Lannett Company, Inc.
9000 State Road
Philadelphia, PA 19136
(215) 333-9000, (800) 325-9994
Fax (215) 333-9004
www.lannett.com
09
MANUFACTURING
AND DISTRIBUTING
HIGH QUALITY
PHARMACEUTICAL
PRODUCTS
COMPANY PROFILE
Lannett Company, Inc. (NYSE Amex:LCI) develops, manufactures and distributes
generic prescription pharmaceutical products in tablet, capsule, topical and oral liquid
forms to customers throughout the United States.
FINANCIAL HIGHLIGHTS
FISCAL YEAR ENDED JUNE 30,
2009
2008
2007
2006
2005
Net Sales
Cost of Sales
Gross Profit
$119,002,215
$72,403,283
$82,577,591
$64,060,375
$44,901,645
73,757,746
56,102,212
61,152,604
35,684,710
36,933,325
45,244,469
16,301,071
21,424,987
28,375,665
7,968,320
Operating Expenses
34,463,600
21,731,605
27,389,396
19,921,747
61,607,978
Operating Income (Loss)
10,780,869
(5,430,534)
(5,964,409)
8,453,918
(53,639,658)
Net Income (Loss)
$6,534,245
$(2,318,059)
$(6,929,008)
$4,968,922
$(32,779,596)
Cash, cash equivalents and investments
$26,982,125
$8,756,847
$8,512,973
$6,089,968
$12,054,309
Total current assets
77,311,175
61,583,175
44,483,940
43,486,847
33,938,115
Property, plant and equipment, net
22,897,385
24,734,103
27,443,161
19,645,549
16,624,848
Total assets
Current liabilities
Long-term debt
124,577,121
113,679,264
101,453,265
103,446,330
92,907,478
38,679,005
35,638,552
22,250,243
20,040,608
16,395,562
8,138,768
8,978,834
9,679,965
8,196,692
9,532,448
QUARTERLY NET SALES TREND
(In Millions of Dollars)
PERCENTAGE OF NET SALES
(By Customer Type)
$17.5
$17.5
$16.6
$20.8
$25.6
$29.2
$28.8
$35.4
50%
5%
45%
Distributors/Wholesalers
Chain Pharmacies
Mail Order Pharmacies
Q1
FY08
Q2
FY08
Q3
FY08
Q4
FY08
Q1
FY09
Q2
FY09
Q3
FY09
Q4
FY09
BOARD OF DIRECTORS
William Farber, R.Ph.
Chairman of the Board
Ronald West
Vice Chairman and L ead Director
Director, Beecher Associates
Arthur P. Bedrosian, J.D.
President, Chief Executive Officer and Director,
Lannett Company, Inc.
Jeffrey Farber
President, Auburn Pharmaceutical
Kenneth Sinclair, Ph.D.
Professor of Accounting,
Lehigh University
Albert Wertheimer, Ph.D.
Professor, Temple University School of Pharmacy,
Director, Center for Pharmaceutical Health Services Research
Myron Winkelman, R.Ph.
President, Winkelman Management Consulting, Inc.
MANAGEMENT TEAM
Arthur P. Bedrosian, J.D.
President, Chief Executive Officer and Director
William Schreck
Senior Vice President and General Manager
Kevin Smith
Vice President—Sales & Marketing
Ernest Sabo
Vice President—Regulatory and Corporate Compliance
Keith R. Ruck
Vice President of Finance and Chief Financial Officer
Stephen J. Kovary
Vice President—Operations
CORPORATE INFORMATION
Corporate Headquarters
9000 State Road
Philadelphia, PA 19136
(215) 333-9000
Independent Registered Public Accounting Firm
Grant Thornton LLP
2001 Market Street
Two Commerce Square, Suite 3100
Philadelphia, PA 19103
Legal Counsel
Fox Rothschild LLP
2000 Market Street
Philadelphia, PA 19103
Investor Relations
PondelWilkinson Inc.
1880 Century Park East, Suite 350
Los Angeles, CA 90067
(310) 279-5980
Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
Securities Listing
The common stock of Lannett Company, Inc. is traded on
the NYSE Amex under the symbol “LCI.”
Annual Report and Form 10-K
Additional copies of this annual report
and the Company’s Form 10-K may be
obtained without charge and the exhibits
to the Form 10-K may be obtained for a
nominal fee by writing to:
Lannett Company, Inc.
Investor Relations
9000 State Road
Philadelphia, PA 19136
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements in “Item 1A – Risk Factors”, “Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and in other statements located elsewhere in this Annual Report. Any statements made in this Annual
Report that are not statements of historical fact or that refer to estimated or anticipated future events are forward-looking statements. We have based
our forward-looking statements on our management’s beliefs and assumptions based on information available to them at this time. Such forward-look-
ing statements reflect our current perspective of our business, future performance, existing trends and information as of the date of this filing. These
include, but are not limited to, our beliefs about future revenue and expense levels and growth rates, prospects related to our strategic initiatives and
business strategies, express or implied assumptions about government regulatory action or inaction, anticipated product approvals and launches, busi-
ness initiatives and product development activities, assessments related to clinical trial results, product performance and competitive environment,
and anticipated financial performance. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,”
“intend,” “could,” “would,” “estimate,” “continue,” or “pursue,” or the negative other variations thereof or comparable terminology, are intended to
identify forward-looking statements. The statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions
that are difficult to predict. We caution the reader that certain important factors may affect our actual operating results and could cause such results to
differ materially from those expressed or implied by forward-looking statements. We believe the risks and uncertainties discussed under the “Item 1A -
Risk Factors” and other risks and uncertainties detailed herein and from time to time in our SEC filings, may affect our actual results.
We disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We
also may make additional disclosures in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and in other filings that we may make from
time to time with the SEC. Other factors besides those listed here could also adversely affect us. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995, as amended.
Arthur P. Bedrosian
President and
Chief Executive Officer
DEAR SHAREHOLDERS:
Our solid performance in fiscal 2009 was the result of strong sales of Lannett’s key products.
In addition, our adherence to current Good Manufacturing Practice (cGMP) standards
continued to help us differentiate ourselves from our competitors and deliver important
medications to the marketplace. We expanded our product pipeline, strengthened our
balance sheet and focused on key areas of our business to capture more market share.
Our progress in fiscal 2009 set an important tone that we believe is a testament to Lannett’s
underlying strength and ability to continue to grow.
In fiscal 2009, net sales grew more than 64% to $119.0 million from $72.4 million for the prior
year. Gross profit nearly tripled to $45.2 million from $16.3 million in fiscal 2008. Net income
rose to $6.5 million, or $0.27 per diluted share, compared with a net loss of $2.3 million,
or $0.10 per share, for the prior year.
