10-Q 1 l89888ae10-q.txt DURAMED PHARMACEUTICALS, INC. 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 June 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 __________ 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 August 7, 2001 27,100,222 Page 1 of 27 pages 2 DURAMED PHARMACEUTICALS, INC. INDEX PART I. Financial Information Page -------------------------------- ---- ITEM 1. Financial Statements Consolidated Balance Sheets ................................. 3-4 Consolidated Statements of Operations ....................... 5 Consolidated Statements of Cash Flows ....................... 6 Consolidated Statement of Stockholders' Equity .............. 7 Notes to Consolidated Financial Statements .................. 8-13 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......... 14-23 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .. 23 PART II. Other Information ---------------------------- ITEM 1. Legal Proceedings ........................................... 24-25 ITEM 4. Submission to a Vote of Security Holders .................... 25 ITEM 6. Exhibits and Reports on Form 8-K............................. 26 SIGNATURES.............................................................. 27 - 2 - 3 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS 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 (UNAUDITED)

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

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 six-month period ended June 30, 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: June 30, December 31, 2001 2000 ------------ ------------ Raw materials $ 15,016,302 $ 15,464,667 Work-in-process 249,156 347,496 Finished goods 17,324,424 16,544,207 Obsolescence reserve (5,376,118) (5,662,965) ------------ ------------ Net inventory $ 27,213,764 $ 26,693,405 ============ ============ - 8 - 9 Note 3. Accrued Liabilities The Company's accrued liabilities consist of the following: June 30, December 31, 2001 2000 ----------- ----------- Brand marketing expenses $ 5,219,268 $ 6,377,487 Profit sharing for joint product development activities 4,544,355 2,719,487 Wages and other compensation 2,393,014 1,592,642 Taxes, other than income taxes 1,268,606 906,598 Deferred merger expense 750,000 -- Bio-studies 596,092 97,009 Other 1,172,478 1,948,592 ----------- ----------- $15,943,813 $13,641,736 =========== =========== Accrued brand marketing expenses represent the amount due Solvay Pharmaceuticals, Inc. ("Solvay Pharmaceuticals") for reimbursement of marketing expenses associated with Solvay Pharmaceuticals' promotion of the Company's Cenestin(R) (synthetic conjugated estrogens, A) Tablets ("Cenestin") product. - 9 - 10 Note 4: Debt and Mandatory Redeemable Convertible Preferred Stock The Company's debt and mandatory redeemable convertible preferred stock consists of the following:

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% (7.25% at June 30, 2001). The equipment term note, secured by specified equipment, bears interest at the prime rate plus 0.75% (7.50% at June 30, 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% (8.00% at June 30, 2001). The note requires monthly principal payments of $145,833 plus interest for the term of the note. - 10 - 11 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 (6.75% at June 30, 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 represents 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 three and six month periods ended June 30, 2001, the Company amortized $83,436 and $166,873, respectively, of the deemed dividend adjustment. - 11 - 12 Note 5: Earnings (Loss) Per Common Share The following is a reconciliation of the numerators and denominators to calculate earnings (loss) per common share:

- 12 - 13 Note 6: Merger Agreement On June 29, 2001, Duramed and Barr Laboratories, Inc. ("Barr") announced the planned merger of the two companies and executed a Definitive Agreement setting forth the provisions of the merger. In the merger, holders of Duramed common stock will receive .2562 shares of Barr common stock for each of their shares of Duramed common stock and holders of Duramed preferred stock will receive 5.0632 shares of Barr common stock for each of their shares of Duramed preferred stock. Duramed stockholders will receive cash for any fractional shares of Barr common stock they would otherwise receive in the merger. The transaction, subject to approval by the stockholders of Duramed and of Barr, antitrust clearance under the Hart-Scott-Rodino Act and other customary approvals and conditions, is expected to close late in Duramed's third quarter or early in its fourth quarter and is expected to be a tax-free exchange, accounted for under the "pooling of interests" method. Under certain specified circumstances, if the merger is not consummated the Company is obligated to pay Barr $15 million. Additionally, Barr is obligated to pay Duramed a termination fee of $15 million if the Barr stockholders do not approve issuance of Barr common stock in connection with the merger. - 13 - 14 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 products in the women's health and the hormone replacement therapy markets. MERGER