10-Q 1 l88266ae10-q.txt DURAMED PHARMACEUTICALS FORM 10-Q 1 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 March 31, 2001 OR [ ] 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. 0-15242 DURAMED PHARMACEUTICALS, INC. Incorporated Under the IRS Employer I.D. Laws of the State No. 11-2590026 of Delaware 7155 East Kemper Road Cincinnati, Ohio 45249 (513) 731-9900 Indicate by checkmark 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, and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- Common Stock, $.01 par value per share: Shares Outstanding as of May 4, 2001 26,685,856 Page 1 of 23 pages 2 DURAMED PHARMACEUTICALS, INC. INDEX Page PART I. Financial Information ---- ----------------------------- ITEM 1. Financial Statements Consolidated Balance Sheets.................................... 3-4 Consolidated Statements of Operations.......................... 5 Consolidated Statements of Cash Flows.......................... 6 Consolidated Statements of Stockholders' Equity ............... 7 Notes to Consolidated Financial Statements..................... 8 - 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 12 - 20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..... 20 PART II. Other Information -------------------------- ITEM 1. Legal Proceedings ....................................... 21 ITEM 6. Exhibits and Reports on Form 8-K ........................... 22 SIGNATURES ........................................................... 23 -2- 3 DURAMED PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS ASSETS

See accompanying notes. -3- 4 DURAMED PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES, MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

See accompanying notes. -4- 5 DURAMED PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes. -5- 6 DURAMED PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes. -6- 7 DURAMED PHARMACEUTICALS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

See accompanying notes. -7- 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Interim Financial Data ---------------------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report of Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") on Form 10-K/A for the year ended December 31, 2000 (the "2000 10-K/A"). Note 2: Inventories ----------------------- Inventories are stated at the lower of cost (first-in, first-out) or market. Components of inventories include: March 31, December 31, 2001 2000 ------------ ------------ Raw materials $ 15,124,433 $ 15,686,281 Work-in-process 319,919 347,496 Finished goods 17,224,663 17,226,616 Obsolescence reserve (6,828,526) (6,566,988) ------------ ------------ Net inventory $ 25,840,489 $ 26,693,405 ============ ============ Note 3: Accrued Liabilities ------------------------------- The Company's accrued liabilities consist of the following: March 31, December 31, 2001 2000 ----------- ----------- Brand marketing expenses $ 6,066,940 $ 6,377,408 Profit sharing for joint product development activities 2,913,595 2,719,487 Wages and other compensation 2,551,008 1,592,642 Taxes, other than income taxes 1,082,527 906,598 Bio-studies 597,184 97,009 Other 1,204,117 1,948,592 ----------- ----------- $14,415,371 $13,641,736 =========== =========== -8- 9 Accrued brand marketing expenses represent the amount due Solvay Pharmaceuticals, Inc. ("Solvay Pharmaceuticals") for marketing expenses associated with Solvay Pharmaceuticals' promotion of the Company's Cenestin(R) (synthetic conjugated estrogens, A) Tablets ("Cenestin"). Note 4: Debt and Mandatory Redeemable Convertible Preferred Stock --------------------------------------------------------------------- The Company's debt and mandatory redeemable convertible preferred stock consists of the following: March 31, December 31, 2001 2000 --------------------------- Foothill Capital financing facilities: Revolving credit facility $15,016,447 $17,123,241 Intangible term note 3,229,167 3,666,667 Equipment term note 2,659,068 2,860,208 Provident Bank mortgage notes 18,400,000 18,800,000 Note payable to contract sales organization 747,795 886,504 Installment notes payable 95,065 47,185 Other 604,535 467,539 ----------- ----------- 40,752,077 43,851,344 Less amount classified as current 4,795,724 4,743,913 ----------- ----------- $35,956,353 $39,107,431 =========== =========== Mandatory redeemable convertible preferred stock $ 8,305,062 $ 8,177,000 =========== =========== Debt ---- The Company's principal lender is Foothill Capital Corporation ("Foothill"). The initial term of the agreement with Foothill is through November 2002, with provisions for renewals. The financing agreement provides for a revolving