PRODUCT APPROVALS/LAUNCHES
In fiscal 2009, we significantly increased our investment in product development in order to
add to our growing product offering and further diversify our portfolio. Over the last year,
we received FDA approvals for three new products, including Doxycycline 75 mg and 150 mg
tablets, indicated for the treatment of bacterial infections, such as urinary tract infections,
among others; Ursodiol 300 mg capsules, indicated for patients with radiolucent noncalcified
gallbladder stones; and Pilocarpine HCI 7.5 mg tablets, indicated for the treatment of
symptoms of dry mouth from salivary gland hypofunction caused by radiotherapy and
Sjorgen’s syndrome.
Additionally, Lannett launched a certain topical anesthetic product used in a variety of
hospital and outpatient settings, as well as Amantadine HCL, which is the first product
resulting from Lannett’s joint venture with Banner Pharmacaps, Inc. Amantadine is indicated
for use as an anti-viral, anti-Parkinson and treatment of drug induced extrapyramidal
symptoms.
PAIN MANAGEMENT
In July 2008, we announced that our wholly owned subsidiary, Cody Laboratories (Cody),
received approval for its import registration application from the U.S. Drug Enforcement
Administration (DEA), allowing the company to enter the pain management market.
We continue to make progress building our capabilities, developing product candidates and
upgrading Cody’s facilities to commercialize this opportunity. In October 2008, Cody received
approval from the U.S. Patent and Trademark Office regarding a method for the preparation
of Hydromorphone and Hydrocodone.
Cody continued to demonstrate its commitment to meeting high-quality standards, receiving
a positive FDA inspection in fiscal 2009 that is a key step to clearing the way for approval of
our pending application for Hydromorphone Tablets.
MARKET OPPORTUNITIES
These accomplishments fortify our foundation as we navigate challenging economic
conditions and seize opportunities in a highly competitive industry. Our ability to adapt to
the marketplace is related to our more than six decades of operating experience in generic
pharmaceuticals. When our market research team found that a number of our large volume
1
DRUG DEVELOPMENT PIPELINE
FORMULATION
SCALE-UP
CLINICAL TESTING
FDA PENDING
38 Products
15 Products
11 Products
18 ANDA’s*
*Abbreviated New Drug Application
We have made
excellent progress
to grow the
company, as
evidenced by
Lannett’s recent
inclusion in the
Russell 2000 Index.
customers, including chain drug stores and national drug distributors, would prefer to
purchase a selection of our products in large quantities, we immediately began offering
bulk packs to meet demand. Providing these types of services, in addition to seeking
FDA approval for important products, differentiates Lannett and is imperative for strong
customer relations.
To ensure we maintain our competitive edge, Lannett strengthened and augmented its
management team in fiscal 2009. We named Keith Ruck as chief financial officer. Keith has
an extensive financial background and expertise in identifying areas to enhance operating
efficiencies. Terence Vollrath, with his more than two decades of operations and business
development experience, was appointed executive vice president of Cody Labs. And, Stephen
Kovary, who brings a deep breadth of operations, plant management and manufacturing
experience to our company, was named vice president of operations of Lannett. These
appointments, coupled with how we execute our business strategies ultimately will
determine the future performance of our company.
GIVING BACK
Our dedicated employees strive to position Lannett as an industry leader that is focused on
quality and integrity, as well as giving back to the community we serve. Lannett has a history
of supporting schools, hospitals, veterans and their families, institutions, rehabilitation
centers, cancer research, as well as the local fire and police departments. In fiscal 2009,
we contributed to Make-A-Wish Foundation, Air Force Assistance Fund, Navy-Marine Corps
Relief Society, Coast Guard Foundation, USO, Honor Flight, DEA Survivor Benefit Fund,
Army Emergency Relief, CJ Foundation for SIDS, University of the Sciences in Philadelphia,
and the Jerry Segal Classic to benefit Magee Rehabilitation Hospital, among others. We have
donated in good times and in bad, and believe that giving back to the community is being
a responsible corporate citizen.
We are also doing our part with respect to the environment. We have implemented a
recycling program, even though businesses are not required to do so in metropolitan
Philadelphia, and we are taking steps to reduce the company’s carbon footprint, as well
as cut energy costs.
MOVING FORWARD
These initiatives, along with our dedication to enhancing the performance of our company
are indicative of Lannett’s core values. We have made excellent progress to grow the
company, as evidenced by Lannett’s recent inclusion in the Russell 2000 Index.
As we move forward, we are excited about the opportunities ahead and confident that our
hard work will continue to help us achieve our goals. I would like to thank our customers and
shareholders for their continued support, and our dedicated employees without whom these
achievements would not be possible.
Sincerely,
Arthur P. Bedrosian, J.D.
President and
Chief Executive Officer
3
PRODUCTS
NAME
Acetazolamide Tablets
Amantadine Gel Capsules
Baclofen Tablets
Bethanechol Chloride Tablets
Butalbital, Aspirin and Caffeine Capsules
MEDICAL INDICATION
EQUIVALENT
Glaucoma
Parkinson’s Disease
Muscle Relaxer
Urinary Retention
Migraine Headache
Diamox®
Symmetrel ®
Lioresal®
Urecholine®
Fiorinal®
Butalbital, Aspirin, Caffeine with Codeine Phosphate Capsules
Migraine Headache
Fiorinal w/Codeine #3®
Esterified Estrogen & Methyltestoterone Tablets
Hormone Replacement
Clindamycin HCl Capsules
Cocaine Topical Solution
Danazol Capsules
Dicyclomine Tablets
Dicyclomine Capsules
Digoxin Tablets
Dipyridamole Tablets
Doxycycline Tablets
Doxycycline Hyclate Tablets
Hydrochlorothiazide Tablet
Hydromorphone HCl Tablets
Levothyroxine Sodium Tablets
Morphine Sulfate Oral Solution
OB-Natal ® ONE Gel Capsules
Oxycodone HCl Oral Solution
Phentermine HCl Tablets
Phentermine HCl Capsules
Pilocarpine HCl Tablets
Primidone Tablets
Probenecid Tablets
Rifampin Capsules
Terbutaline Sulfate Tablets
Unithroid® Tablets
Ursodiol Capsules
Antibiotic
Anesthetic
Endometriosis
Irritable Bowels
Irritable Bowels
Cleocin®
N/A
Danocrine®
Bentyl®
Bentyl®
Congestive Heart Failure
Lanoxin®
Blood Clot Reduction
Persantine®
Antibiotic
Antibiotic
Water Retention
Pain Management
Adoxa®
Periostat®
Estratest®
Hydrodiuril®
Dilaudid®
Thyroid Deficiency
Levoxyl®/Synthroid®
Pain Management
Roxanol®
Pregnancy
PrimaCare ONE®
Pain Management
Roxicodone®
Weight Loss
Weight Loss
Dryness of the Mouth
Epilepsy
Gout
Antibiotic
Bronchospasms
Thyroid Deficiency
Gallstone
Adipex-P®
Fastin®
Salagen®
Mysoline®
Benemid®
Rifadin®
Brethine®
N/A
Actigall ®
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
⌧
(cid:134)
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2009
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File No. 001-31298
LANNETT COMPANY, INC.
