form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the
quarterly period ended December 31, 2009
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the
transition period from __________ to _________
Commission
File No. 1-31773
CARACO
PHARMACEUTICAL LABORATORIES, LTD.
(Exact
name of registrant as specified in its charter)
MICHIGAN
|
38-2505723
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
1150
ELIJAH MCCOY DRIVE, DETROIT, MICHIGAN
|
48202
|
(Address
of principal executive offices)
|
(Zip
Code)
|
TELEPHONE:
(313) 871-8400
Registrant’s
telephone number, including area code
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer o
|
Accelerated
Filer o
|
Non-
Accelerated Filer o
|
Smaller
Reporting Company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
As of
February 11, 2010, the registrant had 39,090,194 shares of common stock issued
and outstanding.
CARACO
PHARMACEUTICAL LABORATORIES LTD.
(A
subsidiary of Sun Pharmaceutical Industries Limited)
BALANCE
SHEETS
|
|
DECEMBER
31,
|
|
|
MARCH
31,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(UNAUDITED)
|
|
|
(AUDITED)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
66,691,206 |
|
|
$ |
65,314,397 |
|
Short-term
investments
|
|
|
10,000,000 |
|
|
|
- |
|
Accounts
receivable, net
|
|
|
82,211,928 |
|
|
|
15,181,197 |
|
Inventories
|
|
|
66,122,027 |
|
|
|
79,510,832 |
|
Prepaid
expenses and deposits
|
|
|
7,294,603 |
|
|
|
9,440,942 |
|
Deferred
income taxes
|
|
|
5,967,307 |
|
|
|
416,985 |
|
Total
current assets
|
|
|
238,287,071 |
|
|
|
169,864,353 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
|
|
|
|
|
|
Land
|
|
|
975,311 |
|
|
|
975,311 |
|
Buildings
and improvements
|
|
|
28,518,377 |
|
|
|
28,148,447 |
|
Equipment
|
|
|
27,973,700 |
|
|
|
26,216,521 |
|
Furniture
and fixtures
|
|
|
1,520,015 |
|
|
|
1,509,582 |
|
Construction
in progress
|
|
|
2,684,708 |
|
|
|
2,708,137 |
|
Total
|
|
|
61,672,111 |
|
|
|
59,557,998 |
|
Less
accumulated depreciation
|
|
|
17,912,503 |
|
|
|
14,734,961 |
|
Net
property, plant and equipment
|
|
|
43,759,608 |
|
|
|
44,823,037 |
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
1,310,256 |
|
|
|
1,383,048 |
|
Deferred
income taxes
|
|
|
21,314,636 |
|
|
|
20,417,885 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
304,671,571 |
|
|
$ |
236,488,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$ |
1,918,931 |
|
|
$ |
7,979,341 |
|
Accounts
payable, Sun Pharma
|
|
|
121,755,345 |
|
|
|
43,928,166 |
|
Accrued
expenses
|
|
|
1,518,825 |
|
|
|
2,757,361 |
|
Income
taxes payable
|
|
|
5,063,120 |
|
|
|
- |
|
Long
term debt, current portion
|
|
|
16,200,000 |
|
|
|
2,700,000 |
|
Total
current liabilities
|
|
|
146,456,221 |
|
|
|
57,364,868 |
|
|
|
|
|
|
|
|
|
|
Long
term debt, net of current portion
|
|
|
- |
|
|
|
15,300,000 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
146,456,221 |
|
|
|
72,664,868 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Series
B convertible preferred stock, no par value; issued and outstanding
1,088,000 shares (December 31, 2009) 2,720,000 shares (March
31, 2009)
|
|
|
11,320,640 |
|
|
|
23,081,920 |
|
Common
stock, no par value; authorized 50,000,000 shares, issued and outstanding
39,090,194 shares (December 31, 2009) 37,458,194 shares (March
31, 2009)
|
|
|
130,330,615 |
|
|
|
118,569,335 |
|
Additional
paid in capital
|
|
|
3,653,971 |
|
|
|
3,474,246 |
|
Retained
earnings
|
|
|
12,910,124 |
|
|
|
18,697,954 |
|
Total
stockholders' equity
|
|
|
158,215,350 |
|
|
|
163,823,455 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
304,671,571 |
|
|
$ |
236,488,323 |
|
See
accompanying notes
CARACO
PHARMACEUTICAL LABORATORIES, LTD.
(A
subsidiary of Sun Pharmaceutical Industries Limited)
STATEMENTS
OF OPERATIONS
|
|
Nine Months ended
December 31,
|
|
|
Quarter ended
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
178,435,869 |
|
|
$ |
286,185,477 |
|
|
$ |
51,989,958 |
|
|
$ |
55,720,312 |
|
Cost
of goods sold
|
|
|
167,148,654 |
|
|
|
224,698,828 |
|
|
|
48,905,076 |
|
|
|
39,818,936 |
|
Reserve
for inventory seized by FDA
|
|
|
15,950,188 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
(loss) profit
|
|
|
(4,662,973 |
) |
|
|
61,486,649 |
|
|
|
3,084,882 |
|
|
|
15,901,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
15,855,217 |
|
|
|
11,790,777 |
|
|
|
5,402,641 |
|
|
|
3,735,532 |
|
Research
and development costs
|
|
|
8,346,916 |
|
|
|
16,886,738 |
|
|
|
2,753,965 |
|
|
|
5,820,799 |
|
Non-recurring
(income)
|
|
|
(20,000,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(8,865,106 |
) |
|
|
32,809,134 |
|
|
|
(5,071,724 |
) |
|
|
6,345,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(402,174 |
) |
|
|
- |
|
|
|
(144,089 |
) |
|
|
- |
|
Interest
income
|
|
|
464,835 |
|
|
|
570,847 |
|
|
|
200,175 |
|
|
|
150,589 |
|
Loss
on sale of equipment
|
|
|
(114,272 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
income
|
|
|
120,698 |
|
|
|
- |
|
|
|
74,390 |
|
|
|
- |
|
Other
income - net
|
|
|
69,087 |
|
|
|
570,847 |
|
|
|
130,476 |
|
|
|
150,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes (benefit)
|
|
|
(8,796,019 |
) |
|
|
33,379,981 |
|
|
|
(4,941,248 |
) |
|
|
6,495,634 |
|
Income
taxes (benefit) expense
|
|
|
(3,008,190 |
) |
|
|
10,431,391 |
|
|
|
(1,907,934 |
) |
|
|
1,411,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(5,787,829 |
) |
|
$ |
22,948,590 |
|
|
$ |
(3,033,314 |
) |
|
$ |
5,084,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.15 |
) |
|
|
0.68 |
|
|
|
(0.08 |
) |
|
|
0.15 |
|
Diluted
|
|
|
(0.15 |
) |
|
|
0.57 |
|
|
|
(0.08 |
) |
|
|
0.13 |
|
See
accompanying notes
CARACO
PHARMACEUTICAL LABORATORIES, LTD.
(A
subsidiary of Sun Pharmaceutical Industries Limited)
STATEMENTS
OF CASH FLOWS
|
|
Nine months ended
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(5,787,829 |
) |
|
$ |
22,948,590 |
|
Adjustments
to reconcile net (loss) income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,375,864 |
|
|
|
2,293,367 |
|
Loss
on sale of equipment
|
|
|
114,272 |
|
|
|
- |
|
Common
stock option expense
|
|
|
179,725 |
|
|
|
237,760 |
|
Common
stock grant expense
|
|
|
- |
|
|
|
169,900 |
|
Net
deferred income taxes
|
|
|
(6,447,073 |
) |
|
|
(2,628,100 |
) |
Changes
in operating assets and liabilities which (used) /
provided cash:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(67,030,731 |
) |
|
|
122,880,719 |
|
Inventories
|
|
|
13,388,805 |
|
|
|
173,410,136 |
|
Prepaid
expenses and deposits
|
|
|
2,146,337 |
|
|
|
883,135 |
|
Accounts
payable
|
|
|
71,766,769 |
|
|
|
(319,204,432 |
) |
Accrued
expenses
|
|
|
(1,238,535 |
) |
|
|
(655,447 |
) |
Income
taxes payable
|
|
|
5,063,120 |
|
|
|
(142,494 |
) |
Net
cash provided by operating activities
|
|
|
15,530,724 |
|
|
|
193,134 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(2,354,225 |
) |
|
|
(21,680,627 |
) |
Proceeds
from sale of equipment
|
|
|
310 |
|
|
|
- |
|
Purchase
of short-term investment
|
|
|
(10,000,000 |
) |
|
|
- |
|
Purchases
of intangibles
|
|
|
- |
|
|
|
(1,455,840 |
) |
Net
cash used in investing activities
|
|
|
(12,353,915 |
) |
|
|
(23,136,467 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Repayments
of loans payable to financial institutions
|
|
|
(1,800,000 |
) |
|
|
- |
|
Proceeds
from exercise of stock options
|
|
|
- |
|
|
|
11,250 |
|
Net
cash (used in) provided by financing activities
|
|
|
(1,800,000 |
) |
|
|
11,250 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,376,809 |
|
|
|
(22,932,083 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
65,314,397 |
|
|
|
56,906,051 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
66,691,206 |
|
|
$ |
33,973,968 |
|
See
accompanying notes
CARACO
PHARMACEUTICAL LABORATORIES, LTD.
(A
subsidiary of Sun Pharmaceutical Industries Limited)
STATEMENT
OF STOCKHOLDERS' EQUITY (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL
|
|
|
|
|
|
TOTAL
|
|
|
|
PREFERRED STOCK
|
|
|
COMMON STOCK
|
|
|
PAID
IN
|
|
|
RETAINED
|
|
|
STOCKHOLDERS'
|
|
|
|
SHARES
|
|
|
AMOUNT
|
|
|
SHARES
|
|
|
AMOUNT
|
|
|
CAPITAL
|
|
|
EARNINGS
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at April 1, 2009
|
|
|
2,720,000 |
|
|
$ |
23,081,920 |
|
|
|
37,458,194 |
|
|
$ |
118,569,335 |
|
|
$ |
3,474,246 |
|
|
$ |
18,697,953 |
|
|
$ |
163,823,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock into common stock
|
|
|
(1,632,000 |
) |
|
|
(11,761,280 |
) |
|
|
1,632,000 |
|
|
|
11,761,280 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock options expensed
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
179,725 |
|
|
|
- |
|
|
|
179,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,787,829 |
) |
|
|
(5,787,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2009
|
|
|
1,088,000 |
|
|
$ |
11,320,640 |
|
|
|
39,090,194 |
|
|
$ |
130,330,615 |
|
|
$ |
3,653,971 |
|
|
$ |
12,910,124 |
|
|
$ |
158,215,350 |
|
See
accompanying notes
CARACO
PHARMACEUTICAL LABORATORIES, LTD.
FORM
10-Q
NOTES TO UNAUDITED FINANCIAL
STATEMENTS
The
balance sheet as of March 31, 2009 is audited. All other financial statements
contained herein are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have been
included. Such adjustments consisted only of normal recurring items, with the
exception of a reserve for inventory seized by the U.S. Food and Drug
Administration (“FDA”), as discussed below. Interim results are not
necessarily indicative of results for the full year.
The
financial statements contained herein should be read in conjunction with the
financial statements and notes thereto included in the Annual Report on Form
10-K as of and for the year ended March 31, 2009 of Caraco Pharmaceutical
Laboratories, Ltd. (“Caraco,” the “Company,” or the “Corporation” and which is
also referred to as “we,” “us,” or “our”). In preparing these
financial statements, the Company has evaluated events and transactions for
potential recognition or disclosure through February 11, 2010, the date the
financial statements were available to be issued.
The
accounting policies followed by the Corporation with respect to the unaudited
interim financial statements are consistent with those stated in the
Corporation’s Annual Report on Form 10-K.
2.
|
ORGANIZATION AND NATURE OF
BUSINESS
|
Caraco is
a corporation organized under Michigan law in 1984, engaged in the business of
developing, manufacturing, marketing and distributing generic pharmaceuticals to
the nation's largest wholesalers, distributors, warehousing and non-warehousing
chain drugstores and managed care providers, throughout the U.S.
A generic
pharmaceutical is the chemical and therapeutic equivalent of a brand-name drug
as to which the patent and/or market exclusivity has expired. Generic
pharmaceuticals are well accepted for substitution of brand pharmaceuticals
(which substitution is regulated by individual state regulations) as
they sell at a discount to the branded product’s price and have been determined
to be their equivalent in quality and bioavailability.
Our
present product portfolio includes 41 prescription products, in 90 strengths, in
various package sizes. This represents products we distribute for Sun
Pharmaceutical Industries Limited, a specialty pharmaceutical corporation
organized under the laws of India (“Sun Pharma”) and products manufactured by
other third parties relating to Caraco-owned products (those products for which
Caraco owns the Abbrevated New Drug Applications (“ANDAs”)). This
does not include those Caraco-owned products for which the Company has
temporarily ceased manufacturing and marketing, due to the enforcement actions
of the FDA. The products are intended to treat a variety of disorders including
but not limited to the following: hypertension, arthritis, epilepsy, diabetes,
depression and pain management.
A
significant source of our earlier funding had been from Sun
Pharma. Since August 1997, Sun Pharma has contributed equity capital
and had advanced us loans. In addition, among other things, Sun Pharma had acted
as a guarantor on loans to Caraco, has supplied us with a substantial portion of
raw materials for our products, helped us obtain machinery and equipment to
enhance our production capacities at competitive prices, transferred certain
generic products to us and provided us with qualified technical
professionals. Sun Pharma has also provided services as a Clinical
Research Organization, (“CRO”) by performing certain bio-equivalency studies on
our future potential products. Sun Pharma owns approximately 75% of
the outstanding shares of the Company (approximately 76% including the
convertible Series B Preferred Stock). (See “Current Status of the Corporation”
and “Sun Pharmaceutical Industries Limited” below.)
3.
|
CURRENT STATUS OF THE
CORPORATION
|
As
previously disclosed, on June 25, 2009, U.S. Marshals, at the request of the
FDA, arrived and seized drug products manufactured in our Michigan facilities.
The seizure also included ingredients and in-process materials held at these
same facilities. The estimated value of such seized inventory as of December 31,
2009 was $24.0 million. Products sold and distributed by Caraco that are
manufactured by third parties and outside of these facilities are not impacted
and distribution and marketing of these products continues. The Company has also
transferred certain Caraco-owned products to additional alternate manufacturing
sites that would allow the Company to regain revenues from those products while
Caraco completes the necessary remedial actions that would lead to resumption of
its manufacturing operations. The Company intends to file with the FDA
supplements to ANDAs, for its approval, in the next six months for these
transferred products.
