form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
for the
quarterly period ended September 30, 2009
o TRANSITION
REPORT PURSUANT TO SECTION 13
OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the
transition period from __________ to _________
Commission
File No. 1-31773
CARACO
PHARMACEUTICAL LABORATORIES, LTD.
(Exact
name of registrant as specified in its charter)
MICHIGAN
|
38-2505723
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
|
|
1150
ELIJAH MCCOY DRIVE, DETROIT, MICHIGAN
|
48202
|
(Address
of principal executive offices)
|
(Zip
Code)
|
TELEPHONE:
(313) 871-8400
Registrant’s
telephone number, including area code
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer o
|
Accelerated
Filer x
|
Non-
Accelerated Filer o
|
Smaller
Reporting Company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
As of
November 6, 2009, the registrant had 39,090,194 shares of common stock issued
and outstanding.
CARACO
PHARMACEUTICAL LABORATORIES LTD.
(A
subsidiary of Sun Pharmaceutical Industries Limited)
BALANCE
SHEETS
|
|
SEPTEMBER 30,
|
|
|
MARCH
31,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(UNAUDITED)
|
|
|
(AUDITED)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
72,700,493 |
|
|
$ |
65,314,397 |
|
Short-term
investments
|
|
|
10,000,000 |
|
|
|
- |
|
Accounts
receivable, net
|
|
|
48,982,036 |
|
|
|
15,181,197 |
|
Inventories
|
|
|
88,292,526 |
|
|
|
79,510,832 |
|
Prepaid
expenses and deposits
|
|
|
6,973,373 |
|
|
|
9,440,942 |
|
Deferred
income taxes
|
|
|
5,999,648 |
|
|
|
416,985 |
|
Total
current assets
|
|
|
232,948,076 |
|
|
|
169,864,353 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
|
|
|
|
|
|
Land
|
|
|
975,311 |
|
|
|
975,311 |
|
Buildings
and improvements
|
|
|
28,466,328 |
|
|
|
28,148,447 |
|
Equipment
|
|
|
27,684,543 |
|
|
|
26,216,521 |
|
Furniture
and fixtures
|
|
|
1,512,852 |
|
|
|
1,509,582 |
|
Construction
in progress
|
|
|
2,676,571 |
|
|
|
2,708,137 |
|
Total
|
|
|
61,315,605 |
|
|
|
59,557,998 |
|
Less
accumulated depreciation
|
|
|
16,801,151 |
|
|
|
14,734,961 |
|
Net
property, plant and equipment
|
|
|
44,514,454 |
|
|
|
44,823,037 |
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
1,334,524 |
|
|
|
1,383,048 |
|
Deferred
income taxes
|
|
|
21,955,930 |
|
|
|
20,417,885 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
300,752,984 |
|
|
$ |
236,488,323 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$ |
2,621,036 |
|
|
$ |
7,979,341 |
|
Accounts
payable, Sun Pharma
|
|
|
114,962,237 |
|
|
|
43,928,166 |
|
Accrued
expenses
|
|
|
1,974,508 |
|
|
|
2,757,361 |
|
Income
taxes payable
|
|
|
2,890,684 |
|
|
|
- |
|
Long
term debt, current portion
|
|
|
17,100,000 |
|
|
|
2,700,000 |
|
Total
current liabilities
|
|
|
139,548,465 |
|
|
|
57,364,868 |
|
|
|
|
|
|
|
|
|
|
Long
term debt, net of current portion
|
|
|
- |
|
|
|
15,300,000 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
139,548,465 |
|
|
|
72,664,868 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Series
B convertible preferred stock, no par value; issued and outstanding
1,088,000 shares (September 30, 2009) 2,720,000 shares (March
31, 2009)
|
|
|
11,320,640 |
|
|
|
23,081,920 |
|
Common
stock, no par value; authorized 50,000,000 shares, issued and outstanding
39,090,194 shares (September 30, 2009) 37,458,194 shares (March
31, 2009)
|
|
|
130,330,615 |
|
|
|
118,569,335 |
|
Additional
paid in capital
|
|
|
3,609,824 |
|
|
|
3,474,246 |
|
Retained
Earnings
|
|
|
15,943,440 |
|
|
|
18,697,954 |
|
Total
stockholders' equity
|
|
|
161,204,519 |
|
|
|
163,823,455 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
300,752,984 |
|
|
$ |
236,488,323 |
|
See
accompanying notes
CARACO
PHARMACEUTICAL LABORATORIES, LTD.
(A
subsidiary of Sun Pharmaceutical Industries Limited)
STATEMENTS
OF OPERATIONS
|
|
Six Months ended
September 30,
|
|
|
Quarter ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
126,445,911 |
|
|
$ |
230,465,165 |
|
|
$ |
78,375,895 |
|
|
$ |
122,188,425 |
|
Cost
of goods sold
|
|
|
118,243,578 |
|
|
|
184,879,891 |
|
|
|
75,010,528 |
|
|
|
100,186,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit before reserve for inventory seized by FDA
|
|
|
8,202,333 |
|
|
|
45,585,274 |
|
|
|
3,365,367 |
|
|
|
22,001,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for inventory seized by FDA
|
|
|
15,950,188 |
|
|
|
- |
|
|
|
7,503,654 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
(loss) profit
|
|
|
(7,747,855 |
) |
|
|
45,585,274 |
|
|
|
(4,138,287 |
) |
|
|
22,001,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
10,452,575 |
|
|
|
8,055,246 |
|
|
|
6,793,364 |
|
|
|
4,237,244 |
|
Research
and development costs
|
|
|
5,592,951 |
|
|
|
11,065,940 |
|
|
|
(1,492,184 |
) |
|
|
5,581,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income prior to non-recurring income
|
|
|
(23,793,381 |
) |
|
|
26,464,088 |
|
|
|
(9,439,467 |
) |
|
|
12,182,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring
income
|
|
|
20,000,000 |
|
|
|
- |
|
|
|
20,000,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(3,793,381 |
) |
|
|
26,464,088 |
|
|
|
10,560,533 |
|
|
|
12,182,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(258,085 |
) |
|
|
- |
|
|
|
(127,135 |
) |
|
|
- |
|
Interest
income
|
|
|
264,660 |
|
|
|
420,259 |
|
|
|
160,204 |
|
|
|
142,486 |
|
Loss
on sale of equipment
|
|
|
(114,272 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
income
|
|
|
46,309 |
|
|
|
- |
|
|
|
11 |
|
|
|
- |
|
Other
(expense) income - net
|
|
|
(61,388 |
) |
|
|
420,259 |
|
|
|
33,080 |
|
|
|
142,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes
|
|
|
(3,854,769 |
) |
|
|
26,884,347 |
|
|
|
10,593,613 |
|
|
|
12,325,394 |
|
Income
tax (benefit) expense
|
|
|
(1,100,256 |
) |
|
|
9,020,309 |
|
|
|
3,925,076 |
|
|
|
3,901,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(2,754,513 |
) |
|
$ |
17,864,038 |
|
|
$ |
6,668,537 |
|
|
$ |
8,423,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.07 |
) |
|
|
0.54 |
|
|
|
0.17 |
|
|
|
0.25 |
|
Diluted
|
|
|
(0.07 |
) |
|
|
0.44 |
|
|
|
0.16 |
|
|
|
0.21 |
|
See
accompanying notes
CARACO
PHARMACEUTICAL LABORATORIES, LTD.
(A
subsidiary of Sun Pharmaceutical Industries Limited)
STATEMENTS
OF CASH FLOWS
|
|
Six months ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(2,754,513 |
) |
|
$ |
17,864,038 |
|
Adjustments
to reconcile net (loss) income to net cash provided by (used
in) operating activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,240,245 |
|
|
|
1,452,749 |
|
Loss
on sale of equipment
|
|
|
114,272 |
|
|
|
- |
|
Common
stock option expense
|
|
|
135,578 |
|
|
|
151,179 |
|
Common
stock grant expense
|
|
|
- |
|
|
|
169,900 |
|
Net
deferred income taxes
|
|
|
(7,120,708 |
) |
|
|
(1,773,180 |
) |
Changes
in operating assets and liabilities which (used) /
provided cash:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(33,800,840 |
) |
|
|
26,516,913 |
|
Inventories
|
|
|
(8,781,694 |
) |
|
|
183,561,032 |
|
Prepaid
expenses and deposits
|
|
|
2,467,568 |
|
|
|
46,124 |
|
Accounts
payable
|
|
|
65,675,766 |
|
|
|
(237,969,471 |
) |
Accrued
expenses
|
|
|
(782,853 |
) |
|
|
(173,958 |
) |
Income
taxes payable
|
|
|
2,890,684 |
|
|
|
1,960,489 |
|
Net
cash provided by (used in) operating activities
|
|
|
20,283,505 |
|
|
|
(8,194,185 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(1,997,719 |
) |
|
|
(13,665,079 |
) |
Proceeds
from sale of equipment
|
|
|
310 |
|
|
|
- |
|
Purchase
of short-term investment
|
|
|
(10,000,000 |
) |
|
|
- |
|
Purchases
of intangibles
|
|
|
- |
|
|
|
(1,455,840 |
) |
Net
cash used in investing activities
|
|
|
(11,997,409 |
) |
|
|
(15,120,919 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Repayments
of loans payable to financial institutions
|
|
|
(900,000 |
) |
|
|
- |
|
Proceeds
from exercise of stock options
|
|
|
- |
|
|
|
11,250 |
|
Net
cash (used in) provided by financing activities
|
|
|
(900,000 |
) |
|
|
11,250 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
7,386,096 |
|
|
|
(23,303,854 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
65,314,397 |
|
|
|
56,906,051 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$ |
72,700,493 |
|
|
$ |
33,602,197 |
|
See
accompanying notes
CARACO
PHARMACEUTICAL LABORATORIES, LTD.
(A
subsidiary of Sun Pharmaceutical Industries Limited)
STATEMENT
OF STOCKHOLDERS' EQUITY (UNAUDITED)
|
|
PREFERRED
STOCK
|
|
|
COMMON
STOCK
|
|
|
ADDITIONAL
PAID IN
|
|
|
RETAINED
|
|
|
TOTAL
STOCKHOLDERS'
|
|
|
|
SHARES
|
|
|
AMOUNT
|
|
|
SHARES
|
|
|
AMOUNT
|
|
|
CAPITAL
|
|
|
EARNINGS
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at April 1, 2009
|
|
|
2,720,000 |
|
|
$ |
23,081,920 |
|
|
|
37,458,194 |
|
|
$ |
118,569,335 |
|
|
$ |
3,474,246 |
|
|
$ |
18,697,953 |
|
|
$ |
163,823,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock into common stock
|
|
|
(1,632,000 |
) |
|
|
(11,761,280 |
) |
|
|
1,632,000 |
|
|
|
11,761,280 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock options expensed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,578 |
|
|
|
|
|
|
|
135,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,754,513 |
) |
|
|
(2,754,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at September 30, 2009
|
|
|
1,088,000 |
|
|
$ |
11,320,640 |
|
|
|
39,090,194 |
|
|
$ |
130,330,615 |
|
|
$ |
3,609,824 |
|
|
$ |
15,943,440 |
|
|
$ |
161,204,519 |
|
See
accompanying notes
CARACO
PHARMACEUTICAL LABORATORIES, LTD.
FORM
10-Q
NOTES TO UNAUDITED FINANCIAL
STATEMENTS
The
balance sheet as of March 31, 2009 is audited. All other financial statements
contained herein are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have been
included. Such adjustments consisted only of normal recurring items, with the
exception of a reserve for inventory seized by the U.S. Food and Drug
Administration (“FDA”), as discussed below. Interim results are not
necessarily indicative of results for the full year.
The
financial statements contained herein should be read in conjunction with the
financial statements and notes thereto included in the Annual Report on Form
10-K as of and for the year ended March 31, 2009 of Caraco Pharmaceutical
Laboratories, Ltd. (“Caraco,” the “Company,” or the “Corporation” and which is
also referred to as “we,” “us,” or “our”). In preparing these
financial statements, the Company has evaluated events and transactions for
potential recognition or disclosure through October 26, 2009, the date the
financial statements were available to be issued.
The
accounting policies followed by the Corporation with respect to the unaudited
interim financial statements are consistent with those stated in the
Corporation’s Annual Report on Form 10-K.
2.
|
ORGANIZATION AND NATURE OF
BUSINESS
|
Caraco is
a corporation organized under Michigan law in 1984, engaged in the business of
developing, manufacturing, marketing and distributing generic pharmaceuticals to
the nation's largest wholesalers, distributors, warehousing and non-warehousing
chain drugstores and managed care providers, throughout the U.S.
A generic
pharmaceutical is the chemical and therapeutic equivalent of a brand-name drug
as to which the patent and/or market exclusivity has expired. Generic
pharmaceuticals are well accepted for substitution of brand pharmaceuticals
(which substitution is regulated by individual state regulations) as
they sell at a discount to the branded product’s price and have been determined
to be their equivalent in quality and bioavailability.
Our
present product portfolio includes 33 prescription products, in 80 strengths, in
various package sizes. This represents products we distribute for Sun
Pharmaceutical Industries Limited, a specialty pharmaceutical corporation
organized under the laws of India (“Sun Pharma”) and products manufactured by
other third parties relating to Caraco-owned products. This does not
include those Caraco-owned products for which the Company has temporarily ceased
manufacturing and marketing, due to the enforcement actions of the FDA. The
products are intended to treat a variety of disorders including but not limited
to the following: hypertension, arthritis, epilepsy, diabetes, depression and
pain management.
A
significant source of our earlier funding had been from Sun
Pharma. Since August 1997, Sun Pharma has contributed equity capital
and had advanced us loans. In addition, among other things, Sun Pharma had acted
as a guarantor on loans to Caraco, has supplied us with a substantial portion of
raw materials for our products, helped us obtain machinery and equipment to
enhance our production capacities at competitive prices, transferred certain
generic products to us and provided us with qualified technical
professionals. Sun Pharma has also provided services as a Clinical
Research Organization, (“CRO”) by performing certain bio-equivalency studies on
our future potential products. Sun Pharma owns approximately 75% of
the outstanding shares of the Company (approximately 76% including the
convertible Series B Preferred Stock). (See “Current Status of the Corporation”
and “Sun Pharmaceutical Industries Limited” below.)
3.
|
CURRENT STATUS OF THE
CORPORATION
|
As
previously disclosed, on June 25, 2009, U.S. Marshals, at the request of the
FDA, arrived and seized drug products manufactured in our Michigan facilities.