(Exact name of registrant as specified in its charter)
State of Delaware
State of Incorporation
23-0787699
I.R.S. Employer I.D. No.
9000 State Road
Philadelphia, Pennsylvania 19136
Registrant’s telephone number, including area code: (215) 333-9000
(Address of principal executive offices and telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes (cid:134) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134)
No ⌧
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 ⌧ No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (cid:134)
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer (cid:134)
Non-accelerated filer (cid:134)
(Do not check if a smaller reporting company)
Accelerated filer (cid:134)
Smaller reporting company ⌧
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 (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:134)(cid:130)(cid:130)No (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-12 of the Exchange Act). Yes (cid:134)(cid:130)No ⌧
Aggregate market value of common stock held by non-affiliates of the registrant, as of December 31, 2008 was $50,656,740 based on
the closing price of the stock on the NYSE - AMEX.
As of September 15, 2009, there were 24,459,953 shares of the registrant’s common stock, $.001 par value, outstanding.
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 1A. RISK FACTORS
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
SIGNATURES
Annual Report on Form 10-K
Subsidiaries of the Company, Exhibit 21
Consent of Grant Thornton LLP, Exhibit 23.1
Certification of Chief Executive Officer, Exhibit 31.1
Certification of Chief Financial Officer, Exhibit 31.2
Certification of CEO and CFO Pursuant to Section 906, Exhibit 32
3
19
25
26
26
26
27
28
40
40
41
42
42
45
56
59
59
60
61
F-1
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements in “Item 1A — Risk Factors”, “Item 7 —
Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other statements located
elsewhere in this Annual Report. Any statements made in this Annual Report that are not statements of historical fact or that
refer to estimated or anticipated future events are forward-looking statements. We have based our forward-looking
statements on our management’s beliefs and assumptions based on information available to them at this time. Such forward-
looking statements reflect our current perspective of our business, future performance, existing trends and information as of
the date of this filing. These include, but are not limited to, our beliefs about future revenue and expense levels and growth
rates, prospects related to our strategic initiatives and business strategies, express or implied assumptions about government
regulatory action or inaction, anticipated product approvals and launches, business initiatives and product development
activities, assessments related to clinical trial results, product performance and competitive environment, and anticipated
financial performance. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,”
“anticipate,” “intend,” “could,” “would,” “estimate,” “continue,” or “pursue,” or the negative other variations thereof or
comparable terminology, are intended to identify forward-looking statements. The statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We caution the reader that
certain important factors may affect our actual operating results and could cause such results to differ materially from those
expressed or implied by forward-looking statements. We believe the risks and uncertainties discussed under the “Item 1A -
Risk Factors” and other risks and uncertainties detailed herein and from time to time in our SEC filings, may affect our actual
results.
We disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future
events or otherwise. We also may make additional disclosures in our Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and in other filings that we may make from time to time with the SEC. Other factors besides those listed here
could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of
1995, as amended.
ITEM 1.
DESCRIPTION OF BUSINESS
Business Overview
PART I
Lannett Company, Inc. (the “Company,” “Lannett,” “we,” or “us”) was incorporated in 1942 under the laws of the
Commonwealth of Pennsylvania, and reincorporated in 1991 as a Delaware corporation. We develop, manufacture, market
and distribute generic versions of branded pharmaceutical products. We report financial information on a quarterly and fiscal
year basis with the most recent being the fiscal year ended June 30, 2009. All references herein to a “fiscal year” or “Fiscal”
refer to the applicable fiscal year ending June 30.
According to data reported by IMS Health in June 2009, we are among the top 15 companies, based on number of
prescription transactions, for unbranded generic products in the United States. We intend to grow our business organically as
well as through strategic partnerships. Additionally, our Levothyroxine Sodium tablets (“Levo”) were recognized by IMS
Health as the 19th most prescribed pharmaceutical product, including both branded and generic products, in the U.S., reaching
approximately 21 million prescriptions through June 2009. Our product line represents approximately 0.5% of the domestic
prescription market. Over the last year, we have experienced a 10% growth in prescriptions for our products. In addition,
Levo has experienced a 16% annual growth during that period.
Over the past five years, we have experienced a 164% growth in our revenues from approximately $45 million in fiscal year
2005 to over $119 million in fiscal year 2009. This rapid growth has been achieved through strategic partnerships and
opportunities resulting from certain difficulties our various competitors have experienced with regulatory compliance.
Competitive Strengths
Proven Ability to Develop Successful Products and Achieve Scale in Production. We believe that our ability to select viable
products for development, efficiently develop such products, including obtaining any applicable regulatory approvals,
vertically integrate ourselves into certain specialty markets and achieve economies in production are all critical for our
success in the generic pharmaceutical industry in which we operate. We intend to focus on long-term profitability while
seeking to secure market positions with fewer challenges from competitors. Two key examples are morphine sulfate oral
solution and hydromorphone tablets.
3
Efficient Development Systems and Manufacturing Expertise for New Products. We believe that our manufacturing expertise,
low overhead expenses and efficient product development, manufacturing and marketing capabilities can help us remain
competitive in the general pharmaceutical market. We intend to dedicate significant capital toward developing new products
because we believe our success is linked to our ability to continually introduce new generic products into the marketplace.
Over time, if the market for a specific product remains stable and consumer demand remains consistent, additional generic
manufacturing companies will seek to enter and participate in the market by developing the product and seeking regulatory
approval for its sale. Competition from new and other market participants for the manufacture and distribution of certain
products would likely harm our market share with respect to such products as well as force us to reduce our selling price for
such products due to their increased availability. As a result, we believe that our success depends on our ability to properly
assess the competitive effect of new products, including market share, the number of competitors and the generic unit price
erosion. We intend to reduce our exposure to competitive influences that may negatively affect our sales and profits,
including the potential saturation of the market for certain products, by continuing to emphasize maintenance of a strong
research and development (“R&D”) pipeline. We believe that it is in our best interest to avoid becoming materially
dependent on the sale of a single product.