AGREEMENT On June 29, 2001, Duramed and Barr Laboratories, Inc. ("Barr") announced the planned merger of the two companies and executed a Definitive Agreement setting forth the provisions of the merger. In the merger, holders of Duramed common stock will receive .2562 shares of Barr common stock for each of their shares of Duramed common stock and holders of Duramed preferred stock will receive 5.0632 shares of Barr common stock for each of their shares of Duramed preferred stock. Duramed stockholders will receive cash for any fractional shares of Barr common stock they would otherwise receive in the merger. The transaction, subject to approval by the stockholders of Duramed and of Barr, antitrust clearance under the Hart-Scott-Rodino Act and other customary approvals and conditions, is expected to close late in Duramed's third quarter or early in its fourth quarter and is expected to be a tax-free exchange, accounted for under the "pooling of interests" method. - 14 - 15 Under certain specified circumstances, if the merger is not consummated the Company is obligated to pay Barr $15 million. Additionally, Barr is obligated to pay Duramed a termination fee of $15 million if the Barr stockholders do not approve issuance of Barr common stock in connection with the merger. Except as specifically noted, the statements in this report do not reflect the effects of the merger and present Duramed's business on a "stand-alone" basis. 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"), the approval of the Company's third oral contraceptive, Enpresse(TM) (levonorgestrel and ethinyl estradiol) Tablets ("Enpresse") 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. 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 - 15 - 16 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. 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. 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. Successfully Commercialize Approved and Filed Products -- On July 17, 2001, the Company announced FDA approval of its Abbreviated New Drug Application ("ANDA") for its third oral contraceptive, Enpresse(TM) (levonorgestrel and ethinyl estradiol) Tablets, - 16 - 17 a triphasic regimen oral contraceptive. Enpresse is bioequivalent to and therapeutically interchangeable with Triphasil(R) and Tri-Levlen(R) for all new and refill prescriptions. According to IMS America Ltd. ("IMS") data for drugstore and non-retail purchases, branded and generic equivalent sales in 2000 for all levonorgestrel and ethinyl estradiol triphasic regimen oral contraceptive drug products exceeded $230 million. Shipping of Enpresse, Duramed's seventh solid oral dose hormone product, is scheduled to begin in November upon completion of the products' validation. Like Apri and Aviane, the Company will be marketing Enpresse 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. On May 1, 2001, the Company announced FDA approval of its ANDA for Aviane. Aviane is therapeutically equivalent to Alesse(TM). Aviane is the first generic product deemed bioequivalent to and therapeutically interchangeable with Alesse for all new and refill prescriptions. According to IMS data, 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. Shipping of Aviane commenced on May 8, 2001, and the product totaled 94,000 prescriptions for the second quarter of 2001. Apri, the Company's first oral contraceptive product is the first, and currently the only, product bioequivalent to and 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 Richter. The market for these desogestrel products at brand prices is estimated to be approximately $159 million. Prescriptions for Apri totaled 720,000 for the second quarter 2001, up approximately 63% from second quarter 2000 and up 7% from the first quarter 2001. Apri has captured more than 43% 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 three ANDAs on file with the FDA. Two of these ANDAs are for oral contraceptive products. Of the three 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 in 2001 or early 2002. 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 - 17 - 18 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 will continue work on four ANDAs now expected to be filed in early 2002. The four products include a progestin, an estrogen and two non-hormone products. Other ANDA products in development have been delayed due to the Company's re-assessment of its development schedule in light of the pending transaction with Barr Laboratories. Duramed has five products, in various stages of development, which 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. 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. 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 is continuing its Phase IV Studies (post product launch) 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 of 2001 studies commenced involving 0.3 mg, 0.625 mg, and 1.25 mg Cenestin dosage strengths. Phase III work has been completed on a 0.3 mg Cenestin tablet. The Company plans to file a supplemental NDA for the dosage strength with the FDA in August 2001. 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 - 18 - 19 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, cardiovascular markers demonstrated a positive lipid profile. 