As
previously disclosed, the Company voluntarily entered into a Consent Decree of
Condemnation, Forfeiture and Permanent Injunction (“Consent Decree”) with the
FDA on September 29, 2009. As stipulated in the Consent Decree, the Company will
attempt to have the seized inventory released. The Company believes that, except
for the raw materials which were opened solely for the purpose of sampling, the
estimated value of which is $8.1 million, all other seized inventory would be
difficult to recondition. Accordingly, a reserve in the amount of $15.9 million
has been created as of December 31, 2009 for this remaining inventory. In
accordance with the Consent Decree, the Company has also provided third party
certification to the FDA and requested the release of raw materials which were
opened solely for the purpose of sampling. On January 29, 2010, we
received a letter from the FDA, seeking clarification on certain points. We are
in the process of submitting a response to such letter. As a result of the FDA
action, we have voluntarily ceased manufacturing operations and instituted, in
two phases, indefinite layoffs of approximately 430 of our
employees. The Company has subsequently started recalling some of
these employees in conjunction with its efforts to restart its manufacturing
activities. The Consent Decree provides a series of measures that, when
satisfied, will permit the Company to resume manufacturing and distributing
those products which are manufactured in its Michigan facilities. The Company
has engaged a consulting firm which is comprised of current good manufacturing
practice (“cGMP”) experts, in accordance with the Consent Decree, and has
submitted a work plan to the FDA in October 2009 for remedial actions leading to
resumption of its manufacturing operations. Some additional details and
clarifications to the work plan were submitted to the FDA on January 14, 2010
for its approval. On February 4, 2010 the Company received a letter from the FDA
seeking clarification on certain points of the work plan. We are in the process
of submitting a response to such letter.
As a
result of the aforesaid FDA actions, there has been a material adverse effect on
our current operations and there may be a material adverse effect on our near
term operations. Under the terms of the Consent Decree, Caraco's cessation of
manufacturing operations will continue until it receives written notification
from independent experts and the FDA that it is in compliance with the Consent
Decree and regulations and can resume operations. However, there is no assurance
that the steps being taken will be successful or result in resolution of the FDA
complaint. We are also not able, at this time, to estimate, the cost
of these actions. We anticipate working with the FDA to resolve its concerns as
effectively and expeditiously as possible in accordance with the terms of the
Consent Decree. The Consent Decree also requires the Company to abide
by certain conditions and restrictions. If the Company violates any portion of
the Consent Decree, it could incur penalties, such as monetary fines, forfeiture
of the seized goods and other penalties.
During
the third quarter ended December 31, 2009 and first nine months of our current
fiscal year (“Fiscal 2010”) ended December 31, 2009, we generated net sales
of $52.0 million and $178.4 million, respectively, compared to $55.7 million and
$286.2 million, respectively, during the corresponding periods of Fiscal 2009.
We incurred $2.8 million and $8.3 million, respectively, in research and
development (“R&D”) expenses during the third quarter and first nine months
of Fiscal 2010, as compared to $5.8 million and $16.9 million, respectively,
during the corresponding periods of Fiscal 2009. We incurred a net pre-tax loss
of $4.9 million during the third quarter and $8.8 million during the first nine
months of Fiscal 2010, as compared to earning net pre-tax income of $6.5 million
and $33.4 million, respectively, during the corresponding periods of Fiscal
2009. Net pre-tax income in the third quarter of Fiscal 2010 was lower primarily
due to the cessation of manufacturing at the Company’s Michigan facilities
resulting in the loss of revenues from such products, as disclosed
above. The net pre-tax loss for the first nine months of the current
fiscal year was due to a reserve we have created, in the amount of $15.9
million, relating to the inventory seized by the FDA, as disclosed above, and
also due to the cessation of manufacturing at the Company’s Michigan facilities,
partially offset by non-recurring income earned during the second quarter of
Fiscal 2010 in the amount of $20.0 million as part of an asset purchase
agreement arising out of a settlement agreement entered into by the Company.
Such income is not expected to recur in future periods. The Company provided an
income tax benefit of $1.9 million and $3.0 million for the third quarter and
first nine months of Fiscal 2010, respectively, as compared to an income tax
expense of $1.4 million and $10.4 million, respectively, in the corresponding
periods of Fiscal 2009. We incurred a net loss of $3.0 million and $5.8 million
during the third quarter and first nine months of Fiscal 2010, as compared
to net income of $5.1 million and $22.9 million, respectively, during the
corresponding periods of Fiscal 2009. We generated cash from operations in the
amount of $15.5 million during the first nine months of Fiscal 2010, as compared
to generating cash from operations in the amount of $0.2 million during the
corresponding period of Fiscal 2009. At December 31, 2009, we had stockholders’
equity of $158.2 million, as compared to stockholders’ equity of $163.8
million at March 31, 2009. (See “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”).
We have
filed two ANDAs relating to two products with the FDA during the first nine
months of Fiscal 2010. We have not received FDA approval for any ANDAs during
the first nine months of Fiscal 2010 and do not expect to receive any approvals
for products out of our Michigan facilities until we resolve the FDA’s concerns
as discussed above. The total number of ANDAs pending approval by the
FDA as of December 31, 2009 was 31 (including four tentative approvals) relating
to 27 products out of our Michigan facilities.
4.
|
RECENT ACCOUNTING
PRONOUNCEMENTS
|
In May
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events”,
which was primarily codified into FASB Accounting Standards Codification (“ASC”)
Topic 855. This pronouncement provides guidance to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. This standard is effective for interim or fiscal periods ending
after June 15, 2009 and became effective for the Company beginning with its
quarterly period ended June 30, 2009. Its adoption did not have
an impact on the Company’s results of operations, financial position or cash
flows.
In June
2009, the FASB issued SFAS No. 168, “FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles - a replacement of
Financial Statement No. 162”, which was primarily codified into ASC Topic
105 — “Generally Accepted Accounting Principles.” This standard
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
non-governmental entities that are presented in conformity with GAAP. This
statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. Accordingly, the Company adopted
this standard effective with its quarterly report ended September 30, 2009. The
adoption of this standard has changed how we reference various elements of GAAP
when preparing our financial statement disclosures, but had no impact on the
Company’s consolidated financial statements.
5.
|
COMPUTATION OF EARNINGS PER
SHARE
|
Earnings
per share is computed using the weighted average number of common shares
outstanding during each period and considers a dual presentation and
reconciliation of “basic” and “diluted” per share amounts. Diluted reflects the
potential dilution of all common stock equivalents.
The basic
and diluted weighted average numbers of common shares outstanding for the third
quarter of Fiscal 2010, ended December 31, 2009, were both 39,090,194, and were
both 38,457,176 for the first nine months of Fiscal 2010. Correspondingly, the
basic and diluted weighted average numbers of common shares outstanding for the
third quarter of Fiscal 2009, ended December 31, 2008, were 34,749,920 and
40,608,355, respectively, and were 33,609,119 and 40,577,201, respectively for
the first nine months of Fiscal 2009.
6.
|
SUN PHARMACEUTICAL INDUSTRIES
LIMITED
|
Pursuant
to a stock purchase agreement, Sun Pharma made an initial investment of $7.5
million for the purchase of 5.3 million common shares of Caraco in
1997.
In August
1997, Caraco entered into an agreement, whereby Sun Pharma was required to
transfer the technology formulas for 25 generic pharmaceutical products over a
five-year period in exchange for 544,000 shares of Caraco common stock for each
technology transfer of an ANDA product (when bio-equivalency studies were
successfully completed) and 181,333 common shares for each technology transfer
of a Drug Efficacy Study Implementation (“DESI”) product. The products provided
to the Corporation from Sun Pharma were selected by mutual agreement. Under such
agreement, Caraco conducted, at its own expense, all tests including
bio-equivalency studies. Pursuant to such agreement through 2002, Sun Pharma
delivered the technology formula for 13 products. This agreement
expired on November 21, 2002, and the Corporation entered into a new technology
transfer agreement with Sun Pharma Global, Inc. (“Sun Global”), an affiliate of
Sun Pharma.
Under the
agreement, which was approved by the Corporation’s independent directors, Sun
Global agreed to provide the formulations for 25 new generic drugs over a
five-year period. Caraco’s rights to the products are limited to the
United States and its territories or possessions, including Puerto
Rico. Sun Global retains rights to the products in all other
territories. The products are selected by mutual agreement. Under this
agreement, Caraco conducts at its own expense all tests, including
bio-equivalency studies. The Corporation also markets the products
consistent with its customary practices. In return for the technology
transfer, Sun Global receives 544,000 shares of Series B Convertible Preferred
Stock for each generic drug transferred when such drug has passed its
bio-equivalency studies.
The
products agreement was amended by the Independent Committee, comprised of the
three independent directors, in the first quarter of 2004 to eliminate the
provision requiring that the Independent Committee concur in the selection of
each product, and provides instead that each product satisfy certain objective
criteria developed by management and approved by the Independent
Committee. Pursuant to such objective criteria, all 25 of the
products under this agreement had been selected, and all 25 products had passed
their respective bio-equivalency studies as of March 31, 2008.
On July
10, 2009, Caraco entered into an agreement with Alkaloida Chemical Company ZRT,
a Hungarian corporation ("Alkaloida") and indirect subsidiary of Sun Pharma,
pursuant to which Alkaloida will provide for certain products an exclusive,
non-transferable license to Caraco to manufacture and market the products in the
United States, its territories and possessions, including Puerto Rico. The
license for a product is for a period of five (5) years from the commencement of
marketing of the product, however, Caraco may extend the license for a further
five (5) year period. Alkaloida is required to deliver the product technology
for a product as soon as it is developed or available or as agreed to by Caraco
and Alkaloida.
The
agreement expires five years from the date of approval of the first ANDA, unless
renewed or extended for consecutive one (1) year periods, however, the licenses
remain valid pursuant to the terms of the agreement. Under certain conditions,
the agreement may be terminated in its entirety or with respect to one or more
products. The agreement is governed by and construed in accordance with the laws
of the State of Michigan. The agreement was approved by Caraco's Independent
Committee. No technology for any product has been transferred under this
agreement to date.
Sun
Pharma operates research and development centers in Mumbai and Vadodara in
India, where the development work for products is performed.
Sun
Pharma and its subsidiaries supply the Corporation with certain raw materials
and formulations, assist in acquiring machinery and equipment to enhance
production capacities, and have provided qualified technical professionals who
work as Caraco employees. Sun Pharma continues to provide Clinical Research
Services on a product by product basis. Also, five of the eight
directors of Caraco are, or were, affiliated with Sun Pharma.
Further,
Sun Pharma and its affiliates may use Caraco as a contract manufacturer and/or
distributor of their products. In December 2004 and January 2005, Caraco entered
into agreements for two such products, of which one is currently being
marketed.
During
the fiscal year ended March 31, 2007 (“Fiscal 2007”), the Corporation entered
into a three-year marketing agreement with Sun Pharma, which was reviewed and
approved by the Board’s Independent Committee. This agreement was
further renewed for a period of one year in January 2010. Under the agreement,
the Corporation purchases selected product formulations offered by Sun Pharma
and markets and distributes the same as part of the current product offerings in
the U.S., its territories and possessions, including Puerto Rico. Sun Pharma is
not obligated to offer Caraco products under this agreement, however, Caraco has
the exclusive right to market in the U.S., its territories and possessions,
including Puerto Rico, any products offered by Sun Pharma and accepted by
Caraco.
During
the fiscal year ended March 31, 2008 (“Fiscal 2008”), the Corporation entered
into a three-year distribution and sale agreement with Sun Pharma, which was
reviewed and approved by the Board’s Independent Committee. Under this agreement
the Company purchases selected formulations which have been filed under
Paragraph IV certification process with the FDA by Sun Pharma and offered for
distribution. Paragraph IV certified (“Paragraph IV”) products may face
litigation challenges with respect to claims of patent infringement. Under the
agreement the Company shares in the sales opportunity and shares the litigation
risk. The Company is indemnified by Sun Pharma of any risk beyond the percentage
agreed to as its profit percentage thereby limiting the Company’s exposure. Sun
Pharma is not obligated to offer Caraco products under this agreement, however,
Caraco has the exclusive right to market in the U.S., its territories and
possessions, including Puerto Rico, any products offered by Sun Pharma and
accepted by Caraco. The Company markets and distributes the same as part of its
current product offerings in the U.S., its territories and possessions,
including Puerto Rico. The license granted with respect to a product terminates
upon the end of an exclusivity period of 180 days or a non-appealable court
decision, or until a third generic manufacturer launches the product, whichever
is later, or until a settlement is reached, at which time the product will
become part of the standard Caraco-Sun Pharma marketing agreement disclosed
above. The Company currently receives a fixed gross profit margin of 8%, or such
other percentages as shall be mutually agreed upon. Under the agreement, Sun
Pharma and Caraco mutually indemnify each other capped by the fixed margin
percentage with respect to damages from infringement.
During
the third quarter and first nine months of Fiscal 2010 the Corporation made net
sales of $48.7 million and $159.5 million, respectively, and during
corresponding periods of Fiscal 2009, the Corporation made net sales of $26.8
million and $193.0 million, respectively, of the marketed products under the
aforesaid agreements.
While
management has a basis to reasonably believe that Sun Pharma's substantial
investment in Caraco provides Sun Pharma with sufficient economic incentive to
continue to assist Caraco in developing its business, and Sun Pharma has
expressed its intent to continue to support Caraco's operations in the near
term, as it has done in the past, there can be no assurance that such support
will, in fact, continue.
During
the first nine months of Fiscal 2010, Sun Global converted 1,632,000 shares of
Series B Preferred Stock into 1,632,000 shares of Common Stock. Through March
31, 2009 Sun Global had converted 10,880,000 shares of Series B Preferred Stock
into 10,880,000 shares of Common Stock, respectively. Sun Pharma’s current
beneficial ownership is 75% (76% including its convertible Series B Preferred
Stock).
In
addition to its substantial relationship with, and dependence on Sun Pharma as
described above, the Corporation is subject to certain risks associated with
companies in the generic pharmaceutical industry. Profitable
operations are dependent on the Corporation's ability to market its products at
reasonable profit margins. In addition to maintaining profitable
operations, the ongoing success of the Corporation will depend, in part, on
satisfaction of FDA concerns, its continuing ability to attract and retain key
employees, obtain timely approvals of its ANDAs, and develop new
products.
7.
|
ACCOUNTING FOR STOCK BASED
COMPENSATION
|
The
Company follows the provisions of ASC Topic 718, “Stock Compensation’” which requires employee
share-based compensation to be accounted for under the fair value method and
requires the use of an option pricing model for estimating the fair value of
stock options at the date of grant. The Company estimates the fair value of
stock options granted using the Black-Scholes option-pricing model, which
requires the Company to estimate the expected term of the stock option grants
and expected future stock price volatility over the term. The term represents
the expected period of time the Company believes the options will be outstanding
based on historical information. Estimates of expected future stock price
volatility are based on the historical volatility of the Company’s common stock.
The Company calculates the historical volatility as the standard deviation of
the differences in the natural logarithms of the weekly stock closing price,
adjusted for dividends and stock splits.