Mutually Beneficial Supply and Distribution Arrangements. In 2004, we entered into an exclusive distribution agreement
with Jerome Stevens Pharmaceuticals (“JSP”) covering four different product lines. Two of these product lines, Levo and
Digoxin, collectively accounted for approximately 62% of our net sales in fiscal year 2009 and both products have
experienced significant growth in sales over the past few years. Distribution agreements with other manufacturers have also
increased our net sales in recent years.
Strong Track Record of Obtaining Regulatory Approvals for New Products. During the past two fiscal years, we have
received 12 approved Abbreviated New Drug Applications (each, an “ANDA”) from the Food and Drug Administration (the
“FDA”). We expect to receive several more during the next fiscal year. These regulatory approvals will enable us to
manufacture and supply a broader portfolio of generic pharmaceutical products.
Dependable Supplier to our Customers. We believe we are viewed within the generic pharmaceutical industry as a strong,
dependable supplier to our customer base. We have cultivated strong and dependable customer relationships by maintaining
adequate inventory levels, employing a responsive order filling system and prioritizing timely fulfillment of those orders. A
majority of our orders are filled and shipped either on the day of, or the day following, the date that we receive the order.
Reputation for Regulatory Compliance. We have a strong track record of regulatory compliance and we believe that we have
strong effective regulatory compliance capabilities and practices through hiring qualified individuals and implementing
strong current Good Manufacturing Practices (“cGMP”). During the last two fiscal years, at least three of our competitors
have experienced plant closures and product recalls due to FDA inspections that found violations of cGMPs at their facilities.
Two of our competitive strengths, our agility in responding quickly to market events and a strong reputation for regulatory
compliance, positioned us to avail ourselves these market opportunities.
In addition, narcotics or “controlled drugs” are subject to a rigorous regulatory compliance regime. We are one of seven
companies in the U.S. that have been granted a license from the U.S. Drug Enforcement Administration (“DEA”) to import
raw poppy straw for conversion into active pharmaceutical ingredients (“API”). Such licenses are renewed annually, but
non-compliance could result in a license not being renewed. As a result, we believe that our strong reputation for regulatory
compliance allows us to have a competitive edge in managing the production and distribution of narcotics and controlled
drugs.
Business Strategies
Continue to Broaden our Product Lines Through Internal Development and Strategic Partnerships. We are focused on
increasing our market share in the generic pharmaceutical industry while concentrating additional resources on the
development of new products, including narcotics and controlled drugs. We hope to continue our efforts to improve our
financial performance by expanding our line of generic products, increasing unit sales to current customers and reducing
overhead and administrative costs.
We have targeted three strategies for expanding our product offerings: (1) deploying our experienced R&D staff to develop
products in-house, (2) entering into additional product development agreements or strategic partnerships with third-party
product developers and formulators and (3) purchasing ANDAs from other generic manufacturers that no longer seek to
manufacture a specific product. We expect that each method will facilitate our identification, selection and development of
additional generic pharmaceutical products that we may distribute through our existing network of customers.
4
We have several existing supply and development agreements with both international and domestic companies, and are
currently in negotiations on similar agreements with additional international companies, through which we can market and
distribute future products. We intend to capitalize on our strong customer relationships to build our market share for such
products.
Improve our Operating Profile in Certain Targeted Specialty Markets. In certain situations, we may increase our focus on
certain specialty markets within the generic pharmaceutical industry. By narrowing our focus to specialty markets, we can
provide increased product alternatives in categories with relatively few other market participants. We plan to strengthen our
relationships with strategic partners, including providers of product development research, raw materials, API and finished
products. We believe that mutually beneficial strategic relationships in such areas, including potential financing
arrangements, partnerships, joint ventures or acquisitions, could enhance our competitive advantages in the generic
pharmaceutical market.
Leverage Ability to Vertically Integrate as a Manufacturer, Supplier and Distributor of Narcotics and Controlled Substances.
We view our April 2007 acquisition of Cody Laboratories, Inc. (“Cody Labs”or “Cody”) as an important step in becoming a
vertically integrated narcotics manufacturer and distributor by allowing us to concentrate on developing and completing our
dosage form manufacturing in order to reduce our narcotic API costs. In July 2008, the DEA granted Cody Labs a license to
directly import raw poppy straw for conversion into API and/or various pharmaceutical products. Only six other companies
in the U.S. have been granted this license to date. This license allows us to avoid increased costs associated with buying
narcotic API from other manufacturers. We anticipate that we can use this license to become a vertically integrated
manufacturer of narcotic products, as well as a supplier of API to the pharmaceutical industry. We believe that the aging
domestic population may result in a higher demand for pain management pharmaceutical products and that we will be well-
positioned to take advantage of this increased demand.
Cody Labs’ manufacturing expertise in narcotic APIs will allow us to build a market with limited domestic competition. We
anticipate that the demand for narcotics and controlled drugs will continue to grow with the “Baby Boomer” generation
demographics and that we are well-positioned to take advantage of these opportunities by concentrating additional resources
in the narcotic area.
Key Products
All of our products currently manufactured and/or sold are prescription products. Of the products listed in the table entitled
“Current Products” below, those containing Levo, Digoxin, Butalbital and Primidone were our key products, collectively
accounting for approximately 72%, 83% and 70% of our net sales in fiscal years 2009, 2008 and 2007, respectively. In fiscal
year 2006, we began selling Sulfamethoxazole w/ Trimethoprim (“SMZ/TMP”). Because of a market opportunity, our sales
of SMZ/TMP increased from 3% of our net sales in fiscal year 2006 to 19% of our net sales in fiscal year 2007, but declined
to 9% of our net sales in fiscal year 2008. SMZ/TMP is not factored among our key products because the applicable supply
agreement expired in August 2008 and was not renewed.
Our products containing Levo are produced and marketed with 12 varying potencies. In addition to generic Levo tablets, we
also market and distribute Unithroid tablets, a branded version of Levo, which is produced and marketed with 11 varying
potencies. Both generic Levo tablets and Unithroid tablets are manufactured by JSP. We began buying generic Levo from
JSP and selling it to our customers in April 2003. In September 2003, we began buying the branded Unithroid tablets from
JSP and selling them to our customers. Levo tablets are used to treat hypothyroidism and other thyroid disorders. Levo
remains one of the most prescribed drugs in the U.S. and is used by over 13 million patients of various ages and demographic
backgrounds. Side effects from Levo are rare, but may include allergic reactions, such as rash or hives. We signed a
distribution agreement with JSP in March 2004 that granted us exclusive distribution rights to Levo tablets through March
2014 (the “JSP Distribution Agreement”). In June 2004, JSP received a letter from the FDA approving its supplemental
application for generic bioequivalence to Levoxyl®. In December 2004, JSP received a letter from the FDA approving its
supplemental application for generic bioequivalence to Synthroid®. Net sales of this product have grown rapidly in recent
years from approximately $35 million in 2007 to almost $48 million in 2009. In our distribution of these products, we
compete with two branded Levo products—Abbott Laboratories’ Synthroid® and Monarch Pharmaceutical’s Levoxyl®— as
well as generic products from Mylan and Sandoz.