credit facility--collateralized by the Company's trade receivables and inventories--and two term notes. The Company's borrowing capacity under the revolving credit facility fluctuates based on the dollar amount of eligible trade receivables and inventory and bears interest at the prime rate plus 0.50% (8.50% at March 31, 2001). The equipment term note, secured by specified equipment, bears interest at the prime rate plus 0.75% (8.75% at March 31, 2001) and requires monthly principal payments of $67,047 plus interest for the remaining term of the note, subject to renewal of the financing agreement. The intangible term note is a four-year term loan, collateralized by the intangible assets of the Company, which bears interest at the prime rate plus 1.25% (9.25% at March 31, 2001). The note requires monthly principal payments of $145,833 plus interest for the term of the note. -9- 10 The Provident Bank mortgage notes represent a $12.0 million note and an $8.0 million note collateralized by a first mortgage on the Company's Cincinnati, Ohio manufacturing facility. Both notes are guaranteed by Solvay America, the parent of Solvay Pharmaceuticals. The $12.0 million note bears interest at the prime rate (8.00% at March 31, 2001) and requires monthly payments of $100,000 plus interest for a ten-year period commencing April 1, 2000. The $8.0 million note bears interest at the prime rate and requires monthly payments of $33,333 plus interest commencing April 1, 2000. Principal payments for the $8.0 million note are based upon a twenty-year amortization with a balloon payment due on March 1, 2010 of $4.0 million. The note payable to a contract sales organization, initially in the principal amount of $1,650,000, represents the initial cost to establish the brand sales force which is representing the Company's brand products (initially Cenestin) to the physician community. The firm with which the Company has contracted to establish and manage the dedicated sales force agreed to finance its own startup costs over the 36-month term of the agreement in exchange for a monthly principal and interest payment by the Company of $53,240. The loan is unsecured and carries an interest rate of 10%. The carrying value of the Company's debt approximates fair market value. Mandatory Redeemable Convertible Preferred Stock ------------------------------------------------ On May 12, 2000, the Company completed a private placement of $10.0 million of Series G Mandatory Redeemable Convertible Preferred Stock with an institutional investor. The preferred shares are immediately convertible to shares of the Company's Common Stock at a fixed price of $5.06 per share. The preferred stock pays a dividend of 5% annually, payable quarterly in arrears, on all unconverted shares. Any of the Series G Preferred Stock that remains outstanding will be automatically redeemed on May 12, 2004. The investor also received warrants which were valued at $765,000 to purchase 500,000 shares of Common Stock at a price of $5.50 per share, exercisable at any time before May 12, 2005. In conjunction with the Company's issuance of the Series G Preferred Stock, an adjustment of $1.3 million was recorded in the year ended December 31, 2000 to properly reflect deemed dividends beyond the stated 5% dividend rate and a beneficial conversion feature as required by EITF 98-5 and 00-27. This adjustment, which has reduced the carrying amount of the Series G Preferred Stock and increased additional paid-in capital, will be amortized through May 12, 2004 and reflected as additional deemed dividends during this period. For the quarter March 31, 2001, the Company has amortized $83,437 of the deemed dividend adjustment. -10- 11 Note 5: Earnings (Loss) Per Common Share -------------------------------------------- The following is a reconciliation of the numerators and denominators to calculate income (loss) per common share:

-11- 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------------------- RESULTS OF OPERATIONS. ---------------------- OVERVIEW -------- Certain statements in this Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including those concerning management's expectations with respect to future financial performance and events, particularly relating to sales of current products as well as the introduction of new manufactured and distributed products. Forward-looking statements involve known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company, which could cause actual results and outcomes to differ materially from those expressed. Factors that might affect the forward-looking statements set forth in this Form 10-Q include, among others, (i) increased