For the
third quarter and first nine months of Fiscal 2010, the Company has recognized
expenses amounting to $44,147 and $179,725 respectively, related to common stock
options as compared to $86,581 and $237,760 respectively, for the corresponding
periods of Fiscal 2009. As of December 31, 2009, total unrecognized compensation
cost related to stock options granted was $244,275. The unrecognized stock
option compensation cost is expected to be recognized over a period of
approximately three years. Stock options to purchase 12,000 shares of common
stock were granted to Directors and employees during the first nine months of
Fiscal 2010, which vest in the amount of one-third on each anniversary following
the date of grant. Additionally, during the first quarter of Fiscal 2009, the
Company had recorded an expense of $169,900 related to a stock grant of 10,000
common shares issued to its then CEO on May 2, 2008, as part of his employment
agreement, which vested immediately upon issuance.
8.
|
COMMON STOCK
ISSUANCES
|
There
were no common stock issuances to Directors or employees during the first nine
months of Fiscal 2010. We issued 1,000 shares of common stock to
our employees upon exercise of their stock options during the first nine months
of Fiscal 2009. Also, during the first quarter of Fiscal 2009, the Company had
issued a stock grant of 10,000 common shares to its former CEO on May 2, 2008,
as noted above.
During
the first nine months of Fiscal 2010, Sun Global converted 1,632,000 shares of
Series B Preferred Stock into 1,632,000 shares of Common Stock. (See “Part II –
Other Information: Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds” below).
9.
|
PREFERRED STOCK
ISSUANCES
|
No shares
of preferred stock were issued during the first nine months of Fiscal 2010 or
Fiscal 2009.
Net sales
decreased during the third quarter and first nine months of Fiscal 2010, in
comparison to the corresponding periods of Fiscal 2009, primarily as a result of
the adverse effect on sales of Caraco-owned products due to the actions of the
FDA and the cessation of manufacturing, as disclosed above, and in part due to
the negative impact of our voluntary recalls. Sales of distributed products were
lower during the first nine months of Fiscal 2010 over the corresponding period
of Fiscal 2009 due to higher sales of Paragraph IV products during the first
nine months of Fiscal 2009. See “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Third Quarter and First Nine
Months of Fiscal 2010 Compared to Third Quarter and First Nine Months of Fiscal
2009.” Sales of distributed products were also lower due to price erosion for
the products sold. We continue to remain competitive on products sold and
marketed during the first nine months of Fiscal 2010. Our organization is
focused on correcting any and all manufacturing issues to allow us to resume the
manufacturing and sales of Caraco-owned products and emerge as a stronger
company. In the interim, we will continue to focus our sales and marketing team
on distributed product sales.
As is
typical in the U.S. retail sector, many of our customers are serviced through
their designated wholesalers. During the third quarter and first nine months of
Fiscal 2010, the Company’s three largest wholesale
customers, Amerisource-Bergen Corporation, McKesson Corporation and
Cardinal Health, accounted for approximately 14%, 11% and 6%, respectively, of
the Company’s total net sales during the third quarter and 9%, 7% and 6%,
respectively, of total net sales for the first nine months of Fiscal 2010.
During the corresponding period of Fiscal 2009, shipments to Amerisource-Bergen
Corporation, McKesson Corporation and Cardinal Health, accounted for
approximately 15%, 22% and 12%, respectively, of the Company’s total net sales
during the third quarter of Fiscal 2009, and 8%, 16% and 22%, respectively, of
total net sales for the first nine months of Fiscal 2009. The majority of these
net sales include sales for various customers of ours that have underlying
direct contracts with our Company that are facilitated through our wholesale
customers. During the third quarter and first nine months of Fiscal 2010, sales
to CVS Caremark Corporation accounted for approximately 33% and 52% of our net
sales. The sales to CVS Caremark Corporation have increased as we entered into a
new contract with it towards the end of Fiscal 2009. Sales to a new customer,
Prime Therapeutics, accounted for 12% during the third quarter of Fiscal 2010.
The sales contracts for both CVS Caremark Corporation and Prime Therapeutics
include extended payment terms, and accordingly, collections of the related
accounts receivable balances from these sales will occur over the next twelve
months.
During
the fourth quarter of Fiscal 2009 the Company entered into a term loan of $18
million with RBS Citizens, N.A. d/b/a Charter One Bank (“Charter One Bank”). The
loan is secured by a mortgage covering the Company’s manufacturing facility and
equipment located in Detroit, Michigan. The rate of interest is calculated as
LIBOR plus an applicable margin thereto (based upon various leverage levels and
current applicable rate is 50 basis points). The aggregate rate applicable to
the Company as of December 31, 2009 was 1.3%. The principal loan payments and
accrued interest are payable on a quarterly basis beginning July 2009. The
principal is to be repaid in equal quarterly installments of $900,000 for ten
quarters through October 2011, and thereafter, if not renewed, the remaining
balance of $9 million is due in the subsequent quarter by January 2012.
Subsequently, in October 2009 the terms of the loan were modified and we entered
into an amended agreement. The amendment adds to the loan a one year line of
credit note for $15 million against which the Company can borrow funds for
working capital purposes or can get letters of credit issued. Against this line
of credit, the Bank has issued an Irrevocable Standby Letter of Credit in an
amount of $15 million, in favor of the United States of America, as required to
be placed with the FDA in accordance with the Consent Decree, as disclosed
above. The line of credit carries an interest rate of LIBOR plus 150 basis
points, and if letters of credit are issued, the associated fees are 0.7% of
such letters of credit on annualized basis. Also, there is an unused fee of
0.25% on an annualized basis to the extent the line remains idle. Both the line
of credit and outstanding term loan are cross collateralized by all of the
Company’s fixed assets and cash deposit accounts held with Charter One Bank in
the same amount. These cash deposits earn interest at prevailing rates
applicable to such money market accounts. We are continuing discussions with
Charter One Bank to resolve its concerns and get the cash collateral released.
Charter One Bank has temporarily suspended our required compliance with the
covenants in the loan agreements relating to FDA enforcement actions, as
previously disclosed, and has suspended testing of certain other compliance
requirements until February 26, 2010. On or before such date, we anticipate
either entering into revised agreements or repaying the loan in full. Currently,
as the loan is in technical default due to the FDA enforcement action, the
entire outstanding balance has been classified as a short-term
liability.
As
required pursuant to the terms of the Loan Agreement, the Company has entered
into an Interest Rate Swap Agreement with Charter One Bank to hedge the interest
rate applicable on the loan. The notional amount for the swap is $16.2 million
which will continue to amortize down as principal payments are made on the
related debt. The annualized fixed rate of interest as it applies to this
agreement is 2.41%. Thus, as of December 31, 2009 the effective rate of interest
to the Company for the term loan was 2.91% (2.41% swap rate plus applicable
margin of 50 basis points). The fair value of this swap agreement at December
31, 2009 was not material.
While it
is not possible to determine with any degree of certainty the ultimate outcome
of the following legal proceedings, the Company believes that it has meritorious
defenses with respect to the claims asserted against it and intends to
vigorously defend its position. An adverse outcome in any of these proceedings
could have a material adverse effect on the Company’s financial position and
results of operations.
As
previously disclosed, on June 9, 2005, Novo Nordisk A/S and Novo Nordisk, Inc.
(“Novo Nordisk”) filed a complaint in the United States District Court for the
Eastern District of Michigan alleging that the Company’s filing of an ANDA
seeking approval to market its generic version of Novo Nordisk’s Prandin®
(repaglinide) drug product infringed Novo Nordisk’s U.S. Patent No. 6,677,358.
Novo Nordisk seeks an order from the Court which, among other things, directs
the FDA not to approve the Company’s ANDA any earlier than the claimed
expiration date. The ANDA filed by the Company contains a Paragraph IV
certification challenging the Novo Nordisk patent as well as a section viii
statement with regard to the patent’s method claim. The Company believes that
this Novo Nordisk patent is invalid and/or will not be infringed by the
Company’s manufacture, use or sale of the product. The Company believes that it
is the first to file an ANDA with a Paragraph IV certification for this drug
product and it intends to defend this action vigorously to capitalize on the
potential for obtaining 180 days exclusivity available for this
product. The Company filed a supplemental answer and counterclaim
challenging Novo Nordisk’s recent Orange Book use code amendment by Novo Nordisk
in reference to Prandin®. On September 25, 2009, the District Court
entered an injunction requiring Novo Nordisk to correct its amended use code
description for Prandin® on the ground that it does not accurately characterize
the referenced method patent. Novo Nordisk has appealed that
injunction and briefing on the appeal has been expedited. On October
14, 2009, the parties entered into a stipulation regarding the appeal. On
October 27, 2009, the United States Court of Appeals for the Federal Circuit
entered an Order staying the use code injunction during the appeal. The appeal
has been briefed and argued before the Court. If the Company prevails
on the use code injunction appeal, Novo Nordisk will stipulate to
noninfringement based on Caraco’s proposed section viii
split-certification. If Novo Nordisk prevails on the use code
injunction appeal, the parties will proceed to trial on patent validity and
unenforceability. Currently, the trial is anticipated to begin in
February, 2010.
As
previously disclosed, on September 22, 2004, Ortho-McNeil Pharmaceutical, Inc.
(“Ortho-McNeil”) filed a complaint in the United States District Court for the
Eastern District of Michigan alleging that the Company’s filing of an ANDA
seeking approval to market its generic version of Ortho-McNeil’s Ultracet® brand
tramadol/acetaminophen drug product infringed Ortho-McNeil’s patent, which
expires on September 6, 2011. Ortho-McNeil sought an order from the district
court which, among other things, directed the FDA not to approve the Company’s
ANDA any earlier than the claimed expiration date. The ANDA filed by
the Company contains a Paragraph IV Certification challenging the Ortho-McNeil
patent. The Company asserted that the Ortho-McNeil patent is invalid and/or will
not be infringed by the Company’s manufacture, use or sale of the
product. Since filing this action, Ortho-McNeil authorized a generic
manufacturer to provide a generic version of Ortho-McNeil’s Ultracet® product
while another manufacturer launched its approved generic at risk. On October 19,
2005, the Company’s motion for summary judgment was granted. On December 19,
2005, the FDA approved the manufacture, use and sale of the Company’s generic
product. Ortho-McNeil filed an appeal of the finding of noninfringement by the
district court with the United States Court of Appeals for the Federal Circuit.
On January 19, 2007, the United States Court of Appeals for the Federal Circuit
affirmed the lower court’s decision granting the Company’s motion for summary
judgment.
Additionally,
the United States Patent and Trademark Office approved Ortho-McNeil’s request
for a reissue patent. Although the district court had determined that the
Company does not infringe Ortho-McNeil’s original patent, on July 31, 2006,
Ortho-McNeil filed a lawsuit against the Company in the United States District
Court for the District of New Jersey, alleging that the Company’s generic
version of Ultracet® brand tramadol/acetaminophen drug product infringes its
reissue patent. On September 26, 2006, the Company filed an answer denying,
among other things, that its generic product infringes any valid claims of
Ortho-McNeil’s reissue patent. On December 10, 2007, the Company filed a motion
for summary judgment that the asserted claims of the reissue patent were obvious
and therefore invalid as a matter of law. This motion was granted by Judge
Cavanaugh of the United States District for New Jersey on April 17, 2008. Final
judgment has been granted. On August 25, 2008, Ortho-McNeil filed a notice of
appeal with respect to that judgment with the United States Court of Appeals for
the Federal Circuit. The appeal was fully briefed and was argued on July 7,
2009. On August 26, 2009, the Court of Appeals reversed a portion of
the previously decided summary judgment. Although the Court did find
that a portion of the patent was not valid, the Court remanded the litigation
back to the lower court for further proceedings. Caraco subsequently
filed a combined petition for a panel rehearing and a rehearing en
banc. That combined petition was denied, and the case has been
remanded back to the Court for further proceedings.
As
previously disclosed, on May 5, 2009, Wyeth filed a complaint against the
Company and Sun Pharma in the United States District Court for the Eastern
District of Michigan. The complaint alleges that the package insert
for Sun Pharma’s product that is distributed by the Company and which is a
generic version of Wyeth’s Protonix® (pantoprazole) pharmaceutical product
contains false and misleading statements regarding the active ingredient of that
product in violation of federal and state laws. The complaint requests damages,
injunctive relief and attorneys’ fees and costs. The Company and Sun Pharma
believe that they have not engaged in any improper conduct and intend to
vigorously contest these allegations. On July 6, 2009, the
Company and Sun Pharma filed a Motion to Dismiss the Complaint for Failure to
State a Claim Upon Which Relief May Be Granted. Plaintiff’s brief in
response to the Company’s and Sun Pharma’s Motion to Dismiss was filed on July
30, 2009. Caraco and Sun Pharma filed a reply memorandum of law in
support of its Motion to Dismiss on August 13, 2009. We are currently
awaiting a decision from the Court.
As
previously disclosed, on June 25, 2009, at the direction of the FDA, the U.S.
Marshal Service, arrived and seized drug products manufactured, work in process
materials, and ingredients held, at the Company's Michigan
facilities. The estimated value of such seized inventory as of
December 31, 2009 was $24.0 million. The office of the United States
Attorney, on behalf of the FDA and Department of Justice, filed a Warrant for
Arrest In Rem to seize certain materials at the Company's Michigan facilities in
the United States District Court for the Eastern District of
Michigan. A Complaint for forfeiture of those materials was filed
with the court by the FDA. The Complaint alleged that the drug
products and materials are adulterated, in that the methods used in, and the
facilities and controls used for, their manufacture, processing, packing and
holding do not conform to cGMP requirements. Also as previously
disclosed, on September 29, 2009, the Company voluntarily entered into a Consent
Decree with the FDA. The Consent Decree provides a series of measures
that, when satisfied, will permit the Company to resume manufacturing and
distributing those products which are manufactured in its Michigan
facilities. Nothing in the Consent Decree prohibits the Company from
distributing FDA approved drug products that are manufactured by third
parties. We intend to continue to work with the FDA under the terms
of the Consent Decree to resolve its concerns as effectively and expeditiously
as possible.
As
previously disclosed, on July 10, 2006, Forest Laboratories, Inc., Forest
Laboratories Holdings, Ltd., and H. Lundbeck A/S (collectively, “Forest”) filed
a complaint in the United States District Court for the Eastern District of
Michigan alleging that the Company’s filing of an ANDA seeking approval to
market its generic version of Forest’s Lexapro® (escitalopram oxalate) drug
product infringed Forest’s Patent No. Re. 34,712 (the “’712
patent”). The ANDA contains Paragraph IV Certifications challenging
the ‘712 patent, as well as two other Forest-owned patents, the 6,916,941 (“the
‘941 patent”) and 7,420,069 ("the '069 patent"). Forest did not
assert the '941 patent or '069 patent, so the Company brought declaratory
judgment actions seeking a declaration that it did not infringe those
patents. The Company vigorously litigated all three
cases.