Digoxin tablets are produced and marketed with two different potencies (0.125 and 0.25 milligrams (“mg”) per tablet). This
product is manufactured by JSP and we distribute it under the JSP Distribution Agreement. We began buying this product
from JSP and selling it to our customers in September 2002. Digoxin tablets are used to treat congestive heart failure in
patients of various ages and demographic backgrounds. The beneficial effects of Digoxin result from direct actions on the
5
cardiac muscle, as well as indirect actions on the cardiovascular system mediated by effects on the autonomic nervous
system. Side effects of Digoxin may include apathy, blurred vision, changes in heartbeat, confusion, dizziness, headaches,
loss of appetite, nausea, vomiting and weakness. Net sales of this product have increased from approximately $4.7 million in
2007 to $26.4 million in 2009.
We distribute two products containing Butalbital. We have manufactured and sold one of the products, Butalbital with
Aspirin and Caffeine capsules, for more than nine years. The other Butalbital product, Butalbital with Aspirin, Caffeine and
Codeine Phosphate capsules, is manufactured by JSP. We began buying this product from JSP and selling it to our customers
in December 2002. Both Butalbital products, which are in orally administered capsule dosage forms, are prescribed to treat
tension headaches caused by contractions of the muscles in the neck and shoulder area and migraine. The drug is prescribed
primarily for adults of various demographic backgrounds. Migraine headache is an increasingly prevalent condition in the
United States. As conditions continue to grow, the demand for effective medical treatments will continue to grow. Common
side effects of drugs which contain Butalbital include dizziness and drowsiness. Although new innovator drugs to treat
migraine headaches have been introduced by brand name drug companies, we believe that there is still a loyal following of
doctors and consumers who prefer to use Butalbital products for treatment. As the brand name companies continue to
promote products containing Butalbital, like Fiorinal®, we expect to continue to produce and sell our generic Butalbital
products.
Primidone tablets are produced and marketed with two different potencies (50mg and 250mg tablets). We developed and
manufacture Primidone tablets and began selling Primidone 50mg tablets in June 2001. In addition, we have been
manufacturing and selling Primidone 250mg tablets for more than seven years. Both Primidone products, which are in orally
administered tablet dosage forms, are prescribed to treat convulsion and seizures in epileptic patients of all ages and
demographic backgrounds. Common side effects of Primidone include lack of muscle coordination, vertigo and severe
dizziness.
Validated Pharmaceutical Capabilities
Our manufacturing facility consists of 31,000 square feet on an approximately 3.5-acre parcel of land that we own. In
addition, we own a 63,000 square foot building on approximately 3.0 acres located within one mile of our manufacturing
facility that houses packaging, warehousing, shipping, R&D and certain administrative functions. In addition, we lease a third
building located several miles from our manufacturing facility, consisting of 66,000 square feet on approximately 7.3 acres.
This building is currently being used as a warehouse. We expect to purchase this building in fall 2009 for approximately
$3.8 million, plus the cost of fit out estimated to be approximately $2 million. A significant portion of the purchase price and
fit out costs are expected to be financed through a series of loans with a bank and a Pennsylvania state government-run
development agency.
The manufacturing facility of our wholly-owned subsidiary, Cody Labs, consists of an approximately 73,000 square foot
structure located on approximately 16.2 acres in Cody, Wyoming. Cody Labs leases the facility from Cody LCI Realty,
LLC, Wyoming, which is 50% owned by us and 50% by an officer of Cody Labs and his former spouse. Cody Labs’
manufacturing facility currently has capacity for further expansion, both inside the existing structure, as well as by building
out the current structure.
We have adopted many FDA regulations relating to cGMPs in the last several years, and we believe we are operating our
facilities in material compliance with the FDA’s cGMP regulations. In designing our facilities, full attention was given to
material flow, equipment and automation, quality control and inspection. A granulator, an automatic film coating machine,
high-speed tablet presses, blenders, encapsulators, fluid bed dryers, high shear mixers and high-speed bottle filling are a few
examples of the sophisticated product development, manufacturing and packaging equipment we use. In addition, our
Quality Control laboratory facilities are equipped with high precision instruments, such as automated high-pressure liquid
chromatographs, gas chromatographs, robots and laser particle size analyzers.
We continue to pursue our comprehensive plan for improving and maintaining quality control and quality assurance
programs for our pharmaceutical development and manufacturing facilities. The FDA periodically inspects our production
facilities to determine our compliance with the FDA’s manufacturing standards. Typically, after completing its inspection,
the FDA will issue us a report, entitled a Form 483, containing observations of any possible violations of cGMPs. The FDA’s
observations may be minor or severe in nature and the degree of severity is generally determined by the time necessary to
remediate the cGMP violation, any consequences to the consumer of the products, and whether the observation is subject to a
Warning Letter from the FDA. By strictly complying with cGMPs and the various FDA guidelines, and Good Laboratory
Practices (“GLPs”), as well as adherence to our Standard Operating Procedures, we have successfully minimized the number
of observations in our FDA inspections in recent years.
6
Research and Development Process
Over the past several years, we have consistently devoted resources to R&D projects, including new generic product
offerings. The costs of these R&D efforts are expensed during the periods incurred. We believe that such investment
expense may be recovered in future years when we receive marketing approval from the FDA to distribute such products. In
addition to using cash generated from our operations, we have entered into financing agreements with third parties to provide
additional cash when needed. These financing agreements are more fully described in the section entitled “Liquidity and
Capital Resources” in Item 7 of this Form 10-K. We have embarked on a plan to grow in future years. In addition to
organic growth to be achieved through our own R&D efforts, we have also initiated marketing projects with other companies
in order to expand future revenue. We expect that our growing list of generic products under development will drive future
growth. We also intend to use our R&D infrastructure to continually devote resources to additional R&D projects. The
following steps outline the numerous stages in the generic drug development process:
1.) Formulation and Analytical Method Development. After a drug candidate is selected for future sales, product
development scientists perform various experiments on the incorporation of active ingredients into a dosage form.
These experiments will result in the creation of a number of product formulations to determine which formula will
be most suitable for our subsequent development process. Various formulations are tested in the laboratory to
measure results against the innovator drug. During this time, we may use reverse engineering methods on samples
of the innovator drug to determine the type and quantity of inactive ingredients. During the formulation phase, our
R&D chemists begin to develop an analytical, laboratory testing method. The successful development of this test
method will allow us to test developmental and commercial batches of the product in the future. All of the
information used in the final formulation, including the analytical test methods adopted for the generic drug
candidate, will be included as part of the Chemistry, Manufacturing and Controls section of the ANDA submitted to
the FDA in the generic drug application.