competition from new and existing competitors and pricing practices of those competitors, (ii) the amount of funds continuing to be available for internal research and development and for research and development joint ventures, (iii) research and development project delays or delays in obtaining regulatory approvals, (iv) the ability of the Company to retain and attract personnel in key operational areas, (v) the status of strategic alliances, and (vi) the success of brand marketing efforts. Duramed develops, manufactures, and distributes a line of prescription drug products in tablet, capsule and liquid forms to customers throughout the United States. Products sold by the Company include those of its own manufacture and those it markets under arrangements with other drug manufacturers. The Company's results include expenses associated with a product development program designed to generate a stream of new product offerings. The Company's strategy has been to focus its product development activities primarily on prescription drugs with attractive market opportunities and potentially limited competition due to technological barriers of entry--particularly the women's health and the hormone replacement therapy market. The Company's product development efforts include modified release technologies as well as controlled substances development. OUTLOOK Business Strategy Outlook -- Based on assessments of the market opportunities for hormone products and the related impact on Duramed's revenues and profitability, management believes that (subject to business risks described elsewhere in this document) the continued market penetration of Cenestin and Apri(R) (desogestrel and ethinyl estradiol) Tablets ("Apri"), the introduction of Aviane(TM)(levonorgestrel 100 mcg and ethinyl estradiol 20 mcg) Tablets, ("Aviane") and anticipated approvals of additional hormone products in 2001 will continue to improve Duramed's long-term outlook and enhance the Company's ability to become a leader in the women's health market. -12- 13 To achieve its goals of leadership and improving operating performance, the Company's business plan involves primary focus on three areas: Maximize the Market Penetration of Cenestin -- Cenestin, an estrogen replacement therapy (ERT), competes with other ERT/HRT (hormone replacement therapy) products in a market approaching $2.0 billion in the United States alone. According to leading pharmaceutical market data providers, the HRT market is growing at a projected annual rate of 10-15%. ERT/HRT therapies are prescribed for women entering into or in menopause. The average age for women entering menopause is 51 years. Currently, more than 40 million women in the U.S. are over 50 and, therefore, candidates to take either ERT (estrogen only) or HRT (estrogen with progestin). According to the American College of Obstetrics and Gynecology, the first wave of "baby boomer" women (born between 1945-1960) is now entering menopause, and another 20 million will reach menopause in the next decade. Duramed believes that the distinctive characteristics of its product will contribute to its ability to capture a significant share of the ERT market. To help communicate Cenestin's availability and favorable characteristics, on March 30, 1999 Duramed entered into a marketing and distribution agreement with Cardinal Health Sales and Marketing Services ("Cardinal") to perform the necessary direct-to-doctor sales efforts. To expand and enhance the promotion of Cenestin, in the fourth quarter of 1999 Duramed entered into an agreement with Solvay Pharmaceuticals to jointly promote three of the companies' hormone products in the United States: Duramed's Cenestin and Solvay Pharmaceuticals' Estratest(R)/Estratest(R) H.S. and Prometrium(R). The agreement resulted in a combined national sales force of approximately 300 Cardinal and Solvay Pharmaceuticals sales representatives who promote the alliance's products to physicians across the United States. Solvay Pharmaceuticals' resources also include teams of regional marketing managers, district managers, medical liaison teams, and a medical advisory committee comprised of leading women's health physicians. Cenestin was designated as the primary product in the Duramed/Solvay Pharmaceuticals alliance while the Solvay Pharmaceuticals products address additional important therapeutic requirements in women's health and complement Cenestin in the pharmaceutical sales effort. -13- 14 The original agreements for the three product co-promotions had expiration dates of December 31, 2000. The Company and Solvay have continued the co-promotion of Estratest/Estratest H.S. and