SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
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Commission file number: 39040
ENDO PHARMACEUTICALS HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4022871
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
100 Painters Drive
Chadds Ford, Pennsylvania 19317
(Address of Principal Executive Offices)
(610) 558-9800
(Registrant's Telephone Number, Including Area Code)
Indicate by check |X| whether the registrant: (1) has filed all reports
required to be filed by Sections 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 |_|
The aggregate number of shares of the Registrant's common stock
outstanding as of November 14, 2001 was 100,538,950.
ENDO PHARMACEUTICALS HOLDINGS INC.
REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
----
Consolidated Balance Sheets (Unaudited)
September 30, 2001 and December 31, 2000.................. 1
Consolidated Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2001 and 2000... 2
Consolidated Statements of Cash Flows (Unaudited)
Nine months Ended September 30, 2001 and 2000............. 3
Notes to Consolidated Financial Statements (Unaudited).......... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 7
Overview........................................................ 7
General......................................................... 8
Three Months Ended September 30, 2001 Compared
to the Three Months Ended September 30, 2000............... 8
Nine Months Ended September 30, 2001 Compared
to the Nine Months Ended September 30, 2000................ 9
Liquidity and Capital Resources................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 12
Item 2. Changes in Securities and Use of Proceeds....................... 12
Item 3. Defaults Upon Senior Securities................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............. 12
Item 5. Other Information............................................... 12
Item 6. Exhibits and Reports on Form 8-K................................ 12
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Forward-Looking Statements
This Report contains 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, as amended, that are based on management's beliefs and
assumptions, current expectations, estimates and projections. These statements
are subject to risks and uncertainties and, therefore, actual results may
differ materially from those expressed or implied by these forward-looking
statements. Forward-looking statements are not historical facts and include
information regarding the Company's possible or assumed results of operations.
Also, statements or expressions that are preceded by, followed by, or that
include, the words "believes," "anticipates," "plans," "expects," "intends,"
"estimates" or similar expressions are forward-looking statements. Endo's
estimated or anticipated future results, product performance or other
non-historical facts are forward-looking and reflect Endo's current
perspective on existing trends and information. Many of the factors that will
determine the Company's future results are beyond the ability of the Company
to control or predict. The reader should not rely on any forward-looking
statement. The Company undertakes no obligations to update any forward-looking
statements whether as a result of new information, future events or otherwise.
Several important factors, in addition to the specific factors discussed in
connection with these forward-looking statements individually, could affect
the future results of Endo and could cause those results to differ materially
from those expressed in the forward-looking statements contained herein.
Important factors that may affect future results include, but are not limited
to:
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|X| the Company's ability to successfully develop, commercialize and market
new products;
|X| results of clinical trials on new products;
|X| competition for the business of the Company's branded and generic
products, and in connection with the Company's acquisition of rights to
intellectual property assets;
|X| market acceptance of the Company's future products;
|X| government regulation of the pharmaceutical industry;
|X| the Company's dependence on a small number of products;
|X| the Company's dependence on outside manufacturers for the manufacture of
its products;
|X| the Company's dependence on third parties to supply raw materials and to
provide services for the core aspects of its business;
|X| new regulatory action or lawsuits relating to the Company's use of
narcotics in most of its core products;
|X| the Company's exposure to product liability claims and product recalls
and the possibility that the Company may not be able to adequately insure
itself;
|X| the Company's ability to protect its proprietary technology;
|X| the Company's ability to successfully implement its acquisition strategy;
|X| the availability of controlled substances that constitute the active
ingredients of some of the Company's products and products in
development;
|X| the availability of third-party reimbursement for the Company's products;
|X| the Company's dependence on sales to a limited number of large pharmacy
chains and wholesale drug distributors for a large portion of its total
net sales; and
--------------------------------------------------------------------------------
other risks and uncertainties detailed in Endo's Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on June 9, 2000, as
amended, and in Endo's Registration Statement on Form S-3 dated October 17,
2001. Readers should evaluate any statement in light of these important
factors.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
September 30, December 31,
2001 2000
------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 89,309 $ 59,196
Accounts receivable, net......................... 79,419 78,312
Inventories...................................... 20,257 29,746
Prepaid expenses................................. 2,731 3,496
Deferred income taxes............................ 2,161 2,304
------- --------
Total current assets........................ 193,877 173,054
------- --------
PROPERTY AND EQUIPMENT, Net........................... 9,086 5,742
GOODWILL AND OTHER INTANGIBLES, Net................... 245,519 284,560
DEFERRED INCOME TAXES................................. 1,979 736
RESTRICTED CASH....................................... 150 150
OTHER ASSETS ......................................... 5,571 3,598
------- --------
TOTAL ASSETS ......................................... $456,182 $467,840
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................$ 21,370 $ 15,855
Accrued expenses.................................... 50,862 45,520
Income taxes payable................................ 185 2,549
Current portion of long-term debt................... 16,140 36,371
------- --------
Total current liabilities...................... 88,557 100,295
------- --------
LONG-TERM DEBT, Less current portion..................... 174,516 162,154
OTHER LIABILITIES........................................ 2,183 7,218
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; 40,000,000 shares authorized; none issued
Common Stock, $.01 par value; 175,000,000 shares
authorized; and 89,138,950 issued and outstanding at
September 30, 2001 and December 31, 2000 .............. 891 891
Additional paid-in capital................................. 423,208 385,955
Accumulated deficit........................................(233,173) (188,673)
--------- ---------
Total Stockholders' Equity............................ 190,926 198,173
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................$456,182 $467,840
========= =========
See Notes to Consolidated Financial Statements
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
------ ------ ------ ------
NET SALES............................................. $ 66,268 $ 50,902 $ 173,507 $ 119,836
COST OF SALES......................................... 20,622 15,254 54,303 43,587
------ ------ ------- -------
GROSS PROFIT.......................................... 45,646 35,648 119,204 76,249
------ ------ ------- -------
COSTS AND EXPENSES:
Selling, general and administrative.............. 19,588 14,564 54,931 40,702
Research and development......................... 7,886 8,315 25,396 16,011
Depreciation and amortization.................... 12,394 10,715 37,170 15,041
Compensation related to stock options - primarily
selling, general and administrative 37,253 37,253
Purchased in-process research and development 133,200 133,200
Merger and other related costs 1,583 1,583
Separation benefits.............................. 22,034
------ ------ ------- -------
OPERATING INCOME (LOSS) .............................. (31,475) (132,729) (35,546) (152,322)
------ ------ ------- -------
INTEREST EXPENSE, Net of interest income of $607,
$782, $2,423 and $1,809, respectively................ 2,686 3,672 9,129 11,390
------ ------ ------- -------
LOSS BEFORE INCOME TAX (BENEFIT) (34,161) (136,401) (44,675) (163,712)
------ ------ ------- -------
INCOME TAX (BENEFIT).................................. (1,168) 147 (175) (10,178)
------ ------ ------- -------
NET LOSS.............................................. $(32,993)$(136,548) $ (44,500) $ (153,534)
====== ======= ======= =======
NET LOSS PER SHARE:
Net Loss per Share:
Basic....................................... $ (.37)$ (1.59) $ (.50) $ (2.01)
Diluted..................................... $ (.37)$ (1.59) $ (.50) $ (2.01)
Weighted Average Shares:
Basic....................................... 89,139 85,848 89,139 76,202
Diluted..................................... 89,139 85,848 89,139 76,202
See Notes to Consolidated Financial Statements.
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended
September 30,
-------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net Loss......................................................................... $ (44,500) $ (153,534)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization............................................... 37,170 15,041
Purchased in-process research and development............................... 133,200
Amortization of deferred financing costs.................................... 1,165 909
Accretion of promissory notes............................................... 3,771 2,407
Deferred income taxes....................................................... (1,100) (10,253)
Compensation related to stock options....................................... 37,253 20,782
Changes in assets and liabilities which provided (used) cash:
Accounts receivable......................................................... (1,107) 3,127
Inventories................................................................. 9,489 (9,779)
Other assets................................................................ (2,049) 560
Accounts payable............................................................ 5,515 (73)
Accrued expenses............................................................ 8,473 3,685
Income taxes payable........................................................ (2,364)
Other liabilities........................................................... 16,266 14,898
------- ------
Net cash provided by operating activities.............................. 67,982 20,970
------- ------
INVESTING ACTIVITIES:
Purchase of property and equipment............................................... (4,928) (871)
Net cash acquired in the Merger 19,611
------- ------
Net cash (used in) provided by investing activities................... (4,928) 18,740
------- ------
FINANCING ACTIVITIES:
Repayments of long-term debt..................................................... (32,941) (12,830)
Issuance of Class A Common Stock on March 6, 2000................................