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, Aviane and Enpresse; (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. - 19 - 20 RESULTS OF OPERATIONS NET SALES Net sales increased $11.8 million (57.3%) and $22.6 million (60.6%) for the three and six-month periods ended June 30, 2001 as compared with the same periods in 2000. Hormone product sales for the three and six month periods ended June 30, 2001 were $20.4 million and $35.0 million compared to $8.6 million and $16.1 million for the same periods in 2000. Net sales for the three and six months ended June 30, 2001 include $6.6 million and $13.2 million in Cenestin revenue compared to $3.8 million and $6.7 million in the same periods in 2000. Oral contraceptive revenues were $13.0 million and $20.2 million for the three and six months ended June 30, 2001 as compared to $4.1 million and $8.1 million for the same periods in 2000. Non-hormone product sales were $12.2 million and $24.9 million for the three and six month periods ended June 30, 2001 compared to $12.1 million and $21.2 million in the same periods in 2000. The increase in 2001 is due principally to increased sales of selected seasonal cough/cold products. GROSS MARGIN The gross margin, and the corresponding percentage of net sales, was $16.1 million (49.6%) and $28.9 million (48.3%) for the three and six months ended June 30, 2001 compared with $9.2 million (44.4%) and $14.8 million (39.7%) for the same periods in 2000. The gross margin improvement (95.3%) in the first half of 2001 was due to greater sales of higher margin products, principally hormone products. The gross margin improvement also reflects increased operating efficiency of the hormone manufacturing facility through greater utilization. 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 the Company's hormone products penetrate the market. Additionally, the Company's gross margin could be favorably impacted by increased sales performance of recently approved products, additional approvals of pending applications and contributions from manufacturing service revenues. FDA approval of the Company's pending applications is outside the Company's control and management cannot 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 approval; this has occurred with some of the Company's products, such as methylprednisolone. These impacts can be material depending on the products affected. - 20 - 21 PRODUCT DEVELOPMENT Product development expenditures increased $1.4 million (232.5%) and $1.2 million (64.3%) for the three and six-month periods ended June 30, 2001 compared with the same periods in 2000. The increase was due to the purchase of raw material and the timing of bioequivalency and clinical studies. The increase is consistent with the Company's 2001 business plan. The Company's product development emphasis is on prescription drugs with attractive market opportunities and potentially limited competition due to technological barriers of entry - particularly products in the women's health and the replacement therapy markets. BRAND MARKETING AND SELLING The Company's brand marketing and sales and marketing expenses increased by $1.5 million (64.3%) and $4.0 million (58.7%) for the three and six month periods ended June 30, 2001 compared with the same periods in 2000. The increase represents Solvay Pharmaceuticals' share of Cenestin profits resulting from increased Cenestin revenues, partially offset by higher selling expenses in 2000 relating to Cenestin that were not covered by the Solvay agreement. GENERAL AND ADMINISTRATIVE General and administrative expenses increased $1.2 million (40.8%) and $1.8 million (31.5%) for the three and six-month periods ended June 30, 2001 compared with the same periods in 2000. The increase was due principally to additional hires and personnel-related expenses. NET INTEREST EXPENSE AND INTEREST RATE RISK The Company's borrowings are primarily variable rate facilities. Net interest expense for the three and six month periods ended June 30, 2001 decreased $0.3 million (22.1%) and $0.6 million (22.8%) compared to the same period in 2000 due to reduced interest rates and the reduced average balance outstanding of interest bearing obligations. The Company has floating rate debt totaling $43.6 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, in addition to the average balance outstanding variable rate facilities. INCOME TAXES The income tax provision in the three and six month periods ended June 30, 2001 and the three month period ended June 30, 2000 represents alternative minimum tax. A provision for regular income tax was not required for the three and six month periods ended June 30, 2001, due to net operating loss carryforwards of approximately $105 million. - 21 - 22 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 $208,436 and $416,873 for the three and six month periods ended June 30, 2001, and $69,317 in the second quarter of 2000 represented dividends associated with the unconverted portion of the Series G Convertible Preferred Stock. The Series F Mandatory Redeemable Preferred Stock (issued in February 