Prometrium past that date without a formal extension of the agreements. Effective January 1, 2000, the Company and Solvay entered into a letter agreement relating to Cenestin which outlines a 10-year marketing agreement whereby the two companies will share in the profits of Cenestin. Solvay Pharmaceuticals assumed responsibility for the advertising and sales promotion and agreed-upon expenses related to Cenestin, including the direct selling expenses of Cardinal. In consideration of the aforementioned services and funding, Solvay Pharmaceuticals receives 80% of the gross profit from Cenestin, and Duramed receives 20%, until Solvay's cumulative selling and marketing investment is recovered and Cenestin becomes an income-producing product. The Company records the amount for reimbursement of Solvay Pharmaceuticals' marketing expenses (80% of Cenestin gross profits) as "brand marketing expenses" on the accompanying Consolidated Statement of Operations. After the income producing level is achieved, Duramed will receive 80% of the gross profit dollars and Solvay Pharmaceuticals 20% until Duramed recovers the remaining portion of $38 million the Company invested in the product during 1999. After each company has recovered its specified investments, the net profit dollars will be split equally for the remainder of the ten-year term of the agreement. Discussions are continuing with Solvay with respect to maximizing the effects of Cenestin marketing. Successfully Commercialize Approved and Filed Products -- On May 1, 2001, the Company announced U.S. Food and Drug Administration ("FDA") approval of its Abbreviated New Drug Application (ANDA) for Aviane. Aviane is therapeutically equivalent to Alesse(TM). Aviane is the first and only generic product deemed bioequivalent to and therapeutically interchangeable with Alesse for all new and refill prescriptions. According to IMS America, Ltd. data for drugstore and non-retail purchases, Alesse sales in 2000 were approximately $130 million, up 35% from 1999. Aviane is Duramed's second entry into the $2 billion oral contraceptive market. Aviane is the first approved generic substitute for Alesse and presently has no other generic competitors. Like Apri, the Company will be marketing Aviane as a value brand, meaning that the product can be written as a prescription by physicians and/or substituted for the brand product by pharmacists. Apri, the Company's first oral contraceptive product is the first, and currently the only, product therapeutically interchangeable with Ortho-Cept(R) and Desogen(R) tablets for all new and refill prescriptions. This product was the first product marketed under the Company's agreement with Gedeon Richter, Ltd. The agreement provides for the profits generated by products under the agreement to be split between Duramed and Gedeon -14- 15 Richter. The market for these desogestrel products at brand prices is estimated to be approximately $159 million. Prescriptions for Apri totaled 674,000 for the first quarter 2001, up approximately 100% from first quarter 2000, the first full quarter of oral contraceptive sales, and up 9% from the fourth quarter 2000. Apri has captured more than 40% of the total prescriptions in the segment in which it competes and more than 3% of the entire oral contraceptive market since its launch in the fourth quarter of 1999. The Company currently has four ANDAs on file with the FDA. Three of these ANDAs are for oral contraceptive products. Of the four products awaiting approval at FDA, one, the Company's filing on Mircette(TM), represents an ANDA for which Duramed was first to file. In 2000, the brand sales for this product were approximately $120 million. Approvals of these filings are expected to begin in 2001. The Company's filing on Mircette(TM) is currently under litigation. The Mircette patent is held by Biotechnology General Corp., which has filed suit for declaratory and injunctive relief claiming Duramed's product infringes its patent. Duramed is vigorously defending this lawsuit, claiming that the patent at issue is invalid and, in any event, not infringed. The Waxman-Hatch Act provides that Duramed will be awarded a 180-day period of generic marketing exclusivity should it prevail in the lawsuit. Continue to Invest in Product Development Activities -- During the remainder of 2001, the Company expects to file five additional ANDAs for hormones, including a progestin, an estrogen, and three oral contraceptives. Duramed also anticipates filing three non-hormone ANDAs. The 2000 combined brand sales on these eight items exceeded $550 million. The progestin product is a micronized natural progesterone on which the necessary