------- ------
Net cash used in financing activities.................................. (32,941) (12,823)
------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................................. 30,113 26,887
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................ 59,196 22,028
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $89,309 $ 48,915
======= ========
SUPPLEMENTAL INFORMATION:
Interest Paid.................................................................... $ 6,622 $ 9,917
Income Taxes Paid................................................................ $ 2,189 $ 75
SCHEDULE OF NON-CASH INVESTING AND FINANCIAL ACTIVITIES
Promissory Note issued under Manufacturing & Supply Agreement $21,301 $ 20,003
Fair value of net assets acquired in the Merger, net of cash $228,941
Adjustment to fair value of net assets acquired in the Merger due to lease $3,131
termination
See Notes to Consolidated Financial Statements.
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying condensed consolidated
financial statements of Endo Pharmaceuticals Holdings Inc. ("Endo" or the
"Company") and its subsidiaries, which are unaudited, include all normal
and recurring adjustments necessary to present fairly the Company's
financial position as of September 30, 2001 and the results of operations
and cash flows for the periods presented. The accompanying consolidated
balance sheet as of December 31, 2000 is derived from the Company's audited
financial statements. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted as promulgated by APB Opinion No. 28 and Rule 10-01 of
Regulation S-X promulgated under the Securities Act of 1933. These
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto as of and for
the year ended December 31, 2000 contained in the Company's Annual Report
on Form 10-K filed on March 29, 2001.
2. MERGER
On November 29, 1999, the Company and Algos Pharmaceutical Corporation
("Algos") announced that they had entered into a definitive merger
agreement providing for the merger (the "Merger") of Algos into Endo Inc.,
a newly formed, wholly owned subsidiary of the Company. The Merger, which
was completed on July 17, 2000, has been accounted for by the Company using
the purchase method of accounting. The assets acquired and liabilities
assumed of Algos were recorded at their fair values at the date of
acquisition based on an independent appraisal. The assets acquired and
liabilities assumed, results of operations and cash flows of Algos have
been included in the Company's financial statements prospectively for
reporting periods beginning July 17, 2000.
The total purchase price of $248.6 million (including approximately
$7.0 million in transaction fees) was determined using an average closing
price of the Algos common stock for a reasonable period of time before and
after the April 17, 2000 measurement date of $13.54 and the 17,832,106
common shares and common share equivalents of Algos outstanding at the date
of the Merger (including 21,580 outstanding Algos Series A Warrants). The
allocation of the fair value of the assets acquired and liabilities assumed
includes an allocation to workforce in place of $11.9 million which is
being amortized over its estimated useful life of two years, patents of
$3.2 million which is being amortized over their estimated useful lives of
17 years and goodwill of $104.8 million which is being amortized over its
estimated useful life of three years. In addition, the Company recorded
estimated liabilities for exit costs of $3.1 million related to
non-cancelable lease payments and $1.1 million for employee relocation
costs. In the third quarter of 2001, the Company was released from its
obligation under lease payments on the former Algos corporate offices.
Accordingly, this estimated liability for exit costs of $3.1 million was
reversed and recorded as a reduction in goodwill. The balance of the
estimated liabilities for exit costs is $1.0 million as of September 30,
2001. Also, as a result of the Merger, it was determined that the
utilization of the Company's federal deferred tax assets is uncertain.
Accordingly, a valuation allowance has been recorded to fully reserve the
Company's federal deferred tax assets.
The Merger included various on-going projects to research and develop
innovative new products for pain management. As a result, the allocation of
the fair value of the assets acquired and liabilities assumed includes an
allocation to purchased in-process research and development ("IPRD") of
$133.2 million which was immediately expensed in the consolidated statement
of operations on the acquisition date. The methodology used by the Company
on the acquisition date in determining the value of IPRD was to: 1)
identify the various on-going projects that the Company will prioritize and
continue; 2) project net future cash flows of the identified projects based
on current demand and pricing assumptions, less the anticipated expenses to
complete the development program, drug application, and launch the products
(significant net cash inflows from MorphiDex(R) were projected in 2003); 3)
discount these cash flows based on a risk-adjusted discount rates ranging
from 25% to 33% (weighted average discount rate of 27%); and 4) apply the
estimated percentage of completion to the discounted cash flow for each
individual project ranging from 4% to 81%. The discount rate was determined
after considering various uncertainties at the time of the Merger,
primarily the stage of project completion.
The Company allocated fair value to the three opioid analgesic
projects of Algos: MorphiDex(R), HydrocoDexTM and OxycoDexTM. The
development program for a new pharmaceutical substance involves several
different phases prior to submission of an application with the appropriate
governmental agency for approval. Such application must be approved prior
to marketing a new drug. Despite the Company's commitment to completion of
the research and development projects, many factors may arise that could
cause a project to be withdrawn or delayed, including the inability to
prove the safety and efficacy of a drug during the development process.
Upon withdrawal, it is unlikely that the development activities will have
alternative use. If these projects are not successfully developed, the
Company's results of operations and financial position in a future period
could be negatively impacted.
3. RECAPITALIZATION
In connection with the Merger, the Company effected a recapitalization
(the "Recapitalization") of its common stock, par value $.01 per share
("Common Stock"), class A common stock, par value $.01 per share ("Class A
Common Stock") and preferred stock. The Recapitalization was effected on
July 17, 2000 through a stock dividend of approximately 64.59 shares of
Common Stock for each share of Common Stock and Class A Common Stock
outstanding immediately prior to the Merger. Immediately prior to the
Merger, the Company amended and restated its certificate of incorporation
to effect the Recapitalization and to eliminate its Class A Common Stock.
The effect of the Recapitalization has been reflected in the accompanying
financial statements.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, which is effective for
all fiscal years beginning after June 15, 2000. SFAS 133, as amended by
SFAS 137 and SFAS 138, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on
the balance sheet at fair value. If the derivative is designated in a fair
value hedge, the changes in the fair value of the derivative and the hedged
item are recognized in earnings. If the derivative is designated as a cash
flow hedge, changes in the fair value of the derivative are recorded in
other comprehensive income ("OCI") and are recognized in the income
statement when the hedged item affects earnings. SFAS 133 defines new
requirements for designation and documentation of hedging relationships as
well as on-going effectiveness assessments in order to use hedge
accounting. A derivative that does not qualify as a hedge will be marked to
fair value through earnings.
At January 1, 2001, the Company recorded $0.2 million as an
accumulated transition adjustment as a reduction to earnings relating to
cash flow hedges.
In December 1999, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin, SAB 101, entitled "Revenue Recognition in
Financial Statements," as amended, effective as of October 1, 2000, which
summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition. The adoption of this guideline had no
effect on the Company's financial statements.
In March 2000, the FASB issued Financial Accounting Series
Interpretation No. 44 entitled "Accounting for Certain Transactions
involving Stock Compensation," which provides clarification to Accounting
Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued
to Employees." The adoption of this interpretation had no effect on the
Company's financial statements.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 is
effective for all business combinations completed after June 30, 2001. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001.
SFAS No. 141 requires that all business combinations be accounted for under
the purchase method only and that certain acquired intangible assets in a
business combination be recognized as assets apart from goodwill. SFAS No.
142 establishes revised reporting requirements for goodwill and other
intangible assets. Upon adoption, the Company will no longer amortize
goodwill unless evidence of an impairment exists. Goodwill will be
evaluated for impairment on at least an annual basis. Although the Company
is currently evaluating all of the provisions of SFAS No. 141 and SFAS No.