On July
10, 2009, the Company announced that it has reached an agreement with Forest to
settle the Lexapro® litigation. On October 2, 2009, the Company
announced that it closed the Asset Purchase Agreement (the “APA”) related to
that settlement. In accordance with the previously disclosed
settlement:
|
1.
|
Forest
has agreed to provide licenses to the Company for any patents related to
Lexapro® with respect to the marketing of the Company’s generic version of
the product as of the date that any third party generic enters the market
with final approval from the FDA other than an authorized generic or the
first filer with Hatch-Waxman
exclusivity.
|
|
2.
|
Forest
has reimbursed the Company for a portion of its attorney’s fees related to
this litigation.
|
|
3.
|
Pursuant
to the APA, the Company is taking over the commercialization and sale of
several products from Forest’s Inwood business and received compensation
payment from Forest in connection with its Inwood business. Caraco has
paid Forest an advance against royalties and will pay royalties on net
sales of these products.
|
As
previously disclosed, on July 17, 2009 and July 23, 2009, two purported class
action lawsuits were filed in the United States District Court for the Eastern
District of Michigan against the Company and certain of its executive officers.
The lawsuits allege securities violations related to the Company’s public
statements on FDA compliance issues made between May 29, 2008 and June 25,
2009. On September 15, 2009, plaintiffs in both of the purported
lawsuits filed motions for consolidation of the cases and for approval of lead
plaintiff. On November 9, 2009, a Stipulation and Order of Dismissal
was entered by the Court dismissing one of the two cases, effectively
consolidating the cases. On January 13, 2010, the Court entered a
Stipulation and Order appointing the lead plaintiff and lead counsel for
plaintiff. The Company believes the allegations to be without merit
and intends to vigorously defend itself.
As
previously disclosed, effective July 31, 2009, MedImmune, LLC, Sun Pharma, and
the Company, entered into a Settlement and License Agreement (the “Settlement”)
to resolve certain litigation. Under the Settlement, MedImmune
grants, in exchange for certain payments, to Sun Pharma and its affiliates
(including Caraco), a license to continue to market a generic version of
MedImmune’s drug product Ethyol®. The Company had stated in its Quarterly Report
on Form 10-Q for the quarter ended June 30, 2009, that it intends to file a copy
of this agreement with its Quarterly Report on Form 10-Q for the quarter ending
September 30, 2009, requesting confidential treatment for certain portions.
Subsequently, the Company determined that no filing of the agreement is
necessary because the agreement will not have a material impact on its financial
position.
On
September 29, 2009, Taro Pharmaceutical Industries Ltd. and Taro Pharmaceuticals
U.S.A., Inc. (“Taro”) filed suit against Caraco and Sun Pharma and certain of
its affiliates. The complaint, as it pertains to Caraco, alleges
misappropriation and misuse of trade secrets, unfair competition, tortious
interference with business relationships, fraud and unjust
enrichment. The claims against Caraco arise out of Caraco’s purported
access to information from Taro as a part of the due diligence conducted for Sun
Pharma’s tender offer for Taro Pharmaceuticals Industries Ltd. On
December 18, 2009, the Defendants filed a Motion to dismiss the
complaint. That motion has not yet been fully briefed by all parties.
Caraco intends to vigorously defend this action.
On
December 3, 2009, a shareholder derivative complaint was filed in the Circuit
Court for the County of Wayne, State of Michigan, by Anil Diwadkar, derivatively
on behalf of the Company, against certain current and former officers and
directors of the Company. The complaint alleges that the individual defendants
breached their fiduciary duties by, among other things, knowingly causing or
allowing the Company to manufacture products in violation of the FDA’s current
Good Manufacturing Practice requirements, despite repeated warnings by the FDA.
The complaint adds that the defendants knowingly failed to take the actions and
steps necessary in order to bring the Company’s manufacturing facilities in line
with applicable FDA standards. The complaint seeks damages in an amount
exceeding $25,000, appropriate equitable relief and costs. On January 5, 2010, a
stipulated order was entered into by the parties agreeing to stay the case until
March 16, 2010, and giving defendants until March 16, 2010 to answer or
otherwise respond to the complaint. As previously disclosed, and as permitted
under Michigan law, the Board of Directors asked Mr. F. Folsom Bell, a
disinterested Director, elected by the shareholders and designated as
independent by the Board of Directors, to make a determination in good faith
after conducting a reasonable investigation upon which his conclusions are
based, as to whether or not the maintenance of the derivative proceeding
requested by the shareholder is in the best interests of the Company. Under
Michigan law, and assuming no legal viable challenges thereto, if Mr. Bell makes
a determination in good faith after conducting a reasonable investigation upon
which his conclusions are based, that the maintenance of the derivative
proceedings is not in the best interests of the Company, the Court is required
to dismiss the case.
The
Company is also currently involved, and from time to time becomes involved, in
certain other legal proceedings relating to the conduct of its business,
including those pertaining to product liability, contract and employment
claims. While the outcome of any of such proceedings cannot be
accurately predicted, the Company does not believe that the ultimate resolution
of any of these existing proceedings will have a material adverse effect on the
Company's financial condition or liquidity.
Inventories
consist of the following amounts:
|
|
December 31, 2009
|
|
|
March 31, 2009
|
|
Raw
materials
|
|
$ |
15,329,423 |
|
|
$ |
17,954,511 |
|
Goods
in transit (Distributed)
|
|
|
11,448,738 |
|
|
|
29,236,869 |
|
Work
in process
|
|
|
6,826,545 |
|
|
|
9,279,009 |
|
Finished
goods (Caraco- Owned)
|
|
|
10,843,948 |
|
|
|
9,749,721 |
|
Finished
goods (Distributed)
|
|
|
37,623,561 |
|
|
|
13,290,722 |
|
Inventories
before reserves
|
|
$ |
82,072,215 |
|
|
$ |
79,510,832 |
|
Less
: Reserve for certain inventory under control of the FDA
|
|
|
15,950,188 |
|
|
|
- |
|
Total
Inventories
|
|
$ |
66,122,027 |
|
|
$ |
79,510,832 |
|
Total
inventories at December 31, 2009 and March 31, 2009 includes materials purchased
in the amount of $2,471,824 and $2,875,885, respectively, related to products
for which the Company has filed ANDAs that are awaiting approval from the FDA,
and the commercial launch of such products will commence once the approvals are
received.
As
disclosed above, on June 25, 2009, certain drug products manufactured, work in
process, and ingredients held, at the Company's Michigan facilities were seized
at the direction of the FDA. The estimated value of such seized inventory as of
December 31, 2009 was $24.0 million. The Company voluntarily entered into a
Consent Decree with the FDA on September 29, 2009. As stipulated in the Consent
Decree, the Company will attempt to have the seized inventory released. The
Company believes that, except for the raw materials which were opened solely for
the purpose of sampling, the estimated value of which is $8.1 million, all other
seized inventory would be difficult to recondition. Accordingly, a reserve in
the amount of $15.9 million has been created as of December 31, 2009 for this
remaining inventory which consists of work in process relating to those
materials which are in various stages of production within our manufacturing
facilities, all finished goods and those raw material ingredients which are
partially consumed in process. In accordance with the Consent Decree,
the Company has also provided third party certification to the FDA and requested
the release of raw materials which were opened solely for the purpose of
sampling. On January 29, 2010, we received a letter from the FDA, seeking
clarification on certain points. We are in the process of submitting a response
to such letter. The Company believes that it will be able to use the inventory
of raw materials which were opened solely for sampling purposes, however, in the
event the Company is unable to recondition or recover all of such inventory, the
Company will adjust the value of its inventory accordingly in future periods,
which would result in a negative impact on the future operating results of the
Company.
The
provision (benefit) for income taxes is as follows:
|
|
Nine Months Ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
4,982,518 |
|
|
$ |
13,059,491 |
|
Deferred
|
|
|
(7,990,708 |
) |
|
|
(2,628,100 |
) |
Total
|
|
$ |
(3,008,190 |
) |
|
$ |
10,431,391 |
|
The
provision (benefit) for income taxes is different from that which would be
obtained by applying the statutory federal income tax rate to income before
income taxes. The items causing the difference for the first nine months of
Fiscal 2010 and Fiscal 2009, respectively, are as follows:
|
|
Nine Months Ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
Provision
(benefit) for income taxes at federal statutory rate
|
|
$ |
(3,078,606 |
) |
|
$ |
11,682,993 |
|
Permanent
items and other
|
|
|
70,416 |
|
|
|
(1,251,602 |
) |
Income
taxes
|
|
$ |
(3,008,190 |
) |
|
$ |
10,431,391 |
|
Deferred
taxes consist of the following:
|
|
December 31,
2009
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$ |
598,224 |
|
|
$ |
797,631 |
|
Intangibles
|
|
|
24,681,310 |
|
|
|
26,458,255 |
|
Reserve
for inventory
|
|
|
5,582,603 |
|
|
|
- |
|
Other
|
|
|
384,702 |
|
|
|
417,136 |
|
Total
deferred tax assets
|
|
$ |
31,246,839 |
|
|
$ |
27,673,022 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
$ |
1,545,246 |
|
|
$ |
6,180,987 |
|
Depreciation
|
|
|
2,419,650 |
|
|
|
657,165 |
|
Total
deferred tax liabilities
|
|
$ |
3,964,896 |
|
|
$ |
6,838,152 |
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$ |
27,281,943 |
|
|
$ |
20,834,870 |
|
The
Company operates in two reportable segments consisting of (1) Caraco-owned
products (those products for which Caraco owns the ANDAs) and (2) those products
distributed under various agreements with Sun Pharma and its affiliates and with
others. The sales and gross profits earned on these categories of products are
as follows:
Fiscal
2010:
|
|
Quarter
Ended
December
31, 2009
|
|
|
Nine
Months Ended
December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
Net
Sales
|
|
|
Gross
Profit
|
|
|
Net
Sales
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caraco-Owned
Products
|
|
$ |
3,322,070 |
|
|
$ |
(1,124,630 |
) |
|
$ |
18,895,700 |
|
|
$ |
(18,666,990 |
) |
Distributed
Products
|
|
|
48,667,888 |
|
|
|
4,209,512 |
|
|
|
159,540,169 |
|
|
|
14,004,017 |
|
Total
|
|
$ |
51,989,958 |
|
|
$ |
3,084,882 |
|
|
$ |
178,435,869 |
|
|
$ |
(4,662,973 |
) |
Fiscal
2009:
|
|
Quarter
Ended
December
31, 2008
|
|
|
Nine
Months Ended
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
Net
Sales
|
|
|
Gross
Profit
|
|
|
Net
Sales
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caraco-Owned
Products
|
|
$ |
28,875,005 |
|
|
$ |
13,117,905 |
|
|
$ |
93,152,872 |
|
|
$ |
44,865,607 |
|
Distributed
Products
|
|
|
26,845,307 |
|
|
|
2,783,471 |
|
|
|
193,032,605 |
|
|
|
16,621,042 |
|
Total
|
|
$ |
55,720,312 |
|
|
$ |
15,901,376 |
|
|
$ |
286,185,477 |
|
|
$ |
61,486,649 |
|
None
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion and analysis provides information that management believes
is relevant to an understanding of the Corporation’s results of operations and
financial condition. The discussion should be read in conjunction with the
financial statements and notes thereto and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” included in the Company’s 2009
Annual Report on Form 10-K as of and for the year ended March 31, 2009 (the
“Annual Report”) and the unaudited interim financial statements included in Item
1 of this Quarterly Report on Form 10-Q.
Critical
Accounting Policies and Estimates
Our
significant accounting policies are described in Note 1 to our financial
statements included in our Annual Report. Certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require management’s subjective judgments. As a result, these
judgments are subject to an inherent degree of uncertainty. In applying these
policies, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Significant estimates include, but are not
limited to, provisions for estimated customer returns, discounts, rebates and
other price adjustments, including customer chargebacks, valuation allowances
for deferred tax assets, valuation of overhead components in inventory and the
reserve for inventory. Our discussion and analysis of our financial condition
and results of operations are based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. There have neither been material changes to our critical
accounting policies for the periods presented nor any material quantitative
revisions to our critical accounting estimates for the periods
presented.
Revenue
Recognition
Revenue
from product sales, both manufactured and distributed, net of estimated
provisions, is recognized when there is persuasive evidence that an arrangement
exists, shipment of the goods has occurred, the selling price is fixed or
determinable, and collectibility is reasonably probable. Our customers consist
primarily of large pharmaceutical wholesalers who sell directly into the retail
channel, chain drug stores, distributors, and managed care customers. Provisions
for sales discounts, and estimates for chargebacks, rebates, and product returns
are established as a reduction of product sales revenue at the time revenues are
recognized, based on historical experience and current market trends adjusted to
reflect known changes in the factors that impact these reserves. These revenue
reductions are reflected as a direct reduction to accounts receivable through an
allowance.
Chargebacks
Chargebacks
represent our most significant provision against gross accounts receivable and
related reduction to gross revenue. Chargebacks are retroactive credits given to
our wholesale customers that represent the difference between the lower price
they sell (contractual price) to retail, chain stores, and managed care
organizations and what we charge the wholesaler. We estimate chargebacks at the
time of sale for our wholesale customers. We are currently unable to
specifically determine whether the amounts allowed in specific prior periods for
chargeback reserves have been over or understated. Wholesaler customers who
submit chargebacks to the Company do not reference a specific invoice that the
chargeback is related to when the chargeback is submitted to the Company. Thus,
we cannot determine the specific period to which the wholesaler’s chargeback
relates.
We
consider the following factors in the determination of the estimates of
chargebacks.
1. The
historical data of chargebacks as a percentage of sales, as well as actual
chargeback reports received from our primary wholesaler customers.
2. Volume
of all products sold to wholesaler customers and the average chargeback rates
for the current quarter as compared to the previous quarter and compared to the
last six month period.
3. The
sales trends and future estimated prices of our products, wholesale acquisition
cost (WAC), the contract prices with the retailers, chain stores, managed care
organizations (end-users), and our wholesaler customer’s contract
prices.
4. We
utilize remaining inventories on hand at our primary wholesaler customers at the
end of the period in the calculation of our estimates.
Such
estimated amounts, in addition to certain other deductions, are deducted from
our gross sales to determine our net revenues. The amount of actual chargebacks
claimed could be either higher or lower than the amounts we accrued. Changes in
our estimates, if any, would be recorded in the income statement in the period
the change is determined. If we materially over or under estimate the amount
that will ultimately be charged back to us by our wholesale customers, there
could be a material impact on our financial statements.
Shelf
Stock Adjustments
Shelf
stock adjustments are credits issued to our customers to reflect decreases in
the selling prices of our product. These credits are customary in the industry
and are intended to reduce the customers’ inventory cost to better reflect
current market prices. The determination to grant a shelf stock adjustment to a
customer following a price decrease is at our discretion.
Factors
considered when recording a reserve for shelf stock adjustments include
estimated launch dates of competing products based on market intelligence,
estimated decline in market price of our product based on historical experience
and input from customers and levels of inventory held by customers at the date
of the adjustments as provided by them.