development work is complete. The Company anticipates filing this ANDA in late 2001. Clinical studies for the combination therapy of this product plus Cenestin will be initiated as funds generated from recently approved products and other resources become available. Duramed has five products, in various stages of development, that the Company intends to file as NDAs. These products, including the combination of Cenestin with a natural progesterone, if approved, should expand the Cenestin brand franchise. Evaluation of the potential for patenting the technology used to develop these extensions of the Cenestin franchise is also in process. Assuming successful completion of the required clinical studies and FDA approval, the Company anticipates these products could be to market in three to four years. -15- 16 With the resources provided by the Company's expanding female hormone product portfolio, the Company intends to expand its research and development in the women's healthcare area. The Company continues its Phase IV Studies program to examine the multiple benefits of Cenestin in areas such as the central nervous system, cardiovascular system, skeletal system, and fibromyalgia. In the first quarter studies commenced involving 0.3 mg, 0.625 mg, and 1.25 mg Cenestin dosage strengths. In the central nervous system (CNS), two studies are underway to measure Cenestin's effects on cerebral blood flow. Another CNS study evaluates Cenestin's capacity to improve sleep quality. In the area of fibromyalgia, the Company also commenced a study regarding Cenestin's potential ability to positively impact pain and range of motion disorders. This study will provide information on Cenestin's effects on BMD - bone mineral density. In late 1999, the Company completed a bone marker study that demonstrated that Cenestin caused a favorable reduction in bone markers, which indicates a bone preservation effect. In addition, in the cardiovascular evaluation, a positive lipid profile was found. The Company's business strategy includes pursuing strategic partnerships on product projects where appropriate in order to fund projects. The Company's ability to achieve its business plan is dependent upon a number of factors including: (1) the rate at which Cenestin continues to penetrate the ERT market; (2) the sales performance of Apri and Aviane; (3) the successful approval and commercialization of products on file with the FDA and the development of additional potential sources of revenue; (4) the profit level generated from the Company's current business; and (5) the level of spending on product development projects including clinical and bioequivalency studies. -16- 17 RESULTS OF OPERATIONS --------------------- NET SALES Net sales increased $10.7 million (64.7%) for the three months ended March 31, 2001 compared to the same period in 2000. Of the $27.3 million revenue generated in the quarter, $14.6 million (53.3%) came from hormone product sales. Hormone product sales for the first quarter of 2000 were $7.5 million (45.2%). First quarter 2001 Cenestin revenues were $6.6 million, as compared to $2.9 million in the first quarter 2000. Oral contraceptive revenues were $7.2 million as compared to $4.0 million in the first quarter 2000. Non-hormone product sales were $12.7 million in the first quarter 2001, as compared to $9.1 million in first quarter 2000, an increase of 39.6%, due primarily to increased sales of selected seasonal cough/cold products. GROSS MARGIN Gross margins, and the corresponding percentages of net sales, for the three-month periods ended March 31, 2001 and 2000, were $12.8 million (46.7%), and $5.6 million (33.9%), respectively. The gross margin improvement (128.6%) was due to greater sales of higher margin products, principally hormone products and seasonal cough/cold products. Various factors are expected to impact the Company's gross margin in 2001 and beyond, the most significant of which will be the rate at which Cenestin penetrates the ERT market and the contribution from recently approved products, such as Aviane. Approvals of pending applications, and the contributions from manufacturing service revenues could also favorably impact the gross margin. FDA approval of the Company's pending applications is outside the Company's control and management cannot precisely predict whether or when these approvals will be obtained. The Company's generic products are subject to price deterioration as market conditions change, particularly when additional competitive products are introduced as a result of FDA approvals; this has occurred with some of the Company's products, such as methylprednisolone. These impacts