The seizure also included ingredients and in-process materials held at these
same facilities. The estimated value of such seized inventory as of September
30, 2009 was $24.0 million. Products sold and distributed by Caraco that are
manufactured by third parties and outside of these facilities are not impacted
and we continue distribution and marketing of these products.
The
Company voluntarily entered into a Consent Decree of Condemnation, Forfeiture
and Permanent Injunction (“Consent Decree”) with the FDA on September 29, 2009.
As stipulated in the Consent Decree, the Company will attempt to have the seized
inventory released. The Company believes that, except for the raw materials
which were opened solely for the purpose of sampling, the estimated value of
which is $8.1 million, all other seized inventory would be difficult to
recondition. Accordingly, a reserve in the amount of $15.9 million has been
created as of September 30, 2009 for this remaining inventory. As a result of
the FDA action, we have voluntarily ceased manufacturing operations and
instituted, in two phases, indefinite layoffs of approximately 430 of our
employees. The Consent Decree provides a series of measures that,
when satisfied, will permit the Company to resume manufacturing and distributing
those products which are manufactured in its Michigan facilities. The Company
has engaged a consulting firm which is comprised of current good manufacturing
practice (“cGMP”) experts, in accordance with the Consent Decree.
As a
result of this event, there has been a material adverse effect on our current
operations and there may be a material adverse effect on our near term
operations. Under the terms of the Consent Decree, Caraco's cessation of
manufacturing operations will continue until it receives written notification
from independent experts and the FDA that it is in compliance with the Consent
Decree and regulations and can resume operations. However, there is no assurance
that the steps being taken will be successful or result in resolution of the FDA
complaint. We are also not able, at this time, to estimate, the cost
of these actions. We anticipate working with the FDA to resolve its concerns as
effectively and expeditiously as possible in accordance with the terms of the
Consent Decree. The Consent Decree also requires the Company to abide
by certain conditions and restrictions. If the Company violates any portion of
the Consent Decree, it could incur penalties, such as monetary fines, forfeiture
of the seized goods and other penalties.
During
the second quarter ended September 30, 2009 and first six months of our current
fiscal year (“Fiscal 2010”) ended September 30, 2009, we generated net
sales of $78.4 million and $126.4 million, respectively, compared to $122.2
million and $230.5 million, respectively, during the corresponding periods of
Fiscal 2009. We incurred $(1.5) million and $5.6 million, respectively, in
research and development (“R&D”) expenses during the second quarter and
first six months of Fiscal 2010, as compared to $5.6 million and $11.1 million,
respectively, during the corresponding periods of Fiscal 2009. We generated cash
from operations in the amount of $20.3 million during the first six months of
Fiscal 2010, as compared to using cash from operations in the amount of $8.2
million during the corresponding period of Fiscal 2009. We earned a net
pre-tax income of $10.6 million during the second quarter and incurred a net
pre-tax loss of $3.9 million during the first six months of Fiscal 2010, as
compared to earning net pre-tax income of $12.3 million and $26.9 million,
respectively, during the corresponding periods of Fiscal 2009. Net pre-tax
income in both periods of the current fiscal year were lower as we have created
a reserve in the amount of $7.5 million and $15.9 million, respectively, during
the second quarter and first six months of Fiscal 2010 relating to the inventory
seized by the FDA as disclosed above and also due to the cessation of
manufacturing at the Company’s Michigan facilities resulting in loss of revenues
of such products, as also disclosed above. Net pre-tax income was also
positively affected by non-recurring income earned in the amount of $20.0
million as part of an asset purchase agreement arising out of a settlement
agreement entered into by the Company during the current period that is not
expected to recur in future periods. The Company recorded an income tax expense
of $3.9 million and provided an income tax benefit of $1.1 million for the
second quarter and first six months of Fiscal 2010, respectively, as compared to
an income tax expense of $3.9 million and $9.0 million, respectively, in the
corresponding periods of Fiscal 2009. We earned a net income of $6.7 million
during the second quarter and incurred a net loss of $2.8 million for the first
six months of Fiscal 2010, as compared to net income of $8.4 million and $17.9
million, respectively, during the corresponding periods of Fiscal
2009. At September 30, 2009, we had stockholders’ equity of
$161.2 million, as compared to stockholders’ equity of $163.8 million at
March 31, 2009. (See “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”).
We have
filed two Abbreviated New Drug Applications (“ANDAs”) relating to two products
with the FDA during the first six months of Fiscal 2010. We have not received
FDA approval for any ANDAs during the first six months of Fiscal 2010 and do not
expect to receive any approvals for products out of our Michigan facilities
until we resolve the FDA’s concerns as discussed above. The total
number of ANDAs pending approval by the FDA as of September 30, 2009 was 31
(including four tentative approvals) relating to 27 products.
4.
|
RECENT ACCOUNTING
PRONOUNCEMENTS
|
In May
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events”,
which was primarily codified into FASB Accounting Standards Codification (“ASC”)
Topic 855. This pronouncement provides guidance to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. This standard is effective for interim or fiscal periods ending
after June 15, 2009 and became effective for the Company beginning with its
quarterly period ended June 30, 2009. Its adoption did not have
an impact on the Company’s results of operations, financial position or cash
flows.
In June
2009, the FASB issued SFAS No. 168, “FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles- a replacement of
Financial Statement No. 162”, which was primarily codified into ASC Topic
105 — “Generally Accepted Accounting Principles.” This standard
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
non-governmental entities that are presented in conformity with GAAP. This
statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. Accordingly, the Company adopted
this standard effective with its quarterly report ended September 30, 2009. The
adoption of this standard has changed how we reference various elements of GAAP
when preparing our financial statement disclosures, but had no impact on the
Company’s consolidated financial statements.
5.
|
COMPUTATION OF EARNINGS PER
SHARE
|
Earnings
per share is computed using the weighted average number of common shares
outstanding during each period and considers a dual presentation and
reconciliation of “basic” and “diluted” per share amounts. Diluted reflects the
potential dilution of all common stock equivalents.
The basic
and diluted weighted average numbers of common shares outstanding for the second
quarter of Fiscal 2010, ended September 30, 2009, were 38,723,585 and
40,468,406, respectively, and were both 38,138,937 for the first six months of
Fiscal 2010. Correspondingly, the basic and diluted weighted average numbers of
common shares outstanding for the second quarter of Fiscal 2009, ended September
30, 2008, were 33,389,920 and 40,593,328, respectively, and were 33,035,602 and
40,565,004, respectively for the first six months of Fiscal 2009.
6.
|
SUN PHARMACEUTICAL INDUSTRIES
LIMITED
|
Pursuant
to a stock purchase agreement, Sun Pharma made an initial investment of $7.5
million for the purchase of 5.3 million common shares of Caraco in
1997.
In August
1997, Caraco entered into an agreement, whereby Sun Pharma was required to
transfer the technology formulas for 25 generic pharmaceutical products over a
five-year period in exchange for 544,000 shares of Caraco common stock for each
technology transfer of an ANDA product (when bio-equivalency studies were
successfully completed) and 181,333 common shares for each technology transfer
of a Drug Efficacy Study Implementation (“DESI”) product. The products provided
to the Corporation from Sun Pharma were selected by mutual agreement. Under such
agreement, Caraco conducted, at its own expense, all tests including
bio-equivalency studies. Pursuant to such agreement through 2002, Sun Pharma
delivered the technology formula for 13 products. This agreement
expired on November 21, 2002, and the Corporation entered into a new technology
transfer agreement with Sun Pharma Global, Inc. (“Sun Global”), an affiliate of
Sun Pharma.
Under the
agreement, which was approved by the Corporation’s independent directors, Sun
Global agreed to provide the formulations for 25 new generic drugs over a
five-year period. Caraco’s rights to the products are limited to the
United States and its territories or possessions, including Puerto
Rico. Sun Global retains rights to the products in all other
territories. The products are selected by mutual agreement. Under this
agreement, Caraco conducts at its own expense all tests, including
bio-equivalency studies. The Corporation also markets the products
consistent with its customary practices. In return for the technology
transfer, Sun Global receives 544,000 shares of Series B Convertible Preferred
Stock for each generic drug transferred when such drug has passed its
bio-equivalency studies.
The
products agreement was amended by the Independent Committee, comprised of the
three independent directors, in the first quarter of 2004 to eliminate the
provision requiring that the Independent Committee concur in the selection of
each product, and provides instead that each product satisfy certain objective
criteria developed by management and approved by the Independent
Committee. Pursuant to such objective criteria, all 25 of the
products under this agreement had been selected, and all 25 products had passed
their respective bio-equivalency studies as of March 31, 2008.
On July
10, 2009, Caraco entered into an agreement with Alkaloida Chemical Company ZRT,
a Hungarian corporation ("Alkaloida") and indirect subsidiary of Sun Pharma,
pursuant to which Alkaloida will provide for certain products an exclusive,
non-transferable license to Caraco to manufacture and market the products in the
United States, its territories and possessions, including Puerto Rico. The
license for a product is for a period of five (5) years from the commencement of
marketing of the product, however, Caraco may extend the license for a further
five (5) year period. Alkaloida is required to deliver the product technology
for a product as soon as it is developed or available or as agreed to by Caraco
and Alkaloida.
The
agreement expires five years from the date of approval of the first ANDA, unless
renewed or extended for consecutive one (1) year periods, however, the licenses
remain valid pursuant to the terms of the agreement. Under certain conditions,
the agreement may be terminated in its entirety or with respect to one or more
products. The agreement is governed by and construed in accordance with the laws
of the State of Michigan. The agreement was approved by Caraco's Independent
Committee. No technology for any product has been transferred under this
agreement to date.
Sun
Pharma operates research and development centers in Mumbai and Vadodara in
India, where the development work for products is performed.
Sun
Pharma and its subsidiaries supply the Corporation with certain raw materials
and formulations, assist in acquiring machinery and equipment to enhance
production capacities, and have provided qualified technical professionals who
work as Caraco employees. Sun Pharma continues to provide Clinical Research
Services on a product by product basis. Also, five of the eight
directors of Caraco are, or were, affiliated with Sun Pharma.
Further,
Sun Pharma and its affiliates may use Caraco as a contract manufacturer and/or
distributor of their products. In December 2004 and January 2005, Caraco entered
into agreements for two such products, of which one is currently being
marketed.
During
the fiscal year ended March 31, 2007 (“Fiscal 2007”), the Corporation entered
into a three-year marketing agreement with Sun Pharma, which was reviewed and
approved by the Board’s Independent Committee. Under the agreement,
the Corporation purchases selected product formulations offered by Sun Pharma
and markets and distributes the same as part of the current product offerings in
the U.S., its territories and possessions, including Puerto Rico. Sun Pharma is
not obligated to offer Caraco products under this agreement, however, Caraco has
the exclusive right to market in the U.S., its territories and possessions,
including Puerto Rico, any products offered by Sun Pharma and accepted by
Caraco.
During
the fiscal year ended March 31, 2008 (“Fiscal 2008”), the Corporation entered
into a three-year distribution and sale agreement with Sun Pharma, which was
reviewed and approved by the Board’s Independent Committee. Under this agreement
the Company purchases selected formulations which have been filed under
Paragraph IV certification process with the FDA by Sun Pharma and offered for
distribution. Paragraph IV certified (“Paragraph IV”) products may face
litigation challenges with respect to claims of patent infringement. Under the
agreement the Company shares in the sales opportunity and shares the litigation
risk. The Company is indemnified by Sun Pharma of any risk beyond the percentage
agreed to as its profit percentage thereby limiting the Company’s exposure. Sun
Pharma is not obligated to offer Caraco products under this agreement, however,
Caraco has the exclusive right to market in the U.S., its territories and
possessions, including Puerto Rico, any products offered by Sun Pharma and
accepted by Caraco. The Company markets and distributes the same as part of its
current product offerings in the U.S., its territories and possessions,
including Puerto Rico. The license granted with respect to a product terminates
upon the end of an exclusivity period of 180 days or a non-appealable court
decision, or until a third generic manufacturer launches the product, whichever
is later, or until a settlement is reached, at which time the product will
become part of the standard Caraco-Sun Pharma marketing agreement disclosed
above. The Company currently receives a fixed gross profit margin of 8%, or such
other percentages as shall be mutually agreed upon. Under the agreement, Sun
Pharma and Caraco mutually indemnify each other capped by the fixed margin
percentage with respect to damages from infringement.
During
the second quarter and first six months of Fiscal 2010 the Corporation made net
sales of $75.9 million and $110.9 million, respectively, and during
corresponding periods of Fiscal 2009, the Corporation made net sales of $89.9
million and $166.2 million, respectively, of the marketed products under the
aforesaid agreements.
While
management has a basis to reasonably believe that Sun Pharma's substantial
investment in Caraco provides Sun Pharma with sufficient economic incentive to
continue to assist Caraco in developing its business, and Sun Pharma has
expressed its intent to continue to support Caraco's operations in the near
term, as it has done in the past, there can be no assurance that such support
will, in fact, continue.
During
the first six months of Fiscal 2010, Sun Global converted 1,632,000 shares of
Series B Preferred Stock into 1,632,000 shares of Common Stock. Through March
31, 2009 Sun Global had converted 10,880,000 shares of Series B Preferred Stock
into 10,880,000 shares of Common Stock, respectively. Sun Pharma’s current
beneficial ownership is 75% (76% including its convertible Series B Preferred
Stock).
In
addition to its substantial relationship with, and dependence on Sun Pharma as
described above, the Corporation is subject to certain risks associated with
companies in the generic pharmaceutical industry. Profitable
operations are dependent on the Corporation's ability to market its products at
reasonable profit margins. In addition to maintaining profitable
operations, the ongoing success of the Corporation will depend, in part, on
satisfaction of FDA concerns, its continuing ability to attract and retain key
employees, obtain timely approvals of its ANDAs, and develop new
products.
7.
|
ACCOUNTING FOR STOCK BASED
COMPENSATION
|
The
Company follows the provisions of ASC Topic 718, “Stock Compensation’” which requires employee
share-based compensation to be accounted for under the fair value method and
requires the use of an option pricing model for estimating the fair value of
stock options at the date of grant. The Company estimates the fair value of
stock options granted using the Black-Scholes option-pricing model, which
requires the Company to estimate the expected term of the stock option grants
and expected future stock price volatility over the term. The term represents
the expected period of time the Company believes the options will be outstanding
based on historical information. Estimates of expected future stock price
volatility are based on the historical volatility of the Company’s common stock.
The Company calculates the historical volatility as the standard deviation of
the differences in the natural logarithms of the weekly stock closing price,
adjusted for dividends and stock splits.