Product
returns and other allowances
In the
pharmaceutical industry, customers are normally granted the right to return
product for credit if the product has not been used prior to its expiration
date. Our return policy typically allows product returns for products within a
twelve month window from six months prior to the expiration date and up to six
months after the expiration date. We estimate the level of sale, what will
ultimately be returned pursuant to our return policy, and record a related
reserve at the time of sale. These amounts are deducted from our gross sales to
determine our net revenues. Our estimates take into consideration historical
returns of our products and our future expectations. We periodically review the
reserves established for returns and adjust them based on actual experience, if
necessary. The primary factors we consider in estimating our potential product
returns include shelf life of expiration date of each product and historical
levels of expired product returns. In case we become aware of any returns due to
product related issues, such information from the customers is used to estimate
an additional reserve. The amount of actual product return could be either
higher or lower than the amounts we accrued. Changes in our estimates, if any,
would be recorded in the income statement in the period the change is
determined. If we over or under estimate the quantity of product which will
ultimately be returned, there may be a material impact on our financial
statements.
Discounts
(trade and prompt payment discounts) are accrued at the end of every reporting
period based on the gross sales made to the customers during the period and
based on their terms of trade. We review the contracts between the customer and
us as well as the historical data and percentages to estimate the discount
accrual.
Customer
rebates are estimated at every period end, based on direct or indirect
purchases. If the purchases are direct, the rebates are recognized when products
are purchased and a periodic credit is given. For indirect purchases, the
rebates are recognized based on the terms with such customer. Medicaid rebates
are estimated based on the historical data we receive from the public sector
benefit providers, which is based on the final dispensing of our product by a
pharmacy to a benefit plan participant.
Doubtful
Accounts
Doubtful
accounts are estimated based on the data available from external sources,
including information on financial condition of customers. Also, a regular
review of past due receivables is done on a quarterly basis to identify and make
provision for such receivables not expected to be collected.
Gross
Sales and Related Allowances
Our gross
sales for the third quarter and first nine months of Fiscal 2010 were $94.4
million and $308.2 million, respectively, as compared to $118.0 million and
$548.7 million, respectively, for the corresponding periods of Fiscal 2009.
Sales allowances, which include chargebacks, returns, discounts, other customary
customer deductions and other sales costs, constituted approximately 45% and 42%
of gross sales, respectively, for the third quarter and first nine months of
Fiscal 2010 as compared to 47% and 48% of gross sales, respectively, for the
corresponding periods of Fiscal 2009. Net sales for the third quarter and first
nine months of Fiscal 2010 were $52.0 million and $178.4 million, respectively,
as compared to $55.7 million and $286.2 million, respectively, for the
corresponding periods of Fiscal 2009. The primary cause of the decreased sales
allowances for both periods of Fiscal 2010 is due to the impact of higher sales
to customers other than wholesalers, which carry lower deductions from gross
sales, since sales made to wholesale customers includes deductions related to
chargebacks, which represent differences between wholesale acquisition costs
(WAC) and the contractual prices at which the wholesalers ship to our end use
customers.
The
following is a roll forward of the provisions for chargebacks, shelf stock
adjustments, returns and allowances and estimated doubtful account allowances
during Fiscal 2009 and the first nine months of Fiscal 2010.
($ in
Thousands)
|
|
Balances
at beginning of period
|
|
|
Allowances
charged to Gross Sales
|
|
|
Credits
taken by customers
|
|
|
Balance
at the end of period
|
|
|
|
|
|
|
Current
Period
|
|
|
Prior
Period
|
|
|
|
|
|
|
|
For
all of Fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks,
rebates & shelf stock adjustments
|
|
$ |
78,905 |
|
|
$ |
291,070 |
|
|
|
-0- |
|
|
$ |
319,947 |
|
|
$ |
50,028 |
|
Returns
and other allowances
|
|
|
5,273 |
|
|
|
19,870 |
|
|
|
-0- |
|
|
|
18,588 |
|
|
|
6,555 |
|
Doubtful
Accounts
|
|
|
118 |
|
|
|
231 |
|
|
|
-0- |
|
|
|
271 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the first nine months of Fiscal 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks,
rebates & shelf stock adjustments
|
|
$ |
50,028 |
|
|
$ |
118,321 |
|
|
|
-0- |
|
|
$ |
108,722 |
|
|
$ |
59,627 |
|
Returns
and other allowances
|
|
|
6,555 |
|
|
|
11,435 |
|
|
|
-0- |
|
|
|
11,801 |
|
|
|
6,189 |
|
Doubtful
Accounts
|
|
|
78 |
|
|
|
26 |
|
|
|
-0- |
|
|
|
9 |
|
|
|
95 |
|
Research
and Development Costs
Series B
convertible preferred stock was issued to Sun Pharma and its affiliates under
the Products Agreement between the Corporation and Sun Global in exchange for
the technology of formulation products delivered by Sun Global to the
Corporation. Such Products Agreement has been completed with the last
technology transfer occurring during the third quarter of Fiscal
2008. Accordingly, no further non-cash research and development
expense will be incurred there under. The amount of non-cash research
and development expense which was incurred for past technology transfers under
the Products Agreement was charged to operations and was determined based on the
fair value of the preferred shares on the date the respective product formula
passed its bio-equivalency studies. The fair value of such shares was
based upon a valuation performed by Donnelly Penman & Partners, an
independent, third party valuation firm. The exchange of shares was prior to the
initial ANDA submission to the FDA.
We were
responsible for submission of the ANDAs for these transferred formulations for
FDA approval. In our experience, generally the submission of the ANDA
to the FDA was approximately thirty days after the receipt of notice that the
proposed drug product formula passes its bio-equivalency study and accelerated
stability studies. An ANDA contains data related to a generic drug product which
is submitted to the FDA for review and approval. The FDA must first
determine the completeness of the filing and may deny the filing if it is
incomplete. There are various reviews that are completed, including
bio-equivalency, chemistry, manufacturing, and labeling. The
bio-equivalency of a generic drug product is established by measuring the rate
and level of active ingredient(s) in the bloodstream of healthy human subjects
over a period of time. These pharmacokinetic parameters and results are compared
with the innovator’s drug product. The bio-equivalency results of the proposed
generic drug product must meet pharmacokinetic standards set forth by the FDA.
Accordingly, the generic version of a drug product must generally deliver the
same amount of active ingredients into the bloodstream within the same timeframe
as that of the innovator drug product. Following an indication that
the generic drug product has passed its bio-equivalency study, the generic drug
product will undergo reviews for chemistry, manufacturing and
labeling. In each case, the FDA has an opportunity to raise questions
or comments, or issue a deficiency letter. In the event that one or
more deficiency letters are issued by the FDA, the submission of the ANDA may be
halted or delayed as necessary to accommodate the correction of any such
deficiencies and the completion of any additional reviews required. Minor
deficiencies traditionally could delay the approval anywhere from 10 days to 90
days or more. Major deficiencies could stop the evaluation
process. A restart of the FDA review process after a major deficiency
could take up to as many as 180 days or more. Generally, any
deficiencies we have experienced have been minor though at times approvals have
faced considerable delays. Based on these delays, the economic
benefit may not be realized at its highest potential as the delay could cause
our approval to be behind our competition’s approval of the same generic
product.
Based on
the definition and characteristics of an asset, set forth in paragraphs 25 and
26 of Statement of Financial Accounting Concepts No. 6 issued by the FASB, the
Company did not capitalize the technology formulas transferred, as the
probability of the future economic benefit to be derived from such formulations
was uncertain at the time of technology transfer.
In
addition, we have reported the technology transfers as research and development
expenses pursuant to ASC Topic 730, “Research and Development,” In
connection therewith, the research and development technology transferred by Sun
Global under the Products Agreement was always specific research and development
technology for a specific product formula. There were no alternative future uses
(in other research and development projects or otherwise) for such products. For
example, Caraco has never acquired technology from Sun Global with the purpose
of selling such technology and, in fact, has never sold or held for sale any of
the technology transferred by Sun Global to a third party. Caraco has always
developed the research and development technology into manufactured product for
its own business purposes.
Research
and development costs settled in cash are charged to expense as
incurred.
Short-Term
Investments
During
the first quarter of Fiscal 2010 the Company invested $10,000,000 in a bank
certificate of deposit. The term of deposit is for twelve months and
earns interest at a rate of 4.5% APY. If such deposit is withdrawn prior to
maturity, the Company will earn interest at the applicable LIBOR rate as on the
date of such withdrawal.
Intangible
Assets
The
Company had made a cash payment in the first quarter of Fiscal 2009 in the
amount of $1,100,000 for the purchase of certain assets which included brand
products, associated New Drug Applications (“NDAs”) and trademarks. These assets
are recorded as intangible assets in the Company’s balance sheet at December 31,
2009. Additionally during the second quarter of Fiscal 2009, the Company had
paid $356,000 in cash towards product and establishment fees for these products.
The total gross carrying amount for these assets is $1,456,000 as of December
31, 2009. These intangible assets are being amortized equally over a period of
15 years, the period during which the Company expects to receive economic
benefits from these intangible assets. The Company recorded $73,000 in
amortization expense in the first nine months of Fiscal 2010, bringing the total
accumulated amortization related to these intangible assets to $145,000 as of
December 31, 2009.
Income
Taxes
As part
of the process of preparing our financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. We
account for income taxes by the liability method. Under this method, deferred
income taxes are recognized for tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end, based on enacted laws and statutory tax rates
applicable for the differences that are expected to affect taxable income. In
assessing the ability to realize deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. We had net deferred tax
assets of $27.3 million and $20.8 million at December 31, 2009 and March 31,
2009, respectively. Valuation allowances are provided when based upon the weight
of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. We have recorded an income tax benefit
of $1.9 million and $3.0 million, respectively, for the third quarter and first
nine months of Fiscal 2010 as compared to income tax expense of $1.4 million and
$10.4 million, respectively, during the third quarter and first nine months of
Fiscal 2009. The income tax benefit for the third quarter and first nine months
of Fiscal 2010 was predominantly due to losses incurred as a result of FDA
actions including the seizure of inventory for which a reserve has been created.
We have not provided for any valuation allowance as of December 31, 2009 or
March 31, 2009. Based upon the level of projected future taxable income over the
periods in which these deferred assets are deductible, the Company expects that
it is more likely than not that it will realize the benefit of these temporary
differences. As of December 31, 2009, we had federal NOLs of approximately $1.7
million, which are restricted by limitations of Internal Revenue Code Section
382, available to reduce future taxable income. The NOLs will expire
between 2010 and 2012.
The
Company is subject to U.S. federal income tax as well as income tax in certain
state jurisdictions. As previously disclosed, the IRS has initiated an
examination of the Company’s tax return for the fiscal year ended March 31,
2007. The examination has been completed and the IRS has notified the Company
that no adjustments are required to be made to the tax return filed for the
period under review. The Company’s federal statute of limitations has
expired for years prior to 2003.
Inventory
We value
inventories at the lower of cost or market. We determine the cost of raw
materials, work in process and finished goods using the specific identification
cost method. We analyze our inventory levels quarterly and write down inventory
that has become obsolete and inventory that has a cost basis in excess of its
expected net realizable value. Expired inventory is disposed of and the related
costs are written off. Materials acquired solely for R&D are written off in
the year of acquisition. Inventory includes material purchased related to
products for which the Company has filed ANDAs with the FDA and the commercial
launch of such products will commence once the approvals are received. Total
inventories at December 31, 2009 and March 31, 2009 include materials purchased
in the amount of $2,471,824 and $2,875,885, respectively, related to products
for which the Company has filed ANDAs that are awaiting approval from the FDA,
and the commercial launch of such products will commence once the approvals are
received. The determination of whether or not inventory costs will be realizable
requires estimates by management. A critical estimate in this determination is
the estimate of the future expected inventory requirements, whereby we compare
our internal sales forecasts to inventory on hand. Actual results may differ
from those estimates and inventory write-offs may be required. We must also make
estimates about the amount of manufacturing overhead to allocate to our finished
goods and work in process inventories. Although the manufacturing process is
generally similar for our products, we must make judgments as to the portion of
costs to allocate to purchased product, work in process and finished goods, and
such allocations can vary based upon the composition of these components and the
fact that each product produced does not necessarily require the same amount of
time or effort for the same production step. Accordingly, the assumptions we
make can impact the value of reported inventories and cost of
sales.
As
disclosed above, on June 25, 2009, certain drug products manufactured, work in
process, and ingredients held, at the Company's Michigan facilities were seized
at the direction of the FDA. The estimated value of such seized inventory as of
December 31, 2009 was $24.0 million. The Company has voluntarily entered into a
Consent Decree and is in the process of getting the material released. The
Company believes that, except for the raw materials which were opened solely for
the purpose of sampling, the estimated value of which is $8.1 million, all other
seized inventory would be difficult to recondition. A reserve in the balance
amount of $15.9 million has been created as of December 31, 2009 which consists
of work in process relating to those materials which are in various stages of
production within our manufacturing facilities, all finished goods and those raw
material ingredients which are partially consumed in process. In
accordance with the Consent Decree, the Company has also provided third party
certification to the FDA and requested the release of raw materials which were
opened solely for the purpose of sampling. On January 29, 2010, we received a
letter from the FDA, seeking clarification on certain points. We are in the
process of submitting a response to such letter. The Company believes that it
will be able to use the inventory of raw materials which were opened solely for
sampling purposes, however, in the event the Company is unable to recondition or
recover all of such inventory, the Company will adjust the value of its
inventory accordingly in future periods, which would result in a negative impact
on the future operating results of the Company.
OVERVIEW
The
Company has been actively working with a consulting firm comprised of cGMP
experts, in an effort to resume the manufacturing activities at its Michigan
facilities. These consultants were appointed by the Company in accordance with
the Consent Decree, which the Company has voluntarily entered into with the FDA
on September 29, 2009. The Consent Decree provides a series of measures that,
when satisfied, will permit the Company to resume manufacturing and distribution
of those products that are manufactured in its Michigan facilities. The Company
has submitted a work plan, approved by our consultants in October 2009, to the
FDA. Some additional details and clarifications to the work plan were submitted
to the FDA on January 14, 2010 for its approval. On February 4, 2010 the Company
received a letter from the FDA seeking clarification on certain points of the
work plan. We are in the process of submitting a response to such
letter.
As a
result of the FDA action, Caraco has voluntarily ceased manufacturing operations
and instituted, in two phases, indefinite layoffs of approximately 430
employees. The Company has subsequently started recalling some of these
employees in conjunction with its efforts to restart its manufacturing
activities. Products sold and distributed by Caraco that are manufactured by
third parties and outside of these facilities are not impacted and the Company
continues distribution and marketing of these products. The Company has also
transferred certain Caraco-owned products to additional alternate manufacturing
sites that would allow the Company to regain revenues from those products while
Caraco completes the necessary remedial actions that would lead to resumption of
its manufacturing operations. The Company intends to file with the FDA
supplements to ANDAs, for its approval, in the next six months for these
transferred products.