can be material depending on the products affected. -17- 18 PRODUCT DEVELOPMENT Product development expenditures for the three-month period ended March 31, 2001, decreased $175,000 compared to the same period in 2000. The reduction resulted from the savings realized by the consolidation of product development activities into the Company's Cincinnati, Ohio facility. The Company's product development emphasis is on hormone therapies, modified release technologies and controlled substances. The Company will continue to leverage its formulation and production capabilities to pursue opportunities for both branded and multi-source products in the women's healthcare market, as this field offers significant profit potential. Duramed's top priority will be to focus on solid oral dose hormone products developed in-house. The Company also plans to enter into strategic partnerships, where possible, so as to expand its product development capabilities. Such partnering may occur in order to fund clinical studies that require large financial commitments. Other product development projects will be funded internally. The expense level in the first quarter is consistent with the Company's business plan, and expected 2001 product development expenditures remain at $10.0 million compared to $3.8 million in 2000. Product development expenses are dependent on the timing of biostudies and clinical studies and the Company's continuing efforts to balance product development spending and available resources. BRAND MARKETING AND SELLING The Company's brand marketing and selling expenses for the three months ended March 31, 2001 increased $2.6 million compared with the same period in 2000. The increase represents Solvay Pharmaceuticals' share of Cenestin profits resulting from increased Cenestin revenues. GENERAL AND ADMINISTRATIVE General and administrative expenses increased $557,000 for the three months ended March 31, 2001 compared with the same period in 2000, principally due to additional hires and personnel-related expenses. -18- 19 NET INTEREST EXPENSE AND INTEREST RATE RISK The Company's borrowings are primarily variable rate facilities. Net interest expense decreased by $340,000 in the first quarter of 2001 compared to the same period in 2000, due to reduced interest rates and the reduced balance outstanding of interest bearing obligations. At March 31, 2001 the Company had floating rate debt totaling $39.3 million, with interest fluctuating based on changes in the prime rate. As a result, annual interest expense in 2001 will fluctuate based upon fluctuations in those rates. INCOME TAXES The income tax provision in the three months ended March 31, 2001 represents alternative minimum tax. A provision for alternative minimum tax was not required for the three months ended March 31, 2000, due to the net loss. A provision for regular income tax was not required for the three months ended March 31, 2001, due to net operating loss carryforwards of approximately $108 million. PREFERRED DIVIDENDS The Series G Mandatory Redeemable Convertible Preferred Stock (issued in May 2000) provides for a 5% dividend on unconverted shares. Preferred stock dividends and deemed dividends aggregated $208,437 for the three-month period ended March 31, 2001, and represented dividends associated with the unconverted portion of the Series G Preferred Stock. The Series F Mandatory Redeemable Convertible Preferred Stock (issued in February 1998) provided for a 5% dividend on unconverted shares. Preferred Stock dividends of $16,905 in the three-month period ended March 31, 2000 represented dividends associated with the unconverted portion of Series F Preferred Stock. These shares now have all been converted into Common Stock. BENEFICIAL CONVERSION DIVIDEND In conjunction with the issuance of the Series G Preferred Stock, the Company recorded an adjustment of $1.3 million in the year ended December 31, 2000 to properly reflect deemed dividends beyond the stated 5% dividend rate and a beneficial conversion feature as required by EITF 98-5 and 00-27. This adjustment, which has reduced the carrying amount of the Series G Preferred Stock and increased additional paid-in-capital, will be amortized through May 12, 2004 and reflected as additional deemed dividends during this period. For the three-month period ended March 31, 2001, the Company has amortized $83,437 of the deemed dividend adjustment. -19- 20 LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Operating and Financing Activities For the first quarter of 2001 the Company had net income of $1.8 million which contributed to $3.8 million of cash flows from operating activities, $2.1 million