and veterinary pharmaceuticals
produced by third parties and, to a limited extent, the Company.
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 through 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" 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. 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. using its sales force of two
professionals. Sales outside the U.S. are primarily through the
use of local agents and distributors.
Animal Health
The animal health 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
1998, the Company had animal health product sales of
approximately $185.3 million, before elimination of intercompany
sales, with operating profit of approximately $41.4 million.
Animal Health Division ("AHD")
The Company develops, manufactures and markets feed additive
and animal health 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 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 cattle and calf feed
additives; and (v) Vitamin D3, a feed additive used for poultry
and swine. 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. (See "Risk Factors
Governmental Actions Affecting the Company" for a discussion of
certain legislative action affecting the sales of Albac.) 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.
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 at least a 14-day period of
time 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. 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. (See "Environmental" for a discussion
of an administrative action related to the Oslo facility").
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. and Europe. 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 and Mexico are sold through a staff of
technically trained sales and technical service employees and
distributors located throughout the U.S. 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. It is anticipated that
approximately 50% of the Company's U.S. animal health sales will
be made through this joint venture. Sales of the Animal Health
Division's products outside North America are made primarily
through the use of distributors and sales companies. The Company
has sales offices in Norway, Canada, Mexico, Singapore and the
People's Republic of China and in 1997 added sales offices in
Brazil and France and, in 1998, added a sales office in Belgium.
The Company anticipates establishing additional foreign sales
offices.
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. 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.
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, catfish, yellowtail and
other commercially important farm species.
Facilities. The Company manufactures its fish vaccine products
in Bellevue, Washington and at its Overhalla, Norway facility. A
contract manufacturer in Germany provides certain raw materials
for vaccine production.
Competition. The Company has few competitors in the aquatic
animal health industry. However, 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 meet 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 and the U.S.
Sales and Distribution. The Company sells its aquatic animal
health products through its own technically oriented sales staff
of twelve people in Norway and the U.S. 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
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 segment
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 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 the Animal
Health segment 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; Bellevue, Washington; and
Chicago Heights, Illinois, as well as through independent
research facilities in the U.S. and Norway.
Research and development expenses were approximately $36.0
million, $32.1 million, and $34.3 million in 1998, 1997, and
1996, respectively. In 1998, the Company received approximately
100 governmental product, market and manufacturing approvals.
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 taken by the Company 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: (i) the subject
of an approved New Drug Application ("NDA") which has been
reviewed for both safety and effectiveness; (ii) marketed under
an NDA approved for safety only; (iii)marketed without an NDA or
(iv) marketed pursuant to over-the-counter ("OTC") 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 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 its current pharmaceutical products
are legally marketed under the applicable FDA procedure, the
Company's 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 a Waxman-Hatch Act ANDA 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 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 the
Company conducts 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, results of operations and financial condition.
Facility Approvals. The Company's manufacturing operations (in
the U.S. as well as three of the Company's 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, especially since the FDA and certain other analogous
governmental agencies have increased the number of regular
inspections to determine 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 person or 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. There is
also a Directive relating to Good Manufacturing Practice ("GMP")
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 Drug Price
Competition and Patent Term Restoration Act of 1984 ("Waxman-
Hatch Act") amended both the Patent Code and the Federal Food,
Drug, and Cosmetic 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 and/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 a drug approval. Patent terms may also be
extended pursuant to the terms of the Uruguay Round Agreements
Act ("URAA")or by future legislation. In addition, the FDA
Modernization Act of 1997 allows brand name manufacturers to seek
six months of additional exclusivity when they have conducted
pediatric studies on the drug. Therefore, the Company cannot
predict the extent to which the Waxman-Hatch Act, the FDA
Modernization Act of 1997, the URAA or future legislation could
postpone launch of some of its new products.
In Europe, certain Directives confer a similar market
exclusivity in respect of proprietary medicines, irrespective of
any patent protection. Before a generic manufacturer can present
an abridged application for a marketing authorization, it must
generally wait until the original proprietary drug has been on
the market for a certain period (unless he has the consent of the
person who submitted the original test data for the first
marketing authorization, or can compile an adequate dossier of
his own). In the case of high-technology products, this period is
ten years and six years in respect of other medicinal products,
subject to the option for member states to elect for an
exclusivity period of ten years in respect of all products, or to
dispense with the six-year period where that would offer
protection beyond patent expiry.
In addition to the exclusivity period, it is also possible in
the EU to effectively extend the period of patent protection for
a product which has a marketing authorization by means of a
Supplementary Protection Certificate ("SPC"). An SPC comes into
force on the expiry of the relevant patent and lasts for a period
calculated with reference to the delay between the lodging of the
patent and the granting of the first marketing authorization for
the drug. This period of protection, subject to a maximum of five
years, further delays the marketing of generic medicinal