For the
second quarter and first six months of Fiscal 2010, the Company has recognized
expenses amounting to $49,795 and $135,578 respectively, related to common stock
options as compared to $86,574 and $151,179 respectively, for the corresponding
periods of Fiscal 2009. As of September 30, 2009, total unrecognized
compensation cost related to stock options granted was $277,696. The
unrecognized stock option compensation cost is expected to be recognized over a
period of approximately three years. Stock options to purchase 6,000 shares of
common stock were granted to Directors during the first six months of Fiscal
2010, which vest in the amount of one-third on each anniversary following the
date of grant. Additionally, during the first quarter of Fiscal 2009, the
Company recorded an expense of $169,900 related to a stock grant of 10,000
common shares issued to its then CEO on May 2, 2008, as part of his employment
agreement, which vested immediately upon issuance.
8.
|
COMMON STOCK
ISSUANCES
|
There
were no common stock issuances to Directors or employees during the first six
months of Fiscal 2010. We issued 1,000 shares of common stock to
our employees upon exercise of their stock options during the first six months
of Fiscal 2009. Also, during the first quarter of Fiscal 2009, the Company
issued a stock grant of 10,000 common shares to its former CEO on May 2, 2008,
as noted above.
During
the first six months of Fiscal 2010, Sun Global converted 1,632,000 shares of
Series B Preferred Stock into 1,632,000 shares of Common Stock. (See “Part II –
Other Information: Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds” below).
9.
|
PREFERRED STOCK
ISSUANCES
|
No shares
of preferred stock were issued during the first six months of Fiscal 2010 or
Fiscal 2009.
Sales of
distributed products were significantly lower for the second quarter and first
six months of Fiscal 2010, in comparison to the corresponding periods of Fiscal
2009 primarily as a result of significantly higher sales of Paragraph IV
products during both periods of Fiscal 2009. See “Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Second Quarter and First Six Months of Fiscal 2010 Compared to Second Quarter
and First Six Months of Fiscal 2009.” Sales of distributed products were also
lower due to price erosion for the products sold. We continue to remain
competitive on products sold and marketed during the first six months of Fiscal
2010. However, during the second quarter and first six months, sales of
Caraco-owned products (those products for which Caraco owns the ANDAs) were
adversely affected by the actions of the FDA and the cessation of manufacturing,
as disclosed above and in part due to the negative impact of our voluntary
recalls,. Our organization is focused on correcting any and all manufacturing
issues to allow us to emerge as a stronger company. In the interim, we will
continue to focus our sales and marketing team on distributed product
sales.
As is
typical in the U.S. retail sector, many of our customers are serviced through
their designated wholesalers. During the second quarter and first six months of
Fiscal 2010, the Company’s three largest wholesale
customers, Amerisource-Bergen Corporation, McKesson Corporation and
Cardinal Health, accounted for approximately 5%, 3% and 3%, respectively, of the
Company’s total net sales during the second quarter and 7%, 6% and 5%,
respectively, of total net sales for the first six months of Fiscal 2010. During
the corresponding period of Fiscal 2009, shipments to Amerisource-Bergen
Corporation, McKesson Corporation and Cardinal Health, accounted for
approximately 7%, 10% and 38%, respectively, of the Company’s total net sales
during the second quarter of Fiscal 2009, and 6%, 15 and 25%, respectively, of
total net sales for the first six months of Fiscal 2009. The majority of these
net sales include sales for various customers of ours that have underlying
direct contracts with our Company that are facilitated through our wholesale
customers. During the second quarter and first six months of Fiscal 2010, sales
to CVS Caremark Corporation accounted for approximately 74% and 60% of our net
sales. The sales to CVS Caremark Corporation have increased as we have entered
into a new contract with it towards the end of Fiscal 2009.
As a
consequence of the FDA actions disclosed above, on June 29, 2009, JP Morgan
Chase Bank N.A. (“JP Morgan”) temporarily suspended the Company’s $10 million
Credit Agreement until such time as the matters with the FDA are resolved to the
satisfaction of JP Morgan bank or such Credit Agreement expires. The Credit
Agreement is set to expire on November 30, 2009. However, there were
no borrowings under the Credit Agreement at any time during the current fiscal
year. Under the Credit Agreement, JP Morgan may make loans and issue
letters of credit to the Corporation for working capital needs and general
corporate purposes. Letters of credit, if issued, expire one year from their
date of issuance, but no later than November 30, 2009. Borrowings are secured by
the Corporation’s receivables and inventory. Interest is payable based on a
LIBOR Rate or an alternate base rate (determined by reference to the prime rate
or the federal funds effective rate), as selected by the Corporation. The rate
of interest is LIBOR plus 75 basis points, or the bank’s prime rate minus 100
basis points (provided the prime rate is not less than the prevailing one month
LIBOR Rate plus 250 basis points). The effective rates were 1.35% and 2.25%,
respectively, at June 30, 2009 subsequent to which the line of credit was
suspended. The Credit Agreement requires that certain financial covenants be met
on a quarterly basis.
During
the fourth quarter of Fiscal 2009 the Company entered into a term loan of $18
million with RBS Citizens, N.A. d/b/a Charter One Bank (“Charter One Bank”). The
loan is secured by a mortgage covering the Company’s manufacturing facility and
equipment located in Detroit, Michigan. The rate of interest is calculated as
LIBOR plus an applicable margin thereto (based upon various leverage levels and
current applicable rate is 50 basis points). The aggregate rate applicable to
the Company as of September 30, 2009 was 1.5%. The principal loan payments and
accrued interest are payable on a quarterly basis beginning July 2009. The
principal is to be repaid in equal quarterly installments of $900,000 for ten
quarters through October 2011, and thereafter, if not renewed, the remaining
balance of $9 million is due in the subsequent quarter by January 2012.
Subsequently, the terms of the loan were modified and we entered into an amended
agreement. The amended agreement amended the loan to add to the equipment term
loan for the purposes of financing new machinery and equipment and building
improvements, a one year line of credit note for $15 million against which the
Company can borrow funds for working capital purposes or can get letters of
credit issued. The line of credit carries an interest rate of LIBOR plus 150
basis points, and if letters of credit are issued, the associated fees are 0.7%
of such letters of credit on annualized basis. Also, there is an unused fee of
0.25% on an annualized basis to the extent the line remains idle. Both the line
of credit and outstanding term loan are cross collaterized by all of the
Company’s fixed assets and cash deposit accounts held with Charter One Bank in
the same amount. These cash deposits earn interest at prevailing rates
applicable to such money market acoounts. Against this line of
credit, the Bank has issued an Irrevocable Standby Letter of Credit in an amount
of $15 million, in favor of the United States of America, as required to be
placed with the FDA in accordance with the Consent Decree, as disclosed above.
We are continuing discussions with Charter One Bank to resolve its concerns and
get the cash collateral released. Charter One Bank has temporarily suspended our
required compliance with the covenants in the loan agreements relating to FDA
enforcement actions as previously disclosed, and has suspended testing of
certain other compliance requirements until February 26, 2010. On or before such
date, we anticipate either entering into revised agreements or repaying the loan
in full. Currently, as the loan is in technical default due to the FDA
enforcement action, the entire outstanding balance has been classified as a
short-term liability.
As
required pursuant to the terms of the Loan Agreement, the Company has entered
into an Interest Rate Swap Agreement with Charter One Bank to hedge the interest
rate applicable on the loan. The notional amount for the swap is $17.1 million
which will continue to amortize down as principal payments are made on the
related debt. The annualized fixed rate of interest as it applies to this
agreement is 2.41%. Thus as of September 30, 2009 the effective rate of interest
to the Company for the term loan was 2.91% (2.41% swap rate plus applicable
margin of 50 basis points). The fair value of this swap agreement at September
30, 2009 was not material.
While it
is not possible to determine with any degree of certainty the ultimate outcome
of the following legal proceedings, the Company believes that it has meritorious
defenses with respect to the claims asserted against it and intends to
vigorously defend its position. An adverse outcome in any of these proceedings
could have a material adverse effect on the Company’s financial position and
results of operations.
As
previously disclosed, on June 9, 2005, Novo Nordisk A/S and Novo Nordisk, Inc.
(“Novo Nordisk”) filed a complaint in the United States District Court for the
Eastern District of Michigan alleging that the Company’s filing of an ANDA
seeking approval to market its generic version of Novo Nordisk’s Prandin®
(repaglinide) drug product infringed Novo Nordisk’s U.S. Patent No. 6,677,358.
Novo Nordisk seeks an order from the Court which, among other things, directs
the FDA not to approve the Company’s ANDA any earlier than the claimed
expiration date. The ANDA filed by the Company contains a Paragraph IV
certification challenging the Novo Nordisk patent as well as a section viii
statement with regard to the patent’s method claim. The Company believes that
this Novo Nordisk patent is invalid and/or will not be infringed by the
Company’s manufacture, use or sale of the product. The Company believes that it
is the first to file an ANDA with a Paragraph IV certification for this drug
product and it intends to defend this action vigorously to capitalize on the
potential for obtaining 180 days exclusivity available for this
product. Earlier this year, the Company filed a supplemental answer
and counterclaim challenging Novo Nordisk’s recent Orange Book use code
amendment by Novo Nordisk in reference to Prandin®. On September 25,
2009, the District Court entered an injunction requiring Novo Nordisk to correct
its amended use code description for Prandin® on the ground that it does not
accurately characterize the referenced method patent. Novo Nordisk
has appealed that injunction and briefing on the appeal has been
expedited. On October 14, 2009, the parties entered into a
stipulation regarding the appeal. On October 27, 2009, the United States Court
of Appeals for the Federal Circuit entered an Order staying the use code
injunction during the appeal. We expect briefing on the appeal to be completed
sometime in November of 2009..If the Company prevails on the use code injunction
appeal, Novo Nordisk will stipulate to noninfringement based on Caraco’s
proposed section viii split-certification. If Novo Nordisk prevails
on the use code injunction appeal, the parties will proceed to trial on patent
validity and unenforceability. Currently, the trial is anticipated to
begin in February, 2010.
As
previously disclosed, on July 10, 2006, Forest Laboratories, Inc., Forest
Laboratories Holdings, Ltd., and H. Lundbeck A/S (collectively, “Forest”) filed
a complaint in the United States District Court for the Eastern District of
Michigan alleging that the Company’s filing of an ANDA seeking approval to
market its generic version of Forest’s Lexapro® (escitalopram oxalate) drug
product infringed Forest’s Patent No. Re. 34,712 (the “’712
patent”). The ANDA contains Paragraph IV Certifications challenging
the ‘712 patent, as well as two other Forest-owned patents, the 6,916,941 (“the
‘941 patent”) and 7,420,069 ("the '069 patent"). Forest did not
assert the '941 patent or '069 patent, so the Company brought declaratory
judgment actions seeking a declaration that it did not infringe those
patents. The Company vigorously litigated all three
cases.
On July
10, 2009, the Company announced that it has reached an agreement with Forest to
settle the Lexapro® litigation. On October 2, 2009, the Company
announced that it closed the Asset Purchase Agreement (the “APA”) related to
that settlement. In accordance with the previously disclosed
settlement:
|
1.
|
Forest
has agreed to provide licenses to the Company for any patents related to
Lexapro® with respect to the marketing of the Company’s generic version of
the product as of the date that any third party generic enters the market
with final approval from the FDA other than an authorized generic or the
first filer with Hatch-Waxman
exclusivity.
|
|
2.
|
Forest
has reimbursed the Company for a portion of its attorney’s fees related to
this litigation.
|
|
3.
|
Pursuant
to the APA, the Company is taking over the commercialization and sale of
several products from Forest’s Inwood business and received compensation
payment from Forest in connection with its Inwood business. Caraco has
paid Forest an advance against royalties and will pay royalties on net
sales of these products.
|
As
previously disclosed, on September 22, 2004, Ortho-McNeil Pharmaceutical, Inc.
(“Ortho-McNeil”) filed a complaint in the United States District Court for the
Eastern District of Michigan alleging that the Company’s filing of an ANDA
seeking approval to market its generic version of Ortho-McNeil’s Ultracet® brand
tramadol/acetaminophen drug product infringed Ortho-McNeil’s patent, which
expires on September 6, 2011. Ortho-McNeil sought an order from the district
court which, among other things, directed the FDA not to approve the Company’s
ANDA any earlier than the claimed expiration date. The ANDA filed by the Company
contains a Paragraph IV Certification challenging the Ortho-McNeil patent. The
Company asserted that the Ortho-McNeil patent is invalid and/or will not be
infringed by the Company’s manufacture, use or sale of the product. Since filing
this action, Ortho-McNeil authorized a generic manufacturer to provide a generic
version of Ortho-McNeil’s Ultracet® product while another manufacturer launched
its approved generic at risk. On October 19, 2005, the Company’s motion for
summary judgment was granted. On December 19, 2005, the FDA approved the
manufacture, use and sale of the Company’s generic product. Ortho-McNeil filed
an appeal of the finding of noninfringement by the district court with the
United States Court of Appeals for the Federal Circuit. On January 19, 2007, the
United States Court of Appeals for the Federal Circuit affirmed the lower
court’s decision granting the Company’s motion for summary
judgment.
Additionally,
the United States Patent and Trademark Office approved Ortho-McNeil’s request
for a reissue patent. Although the district court had determined that the
Company does not infringe Ortho-McNeil’s original patent, on July 31, 2006,
Ortho-McNeil filed a lawsuit against the Company in the United States District
Court for the District of New Jersey, alleging that the Company’s generic
version of Ultracet® brand tramadol/acetaminophen drug product infringes its
reissue patent. On September 26, 2006, the Company filed an answer denying,
among other things, that its generic product infringes any valid claims of
Ortho-McNeil’s reissue patent. On December 10, 2007, the Company filed a motion
for summary judgment that the asserted claims of the reissue patent were obvious
and therefore invalid as a matter of law. This motion was granted by Judge
Cavanaugh of the District of New Jersey on April 17, 2008. Final judgment has
been granted. On August 25, 2008, Ortho-McNeil filed a notice of appeal with
respect to that judgment with the United States Court of Appeals for the Federal
Circuit. The appeal was fully briefed and was argued on July 7,
2009. On August 26, 2009, the Court of Appeals reversed a portion of
the previously decided summary judgment. Although the Court did find
that a portion of the patent was not valid, the Court remanded the litigation
back to the lower court for further proceedings. Caraco subsequently
filed a combined petition for a panel rehearing and a rehearing en
banc. That combined petition for rehearing remains pending before the
Court.