2.) Scale-up. After the product development scientists and the R&D chemists agree on a final formulation to use in
moving the drug candidate forward in the developmental process, we will attempt to increase the batch size of the
product. The batch size represents the standard magnitude to be used in manufacturing a batch of the product. The
determination of batch size will affect the amount of raw material that is input into the manufacturing process and
the number of expected dosages to be created during the production cycle. We attempt to determine batch size
based on the amount of active ingredient in each dosage, the available production equipment and unit sales
projections. The scaled-up batch is then generally produced in our commercial manufacturing facilities. During this
manufacturing process, we will document the equipment used, the amount of time in each major processing step and
any other steps needed to consistently produce a batch of that product. This information, generally referred to as the
validated manufacturing process, will be included in our ANDA submitted to the FDA.
3.) Clinical testing. After a successful scale-up of the generic drug batch, we schedule and perform bioequivalency and
in some cases clinical testing procedures on the product if required by the FDA. These procedures, which are
generally outsourced to third parties, include testing the absorption of the generic product in the human bloodstream
compared to the absorption of the innovator drug. The results of this testing are then documented and reported to us
to determine the “success” of the generic drug product. Success, in this context, means that we are able to
demonstrate that our product is comparable to the innovator product in dosage form, strength, route of
administration, quality, performance characteristics and intended use. Since bioequivalence (meaning that the
product performs in the same manner and in the same amount of time as the innovator drug) and a stable formula
are the primary requirements for a generic drug approval (assuming the manufacturing plant is in compliance with
the FDA’s cGMPs), lengthy and costly clinical trials proving safety and efficacy, which are required by the FDA for
innovator drug approvals, are typically unnecessary for generic companies. If the results are successful, we will
continue the collection of documentation and information for assembly of the drug application.
4.) Submission of the ANDA for FDA review and approval. The ANDA process became formalized under The Drug
Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act (“Hatch-
Waxman Act”). The Hatch-Waxman Act amended the Federal Food, Drug and Cosmetic Act (“FDCA”) to permit
FDA to review and approve an ANDA for a generic copy of a drug product, which previously received FDA
approval through its new drug approval process, without having the generic drug company conduct costly clinical
trials. An ANDA is a comprehensive submission that contains, among other things, data and information pertaining
to the active pharmaceutical ingredient, drug product formulation, specifications and stability of the generic drug, as
well as analytical methods, manufacturing process validation data, and quality control procedures.
7
According to the September 2008 issue of Generics Bulletin, the current FDA review time for ANDAs exceeds 19 months.
While we have received approval for our ANDAs in 14 months, we have also waited longer than 19 months before receiving
approval. Subsequently, the FDA advised that electronic submissions of applications may shorten the approval process. We
currently file our ANDAs electronically. ANDAs submitted for our products may not receive FDA approval on a timely
basis, if at all.
When a generic drug company files an ANDA with the FDA, it must certify that no patents are listed in the Orange Book, the
FDA’s reference listing of approved drugs and listed patents. An ANDA filer must certify, with respect to each application
whether the filer is challenging a patent, either (i) that no patent was filed for the listed drug (a “paragraph I” certification),
(ii) that the patent has expired (a “paragraph II” certification), (iii) that the patent will expire on a specified date and the
ANDA filer will not market the drug until that date (a “paragraph III” certification), or (iv) that the patent is invalid or would
not be infringed by the manufacture, use, or sale of the new drug (a “paragraph IV” certification). A paragraph IV
certification must be provided to each owner of the patent that is the subject of the certification and to the holder of the
approved ANDA to which the ANDA refers. A paragraph IV certification can trigger an automatic 30 month stay of the
ANDA if the innovator company files a claim. It will delay the approval of the generic company’s ANDA. Currently, we
have filed no paragraph IV certifications with our ANDAs.
Over the past several years, we have hired additional personnel in product development, production, formulation and the
R&D laboratory.
Sales and Customer Relationships
We sell our pharmaceutical products to generic pharmaceutical distributors, drug wholesalers, chain drug retailers, private
label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying
groups, governmental entities and health maintenance organizations. We promote our products through direct sales, trade
shows, trade publications and bids. We also license the marketing of our products to other manufacturers and/or marketers in
private label agreements.
We continue to expand our sales to major chain drug stores. Our policies of maintaining an adequate inventory, employing a
responsive order filling system and prioritizing timely fulfillment of those orders have contributed to a strong reputation
among our customers as a dependable supplier of high quality generic pharmaceuticals. In addition, our subsidiary, Cody
Labs, sells APIs to dosage form manufacturers.
Some of our new generic products were developed and are manufactured by us while other products were developed and
manufactured by other companies. The products currently manufactured by us and those manufactured by others are
identified in the section entitled “Current Products” in Item 1 of this Form 10-K.
Management
We have been focused on increasing the size and quality of our management team in anticipation of continuing our growth.
We have hired experienced personnel from large, established, brand pharmaceutical companies as well as competing generic
companies to complement the skills and knowledge of the existing management team. As we continue to grow, additional
personnel may need to be added to our management team. We intend to hire the best people available to expand the
knowledge base and expertise within our personnel ranks.