As
stipulated in the Consent Decree, the Company will attempt to have the seized
inventory released. The estimated value of this inventory of drug products
manufactured in Caraco's Michigan facilities including ingredients and
in-process materials was $24.0 million, as of December 31, 2009. The Company
believes that, except for the raw materials which were opened solely for the
purpose of sampling, the estimated value of which is $8.1 million, all other
such inventory would be difficult to recondition. Accordingly, a reserve in the
amount of $15.9 million has been created as of December 31, 2009 for this
remaining inventory. In accordance with the Consent Decree, the Company has also
provided third party certification to the FDA and requested the release of raw
materials which were opened solely for the purpose of sampling. On January 29,
2010, we received a letter from the FDA, seeking clarification on certain
points. We are in the process of submitting a response to such
letter.
As a
result of this event, there has been a material adverse effect on our current
operations and there may be a material adverse effect on our near term
operations. Under terms of the Consent Decree, Caraco's cessation of
manufacturing operations will continue until it receives written notification
from independent experts and the FDA that it is in compliance with the Consent
Decree and regulations and can resume operations. However, there is no assurance
that the steps being taken will be successful or result in resolution of the FDA
issues. We are also not able, at this time, to estimate, the cost of
these actions. We anticipate working with the FDA to resolve its concerns as
effectively and expeditiously as possible in accordance with the terms of the
Consent Decree. The Consent Decree also requires the Company to abide
by certain conditions and restrictions. If the Company violates any portion of
the Consent Decree, it could incur penalties, such as monetary fines, forfeiture
of the seized goods and other penalties.
During
the third quarter ended December 31, 2009 and first nine months of our current
fiscal year (“Fiscal 2010”) ended December 31, 2009, we generated net sales of
$52.0 million and $178.4 million, respectively, compared to $55.7 million and
$286.2 million, respectively, during the corresponding periods of Fiscal 2009.
We incurred $2.8 million and $8.3 million, respectively, in research and
development (“R&D”) expenses during the third quarter and first nine months
of Fiscal 2010, as compared to $5.8 million and $16.9 million, respectively,
during the corresponding periods of Fiscal 2009. We incurred a net pre-tax loss
of $4.9 million and $8.8 million during the third quarter and first nine months
of Fiscal 2010, respectively, as compared to earning net pre-tax income of $6.5
million and $33.4 million, respectively, during the corresponding periods of
Fiscal 2009. Net pre-tax income in the third quarter of Fiscal 2010 was lower
primarily due to the cessation of manufacturing at the Company’s Michigan
facilities resulting in the loss of revenues from such products, as disclosed
above. The net pre-tax loss for the first nine months of the current
fiscal year was due to a reserve we have created, in the amount of $15.9
million, relating to the inventory seized by the FDA, as disclosed above, and
also due to the cessation of manufacturing at the Company’s Michigan facilities,
partially offset by non-recurring income earned during the second quarter of
Fiscal 2010 in the amount of $20.0 million as part of an asset purchase
agreement arising out of a settlement agreement entered into by the Company.
Such income is not expected to recur in future periods. The Company provided an
income tax benefit of $1.9 million and $3.0 million for the third quarter and
first nine months of Fiscal 2010, respectively, as compared to an income tax
expense of $1.4 million and $10.4 million, respectively, in the corresponding
periods of Fiscal 2009. We incurred a net loss of $3.0 million and $5.8 million
during the third quarter and first nine months of Fiscal 2010, respectively, as
compared to earning net income of $5.1 million and $22.9 million, respectively,
during the corresponding periods of Fiscal 2009. We generated cash from
operations in the amount of $15.5 million during the first nine months of Fiscal
2010, as compared to generating cash from operations in the amount of $0.2
million during the corresponding period of Fiscal 2009. At December 31, 2009, we
had stockholders’ equity of $158.2 million, as compared to stockholders’ equity
of $163.8 million at March 31, 2009. (See “Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations”).
We have
filed two ANDAs relating to two products with the FDA during the first nine
months of Fiscal 2010. We have not received FDA approval for any ANDAs during
the first nine months of Fiscal 2010 and do not expect to receive any approvals
for products out of our Michigan facilities until we resolve the FDA’s concerns
as discussed above. The total number of ANDAs pending approval by the
FDA as of December 31, 2009 was 31 (including four tentative approvals) relating
to 27 products out of our Michigan facilities.
During
Fiscal 2008, the Company commenced construction on the expansion of its primary
facility located in Detroit, Michigan. The expansion occurred on the acreage the
Company acquired for $0.3 million directly adjacent to its existing
manufacturing facility. The expansion was completed during the fourth quarter of
Fiscal 2009 and added approximately 140,000 square feet to our manufacturing
facility. The expanded facility encompasses additional space required for
manufacturing, quality control laboratories, raw material storage and
administrative offices. It will also introduce additional automated equipment
and process flow efficiencies in order to reduce long term costs associated with
our production, while maintaining quality. As disclosed, however, the Company
has voluntarily ceased manufacturing as a result of the FDA action. In addition,
the Company continued updating its packaging facility located in Farmington
Hills, Michigan. During Fiscal 2007, the Company acquired this packaging
facility for $1.7 million. We have improved the infrastructure and process flow
by replacing manual packaging lines with automated lines, thereby having less
human intervention. This has already improved quality control in our packaging
operations and will result in improved capacity. This 33,369 square foot
facility was previously owned and operated by a third party packager of our
portfolio of products. As disclosed, however, the Company has voluntarily ceased
manufacturing as a result of the FDA action and accordingly operations in this
facility have also been temporarily suspended.
FDA
COMPLIANCE
During
Fiscal 2009, the FDA inspected both the Elijah McCoy manufacturing facility and
the Farmington packaging facility. Forms FDA 483 were issued at the conclusion
of both inspections detailing the FDA investigators’ observations. Responses to
these observations were submitted to the FDA detailing the Company’s actions
taken in response to the observations. On October 31, 2008, the Company received
a warning letter from the Detroit District of the FDA for its manufacturing
facility in Detroit, Michigan. In this letter, the Agency reiterated some of the
concerns detailed in the previous Forms 483 issued as a result of previous
inspections. These concerns included inadequate and untimely investigations by
our quality control unit of certain incidents contrary to the Company’s standard
operating procedures. The warning letter also stated that the FDA expressed
serious concerns regarding “a) your firm’s compliance history including several
past inspections that documented significant CGMP deficiencies, b) the serious
nature of the observed violations, c) your plans for expansion under these
violative conditions, and d) the risk to consumers associated with the CGMP
deviations involving potential product contamination.” The FDA also
raised concerns about our corrective action plans. The FDA added that failure to
promptly correct the deficiencies may result in legal action without further
notice, including, without limitation, seizure and injunction. It also noted
that other federal agencies may take this warning letter into account when
considering the award of contracts. Additionally, the FDA may withhold approval
of requests for export certificates, or approval of pending new drug
applications. We promptly responded to the warning letter on November 24, 2008
for the deficiencies noted and provided our corrective actions. The Detroit
District acknowledged our response on December 22, 2008. It noted that our
corrective actions would be evaluated during the FDA’s next scheduled
inspection of our Detroit facility. On March 11, 2009 the FDA began an
inspection as a follow-up to the October 2008 warning letter. This inspection
covered all the quality and production systems of the Company and concluded
on May 12, 2009. The FDA investigators provided the Company with a list of their
observations on FDA Form 483. Some of the observations were relative to the
recent recalls and compliance, whereas others were focused on inventory
controls. The FDA's inspection found unresolved violations of current Good
Manufacturing Practice (cGMP) requirements as previously disclosed in our last
SEC filing on Form 10-K filed June 15, 2009. On March 31, 2009, we recalled all
tablets of Digoxin, USP, 0.125 mg, and Digoxin, USP, 0.25 mg, distributed prior
to March 31, 2009 to the consumer level. As a precautionary measure, in April
2009, we initiated recalls of certain product lots manufactured in our Detroit,
Michigan facility, primarily to the retail and wholesale levels. The total sales
revenue, related to these recalls, we believe, is approximately $4.2 million.
These recalls were voluntarily initiated by the Company with the knowledge of
the FDA. The recalls were made as a precautionary measure. The Company provided
a written response to these observations on June 19, 2009. On June 25, 2009,
U.S. Marshals, at the request of the FDA, seized drug products manufactured in
our Michigan facilities. The seizure also included ingredients held at these
same facilities as well as work in process. Products distributed by Caraco that
are manufactured outside of these facilities are not impacted. In its complaint
relating to its seizure, the FDA stated, among other things, that the May 12,
2009 inspection and the Company’s written response thereto revealed continuing
significant cGMP violations. The FDA also stated that the drug
products are adulterated in that the methods used in, and the facilities and
controls used for, their manufacture, processing, packing, and/or holding do not
conform to and are not operated and administered in conformity with cGMP
requirements. As a result of the FDA action, we voluntarily
ceased manufacturing operations and instituted an indefinite reduction in our
workforce of approximately 430 employees in two phases. The Company
has subsequently started recalling some of these employees in conjunction with
its efforts to restart its manufacturing activities. This FDA action has
resulted and will result in a material adverse effect on our current and near
term operations.
On
September 29, 2009, Caraco voluntarily entered into a Consent Decree with the
FDA regarding the Company's drug manufacturing operations. The Consent Decree
provides a series of measures that, when satisfied, will permit Caraco to resume
manufacturing and distributing those products that are manufactured in its
Michigan facilities. The Company is working expeditiously to satisfy the
requirements of the Consent Decree and has already retained independent cGMP
experts for review of the Company's operations and to facilitate a successful
result.
Under
terms of the Consent Decree, Caraco's cessation of manufacturing operations will
continue until it receives written notification from independent experts and the
FDA that it is in compliance with the Consent Decree and regulations and can
resume operations. Nothing in the Consent Decree prohibits Caraco from
distributing FDA approved drug products that are manufactured by third parties.
There is no assurance that the steps taken will be successful or result in
resolution of the FDA complaint. We are also not able, at this time, to estimate
the cost of these actions. We intend to continue to work with the FDA to resolve
its concerns as effectively and expeditiously as possible.
We have
not obtained FDA approvals of our ANDAs since the first quarter of Fiscal 2009.
It is unlikely that we will receive any approvals for product out of our
Michigan facilities until the FDA reviews our remediation response and makes a
determination of our status. We have submitted a remediation work plan, approved
by our consultants, to the FDA in October 2009. Some additional details and
clarifications to the work plan were submitted to the FDA on January 14, 2010
for its approval. On February 4, 2010 the Company received a letter from the FDA
seeking clarification on certain points of the work plan. We are in the process
of submitting a response to such letter. Remediation activities have been
ongoing with the full knowledge of the FDA. In accordance with the
Consent Decree, we have also provided third party certification to the FDA and
requested the release of raw materials which were opened solely for the purpose
of sampling. On January 29, 2010, we received a letter from the FDA, seeking
clarification on certain points. We are in the process of submitting a response
to such letter.
Customer
confidence could diminish based on the recent recalls and our status with the
FDA. As previously disclosed, certain government contracts have been and could
be affected by the warning letter and our current status. In the fourth quarter
of Fiscal 2009, due to our status with the FDA, the Veterans Administration has
not renewed certain product contracts we had with it that were expiring. Once we
have resolved our current issues with the FDA, we may regain this business when
these contracts come up for renewal, which occurs on an annual
basis.
Third
Quarter and First Nine Months Fiscal 2010 Compared to Third Quarter and
First Nine Months Fiscal 2009
Net Sales. Net
sales for the third quarter and first nine months of Fiscal 2010, ended December
31, 2009, were $52.0 million and $178.4 million respectively, as compared to
$55.7 million and $286.2 million, respectively, for the third quarter and first
nine months of Fiscal 2009, reflecting a decrease of 7% and 38% in the
respective periods. Net sales decreased during the third quarter and first nine
months of Fiscal 2010, in comparison to the corresponding periods of Fiscal
2009, primarily as a result of the adverse effect on sales of Caraco-owned
products due to the actions of the FDA and the cessation of manufacturing, as
disclosed above, and in part due to the negative impact of our voluntary
recalls. Sales of distributed products were lower during the first nine months
of Fiscal 2010 over the corresponding period of Fiscal 2009 due to higher sales
of Paragraph IV products during the first nine months of Fiscal 2009,
particularly sales of certain Paragraph IV products which were launched by the
Company during the fourth quarter of Fiscal 2008 under the distribution and sale
agreement with Sun Pharma. These product sales may or may not be sustainable, as
previously disclosed. The sales of distributed products were also lower due to
price erosion on the products sold, partially offset by new product launches.
Sales of one product (oxcarbazepine), launched under the marketing agreement
during the third quarter of Fiscal 2008 were significantly higher during the
first nine months of Fiscal 2009. This product was launched with 180 days shared
exclusivity, which allowed its higher sales during the first quarter of Fiscal
2009. Subsequent to the end of the exclusivity period, which occurred during the
first quarter of Fiscal 2009, the net realizations for this product have
decreased significantly as several other competitors have entered the market for
this generic product. Sales of Caraco-owned products during the third quarter
were negligible as we have stopped marketing, effective June 25, 2009, all the
products which were being manufactured out of our Michigan facilities on account
of the FDA actions, as previously discussed. Similarly, the sales of
Caraco-owned products for first nine months of Fiscal 2010 were lower due to,
the FDA’s action and in part due to the negative impact of our voluntary recalls
of certain products. We did not distribute any digoxin during the period
subsequent to the recall of digoxin that occurred on March 31, 2009. We also had
a recall on various products on April 17, 2009, as previously disclosed. The
subsequent sales on some of those manufactured products were negatively impacted
by the recall. Net sales for distributed products were $48.7
million and $159.5 million, respectively, for the third quarter and first nine
months of Fiscal 2010, as compared to $26.8 million and $193.0 million,
respectively, for the corresponding periods of Fiscal 2009. The sales of
distributed products were higher in the third quarter of Fiscal 2010, as
compared to corresponding period last year, primarily due to increased sales of
Paragraph IV products. Net sales for Caraco-owned products were $3.3 million and
$18.9 million, respectively, for the third quarter and first nine months of
Fiscal 2010, as compared to $28.9 million and $93.2 million, respectively, for
the corresponding periods of Fiscal 2009. We were manufacturing and marketing
all except two of our approved products. However, as a result of action taken by
the FDA, we have ceased manufacturing operations of the products which we
manufacture at our facilities located in the state of Michigan. We continue to
have manufacturing products sales that are manufactured by third party
manufacturers including Sun Pharma. During the third quarter of Fiscal 2010 we
have started selling two products which were acquired as part of an asset
purchase agreement with Forest as previously disclosed.
Overall
sales of one product accounted for approximately 56% and 62% of net sales for
the third quarter and first nine months of Fiscal 2010 as compared to sales of
two products which accounted for approximately 26% and 52% of net sales for the
corresponding periods of Fiscal 2009.