As
previously disclosed, on May 5, 2009, Wyeth filed a complaint against the
Company and Sun Pharma in the United States District Court for the Eastern
District of Michigan. The complaint alleges that the package insert
for Sun Pharma’s product that is distributed by the Company and which is a
generic version of Wyeth’s Protonix® (pantoprazole) pharmaceutical product
contains false and misleading statements regarding the active ingredient of that
product in violation of federal and state laws. The complaint requests damages,
injunctive relief and attorneys’ fees and costs. The Company and Sun Pharma
believe that they have not engaged in any improper conduct and intend to
vigorously contest these allegations. On July 6, 2009, the
Company and Sun Pharma filed a Motion to Dismiss the Complaint for Failure to
State a Claim Upon Which Relief May Be Granted. Plaintiff’s brief in
response to the Company’s and Sun Pharma’s Motion to Dismiss was filed on July
30, 2009. Caraco and Sun Pharma filed a reply memorandum of law in
support of its Motion to Dismiss on August 13, 2009. The Motion has
been fully briefed and we are awaiting a decision from the
Court.
As
previously disclosed, on June 25th, 2009, at the direction of the FDA, the U.S.
Marshal Service, arrived and seized drug products manufactured, work in process
materials, and ingredients held, at the Company's Michigan
facilities. The estimated value of such seized inventory as of
September 30, 2009 was $24.0 million. The office of the United States
Attorney, on behalf of the FDA and Department of Justice, filed a Warrant for
Arrest In Rem to seize certain materials at the Company's Michigan facilities in
the United States District Court for the Eastern District of
Michigan. A Complaint for forfeiture of those materials was filed
with the court by the FDA. The Complaint alleged that the drug
products and materials are adulterated, in that the methods used in, and the
facilities and controls used for, their manufacture, processing, packing and
holding do not conform to cGMP requirements. Also as previously
disclosed, on September 29, 2009, the Company voluntarily entered into a Consent
Decree with the FDA. The Consent Decree provides a series of measures
that, when satisfied, will permit the Company to resume manufacturing and
distributing those products which are manufactured in its Michigan
facilities. Nothing in the Consent Decree prohibits the Company from
distributing FDA approved drug products that are manufactured by third
parties. We intend to continue to work with the FDA under the terms
of the Consent Decree to resolve its concerns as effectively and expeditiously
as possible.
As
previously disclosed, on July 17, 2009 and July 23, 2009, two purported class
action lawsuits were filed in the United States District Court for the Eastern
District of Michigan against the Company and certain of its executive
officers. The lawsuits allege securities violations
related to the Company’s public statements on FDA compliance issues made between
May 29, 2008 and June 25, 2009. On September 15, 2009, plaintiffs in
both of the purported lawsuits filed motions for consolidation of the cases and
for approval of lead plaintiff. The Company believes the allegations
to be without merit and intends to vigorously defend itself.
On
September 29, 2009, Taro Pharmaceutical Industries Ltd. and Taro Pharmaceuticals
U.S.A., Inc. (“Taro”) filed suit against Caraco and Sun Pharma and certain of
its affiliates. The complaint, as it pertains to Caraco, alleges
misappropriation and misuse of trade secrets, unfair competition, tortious
interference with business relationships, fraud and unjust
enrichment. The claims against Caraco arise out of Caraco’s purported
access to information from Taro as a part of the due diligence conducted for Sun
Pharma’s tender offer for Taro Pharmaceuticals Industries Ltd. Caraco
intends to vigorously defend this action.
The
Company is also involved in certain other legal proceedings from time to time
incidental to normal business activities. While the outcome of any such
proceedings cannot be accurately predicted, the Company does not believe the
ultimate resolution of any of these certain existing matters would have a
material adverse effect on its financial position or results of
operations.
Inventories
consist of the following amounts:
|
|
September
30, 2009
|
|
|
March
31, 2009
|
|
Raw
materials
|
|
$ |
18,325,368 |
|
|
$ |
17,954,511 |
|
Goods
in transit (Distributed)
|
|
|
22,191,773 |
|
|
|
29,236,869 |
|
Work
in process
|
|
|
7,183,097 |
|
|
|
9,279,009 |
|
Finished
goods (Caraco- Owned)
|
|
|
10,141,321 |
|
|
|
9,749,721 |
|
Finished
goods (Distributed)
|
|
|
46,401,155 |
|
|
|
13,290,722 |
|
Inventories
before reserves
|
|
$ |
104,242,714 |
|
|
$ |
79,510,832 |
|
Less
: Reserve for certain inventory under control of the FDA
|
|
|
15,950,188 |
|
|
|
- |
|
Total
Inventories
|
|
$ |
88,292,526 |
|
|
$ |
79,510,832 |
|
Total
inventories at September 30, 2009 and March 31, 2009 includes materials
purchased in the amount of $3,257,323 and $2,875,885, respectively, related to
products for which the Company has filed ANDAs with the FDA, and the commercial
launch of such products will commence once the approvals are
received.
As
disclosed above, on June 25, 2009, certain drug products manufactured, work in
process, and ingredients held, at the Company's Michigan facilities were seized
at the direction of the FDA . The estimated value of such seized inventory as of
September 30, 2009 was $24.0 million. The Company voluntarily entered into a
Consent Decree with the FDA on September 29, 2009. As stipulated in the Consent
Decree, the Company will attempt to have the seized inventory released. The
Company believes that, except for the raw materials which were opened solely for
the purpose of sampling, the estimated value of which is $8.1 million, all other
seized inventory would be difficult to recondition. Accordingly, a reserve in
the amount of $15.9 million has been created as of September 30, 2009 for this
remaining inventory which consists of work in process relating to those
materials which are in various stages of production within our manufacturing
facilities, all finished goods and those raw material ingredients which are
partially consumed in process. The Company believes that it will be
able to use the inventory of raw materials which were opened solely for sampling
purposes, however, in the event the Company is unable to recondition or recover
all of such inventory, the Company will adjust the value of its inventory
accordingly in future periods, which would result in a negative impact on the
future operating results of the Company.
The
provision for income taxes is as follows:
|
|
Six Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
5,820,451 |
|
|
$ |
10,743,489 |
|
Deferred
|
|
|
(7,120,707 |
) |
|
|
(1,773,180 |
) |
Total
|
|
$ |
(1,300,256 |
) |
|
$ |
8,970,309 |
|
The
provision for income taxes is different from that which would be obtained by
applying the statutory federal income tax rate to income before income taxes.
The items causing the difference for the first six months of Fiscal 2010 and
Fiscal 2009, respectively, are as follows:
|
|
Six Months Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
Provision
for income taxes at federal statutory rate
|
|
$ |
(1,349,169 |
) |
|
$ |
9,409,521 |
|
Permanent
items and other
|
|
|
48,913 |
|
|
|
(439,212 |
) |
Income
taxes
|
|
$ |
(1,300,256 |
) |
|
$ |
8,970,309 |
|
Deferred
taxes consist of the following:
|
|
September 30,
2009
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$ |
664,693 |
|
|
$ |
797,631 |
|
Intangibles
|
|
|
25,254,680 |
|
|
|
26,458,255 |
|
Reserve
for inventory
|
|
|
5,582,662 |
|
|
|
- |
|
Other
|
|
|
416,986 |
|
|
|
417,136 |
|
Total
deferred tax assets
|
|
$ |
31,919,021 |
|
|
$ |
27,673,022 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
$ |
3,090,493 |
|
|
$ |
6,180,987 |
|
Depreciation
|
|
|
872,950 |
|
|
|
657,165 |
|
Total
deferred tax liabilities
|
|
$ |
3,963,443 |
|
|
$ |
6,838,152 |
|
|
|
|
|
|
|
|
|
|
Net deferred tax
assets
|
|
$ |
27,955,578 |
|
|
$ |
20,834,870 |
|
The
Company operates in two reportable segments consisting of (1) Caraco-owned
products (those products for which Caraco owns the ANDAs) and (2) those products
distributed under various agreements with Sun Pharma and its affiliates and with
others. The sales and gross profits earned on these categories of products are
as follows
Fiscal
2009:
|
|
Quarter
Ended
September
30, 2009
|
|
|
Six
Months Ended
September
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caraco-Owned
Products
|
|
$ |
2,492,443 |
|
|
$ |
(10,650,146 |
) |
|
$ |
15,573,630 |
|
|
$ |
(17,542,360 |
) |
Distributed
Products
|
|
|
75,883,452 |
|
|
|
6,511,859 |
|
|
|
110,872,281 |
|
|
|
9,794,505 |
|
Total
|
|
$ |
78,375,895 |
|
|
$ |
(4,138,287 |
) |
|
$ |
126,445,911 |
|
|
$ |
(7,747,855 |
) |
Fiscal
2008:
|
|
Quarter
Ended
September
30, 2008
|
|
|
Six
Months Ended
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caraco-Owned
Products
|
|
$ |
32,242,502 |
|
|
$ |
15,359,842 |
|
|
$ |
64,277,867 |
|
|
$ |
31,747,703 |
|
Distributed
Products
|
|
|
89,945,923 |
|
|
|
6,642,021 |
|
|
|
166,187,298 |
|
|
|
13,837,571 |
|
Total
|
|
$ |
122,188,425 |
|
|
$ |
22,001,863 |
|
|
$ |
230,465,165 |
|
|
$ |
45,585,274 |
|
None
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion and analysis provides information that management believes
is relevant to an understanding of the Corporation’s results of operations and
financial condition. The discussion should be read in conjunction with the
financial statements and notes thereto and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” included in the Company’s 2009
Annual Report on Form 10-K as of and for the year ended March 31, 2009 (the
“Annual Report”) and the unaudited interim financial statements included in Item
1 of this Quarterly Report on Form 10-Q.
Critical
Accounting Policies and Estimates
Our
significant accounting policies are described in Note 1 to our financial
statements included in our Annual Report. Certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require management’s subjective judgments. As a result, these
judgments are subject to an inherent degree of uncertainty. In applying these
policies, management makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. Significant estimates include, but are not
limited to, provisions for estimated customer returns, discounts, rebates and
other price adjustments, including customer chargebacks, valuation allowances
for deferred tax assets, valuation of overhead components in inventory and the
reserve for inventory. Our discussion and analysis of our financial condition
and results of operations are based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. There have neither been material changes to our critical
accounting policies for the periods presented nor any material quantitative
revisions to our critical accounting estimates for the periods
presented.
Revenue
Recognition
Revenue
from product sales, both manufactured and distributed, net of estimated
provisions, is recognized when there is persuasive evidence that an arrangement
exists, shipment of the goods has occurred, the selling price is fixed or
determinable, and collectibility is reasonably probable. Our customers consist
primarily of large pharmaceutical wholesalers who sell directly into the retail
channel, chain drug stores, distributors, and managed care customers. Provisions
for sales discounts, and estimates for chargebacks, rebates, and product returns
are established as a reduction of product sales revenue at the time revenues are
recognized, based on historical experience and current market trends adjusted to
reflect known changes in the factors that impact these reserves. These revenue
reductions are reflected as a direct reduction to accounts receivable through an
allowance.
Chargebacks
Chargebacks
represent our most significant provision against gross accounts receivable and
related reduction to gross revenue. Chargebacks are retroactive credits given to
our wholesale customers that represent the difference between the lower price
they sell (contractual price) to retail, chain stores, and managed care
organizations and what we charge the wholesaler. We estimate chargebacks at the
time of sale for our wholesale customers. We are currently unable to
specifically determine whether the amounts allowed in specific prior periods for
chargeback reserves have been over or understated. Wholesaler customers who
submit chargebacks to the Company do not reference a specific invoice that the
chargeback is related to when the chargeback is submitted to the Company. Thus,
we cannot determine the specific period to which the wholesaler’s chargeback
relates.
We
consider the following factors in the determination of the estimates of
chargebacks.
1. The
historical data of chargebacks as a percentage of sales, as well as actual
chargeback reports received from our primary wholesaler customers.
2. Volume
of all products sold to wholesaler customers and the average chargeback rates
for the current quarter as compared to the previous quarter and compared to the
last six month period.
3. The
sales trends and future estimated prices of our products, wholesale acquisition
cost (WAC), the contract prices with the retailers, chain stores, managed care
organizations (end-users), and our wholesaler customer’s contract
prices.
4. We
utilize remaining inventories on hand at our primary wholesaler customers at the
end of the period in the calculation of our estimates.
Such
estimated amounts, in addition to certain other deductions, are deducted from
our gross sales to determine our net revenues. The amount of actual chargebacks
claimed could be either higher or lower than the amounts we accrued. Changes in
our estimates, if any, would be recorded in the income statement in the period
the change is determined. If we materially over or under estimate the amount
that will ultimately be charged back to us by our wholesale customers, there
could be a material impact on our financial statements.
Shelf
Stock Adjustments
Shelf
stock adjustments are credits issued to our customers to reflect decreases in
the selling prices of our product. These credits are customary in the industry
and are intended to reduce the customers’ inventory cost to better reflect
current market prices. The determination to grant a shelf stock adjustment to a
customer following a price decrease is at our discretion.
Factors
considered when recording a reserve for shelf stock adjustments include
estimated launch dates of competing products based on market intelligence,
estimated decline in market price of our product based on historical experience
and input from customers and levels of inventory held by customers at the date
of the adjustments as provided by them.
Product
returns and other allowances
In the
pharmaceutical industry, customers are normally granted the right to return
product for credit if the product has not been used prior to its expiration
date. Our return policy typically allows product returns for products within a
twelve month window from six months prior to the expiration date and up to six
months after the expiration date. We estimate the level of sale, what will
ultimately be returned pursuant to our return policy, and record a related
reserve at the time of sale. These amounts are deducted from our gross sales to
determine our net revenues. Our estimates take into consideration historical
returns of our products and our future expectations. We periodically review the
reserves established for returns and adjust them based on actual experience, if
necessary. The primary factors we consider in estimating our potential product
returns include shelf life of expiration date of each product and historical
levels of expired product returns. In case we become aware of any returns due to
product related issues, such information from the customers is used to estimate
an additional reserve. The amount of actual product return could be either
higher or lower than the amounts we accrued. Changes in our estimates, if any,
would be recorded in the income statement in the period the change is
determined. If we over or under estimate the quantity of product which will
ultimately be returned, there may be a material impact on our financial
statements.
Discounts
(trade and prompt payment discounts) are accrued at the end of every reporting
period based on the gross sales made to the customers during the period and
based on their terms of trade. We review the contracts between the customer and
us as well as the historical data and percentages to estimate the discount
accrual.