142 and therefore is not presently able to quantify the impact of adoption,
the Company does believe the adoption of SFAS No. 142 will have a material
impact on its results of operations. The Company has $228.1 million of
goodwill as of September 30, 2001 and has recorded $30.7 million of
goodwill amortization for the nine months ended September 30, 2001. The
Company will adopt the provisions of SFAS No. 142 effective January 1,
2002.
5. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain
members of management.
The Company is subject to various claims arising out of the normal
course of business with respect to commercial matters, including product
liabilities, patent infringement matters, governmental regulation and other
actions. In the opinion of management, the amount of ultimate liability
with respect to these actions will not materially affect the financial
position, results of operations or liquidity of the Company.
Prior to July 17, 2000, Kelso & Company provided financial advisory
services to the Company for an annual fee of $347,000 plus the
reimbursement of expenses. In connection with the Merger, which was
completed on July 17, 2000, the Company terminated this agreement by making
a one-time payment to Kelso of $1.5 million, which was charged to expenses
as of July 17, 2000.
6. COMPENSATION RELATED TO STOCK OPTIONS
During the period ended September 30, 2001, the Company recorded a
non-cash charge of $37.3 million for stock-based compensation relating to
the vesting of options that were granted under the Endo Pharma LLC Amended
and Restated 1997 Stock Option Plans. Under these plans, tranches of
options vest when the Company attains certain stock price targets. As each
tranche vests, the Company incurs a non-cash charge representing the
difference between the market price of the shares of Common Stock
underlying the options and the exercise price of such options. The Company
may in the future incur up to two additional charges in relation to the
Endo Pharma LLC options. These charges may be substantial. These options
are exercisable into shares of Common Stock that are presently held by Endo
Pharma LLC. As a result, the exercise of these options will not result in
the issuance of additional shares of Common Stock and will not dilute the
public Endo stockholders.
7. SEPARATION BENEFITS
During the period ended March 31, 2000 and immediately thereafter, the
Company entered into separation and release agreements with two executives.
The agreements were accounted for during the period ended March 31, 2000 as
all material terms and conditions were known as of March 31, 2000.
Severance and other termination benefits provided by the agreements
amounting to $1,252,000 were accrued as of March 31, 2000.
The separation and release agreements provided that certain options
granted to the two executives under then existing option plans became fully
vested on the effective dates of the agreements. The agreements also
provided that other options previously granted to the executives would
terminate. The agreements further provided terms and conditions for the
exercise of the vested options. Cost related to stock options resulting
from the agreements resulted in a charge to the Company of $20,782,000
during the period ended March 31, 2000.
8. SUBSEQUENT EVENTS
On October 23, 2001, the Company completed a public offering of 11.4
million primary shares of Common Stock. On October 29, 2001, the Company
used the net proceeds of this public offering totaling $84.9 million
together with $16.1 million of cash and cash equivalents to repay in full
the term loans under its existing credit facility. In connection with the
extinguishment of the term loans, the Company expensed approximately $2.4
million in deferred financing fees. This charge will be reflected as an
extraordinary item, net of tax, in the Company's statement of operations in
the fourth quarter of 2001.
The Company is currently negotiating the terms of a new senior secured
credit facility with a number of lenders, including affiliates of certain
of the underwriters of the recent public offering, to replace the Company's
existing credit agreement. The Company currently expects the new credit
facility to be in the amount of approximately $100 million and to have a
final maturity of five years. Any outstanding loans under the new credit
facility may be secured by a first priority security interest in
substantially all of the Company's assets. The new credit facility is
expected to contain representations and warranties, covenants, events of
default and other provisions customarily found in similar agreements. The
Company cannot assure you that it will be able to enter into the new credit
facility on the terms described above or at all.
******
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Except for the historical information contained in this Report, this
Report, including the following discussion, contains forward-looking
statements that involve risks and uncertainties.
Overview
The Company, through its wholly owned subsidiaries, Endo
Pharmaceuticals Inc. and Endo Inc., is engaged in the research,
development, sales and marketing of branded and generic prescription
pharmaceuticals used primarily for the treatment and management of pain.
Branded products comprised approximately 68%, 76% and 67% of net sales for
the year ended December 31, 1999, the year ended December 31, 2000 and the
nine months ended September 30, 2001, respectively. On August 26, 1997, an
affiliate of Kelso & Company and then members of management entered into an
asset purchase agreement with the then DuPont Merck Pharmaceutical Company
to acquire certain branded and generic pharmaceutical products and
exclusive worldwide rights to a number of new chemical entities in the
DuPont research and development pipeline from DuPont Merck through the
newly-formed Endo Pharmaceuticals. On November 19, 1999, the Company formed
Endo Inc. as a wholly owned subsidiary to effect the acquisition of Algos
Pharmaceutical Corporation ("Algos"). The stock of Endo Pharmaceuticals
Inc. and the stock of Endo Inc. are the only assets of the Company, and the
Company has no other operations or business. The Company was formed as a
holding company and incorporated on November 18, 1997 under the laws of the
state of Delaware and has its principal executive offices at 100 Painters
Drive, Chadds Ford, Pennsylvania 19317 (telephone number: (610) 558-9800).
On July 17, 2000, the Company completed its merger with Algos (the
"Merger"). In the Merger, the Company issued to the former Algos
stockholders, in the aggregate, 17,810,526 shares of Company Common Stock
and 17,810,526 warrants to purchase in the aggregate up to 20,575,507
additional shares of Company Common Stock in certain circumstances as more
fully described in the Company's Registration Statement on Form S-4 filed
with the Securities and Exchange Commission on June 9, 2000, as amended. In
the Merger, the Company also issued to the pre-Merger Endo stockholders, in
the aggregate, 71,328,424 warrants to purchase in the aggregate up to
29,720,177 additional shares of Common Stock in certain other circumstances
as more fully described in the Company's Registration Statement on Form S-4
filed with the Securities and Exchange Commission on June 9, 2000, as
amended.
The Merger has been accounted for by the Company using the purchase method
of accounting. The assets acquired and liabilities assumed of Algos have been
recorded at their fair values based on an independent appraisal. The assets
acquired and liabilities assumed, results of operations and cash flows of
Algos have been included in the Company's financial statements and
Management's Discussion and Analysis of Financial Conditions and Results of
Operations prospectively for reporting periods beginning July 17, 2000.
The Merger included various on-going projects to research and develop
innovative new products for pain management. As a result, the allocation of
the fair value of the assets acquired and liabilities assumed includes an
allocation to purchased in-process research and development ("IPRD") of
$133.2 million which was immediately expensed in the consolidated statement
of operations on the acquisition date. The methodology used by the Company
on the acquisition date in determining the value of IPRD was to: 1)
identify the various on-going projects that the Company will prioritize and
continue; 2) project net future cash flows of the identified projects based
on current demand and pricing assumptions, less the anticipated expenses to
complete the development program, drug application, and launch the products
(significant net cash inflows from MorphiDex(R) were projected in 2003); 3)
discount these cash flows based on a risk-adjusted discount rates ranging
from 25% to 33% (weighted average discount rate of 27%); and 4) apply the
estimated percentage of completion to the discounted cash flow for each
individual project ranging from 4% to 81%. The discount rate was determined
after considering various uncertainties at the time of the merger,
primarily the stage of project completion.
The Company allocated fair value to the three opioid analgesic
projects of Algos: MorphiDex(R), HydrocoDexTM and OxycoDexTM. The
development program for a new pharmaceutical substance involves several
different phases prior to submission of an application with the appropriate
governmental agency for approval. Such application must be approved prior
to marketing a new drug. Despite the Company's commitment to completion of
the research and development projects, many factors may arise that could
cause a project to be withdrawn or delayed, including the inability to
prove the safety and efficacy of a drug during the development process.
Upon withdrawal, it is unlikely that the development activities will have
alternative use. If these projects are not successfully developed, the
Company's results of operations and financial position in a future period
could be negatively impacted.
The Company's quarterly results have fluctuated in the past, and may
continue to fluctuate. These fluctuations are primarily due to the timing
of new product launches, purchasing patterns of the Company's customers,
market acceptance of the Company's products and the impact of competitive
products and pricing.