Gross Profit. We
earned gross profit of $3.1 million in the third quarter of Fiscal 2010 and
incurred a gross loss of $4.7 million during the first nine months of Fiscal
2010, as compared to earning gross profit of $15.9 million and $61.5 million,
respectively, during the corresponding periods of Fiscal 2009. The gross loss in
the first nine months of Fiscal 2010 was, in large part, due to a reserve of
$15.9 million we provided on the inventory seized by the FDA. (See “Inventory”
above), as well as lower sales of both distributed as well as Caraco-owned
products. As disclosed above, due to the actions of the FDA, all shipments of
products which were being manufactured at the Company’s Michigan facilities have
ceased effective June 25, 2009, which has led to diminished sales of
Caraco-owned products. The decrease in gross profit in the third quarter of
Fiscal 2010, as compared to the corresponding period of Fiscal 2009 was
primarily due to the negligible sales of Caraco-owned products.
The gross
profit margin for the third quarter and first nine months of Fiscal 2010 as a
percentage of net sales decreased to 6% and (3%), respectively, as compared to
29% and 21%, respectively, during the corresponding periods of Fiscal 2009. As
disclosed above, we have created a reserve in the amount of $15.9 million during
the first nine months of Fiscal 2010 for the inventory seized by the FDA.
Excluding the impact of the inventory reserve, the gross profit margins in the
first nine months of Fiscal 2010 was 6%, as compared to 21% for the
corresponding period of Fiscal 2009. The decrease in both the periods of Fiscal
2010 was also due to the weight of increased sales of distributed products
versus the sales of Caraco-owned products, as well as significantly lower sales
of Caraco-owned products, which had an impact on the overall margins. The gross
profit margin on distributed products was 9% for both the third quarter and
first nine months of Fiscal 2010, as compared to 10% and 9% for the
corresponding periods of Fiscal 2009. The gross profit margin for Caraco-owned
products was (33%) and (99%) for the third quarter and first nine months of
Fiscal 2010, as compared to 45% and 48% for the corresponding periods of Fiscal
2009. Excluding the impact of the inventory reserve, the gross profit margin in
the first nine months of Fiscal 2010 was (14%). Caraco-owned product margins
have decreased mainly due to impact of overhead absorption, having similar
levels of direct overhead in the first quarter and decreased levels in the
second and third quarters, with lower sales for the third quarter and first nine
months of Fiscal 2010, which contributed 53% and 42%, respectively, to the
decreases in gross profit margin. Price erosion on certain products and changes
in the sales mix of the Caraco-owned products sold also contributed to the
decrease. Also, we had initiated a recall of one product (digoxin) during the
fourth quarter of Fiscal 2009. There were no sales of this product during the
first nine months of Fiscal 2010. The loss of sales of this product also
adversely affected the gross profit margins for the referred periods. Further,
as disclosed earlier, there were significantly low levels of sales of
Caraco-owned products (which included none of the products which were
manufactured at the Company’s Michigan facilities). Also during the third
quarter and first nine months of Fiscal 2010, we wrote off certain non-seized
inventories of approximately $0.3 million, and $0.7 million respectively, partly
relating to one DESI product which is being discontinued as stipulated in the
Consent Decree, and partly related to products we purchased along with the
brand, which have now become obsolete. We cannot determine the mix of
distributed product sales versus Caraco-owned product sales in any given period
as it depends on our ability to gain market share on each product and is
relative to when the FDA approves any given product in either category of
product and the revenue potential of that product once it has been
approved.
Selling, General and Administrative
Expenses. Selling, general and administrative (“SG&A”)
expenses during the third quarter and first nine months of Fiscal 2010 were $5.4
million and $15.9 million, respectively, as compared to $3.7 million and $11.8
million, respectively, during the corresponding periods of Fiscal 2009,
representing increases of 45% and 34%, respectively. SG&A expenses, as a
percentage of net sales increased to 9% for the first nine months of Fiscal
2010, as compared to 4% for the corresponding period of Fiscal 2009. The higher
percentage of SG&A is partly due to the lower sales in the current period
versus the corresponding period last year. Also during the first nine months of
Fiscal 2010, the Company recorded additional expenses related to a) severance
paid to its former CEO, b) legal and professional consultation fees related to
FDA issues, c) payments made to its customers in lieu of contractual unfulfilled
product supply obligations and d) royalty expense related to the sales from
products acquired as part of an asset purchase agreement, as previously
disclosed.
Research and Development
Expenses. Total R&D expenses incurred for the third
quarter and first nine months of Fiscal 2010 were $2.8 million and $8.3 million
respectively, as compared to $5.8 million and $16.9 million, respectively,
during the corresponding periods of Fiscal 2009. The R&D expenses during the
first nine months of Fiscal 2010 were lower compared to those during the
corresponding period of Fiscal 2009 as we were reimbursed a certain amount
relating to certain product litigation costs during the second quarter of Fiscal
2010, as part of a settlement agreement, as previously disclosed. Although
R&D expenses have decreased in the current periods due to the focus of the
Company on remediating FDA concerns, they are likely to increase once the
Company refocuses on new product filings and approvals with the
FDA.
Non-Recurring Income. We
earned a one-time non-recurring income in the amount of $20.0 million during the
second quarter of Fiscal 2010 arising out of a product litigation settlement and
an asset purchase agreement, as previously disclosed.
Net Other Income. We earned
net other income of $0.1 million during both the third quarter and first nine
months of Fiscal 2010, as compared to earnings of net other income of $0.2
million and $0.6 million, respectively, during the corresponding periods of
Fiscal 2009. The lower net other income was primarily due to interest expense
incurred in relation to the Company’s term loan with Charter One Bank and a loss
on removal of certain assets during the first quarter of Fiscal
2010.
Income Taxes. We
provided an income tax benefit of $1.9 million and $3.0 million during the third
quarter and first nine months of Fiscal 2010, respectively, compared to income
tax expense of $1.4 million and $10.4 million, respectively, during the
corresponding periods of Fiscal 2009. The benefit in the current
quarter and nine-month period is due to the future tax benefits of losses
incurred. (See discussion under “Income Taxes” above).
Results of
Operations. We incurred a pre-tax loss of $4.9 million and
$8.8 million during the third quarter and first nine months of Fiscal 2010,
respectively, as compared to earning pre-tax income of $6.5 million and $33.4
million, respectively, during the corresponding periods of Fiscal 2009. We
incurred a net loss of $3.0 million and $5.8 million for the third quarter and
first nine months of Fiscal 2010, respectively, as compared to earning net
income of $5.1 million and $22.9 million, respectively, during the corresponding
periods of Fiscal 2009.
Liquidity and Capital Resources We generated cash
from operations in the amount of $15.5 million during the first nine months of
Fiscal 2010, as compared to generating cash from operations in the amount of
$0.2 million during the corresponding period of Fiscal 2009. The cash flow from
operations was lower in the first nine months of Fiscal 2009 primarily due to a
decrease in accounts payable balances offset, in part, by decreases in accounts
receivable and inventory balances. Accounts receivable increased by $67.0
million to $82.2 million as of December 31, 2009, as compared to $15.2 million
at the end of Fiscal 2009. Accounts receivable is 145 days sales outstanding
(“DSO”) as of December 31, 2009 versus 27 days as of March 31, 2009. The higher
level in DSO at December 31, 2009 is predominately due to outstanding balances
from two customers with whom we have entered into agreements which include
extended payment terms, and accordingly, collections of the related accounts
receivable balances from these sales will occur over the next twelve months.
Further, the lower level in DSO at March 31, 2009 was temporary and is mainly
due to the timing of payments made by the wholesale customers. However, a
deduction for chargebacks will be made by these wholesale customers as they
continue to sell to retail chain stores and managed care organizations with whom
we have contractual pricing. The Company believes that it has provided adequate
reserves for chargeback deductions which are likely to be taken by the wholesale
customers in subsequent periods. Certain wholesale customers purchased
quantities of a certain product based on their own forecast, to ensure an
in-stock position for such product, as there were uncertainties related to the
future availability of such product and continued shipments from the Company.
Inventory levels are equivalent to 117 days sales on hand, as compared to 140
days on hand as of March 31, 2009. Excluding the reserve created for inventory
seized by FDA, inventory levels were equivalent to 145 days sales on hand. The
inventory as of December 31, 2009 includes higher levels of inventory of
Paragraph IV products to support anticipated sales in the near term period. At
March 31, 2009 we had negligible stock of such product on hand. If the sale of
the Paragraph IV products are not allowed by any regulatory authority and Sun
Pharma does not file a timely appeal, we would have various rights to return the
product to Sun Pharma. The accounts
payable balance relating to Sun Pharma has also increased from $43.9 million at
March 31, 2009 to $121.8 million at December 31, 2009 in line with increased
levels of inventory relating to distributed products and accounts receivable
balances.
As
disclosed above the FDA has initiated certain actions and, as a consequence,
production at the Company’s Michigan facilities has voluntarily been ceased.
This will adversely affect the overall profitability of the Company in the near
term. The Company has initiated a reduction in various expenses in an effort to
bring its expenses in line with its current levels of sales. Such
reduction is expected to continue until FDA concerns are resolved and the
Company resumes its manufacturing activities, of which there is no assurance.
The sales of distributed products and certain manufactured products made by
third parties will continue and will contribute to the ongoing cash flows. Also,
the Company has recently entered into an agreement with Forest which, to date,
has provided two additional products to the Company’s product portfolio, and
such products have begun generating incremental revenues under Caraco-owned
product sales. We expect additional products will be added to our portfolio as a
result of this agreement. The Company owns five products that are manufactured
by other third party manufacturers including Sun Pharma and its
affiliates. As of December 31, 2009, we have $67 million in cash and
another $10 million in short-term investments, including the proceeds from a
loan in the amount of $16.2 million, currently classified as a short term
liability. The Company believes that its cash flow from operations and cash
balances will continue to support its ongoing business requirements, however,
because of, among other things, decreased customer confidence, the uncertainty
of future costs of FDA compliance and associated costs, there can be no
assurance.
At
December 31, 2009, we had working capital of $91.8 million, compared to working
capital of $112.5 million at March 31, 2009.
During
the fourth quarter of Fiscal 2009 the Company entered into a term loan of $18
million with RBS Citizens, N.A. d/b/a Charter One Bank (“Charter One Bank”). The
loan is secured by a mortgage covering the Company’s manufacturing facility and
equipment located in Detroit, Michigan. The rate of interest is calculated as
LIBOR plus an applicable margin thereto (based upon various leverage levels and
current applicable rate is 50 basis points). The aggregate rate applicable to
the Company as of December 31, 2009 was 1.3%. The principal loan payments and
accrued interest are payable on a quarterly basis beginning July 2009. The
principal is to be repaid in equal quarterly installments of $900,000 for ten
quarters through October 2011, and thereafter, if not renewed, the remaining
balance of $9 million is due in the subsequent quarter by January 2012.
Subsequently, in October 2009 the terms of the loan were modified and we entered
into an amended agreement. The amendment adds to the loan a one year line of
credit note for $15 million against which the Company can borrow funds for
working capital purposes or can get letters of credit issued. Against this line
of credit, the Bank has issued an Irrevocable Standby Letter of Credit in an
amount of $15 million, in favor of the United States of America, as required to
be placed with the FDA in accordance with the Consent Decree, as disclosed
above. The line of credit carries an interest rate of LIBOR plus 150 basis
points, and if letters of credit are issued, the associated fees are 0.7% of
such letters of credit on annualized basis. Also, there is an unused fee of
0.25% on an annualized basis to the extent the line remains idle. Both the line
of credit and outstanding term loan are cross collateralized by all of the
Company’s fixed assets and cash deposit accounts held with Charter One Bank in
the same amount. These cash deposits earn interest at prevailing rates
applicable to such money market accounts. We are continuing discussions with
Charter One Bank to resolve its concerns and get the cash collateral released.
Charter One Bank has temporarily suspended our required compliance with the
covenants in the loan agreements relating to FDA enforcement actions, as
previously disclosed, and has suspended testing of certain other compliance
requirements until February 26, 2010. On or before such date, we anticipate
either entering into revised agreements or repaying the loan in full. Currently,
as the loan is in technical default due to the FDA enforcement action, the
entire outstanding balance has been classified as a short-term
liability.
As
required pursuant to the terms of the Loan Agreement, the Company has entered
into an Interest Rate Swap Agreement with Charter One Bank to hedge the interest
rate applicable on the loan. The notional amount for the swap is $16.2 million
which will continue to amortize down as principal payments are made on the
related debt. The annualized fixed rate of interest as it applies to this
agreement is 2.41%. Thus as of December 31, 2009 the effective rate of interest
to the Company for the term loan was 2.91% (2.41% swap rate plus applicable
margin of 50 basis points). The fair value of this swap agreement at December
31, 2009 was not material.
Future
Outlook
We intend
to continue to work with the FDA to effectively and expeditiously resolve
remaining concerns, although there can be no assurance that we will succeed in
reaching such a resolution or the terms thereof. We voluntarily
entered into a Consent Decree with the FDA regarding the Company's drug
manufacturing operations. The Consent Decree provides a series of measures that,
when satisfied, will permit Caraco to resume manufacturing and distributing
those products that are manufactured in its Michigan facilities. We continue to
focus on improving support and emphasis on quality assurance, quality control,
and manufacturing areas in order to continually improve the performance of our
quality system. We have hired external consultants who have experience in
assisting manufacturers with FDA compliance issues. These consultants
are reviewing all of our systems, procedures, reporting structures, and
processes, as well as reviewing training on risk management and overall
cGMP. As part of this comprehensive process we are evaluating our
internal and external audit programs, and will make any improvements that we
believe to be necessary to improve these programs. All audits are
based on a historical look back, and offer improvements based on Caraco’s likely
future requirements. These audits will also include follow up action on
compliance issues that need to be addressed. Caraco will obtain assistance and
guidance wherever required from the quality group of Sun Pharma to improve its
quality systems. Though near term sales of Caraco-owned products face
challenges, we believe we are effecting, and intend to effect, the changes
required to improve our performance on sales of these products, on a long-term
basis.
Under
terms of the Consent Decree, Caraco's cessation of manufacturing operations will
continue until it receives written notification from independent experts and the
FDA that it is in compliance with the Consent Decree and regulations and can
resume operations. Nothing in the Consent Decree prohibits Caraco from
distributing FDA approved drug products that are manufactured by third parties.
There is no assurance that the steps taken will be successful or result in
resolution of the FDA complaint. We intend to continue to work with the FDA to
resolve its concerns as effectively and expeditiously as possible.
We
believe that we will emerge a stronger company on a long-term basis. In the last
two years we have added considerable amount of infrastructure in our quality
control laboratories. Our current focus remains on manufacturing and quality
assurance. Currently we are utilizing part of our R&D team to help with
technical validations and compliance initiatives and will continue to do so in
the near term. As a result, our R&D expense has declined in the current
periods.. However, the R&D expenses are likely to increase once the Company
refocuses on new product filings and approvals with the FDA. We anticipate
gaining back our momentum on filings of new ANDAs internally once our compliance
initiatives and technical needs are satisfied. Any third party development in
process will continue. Our production capacity is primarily built, which should
support the business for years to come once we overcome our current
obstacles.