Customer
rebates are estimated at every period end, based on direct or indirect
purchases. If the purchases are direct, the rebates are recognized when products
are purchased and a periodic credit is given. For indirect purchases, the
rebates are recognized based on the terms with such customer. Medicaid rebates
are estimated based on the historical data we receive from the public sector
benefit providers, which is based on the final dispensing of our product by a
pharmacy to a benefit plan participant.
Doubtful
Accounts
Doubtful
accounts are estimated based on the data available from external sources,
including information on financial condition of customers. Also, a regular
review of past due receivables is done on a quarterly basis to identify and make
provision for such receivables not expected to be collected.
Gross
Sales and Related Allowances
Our gross
sales for the second quarter and first six months of Fiscal 2010 were $131.5
million and $213.8 million, respectively, as compared to $250.6 million and
$430.7 million, respectively, for the corresponding periods of Fiscal 2009.
Sales allowances, which include chargebacks, returns, discounts, other customary
customer deductions and other sales costs, constituted approximately 40% and 41%
of gross sales, respectively, for the second quarter and first six months of
Fiscal 2010 as compared to 51% and 46% of gross sales, respectively, for the
corresponding periods of Fiscal 2009. Net sales for the second quarter and first
six months of Fiscal 2010 were $78.4 million and $126.4 million, respectively,
as compared to $122.2 million and $230.5 million, respectively, for the
corresponding periods of Fiscal 2009. The primary cause of the decreased sales
allowances for both periods of Fiscal 2010 is due to the impact of higher sales
to customers other than wholesalers, which carry lower deductions from gross
sales, since sales made to wholesale customers includes deductions related to
chargebacks, which represent differences between wholesale acquisition costs
(WAC) and the contractual prices at which the wholesalers ship to our end use
customers.
The
following is a roll forward of the provisions for chargebacks, shelf stock
adjustments, returns and allowances and estimated doubtful account allowances
during Fiscal 2009 and the first six months of Fiscal 2010.
($
in Thousands)
|
|
|
|
Balances at beginning of
period
|
|
|
Allowances charged to Gross
Sales
|
|
|
Credits taken by customers
|
|
|
Balance at the end of
period
|
|
|
|
|
|
|
Current Period
|
|
|
Prior Period
|
|
|
|
|
|
|
|
For
all of Fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks,
rebates & shelf stock adjustments
|
|
$ |
78,905 |
|
|
$ |
291,070 |
|
|
|
-0- |
|
|
$ |
319,947 |
|
|
$ |
50,028 |
|
Returns
and other allowances
|
|
|
5,273 |
|
|
|
19,870 |
|
|
|
-0- |
|
|
|
18,588 |
|
|
|
6,555 |
|
Doubtful
Accounts
|
|
|
118 |
|
|
|
231 |
|
|
|
-0- |
|
|
|
271 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the first six months of Fiscal 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks,
rebates & shelf stock adjustments
|
|
$ |
50,028 |
|
|
$ |
81,798 |
|
|
|
-0- |
|
|
$ |
65,983 |
|
|
$ |
65,843 |
|
Returns
and other allowances
|
|
|
6,555 |
|
|
|
5,573 |
|
|
|
-0- |
|
|
|
6,540 |
|
|
|
5,588 |
|
Doubtful
Accounts
|
|
|
78 |
|
|
|
9 |
|
|
|
-0- |
|
|
|
9 |
|
|
|
78 |
|
Research
and Development Costs
Series B
convertible preferred stock was issued to Sun Pharma and its affiliates under
the Products Agreement between the Corporation and Sun Global in exchange for
the technology of formulation products delivered by Sun Global to the
Corporation. Such Products Agreement has been completed with the last
technology transfer occurring during the third quarter of Fiscal
2008. Accordingly, no further non-cash research and development
expense will be incurred thereunder. The amount of non-cash research
and development expense which was incurred for past technology transfers under
the Products Agreement was charged to operations and was determined based on the
fair value of the preferred shares on the date the respective product formula
passed its bio-equivalency studies. The fair value of such shares was
based upon a valuation performed by Donnelly Penman & Partners, an
independent, third party valuation firm. The exchange of shares was prior to the
initial ANDA submission to the FDA.
We were
responsible for submission of the ANDAs for these transferred formulations for
FDA approval. In our experience, generally the submission of the ANDA
to the FDA was approximately thirty days after the receipt of notice that the
proposed drug product formula passes its bio-equivalency study and accelerated
stability studies. An ANDA contains data related to a generic drug product which
is submitted to the FDA for review and approval. The FDA must first
determine the completeness of the filing and may deny the filing if it is
incomplete. There are various reviews that are completed, including
bio-equivalency, chemistry, manufacturing, and labeling. The
bio-equivalency of a generic drug product is established by measuring the rate
and level of active ingredient(s) in the bloodstream of healthy human subjects
over a period of time. These pharmacokinetic parameters and results are compared
with the innovator’s drug product. The bio-equivalency results of the proposed
generic drug product must meet pharmacokinetic standards set forth by the FDA.
Accordingly, the generic version of a drug product must generally deliver the
same amount of active ingredients into the bloodstream within the same timeframe
as that of the innovator drug product. Following an indication that
the generic drug product has passed its bio-equivalency study, the generic drug
product will undergo reviews for chemistry, manufacturing and
labeling. In each case, the FDA has an opportunity to raise questions
or comments, or issue a deficiency letter. In the event that one or
more deficiency letters are issued by the FDA, the submission of the ANDA may be
halted or delayed as necessary to accommodate the correction of any such
deficiencies and the completion of any additional reviews required. Minor
deficiencies traditionally could delay the approval anywhere from 10 days to 90
days or more. Major deficiencies could stop the evaluation
process. A restart of the FDA review process after a major deficiency
could take up to as many as 180 days or more. Generally, any
deficiencies we have experienced have been minor though at times approvals have
faced considerable delays. Based on these delays, the economic
benefit may not be realized at its highest potential as the delay could cause
our approval to be behind our competition’s approval of the same generic
product.
Based on
the definition and characteristics of an asset, set forth in paragraphs 25 and
26 of Statement of Financial Accounting Concepts No. 6 issued by the FASB, the
Company did not capitalize the technology formulas transferred, as the
probability of the future economic benefit to be derived from such formulations
was uncertain at the time of technology transfer.
In
addition, we have reported the technology transfers as research and development
expenses pursuant to ASC Topic 730, “Research and Development,” In
connection therewith, the research and development technology transferred by Sun
Global under the Products Agreement was always specific research and development
technology for a specific product formula. There were no alternative future uses
(in other research and development projects or otherwise) for such products. For
example, Caraco has never acquired technology from Sun Global with the purpose
of selling such technology and, in fact, has never sold or held for sale any of
the technology transferred by Sun Global to a third party. Caraco has always
developed the research and development technology into manufactured product for
its own business purposes.
Research
and development costs settled in cash are charged to expense as
incurred.
Short-Term
Investments
During
the first quarter of Fiscal 2010 the Company invested $10,000,000 in a bank
certificate of deposit. The term of deposit is for twelve months and
earns interest at a rate of 4.5% APY. If such deposit is withdrawn prior to
maturity, the Company will earn interest at the applicable LIBOR rate as on the
date of such withdrawal.
Intangible
Assets
The
Company made a cash payment in the first quarter of Fiscal 2009 in the amount of
$1,100,000 for the purchase of certain assets which included brand products,
associated New Drug Applications (“NDAs”) and trademarks. These assets are
recorded as intangible assets in the Company’s balance sheet at September 30,
2009. Additionally during the second quarter of Fiscal 2009, the Company paid
$356,000 in cash towards product and establishment fees for these products. The
total gross carrying amount for these assets is $1,456,000 as of September 30,
2009. These intangible assets are being amortized equally over a period of 15
years, the period during which the Company expects to receive economic benefits
from these intangible assets. The Company recorded $49,000 in amortization
expense in the first six months of Fiscal 2010, bringing the total accumulated
amortization related to these intangible assets to $121,000 as of September 30,
2009.
Income
Taxes
As part
of the process of preparing our financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. We
account for income taxes by the liability method. Under this method, deferred
income taxes are recognized for tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end, based on enacted laws and statutory tax rates
applicable for the differences that are expected to affect taxable income. In
assessing the ability to realize deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. We had net deferred tax
assets of $28.0 million and $20.8 million at September 30, 2009 and March 31,
2009, respectively. Valuation allowances are provided when based upon the weight
of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. We have recorded income tax expense of
$3.9 million and an income tax benefit of $1.1 million, respectively, for the
second quarter and first six months of Fiscal 2010 as compared to income tax
expense of $3.9 million and $9.0 million, respectively, during the second
quarter and first six months of Fiscal 2009. The income tax benefit for first
six months of Fiscal 2010 was predominantly due to losses incurred as a result
of FDA actions including the seizure of inventory for which a reserve has been
created. We have not provided for any valuation allowance as of September 30,
2009 or March 31, 2009. Based upon the level of projected future taxable income
over the periods in which these deferred assets are deductible, the Company
expects that it is more likely than not that it will realize the benefit of
these temporary differences. As of September 30, 2009, we had federal NOLs of
approximately $1.9 million, which are restricted by limitations of Internal
Revenue Code Section 382, available to reduce future taxable
income. The NOLs will expire between 2010 and 2012.
The
Company is subject to U.S. federal income tax as well as income tax in certain
state jurisdictions. As previously disclosed, the IRS has initiated an
examination of the Company’s tax return for the fiscal year ended March 31,
2007. The examination has been completed and the IRS has notified the Company
that no adjustments are required to be made to the tax return filed for the
period under review. The Company’s federal statute of limitations has
expired for years prior to 2003.
Inventory
We value
inventories at the lower of cost or market. We determine the cost of raw
materials, work in process and finished goods using the specific identification
cost method. We analyze our inventory levels quarterly and write down inventory
that has become obsolete and inventory that has a cost basis in excess of its
expected net realizable value. Expired inventory is disposed of and the related
costs are written off. Materials acquired solely for R&D are written off in
the year of acquisition. Inventory includes material purchased related to
products for which the Company has filed ANDAs with the FDA and the
commercial launch of such products will commence once the approvals are
received. The determination of whether or not inventory costs will be realizable
requires estimates by management. A critical estimate in this determination is
the estimate of the future expected inventory requirements, whereby we compare
our internal sales forecasts to inventory on hand. Actual results may differ
from those estimates and inventory write-offs may be required. We must also make
estimates about the amount of manufacturing overhead to allocate to our finished
goods and work in process inventories. Although the manufacturing process is
generally similar for our products, we must make judgments as to the portion of
costs to allocate to purchased product, work in process and finished goods, and
such allocations can vary based upon the composition of these components and the
fact that each product produced does not necessarily require the same amount of
time or effort for the same production step. Accordingly, the assumptions we
make can impact the value of reported inventories and cost of
sales.
As
disclosed above, on June 25, 2009, certain drug products manufactured, work in
process, and ingredients held, at the Company's Michigan facilities were seized
at the direction of the FDA. The estimated value of such seized inventory as of
September 30, 2009 was $24.0 million. The Company has voluntarily entered into a
Consent Decree and is in the process of getting the material released. The
Company believes that, except for the raw materials which were opened solely for
the purpose of sampling, the estimated value of which is $8.1 million, all other
seized inventory would be difficult to recondition. A reserve in the balance
amount of $15.9 million has been created as of September 30, 2009 which consists
of work in process relating to those materials which are in various stages of
production within our manufacturing facilities, all finished goods and those raw
material ingredients which are partially consumed in process. The
Company believes that it will be able to use the inventory of raw materials
which were opened solely for sampling purposes, however, in the event the
Company is unable to recondition or recover all of such inventory, the Company
will adjust the value of its inventory accordingly in future periods, which
would result in a negative impact on the future operating results of the
Company.
OVERVIEW
The
Company voluntarily entered into a Consent Decree with the FDA on September 29,
2009. As stipulated in the Consent Decree, the Company will attempt to have the
seized inventory released. The estimated value of this inventory of drug
products manufactured in Caraco's Michigan facilities including ingredients and
in-process materials was $24.0 million, as of September 30, 2009. The Company
believes that, except for the raw materials which were opened solely for the
purpose of sampling, the estimated value of which is $8.1 million, all other
such inventory would be difficult to recondition. Accordingly, a reserve in the
amount of $15.9 million has been created as of September 30, 2009 for this
remaining inventory. As a result of the FDA action, Caraco has voluntarily
ceased manufacturing operations and instituted, in two phases, indefinite
layoffs of approximately 430 employees. Products sold and distributed by Caraco
that are manufactured by third parties and outside of these facilities are not
impacted and the Company continues distribution and marketing of these products.
The Consent Decree provides a series of measures that, when satisfied, will
permit the Company to resume manufacturing and distribution of those products
that are manufactured in its Michigan facilities. The Company has engaged a
consulting firm which is comprised of cGMP experts, in accordance with the
Consent Decree.
As a
result of this event, there has been a material adverse effect on our current
operations and there may be a material adverse effect on our near term
operations. Under terms of the Consent Decree, Caraco's cessation of
manufacturing operations will continue until it receives written notification
from independent experts and the FDA that it is in compliance with the Consent
Decree and regulations and can resume operations. However, there is no assurance
that the steps being taken will be successful or result in resolution of the FDA
complaint. We are also not able, at this time, to estimate, the cost
of these actions. We anticipate working with the FDA to resolve its concerns as
effectively and expeditiously as possible in accordance with the terms of the
Consent Decree. The Consent Decree also requires the Company to abide
by certain conditions and restrictions. If the Company violates any portion of
the Consent Decree, it could incur penalties, such as monetory fines, forfeiture
of the seized goods and other penalties.
During
the second quarter ended September 30, 2009 and first six months of our current
fiscal year (“Fiscal 2010”) ended September 30, 2009, we generated net sales of
$78.4 million and $126.4 million, respectively, compared to $122.2 million and
$230.5 million, respectively, during the corresponding periods of Fiscal 2009.