Results of Operations
Net Sales
Net sales consist of revenues from sales of pharmaceutical products,
less estimates for certain chargebacks, sales allowances, the cost of
returns and losses. Net sales are recognized when products are shipped.
The following table presents unaudited net sales for select products
for the three months and the nine months ended September 30, 2001 and 2000:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
(in thousands, unaudited)
Percocet(R) $ 16,430 $ 23,379 $ 72,831 $54,251
Lidoderm(R) 16,268 7,343 26,933 12,833
Other Brands 8,087 8,330 16,678 21,311
----- ----- ------ ------
Total Brands $ 40,785 $39,052 $ 116,442 $88,395
======== ======= ========= =======
Total Generics 25,483 11,850 57,065 31,441
------ ------ ------ ------
Total Net Sales $66,268 $50,902 $173,507 $119,836
======= ======= ======== ========
The following table presents unaudited net sales as a percentage of total net
sales for select products for the three months and nine months ended September
30, 2001 and 2000:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
(unaudited)
Percocet(R) 25% 46% 42% 45%
Lidoderm(R) 25% 15% 15% 11%
Other Brands 12% 16% 10% 18%
--- --- --- ---
Total Brands 62% 77% 67% 74%
=== === === ===
Total Generics 38% 23% 33% 26%
---- --- ---- ---
Total Net Sales 100% 100% 100% 100%
==== ==== ==== ====
Goodwill and Other Intangibles
Goodwill and other intangibles represent a significant portion of the
assets and stockholders' equity of the Company. As of September 30, 2001,
goodwill and other intangibles comprised approximately 54% of total assets
and 129% of stockholders' equity. The Company assesses the recoverability
and the amortization period of goodwill by determining whether the amount
can be recovered through undiscounted net cash flows of the businesses
acquired over the remaining amortization period. The Company reviews for
the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, such as in the event of a significant adverse change in
business conditions or a significant change in the intended use of an
asset. An impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset are less
than its carrying amount. Assets are grouped at the lowest level for which
there are identifiable cash flows that are largely independent from other
asset groups. The Company uses the discounted future expected net cash
flows, as its estimate of fair value, to determine the amount of impairment
loss. As a result of the significance of goodwill and other intangibles,
amortization of goodwill and other intangibles will significantly impact
the results of operations of the Company. In addition, the Company's
results of operations and financial position in a future period could be
negatively impacted should an impairment of goodwill and other intangible
assets occur. See "Recent Accounting Pronouncements."
Compensation Related to Stock Options
In the third quarter of 2001 and the fourth quarter of 2000, the
Company incurred non-cash charges of $37.3 million and a non-cash charge of
$15.3 million, in each case for stock-based compensation relating to the
vesting of options that were granted under the Endo Pharma LLC stock option
plans. Under these plans, tranches of options vest when the Company attains
certain stock price targets. As each tranche vests, the Company incurs a
non-cash charge representing the difference between the market price of the
shares of Common Stock underlying the options and the exercise price of
such options. The Company may in the future incur up to two additional
charges in relation to the Endo Pharma LLC options. These charges may be
substantial. These options are exercisable into shares of Common Stock that
are presently held by Endo Pharma LLC. As a result, the exercise of these
options will not result in the issuance of additional shares of Common
Stock and will not dilute the public stockholders of Endo.
All the options granted pursuant to the Endo Pharmaceuticals Holdings
Inc. 2000 Stock Incentive Plan have exercise prices equal to the market price
of the Company Common Stock on the date granted and, under accounting
principles generally accepted in the United States of America, a measurement
date had occurred on the date of grant. Consequently, the Company does not
expect to incur a charge upon the vesting or exercise of those options.
Three Months Ended September 30, 2001 Compared to the Three Months Ended
September 30, 2000
Net Sales. Net sales for the three months ended September 30, 2001
increased by 30% to $66.3 million from $50.9 million in the comparable 2000
period. This increase in net sales was primarily due to the increase in net
sales from Lidoderm(R) and certain generic products. Specifically, in
September 1999, the Company launched Lidoderm(R), the first FDA-approved
product for the treatment of the pain of post-herpetic neuralgia. In
November 1998, the Company launched the 15mg, 30mg and 60mg strengths, in
May 2001, the Company launched the 100mg strength and in September 2001,
the Company launched the 200mg strength of its generic morphine sulfate
extended release tablets. In the second quarter of 2001, the Company
launched two new strengths of its generic product Endocet(R). The increase
in net sales resulting from the foregoing launches were primarily offset by
a decrease in net sales of Percocet(R). In April 2001, generic equivalents
to Percocet(R) 7.5/500 and Percocet(R) 10.0/650 became available. These
generics may have a material impact on the results of operations and cash
flows of the Company in the future.
Gross Profit. Gross profit for the three months ended September 30,
2001 increased by 28% to $45.6 million from $35.6 million in the comparable
2000 period. Gross profit margins decreased to 69% from 70% in the
comparable 2000 period due to an increase in the percentage of net sales
attributable to generic products. Net sales of generic products for the
three months ended September 30, 2001 increased to 38% of net sales from
17% of net sales in the comparable 2000 period. Although net sales of brand
products increased 4% for the three months ended September 30, 2001 over
the comparable 2000 period, generic products increased 115% in the three
months ended September 30, 2001 over the comparable 2000 period due to the
factors discussed above. If the Company achieves its forecast for revenue
and product mix, the Company's management expects an increase in gross
profit and gross profit margin for fiscal year 2001 over fiscal year 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2001
increased by 34% to $19.6 million from $14.6 million in the comparable 2000
period. This increase was due to a $2.1 million increase in sales and
promotional efforts in 2001 over the comparable 2000 period to support
Lidoderm(R) and Percocet(R). The increase in sales and promotional efforts
was primarily due to the first quarter 2001 deployment of a dedicated
contract sales force of 230 full-time representatives comprised of 70
full-time specialty representatives and 160 full-time primary care
representatives compared to 300 part-time representatives in the comparable
2000 period. In addition, the Company experienced an increase in
personnel-related costs in the general and administrative functions in
order to support its growth.
Research and Development Expenses. Research and development expenses
for the three months ended September 30, 2001 decreased by 6% to $7.8
million from $8.3 million in the comparable 2000 period. Research and
development expenses in the three months ended September 30, 2000 included
a significant portion of the cost to manufacture clinical supplies for
ongoing trials.
Depreciation and Amortization. Depreciation and amortization for the
three months ended September 30, 2001 increased to $12.4 million from $10.7
million in the comparable 2000 period. This increase was substantially due
to the increase in amortization of goodwill and other intangibles resulting
from the intangible assets acquired as a result of the Merger. The results
of operations of Algos have been included in the Company's financial
statements prospectively for reporting periods beginning July 17, 2000.
Compensation Related to Stock Options. Compensation related to stock
options of $37.3 million reflects the charge arising from the vesting of
performance-based stock options granted pursuant to the Endo Pharma LLC
stock option plans. Under these plans, tranches of options vest when the
Company attains certain Common Stock price targets. As each tranche vests,
the Company incurs a non-cash charge representing the difference between
the market price of the shares of Common Stock underlying the options and
the exercise price of such options. The Company may in the future incur up
to two additional charges in relation to the Endo Pharma LLC options. These
charges may be substantial. These options are exercisable into shares of
Common Stock that are presently held by Endo Pharma LLC. As a result, the
exercise of these options will not result in the issuance of additional
shares of Common Stock and will not dilute the public stockholders of Endo.
Purchased In-Process Research and Development. Purchased in-process
research and development for the three months ended September 30, 2000 of
$133.2 million resulted from the estimated fair value of the products under
development that the Company acquired in the Merger with Algos.
Merger and Other Related Costs. Merger and other related costs for the
three months ended September 30, 2000 of $1.6 million resulted from fees
incurred as a result of the Merger with Algos that were not considered
direct costs of the acquisition.
Consolidated EBITDA. Consolidated EBITDA for the three months ended
September 30, 2001 increased 58% to $24.7 million from $15.6 million in the
comparable 2000 period.