1998) provided for a 5% dividend on unconverted shares. Preferred Stock dividends of $16,905 in the first quarter of 2000 represented dividends associated with the unconverted portion of Series F Preferred Stock. These shares 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, or upon conversion, and reflected as additional deemed dividends during this period. For the three and six month periods ended June 30, 2001, the Company amortized $83,436 and $166,873, respectively, of the deemed dividend adjustment. LIQUIDITY AND CAPITAL RESOURCES Operating and Financing Activities For the first half of 2001 operating activities resulted in the net use of cash of $200,000 with the most significant component being working capital required to fund a $9.7 million increase in accounts receivable, due to increased sales level, including the launch of Aviane, offset by cash generated from net income exclusive of non-cash transactions. Investing Activities In the first half of 2001, capital expenditures were $1.4 million. Expenditures were principally for manufacturing and packaging equipment. AVAILABLE FUNDS As previously discussed, the Company has entered into a merger agreement with Barr Laboratories, Inc. In the event that the merger is not consummated, the resources provided by the Company's expanding product portfolio are expected to allow the Company to access sufficient - 22 - 23 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. - 23 - 24 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. Section 1 and 2, the Sherman Act, and 15 U.S.C. Section 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. On August 2, 2001, the United States District Court for the Southern District of Ohio filed an order, denying Wyeth-Ayerst's motion to dismiss Duramed's antitrust lawsuit against Wyeth. The court specifically upheld Duramed's right to proceed on all claims for relief against Wyeth, holding that "Duramed has sufficiently stated claims for antitrust violations." The court order recognized the legal adequacy of Duramed's allegations that Wyeth has offered rebates "in order to entice health plans into entering overt exclusive dealing contracts or that the discount programs themselves are de facto, or "disguised" exclusive dealing contracts because - 24 - 25 the incentives are too attractive, or in the alternative, too punitive, financially to pass up." Wyeth must now answer Duramed's complaint and defend the case on the merits. The court's order leaves available all factual allegations of the complaint to support Duramed's four claims for relief, except those allegations pertaining to Wyeth's petitioning activities of the U.S. Food and Drug Administration that are protected under the Noerr-Pennington doctrine, a legal doctrine that immunizes from antitrust liability attempts to influence the legislative process--even if prompted by monopolistic intent. 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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The 2001 Annual Meeting of Stockholders of Duramed Pharmaceuticals, Inc. (the "Meeting") was held on May 10, 2001. The holders of 21,875,908 shares of the Company's 26,612,346 then outstanding shares of common stock (approximately 83%) were present at the Meeting in person or by proxy. (b) At the Meeting, the following nine individuals were duly nominated and properly elected as Directors of the Company to serve until the 2002 Annual Meeting or until their successors are elected and qualified - E. Thomas Arington, Jeffrey T. Arington, George W. Baughman, Vernon A. Brunner, Richard R. Frankovic, Peter R. Seaver, S. Sundararaman, Philip M. Uhrhan and Gerald L. Wolken. The number of votes cast for and against/withheld with respect of each nominee is indicated below: Against/ For Withheld ---------- -------- E. Thomas Arington....................... 21,698,760 177,148 Jeffrey T. Arington...................... 21,628,933 246,975 George W. Baughman....................... 21,765,218 110,690 Vernon A. Brunner........................ 21,763,243 112,665 Richard R. Frankovic..................... 21,549,943 325,965 Peter R. Seaver.......................... 21,767,503 108,405 S. Sundararaman.......................... 21,765,518 110,390 Philip M. Uhrhan......................... 21,764,153 111,755 Gerald L. Wolken......................... 21,764,793 111,115 - 25 - 26 (c) At the Meeting, a proposal to ratify the appointment of Ernst & Young LLP as the Company's independent auditors for fiscal 2001 was approved as follows: Broker For Against Abstentions Non-Votes --- ------- ----------- --------- 21,727,679 113,381 34,848 -0- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K for the quarter ended June 30, 2001: None - 26 - 27 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: August 14, 2001 by: /s/ E. Thomas Arington ------------------------ ----------------------------- E. Thomas Arington Chairman of the Board Chief Executive Officer Dated: August 14, 2001 by: /s/ Timothy J. Holt ------------------------ ----------------------------- Timothy J. Holt Senior Vice President Finance and Administration, Treasurer, Chief Financial Officer - 27 -

DURAMED PHARMACEUTICALS INC 10-Q