We incurred $(1.5) million and $5.6 million, respectively, in research and
development (“R&D”) expenses during the second quarter and first six months
of Fiscal 2010, as compared to $5.6 million and $11.1 million, respectively,
during the corresponding periods of Fiscal 2009. We generated cash from
operations in the amount of $20.3 million during the first six months of Fiscal
2010, as compared to using cash from operations in the amount of $8.2 million
during the corresponding period of Fiscal 2009. We earned a net pre-tax income
of $10.6 million during the second quarter and incurred a net pre-tax loss of
$3.9 million during the first six months of Fiscal 2010, as compared to earning
net pre-tax income of $12.3 million and $26.9 million, respectively, during the
corresponding periods of Fiscal 2009. Net pre-tax income in both periods of the
current fiscal year were lower as we have created a reserve in the amount of
$7.5 million and $15.9 million, respectively, during the second quarter and
first six months of Fiscal 2010 relating to the inventory seized by the FDA, as
disclosed above and also due to the cessation of manufacturing at the Company’s
Michigan facilities resulting in a loss of revenues from such products, as also
disclosed above. Net pre-tax income was also positively affected by
non-recurring income earned in the amount of $20.0 million as part of an asset
purchase agreement arising out of a settlement agreement entered into by the
Company during the current period that is not expected to recur in future
periods. The Company recorded an income tax expense of $3.9 million and provided
an income tax benefit of $1.1 million for the second quarter and first six
months of Fiscal 2010, respectively, as compared to an income tax expense of
$3.9 million and $9.0 million, respectively, in the corresponding periods of
Fiscal 2009. We earned a net income of $6.7 million during the second quarter
and incurred a net loss of $2.8 million for the first six months of Fiscal 2010,
as compared to net income of $8.4 million and $17.9 million, respectively,
during the corresponding periods of Fiscal 2009. At September
30, 2009, we had stockholders’ equity of $161.2 million, as compared to
stockholders’ equity of $163.8 million at March 31, 2009. (See “Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”).
During
Fiscal 2008, the Company commenced construction on the expansion of its primary
facility located in Detroit, Michigan. The expansion occurred on the acreage the
Company acquired for $0.3 million directly adjacent to its existing
manufacturing facility. The expansion was completed during the fourth quarter of
Fiscal 2009 and added approximately 140,000 square feet to our manufacturing
facility. The expanded facility encompasses additional space required for
manufacturing, quality control laboratories, raw material storage and
administrative offices. It will also introduce additional automated equipment
and process flow efficiencies in order to reduce long term costs associated with
our production, while maintaining quality. As disclosed, however, the Company
has voluntarily ceased manufacturing as a result of the FDA action. In addition,
the Company continued updating its packaging facility located in Farmington
Hills, Michigan. During Fiscal 2007, the Company acquired this packaging
facility for $1.7 million. We have improved the infrastructure and process flow
by replacing manual packaging lines with automated lines, thereby having less
human intervention. This has already improved quality control in our packaging
operations and will result in improved capacity. This 33,369 square foot
facility was previously owned and operated by a third party packager of our
portfolio of products. As disclosed, however, the Company has voluntarily ceased
manufacturing as a result of the FDA action and accordingly operations in this
facility have temporarily been suspended.
FDA
COMPLIANCE
During
Fiscal 2009, the FDA inspected both the Elijah McCoy manufacturing facility and
the Farmington packaging facility. Forms FDA 483 were issued at the conclusion
of both inspections detailing the FDA investigators’ observations. Responses to
these observations were submitted to the FDA detailing the Company’s actions
taken in response to the observations. On October 31, 2008, the Company received
a warning letter from the Detroit District of the FDA for its manufacturing
facility in Detroit Michigan. In this letter, the Agency reiterated some of the
concerns detailed in the previous Form 483 issued as a result of our inspection
that concluded in June 2008. These concerns included inadequate and untimely
investigations by our quality control unit of certain incidents contrary to the
Company’s standard operating procedures. The warning letter also stated that the
FDA expressed serious concerns regarding “a) your firm’s compliance history
including several past inspections that documented significant CGMP
deficiencies, b) the serious nature of the observed violations, c) your plans
for expansion under these violative conditions, and d) the risk to consumers
associated with the CGMP deviations involving potential product
contamination.” The FDA also raised concerns about our corrective
action plans. The FDA added that failure to promptly correct the deficiencies
may result in legal action without further notice, including, without
limitation, seizure and injunction. It also noted that other federal agencies
may take this warning letter into account when considering the award of
contracts. Additionally, the FDA may withhold approval of requests for export
certificates, or approval of pending new drug applications. We promptly
responded to the warning letter on November 24, 2008 for the deficiencies noted
and provided our corrective actions. The Detroit District acknowledged our
response on December 22, 2008. It noted that our corrective actions would
be evaluated during the FDA’s next scheduled inspection of our Detroit facility.
On March 11, 2009 the FDA began an inspection as a follow-up to the October 2008
warning letter. This inspection covered all the quality and production systems
of the Company and concluded on May 12, 2009. The FDA investigators
provided the Company with a list of their observations on FDA Form 483. Some of
the observations were relative to the recent recalls and compliance, whereas
others were focused on inventory controls. The FDA's inspection found unresolved
violations of current Good Manufacturing Practice (cGMP) requirements as
previously disclosed in our last SEC filing on Form 10-K filed June 15, 2009. On
March 31, 2009, we recalled all tablets of Digoxin, USP, 0.125 mg, and Digoxin,
USP, 0.25 mg, distributed prior to March 31, 2009 to the consumer level. As a
precautionary measure, in April 2009, we initiated recalls of certain product
lots manufactured in our Detroit, Michigan facility, primarily to the retail and
wholesale levels. The total sales revenue, related to these recalls, we believe,
is approximately $4.2 million. These recalls were voluntarily initiated by the
Company with the knowledge of the FDA. The recalls were made as a precautionary
measure. The Company provided a written response to these observations on June
19, 2009. On June 25, 2009, U.S. Marshals, at the request of the FDA, seized
drug products manufactured in our Michigan facilities. The seizure also included
ingredients held at these same facilities as well as work in process. Products
distributed by Caraco that are manufactured outside of these facilities are not
impacted. In its complaint relating to its seizure, the FDA stated, among other
things, that the May 12, 2009 inspection and the Company’s written response
thereto revealed continuing significant cGMP violations. The FDA also
stated that the drug products are adulterated in that the methods used in, and
the facilities and controls used for, their manufacture, processing, packing,
and/or holding do not conform to and are not operated and administered in
conformity with cGMP requirements. As a result of the FDA
action, we voluntarily ceased manufacturing operations and instituted an
indefinite reduction in our workforce of approximately 430 employees in two
phases. This has resulted and will result in a material adverse
effect on our current and near term operations.
On
September 29, 2009, Caraco voluntarily entered into a Consent Decree with the
FDA regarding the Company's drug manufacturing operations. The Consent Decree
provides a series of measures that, when satisfied, will permit Caraco to resume
manufacturing and distributing those products that are manufactured in its
Michigan facilities. The Company is working expeditiously to satisfy the
requirements of the Consent Decree and has already retained independent cGMP
experts for review of the Company's operations and to facilitate a successful
result.
Under
terms of the Consent Decree, Caraco's cessation of manufacturing operations will
continue until it receives written notification from independent experts and the
FDA that it is in compliance with the Consent Decree and regulations and can
resume operations. Nothing in the Consent Decree prohibits Caraco from
distributing FDA approved drug products that are manufactured by third parties.
There is no assurance that the steps taken will be successful or result in
resolution of the FDA complaint. We are also not able, at this time, to estimate
the cost of these actions. We intend to continue to work with the FDA to resolve
its concerns as effectively and expeditiously as possible.
We have
not obtained FDA approvals of our ANDAs since the first quarter of Fiscal 2009.
It is unlikely that we will receive any approvals for product out of our
Michigan facilities until the FDA reviews our remediation response and makes a
determination of our status. We have changed our leadership in both
manufacturing and quality control in early 2009, in order to better align these
areas with our corporate goals and taken other steps, as stated below, to
improve cGMP compliance.
Customer
confidence could diminish based on the recent recalls and our status with the
FDA. As previously disclosed, certain government contracts have been and could
be affected by the warning letter and our current status. In the fourth quarter
of Fiscal 2009, due to our status with the FDA, the Veterans Administration has
not renewed certain product contracts we had with it that were expiring. Once we
have resolved our current issues with the FDA, we may regain this business when
these contracts come up for renewal, which occurs on an annual
basis.
We have
engaged a consulting firm which is comprised of cGMP experts in accordance with
the Consent Decree. The new leadership in both our quality and production areas
are effecting change as rapidly as possible in order to provide continual
improvement.
Second
Quarter and First Six Months Fiscal 2010 Compared to Second Quarter and
First Six Months Fiscal 2009
Net Sales. Net
sales for the second quarter and first six months of Fiscal 2010, ended
September 30, 2009, were $78.4 million and $126.4 million respectively, as
compared to $122.2 million and $230.5 million, respectively, for the second
quarter and first six months of Fiscal 2009, reflecting a decrease of 36% and
45% in the respective periods. The sales for both of the periods of Fiscal 2009
included high levels of sales of Paragraph IV products which were launched by
the Company during the fourth quarter of Fiscal 2008 under the distribution and
sale agreement with Sun Pharma. These product sales may or may not be
sustainable, as previously disclosed. The sales of distributed products were
also lower due to price erosion on the products sold, partially offset by new
product launches. Sales of one product (oxcarbazepine), launched under the
marketing agreement during the third quarter of Fiscal 2008 were significantly
higher during the first six months of Fiscal 2009. This product was launched
with 180 days shared exclusivity, which allowed its higher sales during the
first quarter of Fiscal 2009. Subsequent to the end of the exclusivity period,
which occurred during the first quarter of Fiscal 2009, the net realizations for
this product have decreased significantly as several other competitors have
entered the market for this generic product. Sales of Caraco-owned products
(those products which Caraco owns the ANDAs) during the second quarter were
negligible as we have stopped marketing, effective June 25, 2009, all the
products which were being manufactured out of our Michigan facilities on account
of the FDA actions, as previously discussed. Similarly, the sales of
Caraco-owned products for first six months of Fiscal 2010 were lower due to, the
FDA’s seizure of certain of our inventory and cessation of manufacturing, as
previously disclosed, and in part due to the negative impact of our
voluntary recalls of certain products. We did not distribute any digoxin during
the period subsequent to the recall of digoxin that occurred on March 31, 2009.
We also had a recall on various products on April 17, 2009, as previously
disclosed. The subsequent sales on some of those manufactured products were
negatively impacted by the recall. Net sales for distributed
products were $75.9 million and $110.9 million, respectively, for the second
quarter and first six months of Fiscal 2010, as compared to $89.9 million and
$166.2 million, respectively, for the corresponding periods of Fiscal 2009. Net
sales for Caraco-owned products were $2.5 million and $15.6 million,
respectively, for the second quarter and first six months of Fiscal 2010, as
compared to $32.2 million and $64.3 million, respectively, for the corresponding
periods of Fiscal 2009. We were manufacturing and marketing all except two of
our approved products. However, as a result of action taken by the FDA, we have
ceased manufacturing operations of the products which we manufacture at our
facilities located in the state of Michigan. We continue to have manufacturing
products sales that are manufactured by third party manufacturers including Sun
Pharma.
Overall
sales of one product accounted for approximately 77% and 65% of net sales for
the second quarter and first six months of Fiscal 2010 as compared to sales of
two products which accounted for approximately 61% and 59% of net sales for the
corresponding periods of Fiscal 2009.
Gross Profit. We
incurred a gross loss of $4.1 million and $7.7 million, respectively, during the
second quarter and first six months of Fiscal 2010, as compared to gross profit
of $22.0 million and $45.6 million, respectively, during the corresponding
periods of Fiscal 2009. The gross loss in the second quarter and first six
months of Fiscal 2010 were, in large part, due to a reserve of $7.5 million and
$15.9 million we provided on the inventory seized by the FDA during the
respective periods. (See “Inventory” above). The gross profit has also decreased
due to negligible sales in the second quarter of Caraco-owned products and lower
sales of both distributed as well as Caraco-owned products in the first six
months of Fiscal 2010. As disclosed above, due to the actions of the FDA, all
shipments of products which were being manufactured at the Company’s Michigan
facilities have ceased effective June 25, 2009, which has led to diminished
sales of Caraco-owned products.
The gross
profit margin for the second quarter and first six months of Fiscal 2010 as a
percentage of net sales decreased to (5%) and (6%), respectively, as compared to
18% and 20%, respectively, during the corresponding periods of Fiscal 2009. As
disclosed above, we have created a reserve in the amount of $7.5 million and
$15.9 million, respectively, during the second quarter and first six months of
Fiscal 2010 for the inventory seized by the FDA. Excluding the impact of the
inventory reserve, the gross profit margins in the second quarter and first six
months of Fiscal 2010 were 4% and 6% respectively, as compared to 18% and 20%,
respectively, for the corresponding periods of Fiscal 2009. This decrease was
due to the weight of increased sales of distributed products versus the sales of
manufactured products, which had an impact on the overall margins. The gross
profit margin on distributed products was 9% for both the second quarter and
first six months of Fiscal 2010, as compared to 7% and 8% for the corresponding
periods of Fiscal 2009. The gross profit margin for Caraco-owned products was
(427%) and (113%) for the second quarter and first six months of Fiscal 2010, as
compared to 48% and 49% for the corresponding periods of Fiscal 2009. Excluding
the impact of the inventory reserves, the gross profit margin in the second
quarter and first six months of Fiscal 2010 was (126)% and (10)%, respectively.
Caraco-owned product margins have decreased mainly due to impact of overhead
absorption, having similar levels of direct overhead in the first quarter and
decreased levels in the second quarter, with lower sales for the second quarter
and first six months of Fiscal 2010, which contributed 108% and 40%,
respectively, to the decreases in gross profit margin. Price erosion on certain
products and changes in the sales mix of the Caraco-owned products sold also
contributed to the decrease. Also, we had initiated a recall of one product
(digoxin) during the fourth quarter of Fiscal 2009. There were no sales of this
product during the first six months of Fiscal 2010. The loss of sales of this
product also adversely affected the gross profit margins for the referred
periods. Further, as disclosed earlier, there were significantly low levels of
sales of Caraco-owned products (which included none of the products which were
manufactured at the Company’s Michigan facilities). Also during the second
quarter of Fiscal 2010, we have written off certain non-seized inventories of
approximately $0.4 million, partly relating to one DESI product which is being
discontinued as stipulated in the Consent Decree, and partly related to products
we purchased along with the brand, which have now become obsolete. We cannot
determine the mix of distributed product sales versus Caraco-owned product sales
in any given period as it depends on our ability to gain market share on each
product and is relative to when the FDA approves any given product in either
category of product and the revenue potential of that product once it has been
approved.