Interest Expense, Net. Interest expense, net for the three months
ended September 30, 2001 decreased by 27% to $2.7 million from $3.7 million
in the comparable 2000 period. The decrease was primarily due to a decrease
in interest expense of $1.0 million due to a decrease in interest rates.
Income Tax (Benefit). Income tax (benefit) for the three months ended
September 30, 2001 increased as a result of an increase in the taxable loss
and, for the three months ended September 30, 2001, reflects only state
income tax benefit. The Company has recorded a valuation allowance on its
existing federal deferred tax assets due to the uncertainty of the
utilization of such amounts in the foreseeable future. The Company
continually evaluates whether conditions exist that indicate that the
utilization of deferred tax assets will be more likely than not.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended
September 30, 2000
Net Sales. Net sales for the nine months ended September 30, 2001
increased by 45% to $173.5 million from $119.8 million in the comparable
2000 period. This increase in net sales was primarily due to the increase
in net sales from several new products. Specifically, in November 1999, the
Company launched Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R)
10.0/650 to complement the existing Percocet(R) 5.0/325 for the relief of
moderate-to-severe pain. In September 1999, the Company launched
Lidoderm(R), the first FDA-approved product for the treatment of the pain
of post-herpetic neuralgia. In November 1998, the Company launched the
15mg, 30mg and 60mg strengths, in May 2001, the Company launched the 100mg
strength and in September 2001, the Company launched the 200mg strength of
its generic morphine sulfate extended release tablets. In the second
quarter of 2001, the Company launched two new strengths of its generic
product Endocet(R). In April 2001, generic equivalents to Percocet(R)
7.5/500 and Percocet(R) 10.0/650 became available. These generics may have
a material impact on the results of operations and cash flows of the
Company in the future.
Gross Profit. Gross profit for the nine months ended September 30,
2001 increased by 56% to $119.2 million from $76.2 million in the
comparable 2000 period. Gross profit margins increased to 69% from 64% due
to a more favorable mix of higher margin products resulting from the
product launches discussed above, and the discontinuation of some lower
margin non-core products. In addition, the increase in gross profit margins
was also due to the existing fixed cost nature of the Company's
manufacturing relationship with Bristol-Myers Squibb Company (formerly
DuPont Pharmaceuticals), currently the Company's most significant contract
manufacturing relationship. If the Company achieves its forecast for
revenue and product mix, the Company's management expects the increase in
gross profits to continue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 30, 2001
increased by 35% to $54.9 million from $40.7 million in the comparable 2000
period. This increase was due to a $7.1 million increase in sales and
promotional efforts in 2001 over the comparable 2000 period to support
Lidoderm(R) and Percocet(R). The increase in sales and promotional efforts
was primarily due to the first quarter 2001 deployment of a dedicated
contract sales force of 230 full-time representatives comprised of 70
full-time specialty representatives and 160 full-time primary care
representatives compared to 300 part-time representatives in the comparable
2000 period. In addition, the Company experienced an increase in
personnel-related costs in the general and administrative functions in
order to support its growth.
Research and Development Expenses. Research and development expenses
for the nine months ended September 30, 2001 increased by 59% to $25.4
million from $16.0 million in the comparable 2000 period. This increase was
due to the Company's increased spending on products under development that
are focused in pain management including the products under development
that had been part of the former Algos pipeline. The results of operations
of Algos have been included in the Company's financial statements
prospectively for reporting periods beginning July 17, 2000.
Depreciation and Amortization. Depreciation and amortization for the
nine months ended September 30, 2001 increased to $37.2 million from $15.0
million in the comparable 2000 period. This increase was substantially due
to the increase in amortization of goodwill and other intangibles resulting
from the intangible assets acquired as a result of the Merger. The results
of operations of Algos have been included in the Company's financial
statements prospectively for reporting periods beginning July 17, 2000.
Compensation Related to Stock Options. Compensation related to stock
options of $37.3 million in the nine months ended September 30, 2001
reflects the charge arising from the vesting of performance-based stock
options granted pursuant to the Endo Pharma LLC stock option plans. Under
these plans, tranches of options vest when the Company attains certain
Common Stock price targets. As each tranche vests, the Company incurs a
non-cash charge representing the difference between the market price of the
shares of Common Stock underlying the options and the exercise price of
such options. The Company may in the future incur up to two additional
charges in relation to the Endo Pharma LLC options. These charges may be
substantial. These options are exercisable into shares of Common Stock that
are presently held by Endo Pharma LLC. As a result, the exercise of these
options will not result in the issuance of additional shares of Common
Stock and will not dilute the public stockholders of Endo.
Purchased In-Process Research and Development. Purchased in-process
research and development for the nine months ended September 30, 2000 of
$133.2 million resulted from the estimated fair value of the products under
development that the Company acquired in the Merger with Algos.
Merger and Other Related Costs. Merger and other related costs for the
nine months ended September 30, 2000 of $1.6 million resulted from fees
incurred as a result of the Merger with Algos that were not considered
direct costs of the acquisition.
Separation Benefits. Separation benefits of $22.0 million for the nine
months ended September 30, 2000 resulted from a $20.8 million charge
related to the acceleration of vesting of stock options held by two former
executives and a $1.2 million charge from compensation and other benefits
pursuant to two separation and release agreements the Company entered into.
The stock compensation charge reflects the estimated difference in the fair
value and the exercise price of such stock options on the effective date of
the separation and release agreements.
Consolidated EBITDA. Consolidated EBITDA for the nine months ended
September 30, 2001 increased by 83% to $55.9 million from $30.6 million in
the comparable 2000 period.
Interest Expense, Net. Interest expense, net for the nine months ended
September 30, 2001 decreased by 20% to $9.1 million from $11.4 million in
the comparable 2000 period. The decrease was primarily due to a decrease in
interest expense of $1.8 million due to a decrease in interest rates. In
addition, the decrease was due to an increase in interest income of $.6
million due to an increase in the average cash balance for the nine months
ended September 30, 2001 compared to the comparable 2000 period. The
increase in the average cash balance was in part due to the acquisition of
$19.6 million in net cash and cash equivalents in the Merger with Algos.
Income Tax (Benefit). Income tax (benefit) for the nine months ended
September 30, 2001 decreased as a result of an decrease in the taxable loss
and, for the nine months ended September 30, 2001, reflects only state
income tax benefit. The Company has recorded a valuation allowance on its
existing federal deferred tax assets due to the uncertainty of the
utilization of such amounts in the foreseeable future. The Company
continually evaluates whether conditions exist that indicate that the
utilization of deferred tax assets will be more likely than not.
Liquidity and Capital Resources
Net cash provided by operating activities increased by $47.0 million
to $68.0 million for the nine months ended September 30, 2001 from $21.0
million for the nine months ended September 30, 2000. This increase was
substantially due to a reduction in cash flow utilized in inventory and
other working capital improvements. Specifically, during the nine months
ended September 30, 2000, the Company was building up inventories to
support the launches of several new products, which utilized a significant
amount of cash flow.
Net cash used in investing activities was $4.9 million for the nine
months ended September 30, 2001 compared to net cash provided by investing
activities of $18.7 million for the nine months ended September 30, 2000.
The $19.6 million in net cash acquired from the merger with Algos was
offset by an increase in capital expenditures of $4.0 million. This
increase in capital expenditures was due to the implementation of an
electronic document management system during 2001 and the purchase of
leasehold improvements and other furniture and fixtures related to the
Company's new principal executive offices, the lease of which commenced in
the third quarter of 2001.
Net cash utilized in financing activities increased by $20.1 million to
$32.9 million for the nine months ended September 30, 2001 from $12.8 million
for the nine months ended September 30, 2000 due to repayments made on the
Company's existing credit facility. On October 29, 2001, the Company repaid in
full the term loans under its existing credit facility.