8
Current Products
As of the date of this filing, we manufactured and/or distributed the following products:
Name of Product
1 Acetazolamide Tablets
2 Amantadine Gel Capsules
3 Baclofen Tablets
4 Bethanechol Chloride Tablets
5 Butalbital, Aspirin and Caffeine Capsules
6 Butalbital, Aspirin, Caffeine with Codeine Phosphate Capsules
7 Clindamycin HCl Capsules
8 Cocaine Topical Solution
9 Danazol Capsules
10 Dicyclomine Tablets
11 Dicyclomine Capsules
12 Digoxin Tablets
13 Dipyridamole Tablets
14 Doxycycline Tablets
15 Doxycycline Hyclate Tablets
16 Esterified Estrogen & Methyltestoterone Tablets
17 Hydrochlorothiazide Tablet
18 Hydromorphone HCl Tablets
19 Levothyroxine Sodium Tablets
20 Morphine Sulfate Oral Solution
21 OB-Natal ® ONE Gel Capsules
22 Oxycodone HCl Oral Solution
23 Phentermine HCl Tablets
24 Phentermine HCl Capsules
25 Pilocarpine HCl Tablets
26 Primidone Tablets
27 Probenecid Tablets
28 Rifampin Capsules
29 Terbutaline Sulfate Tablets
30 Unithroid® Tablet
31 Ursodiol Capsules
Congestive Heart Failure
Hormone Replacement
Medical Indication
Glaucoma
Parkinson’s Disease
Muscle Relaxer
Urinary Retention
Migraine Headache
Migraine Headache
Antibiotic
Anesthetic
Endometriosis
Irritable Bowels
Irritable Bowels
Anticoagulant
Antibiotic
Antibiotic
Water Retention
Pain Management
Thyroid Deficiency
Pain Management
Pregnancy
Pain Management
Weight Loss
Weight Loss
Dryness of the Mouth
Epilepsy
Gout
Antibiotic
Bronchospasms
Thyroid Deficiency
Gallstone
Equivalent Brand
Diamox®
Symmetrel ®
Lioresal®
Urecholine®
Fiorinal®
Fiorinal w/ Codeine #3®
Cleocin®
N/A
Danocrine®
Bentyl®
Bentyl®
Lanoxin®
Persantine ®
Adoxa®
Periostat®
Estratest®
Hydrodiuril®
Dilaudid®
Levoxyl®/ Synthroid®
Roxanol®
PrimaCare ONE®
Roxicodone®
Adipex-P®
Fastin®
Salagen®
Mysoline®
Benemid®
Rifadin®
Brethine®
N/A
Actigall ®
Unlike the branded, innovator companies, we do not develop new molecules. However, we have filed and received two
patents for APIs at our Cody, Wyoming manufacturing facility with an additional patent pending.
In fiscal years 2009 and 2008, we received four and eight ANDA approvals from the FDA, respectively. The following
summary contains more specific details regarding our latest ANDA approvals. Market data is obtained from Wolters
Kluwer.
In July 2007, we received a letter from the FDA with approval to market and launch Baclofen 10mg tablets. Baclofen is the
generic version of Lioresal® and is a muscle relaxer used to treat symptoms of multiple sclerosis. According to Wolters
Kluwer, total sales of generic Baclofen 10mg tablets were $151 million at average wholesale price (“AWP”) in 2007.
In August 2007, we received two letters from the FDA with approval to market and launch Hydrochlorothiazide 25mg and
50mg tablets. Hydrochlorothiazide is the generic version of Hydrodiuril® and is a thiazide diuretic (water pill) that helps
prevent your body from absorbing too much salt. According to Wolters Kluwer, total sales of generic Hydrochlorothiazide
25mg and 50mg tablets were $182 million at AWP in 2007.
In December 2007, we received a letter from the FDA with approval to market and launch Phentermine HCl 30mg capsules.
Phentermine HCl is the generic version of Fastin® and is an appetite suppressant. According to Wolters Kluwer, total sales of
generic Phentermine HCl 30mg capsules were $37.5 million at AWP in 2007.
9
In March 2008, we received three letters from the FDA with approval to market and launch Bethanechol Chloride 5mg, 10mg
and 25mg tablets. Bethanechol Chloride is the generic version of Urecholine® and is indicated for the treatment of acute
postoperative and postpartum non obstructive (functional) urinary retention and for neurogenic atony of the urinary bladder
with retention. According to Wolters Kluwer, total sales of generic Bethanechol Chloride 5mg, 10mg and 25mg tablets at
AWP were $56 million in 2007.
In March 2008, we received a letter from the FDA with approval to market and launch Rifampin 150mg and 300mg capsules.
Rifampin is the generic version of Rifadin® and is used to reduce the number of meningococcal bacteria in the nose and
throat. According to Wolters Kluwer, total sales of generic Rifampin 150mg and 300mg capsules at AWP were $35 million
in 2007.
In April 2008, we received a letter from the FDA with approval to market and launch Dipyridamole 25mg, 50mg and 75mg
tablets. Dipyridamole is the generic version of Persantine® and is used to reduce the formation of blood clots in people who
have had heart valve surgery. According to Wolters Kluwer, total sales of generic Dipyridamole 25mg, 50mg and 75mg
tablets at AWP were $45 million in 2007.
In August 2008, we received a letter from the FDA with approval to market and launch Doxycycline Tablets, 75mg and 150
mg, the generic equivalent of Adoxa® and is used for the treatment of bacterial infections. According to Wolters Kluwer,
combined sales of generic Doxycycline Tablets, 75 mg and 150mg, were $25.8 million in 2007.
In December 2008, we received a letter from the FDA with approval to market and launch Ursodiol 300 mg Capsules, the
generic equivalent of Actigall® and are indicated for patients with radiolucent noncalcified gallbladder stones, and for the
prevention of gallstone formation in obese patients experiencing rapid weight loss. According to Wolters Kluwer, combined
sales of generic and brand Ursodiol were $128.2 million for the 12 months ending October 2008.
In May 2009, we received a letter from the FDA with approval to market and launch Pilocarpine HCI 7.5 mg tablets, the
generic equivalent of Salagen®. Pilocarpine HCI tablets are indicated for (1) the treatment of symptoms of dry mouth from
salivary gland hyprfunction caused by radiotherapy for cancer of the head and neck and (2) the treatment of symptoms of dry
mouth in patients with Sjogren’s syndrome. According to Wolters Kluwer, combined sales of generic and brand Pilocarpine
HCI 7.5mg tablets at AWP were $2.5 million in 2008.
We have additional products currently under development. These products are either orally administered, solid-dosage
products (i.e. tablet/capsule) or oral solutions, topicals or parentarels designed to be generic equivalents to brand named
innovator drugs. Our developmental drug products are intended to treat a diverse range of indications. The products under
development are at various stages in the development cycle—formulation, scale-up, clinical testing and FDA review.
The cost associated with each product that we are currently developing is dependent on numerous factors, including but not
limited to, the complexity of the active ingredient’s chemical characteristics, the price of the raw materials and the FDA-
mandated requirement of bioequivalence studies (depending on the FDA’s Orange Book classification). The estimated cost to
develop a new generic product ranges from $100,000 to $1.5 million.
In addition, as one of the oldest generic drug manufacturers in the country formed in 1942, we currently own several ANDAs
that are dormant on our records for products which we do not manufacture and market. Occasionally, we review such
ANDAs to determine if the market potential for any of these older drugs has recently changed to make it attractive for us to
reconsider manufacturing and selling. If we decide to introduce one of these products into the consumer market, we must
review the original ANDA and related documentation to ensure that the approved product specifications, formulation and
other factors meet current FDA requirements for the marketing of the applicable drug. Generally, in these situations, we file
a supplement to the FDA for the applicable ANDA, informing the FDA of any significant changes in the manufacturing
process, the formulation, the raw material supplier or another major feature of the previously approved ANDA. We would
then redevelop the product and submit it to the FDA for supplemental approval. The FDA’s approval process for an ANDA
supplement is similar to that of a new ANDA.