Selling, General and Administrative
Expenses. Selling, general and administrative (“SG&A”)
expenses during the second quarter and first six months of Fiscal 2010 were $6.8
million and $10.5 million, respectively, as compared to $4.2 million and $8.1
million, respectively, during the corresponding periods of Fiscal 2009,
representing increases of 60% and 30%, respectively. SG&A expenses, as a
percentage of net sales increased to 8% for the first six months of Fiscal 2010,
as compared to 3% for the corresponding period of Fiscal 2009. The higher
percentage of SG&A is partly due to the lower sales in the current period
versus the corresponding period last year. Also during the second quarter of
Fiscal 2010, the Company recorded additional expenses related to a) severance
paid to its former CEO, b) legal and professional consultation fees related to
FDA issues and c) payments made to its customers in lieu of contractual
unfulfilled product supply obligations.
Research and Development
Expenses. Total R&D expenses incurred for the second
quarter and first six months of Fiscal 2010 were $(1.5) million and $5.6 million
respectively, as compared to $5.6 million and $11.1 million, respectively,
during the corresponding periods of Fiscal 2009. The R&D expenses during the
second quarter of Fiscal 2010 were primarily lower compared to those during the
corresponding period of Fiscal 2009 as we were reimbursed a certain amount
relating to certain product litigation costs, as part of a settlement agreement,
as previously disclosed. Also, the R&D costs were lower due to
non-incurrence of any major expenses in the second quarter relating to
bio-equivalency studies and material costs for development.
Non-Recurring Income. We
earned a one-time non-recurring income in the amount of $20.0 million during the
second quarter and first six months of Fiscal 2010 arising out of a product
litigation settlement and an asset purchase agreement, as previously
disclosed.
Net Other Income (Expense). We
earned net other income of $33 thousand during the second quarter and incurred
net other expense of $0.1 million during the first six months of Fiscal 2010, as
compared to earnings of net other income of $0.1 million and $0.4 million,
respectively, during the corresponding periods of Fiscal 2009. The lower net
other income/expense was primarily due to interest expense incurred in relation
to the Company’s term loan with Charter One Bank and a loss on removal of
certain assets during the first quarter of Fiscal 2010.
Income Taxes. We
recorded income tax expense of $3.9 million during the second quarter and
provided an income tax benefit of $1.1 million during the first six
months of Fiscal 2010, respectively, compared to income tax expense
of $3.9 million and $9.0 million, respectively, during the corresponding periods
of Fiscal 2009. The benefit in the current six-month period is due to
the losses incurred. (See discussion under “Income Taxes” above).
Results of
Operations. We earned pre-tax income of $10.6 million during
the second quarter of Fiscal 2010 and incurred a net pre-tax loss of $3.9
million during the first six months of Fiscal 2010, as compared to a net pre-tax
income of $12.3 million and $26.9 million, respectively, during the
corresponding periods of Fiscal 2009. We earned net income of $6.7
million for the second quarter and incurred a net loss of $2.8 million for the
first six months of Fiscal 2010, as compared to net income of $8.4 million and
$17.9 million, respectively, during the corresponding periods of Fiscal
2009.
Liquidity and Capital Resources We generated cash
from operations in the amount of $20.3 million during the first six months of
Fiscal 2010, as compared to using cash in operations in the amount of $8.2
million during the corresponding period of Fiscal 2009. The cash flow from
operations was lower in the first six months of Fiscal 2009 primarily due to a
decrease in accounts payable balances offset, in part, by decreases in accounts
receivable and inventory balances. Accounts receivable increased by $33.8
million to $49.0 million as of September 30, 2009, as compared to $15.2 million
at the end of Fiscal 2009. Accounts receivable is 59 days sales outstanding
(“DSO”) as of September 30, 2009 versus 27 days as of March 31, 2009. The lower
level in DSO at March 31, 2009 was temporary and is mainly due to the timing of
payments made by the wholesale customers. However, a deduction for chargebacks
will be made by these wholesale customers as they continue to sell to retail
chain stores and managed care organizations with whom we have contractual
pricing. The Company believes that it has provided adequate reserves for
chargeback deductions which are likely to be taken by the wholesale customers in
subsequent periods. Certain wholesale customers purchased quantities of a
certain product based on their own forecast, to ensure an in-stock position for
such product, as there were uncertainties related to the future availability of
such product and continued shipments from the Company. Inventory levels are
equivalent to 167 days sales on hand, as compared to 140 days on hand as of
March 31, 2009. Excluding the reserve created for inventory seized by FDA,
inventory levels were equivalent to 198 days sales on hand. The inventory as of
September 30, 2009 includes higher levels of inventory of Paragraph IV products
to support anticipated sales in the near term period. At March 31, 2009 we had
negligible stock of such product on hand. If the sale of the Paragraph IV
products are not allowed by any regulatory authority and Sun Pharma does not
file a timely appeal, we would have various rights to return the product to Sun
Pharma. The accounts payable balance relating to Sun Pharma has also increased
from $43.9 million at March 31, 2009 to $115.0 million at September 30, 2009 in
line with increased levels of inventory relating to distributed
products and accounts receivable balances.
As
disclosed above the FDA has initiated certain actions and, as a consequence,
production at the Company’s Michigan facilities has voluntarily been ceased.
This will adversely affect the overall profitability of the Company in the near
term. The Company has initiated a reduction in various expenses in an effort to
bring its expenses in line with its current levels of sales. Such
reduction is expected to continue until FDA concerns are resolved and the
Company resumes its manufacturing activities, of which there is no assurance.
The sales of distributed products and certain manufactured products made by
third parties will continue and will contribute to the ongoing cash flows. Also,
the Company has recently entered into an agreement with Forest, which, is
expected to provide certain additional products to the Company’s product
portfolio, and such products will generate incremental revenues under
Caraco-owned product sales. The Company owns four products that are manufactured
by other third party manufacturers including Sun Pharma and its
affiliates. As of September 30, 2009, we have $73 million in cash and
another $10 million in short-term investments, including the proceeds from a
loan in the amount of $17.2 million, currently classified as a short term
liability. The Company believes that its cash flow from operations and cash
balances will continue to support its ongoing business requirements, however,
because of, among other things, decreased customer confidence, the uncertainty
of future costs of FDA compliance and associated costs, there can be no
assurance.
At
September 30, 2009, we had working capital of $93.4 million, compared to working
capital of $112.5 million at March 31, 2009.
During
the fourth quarter of Fiscal 2009 the Company entered into a term loan of $18
million with Charter One Bank. The loan is secured by a mortgage covering the
Company’s manufacturing facility and equipment located in Detroit, Michigan. The
rate of interest is calculated as LIBOR plus an applicable margin thereto (based
upon various leverage levels and current applicable rate is 50 basis points).
The aggregate rate applicable to the Company as of September 30, 2009 was 1.5%.
The principal loan payments and accrued interest are payable on a quarterly
basis beginning July 2009. The principal is to be repaid in equal quarterly
installments of $900,000 for ten quarters through October 2011, and thereafter,
if not renewed, the remaining balance of $9 million is due in the subsequent
quarter by January 2012. Subsequently, the terms of the loan were modified and
we entered into an amended agreement. The amended agreement amended the loan to
add to the equipment term loan for the purposes of financing new machinery and
equipment and building improvements, a one year line of credit note for $15
million against which the Company can borrow funds for working capital purposes
or can get letters of credit issued. The line of credit carries an interest rate
of LIBOR plus 150 basis points, and if letters of credit are issued, the
associated fees are 0.7% of such letters of credit on annualized basis. Also,
there is an unused fee of 0.25% on an annualized basis to the extent the line
remains idle. Both the line of credit and outstanding term loan are cross
collaterized by all of the Company’s fixed assets and cash deposit accounts held
with Charter One Bank in the same amount. These cash deposits earn interest at
prevailing rates applicable to such money market acoounts. Against
this line of credit, the Bank has issued an Irrevocable Standby Letter of Credit
in an amount of $15 million, in favor of the United States of America, as
required to be placed with the FDA in accordance with the Consent Decree, as
disclosed above. We are continuing discussions with Charter One Bank to resolve
its concerns and get the cash collateral released. Charter One Bank has
temporarily suspended our required compliance with the covenants in the loan
agreements relating to FDA enforcement actions as previously disclosed, and has
suspended testing of certain other compliance requirements until February 26,
2010. On or before such date, we anticipate either entering into revised
agreements or repaying the loan in full. Currently, as the loan is in technical
default due to the FDA enforcement action, the entire outstanding balance has
been classified as a short-term liability.
As
required pursuant to the terms of the Loan Agreement, the Company has entered
into an Interest Rate Swap Agreement with Charter One Bank to hedge the interest
rate applicable on the loan. The notional amount for the swap is $17.1 million
which will continue to amortize down as principal payments are made on the
related debt. The annualized fixed rate of interest as it applies to this
agreement is 2.41%. Thus as of September 30, 2009 the effective rate of interest
to the Company for the term loan was 2.91% (2.41% swap rate plus applicable
margin of 50 basis points). The fair value of this swap agreement at September
30, 2009 was not material.
Future
Outlook
We intend
to continue to work with the FDA to effectively and expeditiously resolve
remaining concerns, although there can be no assurance that we will succeed in
reaching such a resolution or the terms thereof. We continue to focus
on improving support and emphasis on quality assurance, quality control, and
manufacturing areas in order to continually improve the performance of our
quality system. We have hired external consultants who have experience in
assisting manufacturers with FDA compliance issues. These consultants
will review all of our systems, procedures, reporting structures, and processes,
as well as review training on risk management and overall cGMP. As
part of this comprehensive process we will evaluate our internal and external
audit programs, and will make any improvements that we believe to be necessary
to improve these programs. All audits are based on a historical look
back, and offer improvements based on Caraco’s likely future requirements. These
audits will also include follow up action on compliance issues that need to be
addressed. Caraco would obtain assistance and guidance wherever required from
the quality group of Sun Pharma to improve its quality systems. Though near term
sales of Caraco-owned products face challenges, we believe we are effecting, and
intend to effect, the changes required to improve our performance on sales of
these products, on a long-term basis. We voluntarily entered into a Consent
Decree with the FDA regarding the Company's drug manufacturing operations. The
Consent Decree provides a series of measures that, when satisfied, will permit
Caraco to resume manufacturing and distributing those products that are
manufactured in its Michigan facilities. We are working expeditiously to satisfy
the requirements of the Consent Decree and has already retained independent cGMP
experts for review of the Company's operations and to facilitate a successful
result.
Under
terms of the Consent Decree, Caraco's cessation of manufacturing operations will
continue until it receives written notification from independent experts and the
FDA that it is in compliance with the Consent Decree and regulations and can
resume operations. Nothing in the Consent Decree prohibits Caraco from
distributing FDA approved drug products that are manufactured by third parties.
There is no assurance that the steps taken will be successful or result in
resolution of the FDA complaint. We intend to continue to work with the FDA to
resolve its concerns as effectively and expeditiously as possible.
We
believe that we will emerge a stronger company on a long-term basis. In the last
two years we have added considerable amount of infrastructure in our quality
control laboratories. Our current focus remains on manufacturing and quality
assurance. In near term we will utilize part of our R&D team to help with
technical validations and compliance initiatives. Our R&D expense will
decline as a result. We anticipate gaining back our momentum on filings of new
ANDAs internally once our compliance initiatives and technical needs are
satisfied. Any third party development in process will continue. Our production
capacity is primarily built, which should support the business for years to come
once we can overcome our current obstacles.
Currently,
we have 31 ANDAs pending approval at the FDA (including four tentative
approvals) relating to 27 products. We continue to expand and upgrade our
facilities, and expand our customer base. Our internal efforts, combined with
Sun Pharma in developing new products have also picked up momentum. We now have
10 products, that we market (including Caraco-owned products being manufactured
by third parties and those distributed under various agreements with of Sun
Pharma), whose market share is ranked third or higher against the same products
of our generic competitors. We are focused on products that are currently in our
portfolio and are yet to realize their full market potential. The total
portfolio consists of 33 products.
Although
gross profit margins have come down due to mix of distributed products weight
over Caraco-owned products, and also due to negligible sales of Caraco-owned
products, we believe we can be successful in marketing distributed products and
our products that are manufactured by third parties. We have had nine new
distributed products launched during the first six months of Fiscal 2010 that
Sun Pharma or its affiliates received approvals for from the FDA. We also may
transfer certain manufactured products to an alternate manufacturing site that
would allow the Company to quickly regain gain revenues from those products.
Should the pricing pressures become more severe than anticipated; the result may
be lower growth rates and gross margins. Management has worked, and will
continue to work, diligently to counter the pricing pressures through increased
sales volumes, improved market share on existing products, expansion of our
customer base, improved productivity, and increased cost
reductions.
The
Company intends to decrease its internal development of new products. It will
continue to develop products with third parties, including Alkaloida, an
indirect subsidiary of Sun Pharma (see “6. Sun Pharmaceutical Industries
Limited”) Our R&D expense should decline based on this provided that patent
related expenses remain stable or decline. We believe that we will
continue to have the cash and other means available to meet our working capital
requirements, fund potential litigation expenses relating to Paragraph IV
certification and finance further capital investments. The third party product
development is a critical element in meeting expectations in the
future.
We
believe that Sun Pharma is a partner with a proven track record, and one that
already has provided the Company with quality products. Moreover, Sun Pharma’s
increased beneficial ownership in the Company to approximately 75%
(approximately 76% including the convertible Series B Preferred Stock), should,
we believe, provide it with the vested interest to continue to help the Company
succeed. Sun Pharma has previously provided the Company with capital, loans,
guarantees of loans, personnel, raw materials and equipment, clinical research
services which have significantly helped the Company to date. In addition to the
Sun Pharma products agreement, we have implemented additional development
strategies with various third parties, both domestically and abroad, that will
complement the Sun Pharma’s development pipeline and our own.
The FDA’s
action and the Company’s voluntary actions have had, and are expected to
continue to have, a material adverse effect on operations and operating
results. At September 30, 2009, the Company had $73 million in cash
and $10 million in short-term investments including the proceeds from a loan in
the amount of $17.2 million. The Company believes that its cash flow from
operations and cash balances will continue to support its ongoing business
requirements, however, because, among other things, of the uncertainty of future
costs of FDA compliance and associated costs, there can be no
assurance.
During
Fiscal 2007, we entered into three definitive agreements with different
companies to develop four additional ANDAs for Caraco and provide additional
opportunities for the future development of products. These agreements contain,
for three products, both milestone payments to be paid in cash and profit
sharing based upon future sales for a defined period, and for one product only
milestone payments in cash without any obligation to share profits in the
future. During Fiscal 2008, we have signed two definitive agreements for two
additional products. However we have terminated an agreement earlier entered
into with one company for two of these products. During Fiscal 2009, we entered
into one agreement for one additional product, and subsequent to end of Fiscal
2009, we entered into one more agreement relating to one additional product.