On March 15, 2001, Penwest Pharmaceuticals Co., a collaboration
partner of Endo with which Endo has an alliance agreement and with which
Endo is developing one of its pipeline projects, received a "going concern"
opinion from Ernst & Young LLP, its independent auditors, in connection
with Penwest's Annual Report on Form 10-K for the year ended December 31,
2000. Specifically, Ernst & Young stated that they had substantial doubt
about Penwest's ability to continue as a going concern in light of its
recurring operating losses and negative cash flows from operations in each
of the three years in the period ended December 31, 2000. In addition,
Penwest's Annual Report indicated that, based on anticipated levels of
operations and currently available capital resources, Penwest's management
expects continued operating losses and negative cash flows during 2001. On
July 10, 2001, Penwest announced that it had entered into definitive
agreements for the sale of 2.4 million shares of newly issued common stock
to selected institutional and other accredited investors for an aggregate
of $30.0 million. On July 25, 2001, Penwest filed a Report on Form 8-K with
the SEC that contained an opinion of Ernst & Young LLP that, on account of
this issuance of $30.0 million of common stock, the conditions that raised
substantial doubt about whether Penwest will continue as a going concern no
longer exist. In Penwest's quarterly report for the quarter ended June 30,
2001, Penwest stated that its existing capital resources, including, among
other things, the proceeds of the private placement of $30.0 million of
common stock, will enable Penwest to "maintain currently-planned operations
into at least the fourth quarter of 2002." If Penwest is unable to fund
their portion of the collaboration project with Endo, this may adversely
affect the Company's results of operations and cash flows in the
foreseeable future.
The Company's cash and cash equivalents totaled $89.3 million at
September 30, 2001. On October 23, 2001, the Company completed a public
offering of 11.4 million primary shares of Common Stock. On October 29,
2001, the Company used the net proceeds of this public offering totaling
$84.9 million together with $16.1 million of cash and cash equivalents to
repay in full the term loans under its existing credit facility. The
Company believes that its (a) cash and cash equivalents and (b) cash flow
from operations, will be sufficient to meet its normal operating, investing
and financing requirements in the foreseeable future, including the funding
of the Company's pipeline projects in the event that Endo's collaboration
partners are unable to fund their portion of any particular project. The
Company may use a portion of its cash and cash equivalents to repay all or
a portion of the notes that it has issued to Bristol-Myers Squibb Company
(formerly DuPont Pharmaceuticals), for possible acquisitions and/or for
possible repurchase of warrants originally issued to the former
stockholders of Algos in connection with the Company's acquisition of
Algos. The Company may repurchase these warrants in privately negotiated
transactions, open market purchases, tender offers or otherwise. Repurchase
of these warrants would be subject to market conditions and receipt of any
required third party consents and waivers. In the event that the Company
makes any significant acquisitions or other strategic investments, it may
be required to raise additional funds, through the issuance of additional
debt or equity securities.
The Company is currently negotiating the terms of a new senior secured
credit facility with a number of lenders, including affiliates of certain
of the underwriters of the recent public offering, to replace the Company's
existing credit agreement. The Company currently expects the new credit
facility to be in the amount of approximately $100 million and to have a
final maturity of five years. Any outstanding loans under the new credit
facility may be secured by a first priority security interest in
substantially all of the Company's assets. The new credit facility is
expected to contain representations and warranties, covenants, events of
default and other provisions customarily found in similar agreements. The
Company cannot assure you that it will be able to enter into the new credit
facility on the terms described above or at all.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, which is effective for
all fiscal years beginning after June 15, 2000. SFAS 133, as amended by
SFAS 137 and SFAS 138, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on
the balance sheet at fair value. If the derivative is designated in a fair
value hedge, the changes in the fair value of the derivative and the hedged
item are recognized in earnings. If the derivative is designated as a cash
flow hedge, changes in the fair value of the derivative are recorded in
other comprehensive income ("OCI") and are recognized in the income
statement when the hedged item affects earnings. SFAS 133 defines new
requirements for designation and documentation of hedging relationships as
well as on-going effectiveness assessments in order to use hedge
accounting. A derivative that does not qualify as a hedge will be marked to
fair value through earnings.
At January 1, 2001, the Company recorded $0.2 million as an
accumulated transition adjustment as a reduction to earnings relating to
cash flow hedges.
In December 1999, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin, SAB 101, entitled "Revenue Recognition in
Financial Statements," as amended, effective as of October 1, 2000, which
summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition. The adoption of this guideline had no
effect on the Company's financial statements.
In March 2000, the FASB issued Financial Accounting Series
Interpretation No. 44 entitled "Accounting for Certain Transactions
involving Stock Compensation," which provides clarification to Accounting
Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued
to Employees." The adoption of this interpretation had no effect on the
Company's financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 is effective for all business combinations completed after June 30,
2001. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001. SFAS No. 141 requires that all business combinations be accounted
for under the purchase method only and that certain acquired intangible
assets in a business combination be recognized as assets apart from
goodwill. SFAS No. 142 establishes revised reporting requirements for
goodwill and other intangible assets. Upon adoption, the Company will no
longer amortize goodwill unless evidence of an impairment exists. Goodwill
will be evaluated for impairment on at least an annual basis. Although the
Company is currently evaluating all of the provisions of SFAS No. 141 and
SFAS No. 142 and therefore is not presently able to quantify the impact of
adoption, the Company does believe the adoption of SFAS No. 142 will have a
material impact on the results of operations of the Company. The Company
has $228.1 million of goodwill as of September 30, 2001 and has recorded
$30.7 million of goodwill amortization for the nine months ended September
30, 2001. The Company will adopt the provisions of SFAS No. 142 effective
January 1, 2002.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's primary market risk exposure is to changes in interest
rates (LIBOR) on its variable rate borrowings. The Company does not utilize
financial instruments for trading purposes and holds no derivative
financial instruments that could expose it to significant market risk. The
Company monitors interest rates and enters into interest rate agreements as
considered appropriate. To manage a portion of its exposure to fluctuations
in interest rates, the Company had entered into an interest rate cap
agreement with a notional amount of $82.5 million that sets a maximum LIBOR
rate of 8% that it will pay on the related notional amount. This interest
rate cap agreement expired on August 27, 2000. Effective August 27, 2000,
the Company has entered into a new interest rate cap agreement with a
notional amount of $70.0 million that sets a maximum LIBOR rate of 8% that
the Company will pay on the related notional amount through August 27,
2003. On October 29, 2001, the Company repaid its existing variable rate
borrowings, thereby terminating its interest rate cap agreement.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
On October 20, 2000, The Purdue Frederick Company and related
companies ("Purdue Frederick") filed suit against the Company and its
subsidiary, Endo Pharmaceuticals Inc. ("EPI"), in the U.S. District Court
for the Southern District of New York alleging that EPI's bioequivalent
version of Purdue Frederick's OxyContin(R) (oxycodone hydrochloride
extended-release tablets), 40mg strength, infringes three of its patents.
This suit arose after EPI provided the plaintiffs with notice that its ANDA
submission for a bioequivalent version of Purdue Frederick's OxyContin(R),
40mg strength, challenged the listed patents for OxyContin(R) 40mg tablets.
On March 13, 2001, Purdue Frederick filed a second suit against the Company
and EPI in the U.S. District Court for the Southern District of New York
alleging that EPI's bioequivalent versions of Purdue Frederick's
OxyContin(R), 10mg and 20mg strengths, infringe the same three patents.
This suit arose from EPI having amended its earlier ANDA on February 9,
2001 to add bioequivalent versions of the 10mg and 20mg strengths of
OxyContin(R). On August 30, 2001, Purdue Frederick filed a third suit
against the Company and EPI in the U.S. District Court for the Southern
District of New York alleging that EPI's bioequivalent version of Purdue
Frederick's OxyContin(R), 80mg strength, infringes the same three patents.
This suit arose from EPI having amended its earlier ANDA on July 30, 2001
to add the bioequivalent version of the 80mg strength of OxyContin(R).