Currently,
we have 31 ANDAs pending approval at the FDA (including four tentative
approvals) relating to 27 products out of our Michigan facilities. We continue
to expand and upgrade our facilities, and expand our customer base. Our internal
efforts, combined with Sun Pharma in developing new products have also picked up
momentum. We now have 17 products, that we market (including Caraco-owned
products being manufactured by third parties and those distributed under various
agreements with of Sun Pharma), whose market share is ranked third or higher
against the same products of our generic competitors. We are focused on products
that are currently in our portfolio and are yet to realize their full market
potential. The total portfolio consists of 41 products.
Although
gross profit margins have come down due to mix of distributed products weight
over Caraco-owned products, and also due to negligible sales of Caraco-owned
products, we believe we can be successful in marketing distributed products and
our products that are manufactured by third parties. We have 13 new distributed
products launched during the first nine months of Fiscal 2010 that Sun Pharma or
its affiliates received approvals for from the FDA. We have also transferred
certain Caraco-owned products to additional alternate manufacturing sites that
would allow the Company to regain revenues from those products while Caraco
completes the necessary remedial actions that would lead to resumption of its
manufacturing operations. We intend to file with the FDA supplements to ANDAs,
for its approval, in the next six months for these transferred products. Should
the pricing pressures become more severe than anticipated; the result may be
lower growth rates and gross margins. Management has worked, and will continue
to work, diligently to counter the pricing pressures through increased sales
volumes, improved market share on existing products, expansion of our customer
base, improved productivity, and increased cost reductions.
The
Company intends to decrease its internal development of new products. It will
continue to develop products with third parties, including Alkaloida, an
indirect subsidiary of Sun Pharma (see “6. Sun Pharmaceutical Industries
Limited”). Our R&D expense should decline based on this provided that patent
related expenses remain stable or decline. We believe that we will
continue to have the cash and other means available to meet our working capital
requirements, fund potential litigation expenses relating to Paragraph IV
certification and finance further capital investments. The third party product
development is a critical element in meeting expectations in the
future.
We
believe that Sun Pharma is a partner with a proven track record, and one that
already has provided the Company with quality products. Moreover, Sun Pharma’s
increased beneficial ownership in the Company to approximately 75%
(approximately 76% including the convertible Series B Preferred Stock), should,
we believe, provide it with the vested interest to continue to help the Company
succeed. Sun Pharma has previously provided the Company with capital, loans,
guarantees of loans, personnel, raw materials and equipment, clinical research
services which have significantly helped the Company to date. In addition to the
Sun Pharma products agreement, we have implemented additional development
strategies with various third parties, both domestically and abroad, that will
complement the Sun Pharma’s development pipeline and our own.
The FDA’s
action and the Company’s voluntary actions have had, and are expected to
continue to have, a material adverse effect on operations and operating
results. At December 31, 2009, the Company had $66 million in cash
and $10 million in short-term investments including the proceeds from a loan in
the amount of $16.2 million. The Company believes that its cash flow from
operations and cash balances will continue to support its ongoing business
requirements, however, because, among other things, of the uncertainty of future
costs of FDA compliance and associated costs, there can be no
assurance.
During
Fiscal 2007, we entered into three definitive agreements with different
companies to develop four additional ANDAs for Caraco and provide additional
opportunities for the future development of products. These agreements contain,
for three products, both milestone payments to be paid in cash and profit
sharing based upon future sales for a defined period, and for one product only
milestone payments in cash without any obligation to share profits in the
future. During Fiscal 2008, we have signed two definitive agreements for two
additional products. However we have terminated an agreement earlier entered
into with one company for two of these products. During Fiscal 2009, we entered
into one agreement for one additional product, and subsequent to end of Fiscal
2009, we entered into one more agreement relating to one additional product.
This brings the total number of products being developed by unaffiliated third
party developers to six.
We
anticipate additional development agreements will be entered into in order to
eliminate gaps in our calendar of approvals from the FDA. As previously
mentioned, in Fiscal 2007 we entered into a definitive agreement to market Sun
Pharma ANDAs that are either approved or awaiting approval at the FDA.
Accordingly, we continue to market a number of these products which are
categorized as distributed products. This agreement has been further renewed in
January 2010, for a period of one year. In addition, on January 29, 2008, the
Company executed a distribution and sale agreement with Sun Pharma. This
agreement covers certain mutually agreed upon products that have been filed or
will be filed with the FDA with a Paragraph IV certification. A Paragraph IV
certification states that the filer believes that it either does not infringe
the patent or believes that the patent is invalid. Paragraph IV certified
products face litigation challenges with respect to claims of patent
infringement. Sun Pharma is not obligated to offer Caraco products under this
agreement, however, Caraco has the exclusive right to market in the U.S., its
territories and possessions, including Puerto Rico, any products offered by Sun
Pharma and accepted by Caraco. Under the agreement, the Company participates in
the sales opportunity on the products, and also shares the litigation risks to a
limited extent based on percentage. If such claims are successful, however, they
could have a material adverse effect on the Company. We have been marketing two
products under this agreement including Pantoprazole sodium DR tablets. These
agreements should provide for an alternate stream of products that will
complement our internal research and development and our outsourced development.
From time to time significant product launches such as we incurred under the
distribution and sale agreement for Paragraph IV products in Fiscal 2008 may
occur that will add near term growth that may or may not be sustainable in
future periods. Additionally we will continue to work with Sun Pharma in an
effort to transfer future product technology on a cash basis similar to other
third party developers and in the future we may provide services to Sun Pharma,
its affiliates and other third party pharmaceutical manufacturers relating to
distribution of certain products, on a fee for service basis in effort to expand
our product offerings and remain competitive. In this connection, see “6. Sun
Pharmaceutical Industries Limited” relating to our products agreement with
Alkaloida, an indirect subsidiary of Sun Pharma. It is our belief that our
infrastructure and relationships we have with our customers, can be utilized to
optimize sales for our own products, as well as of other companies that are
entering or are planning to enter the U.S. market but do not have the
infrastructure required to compete effectively.
The
various agreements referenced above will provide four diverse paths of
development, an increased product pipeline and potential revenue. These various
paths mitigate the risk of each other, potentially allowing for an ongoing
stream of approvals from the FDA.
Management’s
goals for the remainder of Fiscal 2010 include:
|
·
|
Compliance
with Consent Decree.
|
|
·
|
Continue
working towards resumption of manufacturing activities in conformance with
FDA guidelines and the Consent
Decree.
|
|
·
|
Continue
research and development activities for ANDA
filings.
|
|
·
|
Continue
to invest in equipment, systems and facilities to meet requirements of
projected short and long-term projects for compliance and
quality.
|
|
·
|
Increase
cGMP training to accommodate staff and
compliance.
|
|
·
|
Increase
market share for certain existing products and recently introduced
products.
|
|
·
|
Enhanced
customer reach and satisfaction.
|
|
·
|
Leverage
distribution and marketing core competencies by marketing third party
products through in-licensing
agreements.
|
|
·
|
Prompt
introduction of new approved products to the
market.
|
|
·
|
Achieving
further operational efficiencies by attaining economies of scale and cost
reduction per unit.
|
|
·
|
Increase
revenue and cash by marketing ANDAs owned by Sun
Pharma.
|
|
·
|
Expand
our relationships with financial institutions to fortify our credit
position and borrowings as
necessary.
|
|
·
|
Research
alternate product development sources and product licenses such as in
licensing authorized generics from brand innovator companies and
acquisitions of ANDAs from competitor manufacturers both domestically and
abroad.
|
|
·
|
Research
possible development of brands for existing stream of products where such
potential exists.
|
|
·
|
Increase
focus on succession planning.
|
|
·
|
Increase
management training and
development.
|
|
·
|
Maintain
balance in trade class.
|
Forward
Looking Statements
This
report, other than the historical financial and business information, may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Without limitation, the words “believes,” “plans,” “expects,” and similar
expressions are intended to identify forward-looking statements. Those
statements include statements regarding our intent, belief, and current
expectation. These statements are not guarantees of future performance and are
subject to risks and uncertainties that cannot be predicted or quantified.
Consequently, actual results could differ materially from those expressed or
implied by such forward-looking statements.
Such
risks and uncertainties include, but are not limited to: (i) that the
information is of a preliminary nature and may be subject to further adjustment;
(ii) not obtaining FDA approval for new products or delays in receiving FDA
approvals; (iii) governmental restrictions on the sale of certain products; (iv)
dependence on key personnel; (v) development by competitors of new or superior
products or cheaper products or new technology for the production of products or
the entry into the market of new competitors; (vi) market and customer
acceptance and demand for new pharmaceutical products; (vii) availability of raw
materials in a timely manner, at competitive prices, and in required quantities;
(viii) timing and success of product development and launch; (ix) integrity and
reliability of the Company’s data; (x) lack of success in attaining full
compliance with regard to regulatory and cGMP compliance; (xi) experiencing
difficulty in managing our recent rapid growth and anticipated future growth;
(xii) dependence on limited customer base; (xiii) occasional credits to certain
customers reflecting price reductions on products previously sold to them and
still available as shelf-stock; (xiv) possibility of an incorrect estimate of
charge-backs and the impact of such an incorrect estimate on net sales, gross
profit and net income; (xv) dependence on few products generating majority of
sales; (xvi) product liability claims for which the Company may be inadequately
insured; (xvii) subjectivity in judgment of management in applying certain
significant accounting policies derived based on historical experience, terms of
contracts, our observations of trends of industry, information received from our
customers and other sources, to estimate revenues, accounts receivable
allowances including chargebacks, rebates, income taxes, values of assets and
inventories; (xviii) litigation involving claims of patent infringement; (xix)
litigation involving claims for royalties and/or options relating to a prior
contract for one product and (xx) material litigation from product recalls,
(xxi) the purported class action lawsuits alleging federal securities laws
violations, (xxii) delays in returning the Company’s products to market,
including loss of market share, (xxiii) increased reserves against the
FDA-seized inventory, and (xxiv) other risks identified in this report and
identified from time to time in our reports and registration statements filed
with the Securities and Exchange Commission (see Item 1A hereof and our Annual
Report on Form 10-K for the year ended March 31, 2009, Part I, Item 1A, for more
detailed discussion of such risks). These forward-looking statements represent
our judgment as of the date of this report. We disclaim, however, any intent or
obligation to update our forward-looking statements.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Refer to
“Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our
Annual Report on Form 10-K for the year ended March 31, 2009 and “11. Debt”
above for a discussion of our market risk.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
a. The
term “disclosure controls and procedures” is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). These
rules refer to the controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed, summarized and
reported within required time periods. Our Chief Executive Officer and our
interim Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report (the “Evaluation Date”), and have concluded that, as of the Evaluation
Date, our disclosure controls and procedures are effective in providing them
with material information relating to the Company known to others within the
Company which is required to be included in our periodic reports filed under the
Exchange Act.
b. There
has been no change in the Company’s internal control over financial reporting
that occurred during the third quarter of Fiscal 2010 that materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
PART II -- OTHER
INFORMATION
ITEM
1.
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LEGAL
PROCEEDINGS
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The
information presented in Note 12 of Part I, Notes to Financial Statements, is
incorporated herein by reference.
In
addition to the risks set forth in our Form 10-K for the year ended March 31,
2009, the following are additional risks to our business:
The
seizure by the FDA of drug products manufactured in our Michigan facilities and
other ingredients, and our voluntary cessation of manufacturing operations, have
had a material adverse effect on our current operations and are expected to have
a material adverse effect on our near term operations.
As a
result of the FDA action, we have voluntarily ceased manufacturing operations
and instituted an indefinite reduction in our workforce of approximately 430
employees in two phases. The Company voluntarily entered into a Consent Decree
with the FDA on September 29, 2009. As stipulated in the Consent Decree, the
Company will attempt to have the seized inventory released. The Company believes
that, except for the raw materials which were opened solely for the purpose of
sampling, the estimated value of which is $8.1 million, all other seized
inventory would be difficult to recondition. Accordingly, a reserve in the
amount of $15.9 million has been created as of December 31, 2009 for this
remaining inventory. In accordance with the Consent Decree, we have also
provided third party certification to the FDA and requested the release of raw
materials which were opened solely for the purpose of sampling. On
January 29, 2010, we received a letter from the FDA, seeking clarification on
certain points. We are in the process of submitting a response to such letter.
As a result of the FDA action, we have voluntarily ceased manufacturing
operations and instituted, in two phases, indefinite layoffs of approximately
430 of our employees. The Company has subsequently started recalling some of
these employees in conjunction with its efforts to restart its manufacturing
activities. The Consent Decree provides a series of measures that, when
satisfied, will permit the Company to resume manufacturing and distributing
those products which are manufactured in its Michigan facilities. The Company
has engaged a consulting firm which is comprised of cGMP experts, in accordance
with the Consent Decree. The Company has submitted a remediation work
plan, approved by our consultants, to the FDA in October 2009. Some additional
details and clarifications to the work plan were submitted to the FDA on January
14, 2010 for its approval. On February 4, 2010 the Company received a letter
from the FDA seeking clarification on certain points of the work plan. We are in
the process of submitting a response to such letter.
As a
result of this event, there has been a material adverse effect on our current
operations and there may be a material adverse effect on our near term
operations. Under terms of the Consent Decree, Caraco's cessation of
manufacturing operations will continue until it receives written notification
from independent experts and the FDA that it is in compliance with the Consent
Decree and regulations and can resume operations. However, there is no assurance
that the steps being taken will be successful or result in resolution of the FDA
complaint. We are also not able, at this time, to estimate, the cost
of these actions. We anticipate working with the FDA to resolve its concerns as
effectively and expeditiously as possible in accordance with the terms of the
Consent Decree. The Consent Decree also requires the Company to abide
by certain conditions and restrictions. If the Company violates any portion of
the Consent Decree, it could incur penalties, such as monetary fines, forfeiture
of the seized goods and other penalties.
Class
action lawsuits have been filed against the Company and certain of its executive
officers.
The
purported class action litigation (See “12. Litigation” above) alleging
violations of federal securities laws by the Company and certain of its
executives involves claims which, if successful, could adversely affect our
financial condition, operating results or cash flows and the market value of our
common stock.
ITEM
2.
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UNREGISTERED
SALES OF EQUITY SECURITES AND USE OF
PROCEEDS
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During
the first nine months of Fiscal 2010, 1,632,000 shares of Series B Preferred
Stock previously issued to Sun Global were converted into 1,632,000 shares of
Caraco common stock and issued to Sun Global.
All
shares of Caraco common stock issued by the Company as set forth above were
issued pursuant to exemptions from registration under Section 4(2) of the
Securities Act of 1933.
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Certification
of Chief Executive Officer
|
|
Certification
of interim Chief Financial Officer.
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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CARACO
PHARMACEUTICAL
|
|
LABORATORIES,
LTD.
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|
|
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Date: February
12, 2010
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By:
/s/ Jitendra N. Doshi
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|
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Jitendra
N. Doshi
|
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Chief
Executive Officer
|
|
|
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Date: February
12, 2010
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By: /s/ Mukul Rathi
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|
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Mukul
Rathi
|
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Interim
Chief Financial Officer
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