This brings the total number of products being developed by unaffiliated third
party developers to six.
We
anticipate additional development agreements will be entered into in order to
eliminate gaps in our calendar of approvals from the FDA. As previously
mentioned, in Fiscal 2007 we entered into a definitive agreement to market Sun
Pharma ANDAs that are either approved or awaiting approval at the FDA.
Accordingly, we continue to market a number of these products which are
categorized as distributed products. In addition, on January 29, 2008, the
Company executed a distribution and sale agreement with Sun Pharma. This
agreement covers certain mutually agreed upon products that have been filed or
will be filed with the FDA with a Paragraph IV certification. A Paragraph IV
certification states that the filer believes that it either does not infringe
the patent or believes that the patent is invalid. Paragraph IV certified
products face litigation challenges with respect to claims of patent
infringement. Sun Pharma is not obligated to offer Caraco products under this
agreement, however, Caraco has the exclusive right to market in the U.S., its
territories and possessions, including Puerto Rico, any products offered by Sun
Pharma and accepted by Caraco. Under the agreement, the Company participates in
the sales opportunity on the products, and also shares the litigation risks to a
limited extent based on percentage. If such claims are successful, however, they
could have a material adverse effect on the Company. We have been marketing two
products under this agreement including Pantoprazole sodium DR tablets. These
agreements should provide for an alternate stream of products that will
complement our internal research and development and our outsourced development.
From time to time significant product launches such as we incurred under the
distribution and sale agreement for Paragraph IV products in Fiscal 2008 may
occur that will add near term growth that may or may not be sustainable in
future periods. Additionally we will continue to work with Sun Pharma in an
effort to transfer future product technology on a cash basis similar to other
third party developers and in the future we may provide services to Sun Pharma,
its affiliates and other third party pharmaceutical manufacturers relating to
distribution of certain products, on a fee for service basis in effort to expand
our product offerings and remain competitive. In this connection, see “6. Sun
Pharmaceutical Industries Limited” relating to our products agreement with
Alkaloida, an indirect subsidiary of Sun Pharma. It is our belief that our
infrastructure and relationships we have with our customers, can be utilized to
optimize sales for our own products, as well as of other companies that are
entering or are planning to enter the U.S. market but do not have the
infrastructure required to compete effectively.
The
various agreements referenced above will provide four diverse paths of
development, an increased product pipeline and potential revenue. These various
paths mitigate the risk of each other, potentially allowing for an ongoing
stream of approvals from the FDA.
Management’s
goals for Fiscal 2010 include:
|
·
|
Compliance
with Consent Decree.
|
|
·
|
Resumption
of manufacturing activities in conformance with FDA guidelines and the
Consent Decree.
|
|
·
|
Continue
research and development activities for ANDA
filings.
|
|
·
|
Continue
to invest in equipment, systems and facilities to meet requirements of
projected short and long-term projects for compliance and
quality.
|
|
·
|
Increase
cGMP training to accommodate staff and
compliance.
|
|
·
|
Increase
market share for certain existing products and recently introduced
products.
|
|
·
|
Enhanced
customer reach and satisfaction.
|
|
·
|
Leverage
distribution and marketing core competencies by marketing third party
products through in-licensing
agreements.
|
|
·
|
Prompt
introduction of new approved products to the
market.
|
|
·
|
Achieving
further operational efficiencies by attaining economies of scale and cost
reduction per unit.
|
|
·
|
Increase
revenue and cash by marketing ANDAs owned by Sun
Pharma.
|
|
·
|
Expand
our relationships with financial institutions to fortify our credit
position and borrowings as
necessary.
|
|
·
|
Research
alternate product development sources and product licenses such as in
licensing authorized generics from brand innovator companies and
acquisitions of ANDAs from competitor manufacturers both domestically and
abroad.
|
|
·
|
Research
possible development of brands for existing stream of products where such
potential exists.
|
|
·
|
Increase
focus on succession planning.
|
|
·
|
Increase
management training and
development.
|
|
·
|
Maintain
balance in trade class.
|
Forward
Looking Statements
This
report, other than the historical financial and business information, may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Without limitation, the words “believes,” “plans,” “expects,” and similar
expressions are intended to identify forward-looking statements. Those
statements include statements regarding our intent, belief, and current
expectation. These statements are not guarantees of future performance and are
subject to risks and uncertainties that cannot be predicted or quantified.
Consequently, actual results could differ materially from those expressed or
implied by such forward-looking statements.
Such
risks and uncertainties include, but are not limited to: (i) that the
information is of a preliminary nature and may be subject to further adjustment;
(ii) not obtaining FDA approval for new products or delays in receiving FDA
approvals; (iii) governmental restrictions on the sale of certain products; (iv)
dependence on key personnel; (v) development by competitors of new or superior
products or cheaper products or new technology for the production of products or
the entry into the market of new competitors; (vi) market and customer
acceptance and demand for new pharmaceutical products; (vii) availability of raw
materials in a timely manner, at competitive prices, and in required quantities;
(viii) timing and success of product development and launch; (ix) integrity and
reliability of the Company’s data; (x) lack of success in attaining full
compliance with regard to regulatory and cGMP compliance; (xi) experiencing
difficulty in managing our recent rapid growth and anticipated future growth;
(xii) dependence on limited customer base; (xiii) occasional credits to certain
customers reflecting price reductions on products previously sold to them and
still available as shelf-stock; (xiv) possibility of an incorrect estimate of
charge-backs and the impact of such an incorrect estimate on net sales, gross
profit and net income; (xv) dependence on few products generating majority of
sales; (xvi) product liability claims for which the Company may be inadequately
insured; (xvii) subjectivity in judgment of management in applying certain
significant accounting policies derived based on historical experience, terms of
contracts, our observations of trends of industry, information received from our
customers and other sources, to estimate revenues, accounts receivable
allowances including chargebacks, rebates, income taxes, values of assets and
inventories; (xviii) litigation involving claims of patent infringement; (xix)
litigation involving claims for royalties and/or options relating to a prior
contract for one product and (xx) material litigation from product recalls,
(xxi) the purported class action lawsuits alleging federal securities laws
violations, (xxii) delays in returning the Company’s products to market,
including loss of market share, (xxiii) increased reserves against the
FDA-seized inventory, and (xxiv) other risks identified in this report and
identified from time to time in our reports and registration statements filed
with the Securities and Exchange Commission (see Item 1A hereof and our Annual
Report on Form 10-K for the year ended March 31, 2009, Part I, Item 1A, for more
detailed discussion of such risks). These forward-looking statements represent
our judgment as of the date of this report. We disclaim, however, any intent or
obligation to update our forward-looking statements.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Refer to
“Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our
Annual Report on Form 10-K for the year ended March 31, 2009 and “11. Debt”
above for a discussion of our market risk.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
a. The
term “disclosure controls and procedures” is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). These
rules refer to the controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed, summarized and
reported within required time periods. Our Chief Executive Officer and our
interim Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report (the “Evaluation Date”), and have concluded that, as of the Evaluation
Date, our disclosure controls and procedures are effective in providing them
with material information relating to the Company known to others within the
Company which is required to be included in our periodic reports filed under the
Exchange Act.
b. There
has been no change in the Company’s internal control over financial reporting
that occurred during the second quarter of Fiscal 2010 that materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
PART II -- OTHER
INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
The
information presented in Note 12 of Part I, Notes to Financial Statements, is
incorporated herein by reference.
In
addition to the risks set forth in our Form 10-K for the year ended March 31,
2009, the following are additional risks to our business:
The
seizure by the FDA of drug products manufactured in our Michigan facilities and
other ingredients, and our voluntary cessation of manufacturing operations, have
had a material adverse effect on our current operations and are expected to have
a material adverse effect on our near term operations.
As a
result of the FDA action, we have voluntarily ceased manufacturing operations
and instituted an indefinite reduction in our workforce of approximately 430
employees in two phases. The Company voluntarily entered into a Consent Decree
with the FDA on September 29, 2009. As stipulated in the Consent Decree, the
Company will attempt to have the seized inventory released. The Company believes
that, except for the raw materials which were opened solely for the purpose of
sampling, the estimated value of which is $8.1 million, all other seized
inventory would be difficult to recondition. Accordingly, a reserve in the
amount of $15.9 million has been created as of September 30, 2009 for this
remaining inventory. As a result of the FDA action, we have voluntarily ceased
manufacturing operations and instituted, in two phases, indefinite layoffs of
approximately 430 of our employees. The Consent Decree provides a
series of measures that, when satisfied, will permit the Company to resume
manufacturing and distributing those products which are manufactured in its
Michigan facilities. The Company has engaged a consulting firm which is
comprised of cGMP experts, in accordance with the Consent Decree.
As a
result of this event, there has been a material adverse effect on our current
operations and there may be a material adverse effect on our near term
operations. Under terms of the Consent Decree, Caraco's cessation of
manufacturing operations will continue until it receives written notification
from independent experts and the FDA that it is in compliance with the Consent
Decree and regulations and can resume operations. However, there is no assurance
that the steps being taken will be successful or result in resolution of the FDA
complaint. We are also not able, at this time, to estimate, the cost
of these actions. We anticipate working with the FDA to resolve its concerns as
effectively and expeditiously as possible in accordance with the terms of the
Consent Decree. The Consent Decree also requires the Company to abide
by certain conditions and restrictions. If the Company violates any portion of
the Consent Decree, it could incur penalties, such as monetary fines, forfeiture
of the seized goods and other penalties.
Class
action lawsuits have been filed against the Company and certain of its executive
officers.
The
purported class action litigation (See “12. Litigation” above) alleging
violations of federal securities laws by the Company and certain of its
executives involves claims which, if successful, could adversely affect our
financial condition, operating results or cash flows and the market value of our
common stock.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITES AND USE OF
PROCEEDS
|
During
the first six months of Fiscal 2010, 1,632,000 shares of Series B Preferred
Stock previously issued to Sun Global were converted into 1,632,000 shares of
Caraco common stock and issued to Sun Global.
All
shares of Caraco common stock issued by the Company as set forth above were
issued pursuant to exemptions from registration under Section 4(2) of the
Securities Act of 1933.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
The
Annual Meeting of Shareholders of the Corporation was held on September 14, 2009
in Dearborn, Michigan for the purpose of electing three directors for a
three-year term expiring in 2012 and upon the election and qualification of
their successors.
Director Name
|
|
Votes For
|
|
|
Votes Withheld
|
|
|
|
|
|
|
|
|
Dilip
S. Shanghvi
|
|
|
31,160,511 |
|
|
|
1,881,535 |
|
|
|
|
|
|
|
|
|
|
Gurpartap
Singh Sachdeva
|
|
|
31,576,242 |
|
|
|
1,465,804 |
|
The names
of the other directors and their remaining terms are as follows:
Director Name
|
|
Term
|
|
|
|
Jitendra
N. Doshi
|
|
2011
|
|
|
|
Sailesh
T. Desai
|
|
2011
|
|
|
|
Timothy
S. Manney
|
|
2010
|
|
|
|
Madhava
Reddy
|
|
2010
|
|
|
|
Sudhir
V. Valia
|
|
2010
|
|
|
|
F.
Folsom Bell
|
|
2012
|
The Board
of Directors appointed F. Folsom Bell to fill the vacancy created by John D.
Crissman’s decision to not stand for re-election, for a term commencing
immediately following the 2009 annual meeting of shareholders and ending
immediately following the 2012 annual meeting of shareholders. Mr.
Bell, however, resigned as a Director effective immediately prior to the Special
Meeting of Shareholders held on October 26, 2009, and was elected by the
shareholders at such Special Meeting as a Director to fill the vacancy created
by his resignation and to serve for the remainder of the term ending immediately
following the 2012 annual meeting of shareholders. As disclosed in
the proxy statement relating to the Special Meeting, on August 27, 2009, the
Company received a shareholder demand letter demanding that the Company take
action against certain officers and directors of the Company to recover certain
damages caused by their alleged breach of fiduciary duties relating to the
Company’s violation of cGMP requirements. The demand letter further
provided that if the Board did not commence such an action, the shareholder
making the demand would commence a shareholder derivative proceeding on behalf
of the Company seeking appropriate relief. As disclosed in such proxy
statement, the election of Mr. Bell by shareholders was necessary in order for
him to be an ‘independent director’ under Michigan law who could determine in
good faith after conducting a reasonable investigation upon which his
conclusions are based as to whether or not the maintenance of the derivative
proceeding is in the best interests of the Company. Following his
election by shareholders, the Board has authorized Mr. Bell, as a disinterested
independent director, to conduct an investigation and make such a determination
with respect to the allegations set forth in the demand letter.
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Asset
Purchase Agreement by and between Forest Laboratories, Inc. and Caraco
Pharmaceutical Laboratories, Ltd., dated July 10, 2009, and as amended on
September 8, 2009, September 11, 2009 and September 22,
2009.
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Registrant’s
Articles of Incorporation as of October 26, 2009.
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Registrant’s
By-laws as of October 26, 2009.
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Settlement
Agreement by and between Forest Laboratories, Inc., H. Lundbeck A/S,
Caraco Pharmaceutical Laboratories, Ltd. and Sun Pharmaceutical Industries
Ltd., dated July 10, 2009.
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Separation
Agreement and Release of All Claims between Daniel Movens and Caraco
Pharmaceutical Laboratories, Ltd., dated July 28, 2009.
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Employment
Agreement of Jitendra N. Doshi, dated as of August 31,
2009.
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Agreement
with Alkaloida Chemical Company ZRT dated July 10,
2009.
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Indemnification
Agreement with F. Folsom Bell dated September 14, 2009.
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Form
of Grant of Independent Director’s Stock Options.
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Form
of Grant of Employee Stock Option.
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First
Amendment to Loan Agreement with RBS Citizens, N.A. dated as of August 11,
2009.
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Second
Amendment to Loan Agreement with RBS Citizens, N.A. dated as of October 9,
2009.
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Certification
of Chief Executive Officer
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Certification
of interim Chief Financial Officer.
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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*
Confidential treatment has been requested for portions of this
exhibit.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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CARACO
PHARMACEUTICAL
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LABORATORIES,
LTD.
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Date: November
9, 2009
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By:
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/s/ Jitendra N. Doshi
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Jitendra
N. Doshi
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Chief
Executive Officer
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Date: November
9, 2009
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By:
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/s/ Mukul Rathi
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Mukul
Rathi
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Interim
Chief Financial Officer
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