For each of the 10mg, 20mg, 40mg and 80mg strengths of this product,
EPI made the required Paragraph IV certification against the patents listed
in the FDA's Orange Book as covering these strengths of OxyContin(R). EPI
has pleaded counterclaims that the patents asserted by Purdue Frederick are
invalid, unenforceable and/or not infringed by EPI's formulation of
oxycodone hydrochloride extended-release tablets, 10mg, 20mg and 40mg
strengths. EPI has also counterclaimed for antitrust damages based on
allegations that Purdue Frederick obtained the patents through fraud on the
United States Patent and Trademark Office and is asserting them while aware
of their invalidity and unenforceability. The Company intends to pursue a
similar litigation strategy with respect to the 80mg strength of this
product. However, the Company cannot make assurances as to the outcome of
this patent challenge. Purdue Frederick was granted a preliminary
injunction (Purdue Pharma L.P. v. Boehringer Ingelheim GmbH, 98 F. Supp. 2d
362 (SDNY 2000)), which decision was affirmed on appeal (Purdue Pharma L.P.
v. Boehringer Ingelheim GmbH, 237 F.3d 1359 (Fed. Cir. 2001)), against a
different manufacturer based on the same patents that are being asserted
against the Company and EPI, and in the same Court in which Purdue
Frederick sued. The Company believes the defenses rejected in the
preliminary injunction decision and in the appellate decision do not
substantially impact the principal defenses raised by the Company and EPI.
We expect to be sued again as early as the fourth quarter of 2001 with
respect to another ANDA we have filed with the FDA. Similar litigation may
also result from products we currently have in development, as well as
those which we may develop in the future. We, however, cannot predict the
timing or outcome of any such litigation, or whether any such litigation
will be brought against us.
In addition to the above, the Company is involved in, or has been
involved in, arbitrations or legal proceedings that arise from the normal
course of its business. The Company cannot predict the timing or outcome of
these claims and proceedings. Currently, the Company is not involved in any
arbitration and/or legal proceeding that it expects to have a material
effect on its business, financial condition or results of operations and
cash flows.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The information called for by this item is incorporated herein by
reference to the Exhibit Index of this report.
(b) Reports on Form 8-K.
The Company filed three reports on Form 8-K during the quarter ended
September 30, 2001. The dates of these reports (and the items reported) are
as follows: August 31, 2001 (Item 5); September 5, 2001 (Item 5); and
September 10, 2001 (Items 5 and 9). Item 9 of the September 10, 2001 Form
8-K incorporated the Company's Form S-3 (File No. 333-69136), which was
filed with the SEC on September 7, 2001 and included financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENDO PHARMACEUTICALS HOLDINGS INC.
(Registrant)
/s/ CAROL A. AMMON
--------------------
Name: Carol A. Ammon
Title: President and Chief Executive
Officer
/s/ JEFFREY R. BLACK
--------------------
Name: Jeffrey R. Black
Title: Senior Vice President and
Chief Financial Officer
Date: November 14, 2001
Exhibit Index
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Exhibit No. Title
----------- -----
2.1 Amended and Restated Agreement and Plan of Merger,
dated as of March 3, 2000 (the "Merger Agreement"),
by and among Endo Pharmaceuticals Holdings Inc.
("Endo"), Endo Inc. and Algos Pharmaceutical
Corporation ("Algos") (incorporated herein by
reference to Exhibit 2.1 of the Registration
Statement on Form S-4 of the Registrant
(Registration No. 333-39040) (the "Registration
Statement"), filed with the Securities and Exchange
Commission (the "Commission") on June 9, 2000)
2.2 Amendment, dated as of April 17, 2000, to the
Merger Agreement, by and between Endo, Endo Inc.
and Algos (incorporated herein by reference to
Exhibit 2.2 of the Registration Statement filed
with the Commission on June 9, 2000)
2.3 Asset Purchase Agreement, dated as of August 27,
1997, by and between Endo Pharmaceuticals Inc.
("Endo Pharmaceuticals") and The DuPont Merck
Pharmaceutical Company ("DuPont Merck
Pharmaceutical") (incorporated herein by reference
to Exhibit 2.3 of the Registration Statement filed
with the Commission on June 9, 2000)
3.1 Amended and Restated Certificate of
Incorporation of Endo (incorporated herein by
reference to Exhibit 3.1 of the Form 10-Q for
the Quarter ended June 30, 2000 filed with the
Commission on August 15, 2000)
3.2 Amended and Restated By-laws of Endo
(incorporated herein by reference to Exhibit 3.2
of the Form 10-Q for the Quarter ended June 30,
2000 filed with the Commission on August 15,
2000)
4.1 Amended and Restated Executive Stockholders
Agreement, dated as of July 14, 2000, by and among
Endo, Endo Pharma LLC ("Endo LLC"), Kelso
Investment Associates V, L.P. ("KIA V"), Kelso
Equity Partners V, L.P. ("KEP V") and the
Management Stockholders (as defined therein)
(incorporated herein by reference to Exhibit 4.1 of
the Form 10-Q for the Quarter ended June 30, 2000
filed with the Commission on August 15, 2000)
4.2 Amended and Restated Employee Stockholders
Agreement, dated as of July 14, 2000, by and
among Endo, Endo LLC, KIA V, KEP V and the
Employee Stockholders (as defined therein)
(incorporated herein by reference to Exhibit 4.2
of the Form 10-Q for the Quarter ended June 30,
2000 filed with the Commission on August 15,
2000)
4.3 Form of Stock Certificate of Endo Common Stock
(incorporated herein by reference to Exhibit 4.3
of the Form 10-Q for the Quarter ended June 30,
2000 filed with the Commission on August 15,
2000)
4.4 Registration Rights Agreement, dated as of July
17, 2000, by and between Endo and Endo LLC
(incorporated herein by reference to Exhibit 4.4
of the Form 10-Q for the Quarter ended June 30,
2000 filed with the Commission on August 15,
2000)
10.1 Endo Warrant Agreement, dated as of July 17,
2000, by and between Endo and United States
Trust Company of New York (incorporated herein
by reference to Exhibit 10.1 of the Form 10-Q
for the Quarter ended June 30, 2000 filed with
the Commission on August 15, 2000)
10.2 Algos Warrant Agreement, dated as of July 17,
2000, by and between Endo and United States
Trust Company of New York (incorporated herein
by reference to Exhibit 10.2 of the Form 10-Q
for the Quarter ended June 30, 2000 filed with
the Commission on August 15, 2000)
10.3 Form of Series A Warrant to Purchase Shares of
Common Stock and Warrants of Endo (incorporated
herein by reference to Exhibit 10.3 of the
Registration Statement filed with the Commission on
June 9, 2000)
10.4 Letter Agreement, dated as of November 26, 1999,
by and among Algos, Endo, KIA V and KEP V
(incorporated herein by reference to Exhibit
10.4 of the Registration Statement filed with
the Commission on June 9, 2000)
10.5 Tax Sharing Agreement, dated as of July 17,
2000, by and among Endo, Endo Inc. and Endo LLC
(incorporated herein by reference to Exhibit
10.5 of the Form 10-Q for the Quarter ended June
30, 2000 filed with the Commission on August 15,
2000)
10.6 Agreement, dated as of July 17, 2000, by and
between Endo and Endo LLC (incorporated herein
by reference to Exhibit 10.6 of the Form 10-Q
for the Quarter ended June 30, 2000 filed with
the Commission on August 15, 2000)
10.7 Credit Agreement, dated as of August 26, 1997,
by and between Endo Pharmaceuticals and The
Chase Manhattan Bank (incorporated herein by
reference to Exhibit 10.7 of the Registration
Statement filed with the Commission on June 9,
2000)
10.8 [Intentionally Omitted.]
10.9 [Intentionally Omitted.]
10.10 Sole and Exclusive License Agreement, dated as
of November 23, 1998, by and between Endo
Pharmaceuticals and Hind Health Care, Inc.
(incorporated herein by reference to Exhibit
10.10 of the Registration Statement filed with
the Commission on June 9, 2000)
10.11 Analgesic License Agreement, dated as of October
27, 1997, by and among Endo Pharmaceuticals,
Endo Laboratories, LLC and DuPont Merck
Pharmaceutical (incorporated herein by reference
to Exhibit 10.11 of the Registration Statement
filed with the Commission on June 9, 2000)
10.12 Anti-Epileptic License Agreement, dated as of
October 27, 1997, by and among Endo
Pharmaceuticals, Endo Laboratories, LLC and
DuPont Merck Pharmaceutical (incorporated herein
by reference to Exhibit 10.12 of the
Registration Statement filed with the Commission
on June 9, 2000)
10.13 [Intentionally Omitted.]