of which was used to reduce the outstanding balance on the Company's revolving credit facility and $1.3 million of which was used to reduce scheduled long-term debt. Investing Activities In the first quarter of 2001, capital expenditures were $0.9 million. Expenditures were principally for manufacturing and packaging equipment. AVAILABLE FUNDS The resources provided by the Company's expanding product portfolio are expected to allow the Company to access sufficient funds to execute the Company's business plan within the existing financing arrangements. As noted above, certain product development activities may depend on obtaining additional sources of financing, through partnering or other means. SEASONALITY Certain of the Company's generic products have a degree of seasonality, the effect of which the Company attempts to mitigate by adding complementary products to its line. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------------------- The information required by Item 3 is included in Net Interest Expense and Interest Rate Risk. -20- 21 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------------------- On September 5, 2000, the Company filed an antitrust lawsuit against Wyeth-Ayerst Laboratories, Inc., the makers of Premarin(R). The complaint, (Duramed Pharmaceuticals, Inc. vs. Wyeth-Ayerst Laboratories, Inc., Case No. C-1-00-735), filed in the Cincinnati Federal District Court, alleges that Wyeth-Ayerst, a subsidiary of American Home Products Corporation, has illegally perpetuated a monopoly in conjugated estrogens products by, among other things, inducing managed care organizations (MCOs) into exclusive contracts for Premarin, therefore eliminating the possibility of Cenestin being placed on formulary with those same MCOs. Duramed seeks actual and treble damages associated with profits lost due to Wyeth-Ayerst's conduct in violation of antitrust laws and seeks to permanently enjoin Wyeth-Ayerst from engaging in anti-competitive and exclusionary conduct. Duramed is the sole plaintiff for the litigation. Duramed's marketing partner for Cenestin, Solvay Pharmaceuticals, is not associated with the lawsuit. Among other things, the suit alleges that, on or about the time of the FDA approval of Cenestin, Wyeth-Ayerst began forming exclusive contracts with MCOs that contained language stating that Premarin be used as "the sole and exclusive conjugated estrogens" on the MCO's formulary. By agreeing to this contract, MCOs would be eligible for Wyeth-Ayerst's rebates and/or administrative fees tied directly to sales of Premarin. Further alleged is that Wyeth-Ayerst has employed "disguised" exclusive contracts that tie the rebates and/or administrative fees that Wyeth-Ayerst pays to an individual MCO to that MCO's national market share of Premarin sales. This, in effect, compels the MCO to promote Premarin and ignore Cenestin. Duramed alleges that both types of contracts violate 15 U.S.C.ss.1 and 2, the Sherman Act, and 15 U.S.C.ss.3, the Clayton Act. On October 26, 2000, Wyeth-Ayerst filed a Motion to Dismiss the Complaint in its entirety, as well as a Motion to Strike certain allegations in the Complaint. On November 7, 2000, Duramed filed a Memorandum in Opposition to Wyeth-Ayerst's Motion to Dismiss and Motion to Strike. Wyeth-Ayerst's Motion remains pending before the Court. On March 1, 2001, Duramed filed a Motion to Compel further production of documents from Wyeth-Ayerst. On March 22, 2001, Wyeth-Ayerst filed a Memorandum in Opposition to Duramed's Motion to Compel. Duramed's Motion remains pending before the Court. In the meantime, discovery is proceeding, with both parties having exchanged documents. -21- 22 The Company is involved in various additional lawsuits and claims, which arise in the ordinary course of business. Although the outcome of such lawsuits and claims cannot be predicted with certainty, their disposition will not, in the opinion of management, result in a material adverse effect on the Company's financial position or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------------------- (a) Exhibits None (b) Reports on Form 8-K for the quarter ended March 31, 2001: None -22- 23 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. DURAMED PHARMACEUTICALS, INC. Dated: May 9, 2001 by: /s/ E. Thomas Arington -------------------------- --------------------------------- E. Thomas Arington Chairman of the Board Chief Executive Officer Dated: May 9, 2001 by: /s/ Timothy J. Holt -------------------------- --------------------------------- Timothy J. Holt Senior Vice President Finance and Administration, Treasurer, Chief Financial Officer -23-

DURAMED PHARMACEUTICALS INC 10-Q