10.14 Supply and Manufacturing Agreement, dated as of
November 23, 1998, by and between Endo
Pharmaceuticals and Teikoku Seiyaku Co., Ltd
(incorporated herein by reference to Exhibit
10.14 of the Registration Statement filed with
the Commission on June 9, 2000)
10.15 Supply Agreement, dated as of July 1, 1998, by
and between Endo Pharmaceuticals and
Mallinckrodt Inc. ("Mallinckrodt") (incorporated
herein by reference to Exhibit 10.15 of the
Registration Statement filed with the Commission
on June 9, 2000)
10.16 Supply Agreement for Bulk Narcotics Raw
Materials, dated as of July 1, 1998, by and
between Endo Pharmaceuticals and Mallinckrodt
(incorporated herein by reference to Exhibit
10.16 of the Registration Statement filed with
the Commission on June 9, 2000)
10.17 Manufacture and Supply Agreement, dated as of
August 26, 1997, by and among Endo
Pharmaceuticals, DuPont Merck Pharmaceutical and
DuPont Merck Pharma (incorporated herein by
reference to Exhibit 10.17 of the Registration
Statement filed with the Commission on June 9,
2000)
10.18 Strategic Alliance Agreement, dated as of September
17, 1997, by and between Endo Pharmaceuticals and
Penwest Pharmaceuticals Group (incorporated herein
by reference to Exhibit 10.18 of the Registration
Statement filed with the Commission on June 9,
2000)
10.19 Agreement, dated as of February 1, 2000, by and
between Endo Pharmaceuticals and Livingston
Healthcare Services Inc. (incorporated herein by
reference to Exhibit 10.19 of the Registration
Statement filed with the Commission on June 9,
2000)
10.20 Medical Affairs Support Services Agreement,
dated as of June 1, 1999, by and between Endo
Pharmaceuticals and Kunitz and Associates, Inc.
(incorporated herein by reference to Exhibit
10.20 of the Registration Statement filed with
the Commission on June 9, 2000)
10.21 Endo Pharmaceuticals Holdings Inc. 2000 Stock
Incentive Plan (incorporated herein by reference
to Exhibit 10.21 of the Quarterly Report on Form
10-Q for the Quarter Ended September 30, 2000)
10.22 Endo LLC Amended and Restated 1997 Employee
Stock Option Plan (incorporated herein by
reference to Exhibit 10.22 of the Quarterly
Report on Form 10-Q for the Quarter Ended
September 30, 2000)
10.23 Endo LLC Amended and Restated 1997 Executive
Stock Option Plan (incorporated herein by
reference to Exhibit 10.23 of the Quarterly
Report on Form 10-Q for the Quarter Ended
September 30, 2000)
10.24 Endo LLC 2000 Amended and Restated Supplemental
Employee Stock Option Plan (incorporated herein
by reference to Exhibit 10.24 of the Quarterly
Report on Form 10-Q for the Quarter Ended
September 30, 2000)
10.25 Endo LLC 2000 Amended and Restated Supplemental
Executive Stock Option Plan (incorporated herein
by reference to Exhibit 10.25 of the Quarterly
Report on Form 10-Q for the Quarter Ended
September 30, 2000)
10.26 Employment Agreement, dated as of July 17, 2000,
by and between Endo and John W. Lyle
(incorporated herein by reference to Exhibit
10.26 of the Form 10-Q for the Quarter Ended
June 30, 2000)
10.27 Amended and Restated Employment Agreement, dated
as of September 1, 2001, by and between Endo
Pharmaceuticals and Carol A. Ammon (incorporated
herein by reference to Exhibit 10.27 of the
Current Report on Form 8-K dated August 31,
2001)
10.28 Amended and Restated Employment Agreement, dated
as of September 1, 2001, by and between Endo
Pharmaceuticals and Jeffrey R. Black
(incorporated herein by reference to Exhibit
10.28 of the Current Report on Form 8-K dated
August 31, 2001)
10.29 Amended and Restated Employment Agreement, dated
as of September 1, 2001, by and between Endo
Pharmaceuticals and David Allen Harvey Lee, MD,
Ph.D. (incorporated herein by reference to
Exhibit 10.29 of the Current Report on Form 8-K
dated August 31, 2001)
10.30 Amended and Restated Employment Agreement, dated
as September 1, 2001, by and between Endo
Pharmaceuticals and Mariann T. MacDonald
(incorporated herein by reference to Exhibit
10.30 of the Current Report on Form 8-K dated
August 31, 2001)
10.31 Separation and Release Agreement, dated as of
March 22, 2000, by and between Endo
Pharmaceuticals, Endo and Osagie O. Imasogie
(incorporated herein by reference to Exhibit
10.31 of the Registration Statement filed with
the Commission on June 9, 2000)
10.32 Separation and Release Agreement, dated as of
April 20, 2000, by and between Endo
Pharmaceuticals, Endo and Louis J. Vollmer
(incorporated herein by reference to Exhibit
10.32 of the Registration Statement filed with
the Commission on June 9, 2000)
10.33 Office Lease, dated as of August 26, 1997, by
and between Endo Pharmaceuticals and Northstar
Development Company (incorporated herein by
reference to Exhibit 10.33 of the Registration
Statement filed with the Commission on June 9,
2000)
10.34 Lease Agreement, dated as of May 5, 2000, by and
between Endo Pharmaceuticals and Painters'
Crossing One Associates, L.P. (incorporated
herein by reference to Exhibit 10.34 of the
Registration Statement filed with the Commission
on June 9, 2000)
10.35 Amended and Restated Employment Agreement, dated
as of September 1, 2001, by and between Endo and
Caroline B. Manogue (incorporated herein by
reference to Exhibit 10.35 of the Current Report
on Form 8-K dated August 31, 2001)
10.36 Amended and Restated Employment Agreement, dated
as of September 1, 2001, by and between Endo and
Peter A. Lankau (incorporated herein by
reference to Exhibit 10.36 of the Current Report
on Form 8-K dated August 31, 2001)
10.37 License Agreement, dated as of August 16, 1993,
by and between Endo Inc. (f/k/a Algos
Pharmaceutical Corporation) and The Medical
College of Virginia (incorporated herein by
reference to Exhibit 10.4.1 of the registration
statement on Form S-1 of Algos Pharmaceutical
Corporation declared effective on September 25,
1996)
10.38 [Intentionally Omitted.]
10.39 Master Development and Toll Manufacturing
Agreement, dated as of May 3, 2001, by and
between Novartis Consumer Health, Inc. and Endo
Pharmaceuticals Inc. (incorporated herein by
reference to Exhibit 10.39 of the Form 10-Q for
the Quarter Ended June 30, 2001)
10.40 [Intentionally Omitted.]
10.41 Service Agreement, dated as of February 1, 2001,
by and between Endo Pharmaceuticals Inc. and
Ventiv Health U.S. Sales Inc. (incorporated
herein by reference to Exhibit 10.41of the
Current Report on Form 8-K dated August 31,
2001)
11 Statement Regarding Computation of per Share Earnings
Exhibit 11
Endo Pharmaceuticals Holdings Inc.
Statement Regarding Computation of Per Share Earnings
(in thousands, except per share data)
Three Months Ended Nine months Ended
September 30, September 30,
----------------------------------------------------------
2001 2001 2000 2000
---- ---- ---- ----
Numerator:
Net loss available to common stockholders $ (32,993) $ (136,548) $ (44,500) $ (153,534)
========== =========== ========== ===========
Denominator:
For basic per share data - weighted average shares 89,139 85,848 89,139 76,202
Effect of dilutive stock options - - - -
---------- ----------- --------- -----------
For diluted per share data
89,139 85,848 89,139 76,202
========== =========== ========= ===========
Basic loss per share
$ (.37) $ (1.59) $ (.50) $ (2.01)
========== =========== ========= ===========
Diluted loss per share
$ (.37) $ (1.59) $ (.50) $ (2.01)
========== =========== ========= ===========