In addition to the efforts of our internal product development group, we have contracted with several outside firms for the
formulation and development of several new generic drug products. These outsourced R&D products are at various stages in
the development cycle—formulation, analytical method development and testing and manufacturing scale-up. These
products are orally administered solid dosage products intended to treat a diverse range of medical indications. We intend to
ultimately transfer the formulation technology and manufacturing process for all of these R&D products to our own
commercial manufacturing sites. We initiated these outsourced R&D efforts to complement the progress of our own internal
R&D efforts.
10
The majority of our R&D projects are being developed in-house under our direct supervision and with our own personnel.
Hence, we do not believe that our outside contracts for product development or manufacturing supply are material in nature,
nor are we substantially dependent on the services rendered by such outside firms. Since we have no control over the FDA
review process, our management is unable to anticipate whether or when it will be able to begin producing and shipping such
additional products.
The following table summarizes key information related to our R&D products. The column headings are defined as follows:
1.) Stage of R&D — defines the current stage of the R&D product in the development process, as of the date of this
Form 10-K.
2.) Regulatory Requirement — defines whether the R&D product is or is expected to be a new ANDA submission,
an ANDA supplement, or a grand-fathered product not requiring specific FDA approval.
3.) Number of Products — defines the number of products in R&D at the stage noted. In this context, a product
means any finished dosage form, including all potencies, containing the same API or combination of APIs and
which represents a generic version of the same Reference Listed Drug (“RLD”) or innovator drug, identified in
the FDA’s Orange Book.
Stage of R&D
FDA Review.....................................................
FDA Review.....................................................
Clinical Testing ................................................
Scale-Up ...........................................................
Scale-Up ...........................................................
Scale-Up ...........................................................
Formulation/Method Development ..................
Regulatory Requirement
ANDA
ANDA supplement
ANDA
Grand-fathered
ANDA supplement
ANDA
ANDA
Number of Products
9
9
11
4
1
10
38
We incurred R&D expenses of approximately $8,427,000 in fiscal year 2009, $5,173,000 in fiscal year 2008, and $7,459,000
in fiscal year 2007. The R&D spending includes spending on bioequivalence studies, internal development resources as well
as outsourced development. While we manage all R&D from our principal executive office in Philadelphia, we have also
been taking advantage of favorable development costs in other countries. We have strategic partnerships with various
companies that either act as contract research organizations or API suppliers as well as dosage form manufacturers. In
addition, U.S.-based research organizations have been engaged for product development to enhance our internal
development. Fixed payment arrangements are established with these development partners, and can range from $150,000 to
$250,000 to develop a drug. Development payments are normally scheduled in advance, based on milestones.
Raw Materials and Finished Goods Inventory Suppliers
Our use of raw materials in the production process consists of using pharmaceutical chemicals in various forms that are
generally available from several sources. FDA approval is required in connection with the process of using most active
ingredient suppliers. In addition to the raw materials we purchase for the production process, we purchase certain finished
dosage inventories, including capsule, tablet and oral liquid products. We sell these finished dosage products directly to our
customers along with the finished dosage products manufactured in-house. If suppliers of a certain material or finished
product are limited, we will generally take certain precautionary steps to avoid a disruption in supply, such as finding a
secondary supplier or ordering larger quantities.
Our primary finished product inventory supplier is JSP in Bohemia, New York. Purchases of finished goods inventory from
JSP accounted for approximately 71% of our inventory purchases in fiscal year 2009, 71% in fiscal year 2008 and 63% in
fiscal year 2007. On March 23, 2004, we entered into the JSP Distribution Agreement for the exclusive distribution rights in
the United States to the current line of JSP products in exchange for four million (4,000,000) shares of our common stock.
The products covered under the JSP Distribution Agreement include Butalbital, Aspirin, Caffeine with Codeine Phosphate
capsules, Digoxin tablets and Levo tablets, sold generically and under the brand name Unithroid®. The initial term of the JSP
Distribution Agreement is ten years, beginning on March 23, 2004 and continuing through March 22, 2014. See note 18 to
our consolidated financial statements for more information on the terms, conditions and financial impact of the JSP
Distribution Agreement.
11
During the term of the JSP Distribution Agreement, we are required to use commercially reasonable efforts to purchase
minimum dollar quantities of JSP’s products that we distribute. The minimum quantity to be purchased in the first year of
the JSP Distribution Agreement was $15 million. Thereafter, the minimum purchase quantity increases by $1 million per
year up to $24 million for the last year of the JSP Distribution Agreement. We have met each applicable minimum purchase
requirement to date, but there is no guarantee that we will be able to continue to do so in the future. If we do not meet the
minimum purchase requirements, JSP’s sole remedy is to terminate the JSP Distribution Agreement.
In August 2005, we entered into a three year agreement with a finished goods provider to purchase, at fixed prices, and
distribute a certain generic pharmaceutical product in the United States. Purchases of finished goods inventory from this
provider accounted for approximately 1%, 14% and 23% of our costs of purchased inventory in fiscal years 2009, 2008 and
2007, respectively. Following its expiration on August 21, 2008, the agreement was not renewed.
We have entered into definitive supply and development agreements with certain international companies, including Wintac
of India, Orion Pharma of Finland, Azad Pharma AG and Swiss Caps of Switzerland and Pharma 2B (formerly Pharmaseed)
of Israel, as well as certain domestic companies, including Banner Pharmacaps, Cerovene and Inverness. We are currently in
negotiations on similar agreements with other international companies, through which we will market and distribute future
products manufactured in-house or by third parties. We intend to capitalize on our strong customer relationships to build our
market share for such products.
Customers and Marketing
We sell our products primarily to wholesale distributors, generic drug distributors, mail-order pharmacies, group purchasing
organizations, chain drug stores and other pharmaceutical companies. The pharmaceutical industry’s largest wholesale
distributors, McKesson, Cardinal Health and Amerisource Bergen, accounted for 8%, 11%, and 9%, respectively, of our net
sales in fiscal year 2009 and 6%, 9% and 5%, respectively, of our net sales in fiscal year 2008. Our largest chain drug store
customer, Walgreens, accounted for 31% and 36% of net sales in fiscal year 2009 and fiscal year 2008, respectively. We
perform ongoing credit evaluations of our customers’ financial condition, and have experienced no significant collection
problems to date. Generally, we require no collateral from our customers.
Sales to wholesale customers include “indirect sales,” which represent sales to third-party entities, such as independent
pharmacies, managed care organizations, hospitals, nursing homes, and group purchasing organizations, collectively referred
to as “indirect customers.” We enter into definitive agreements with our indirect customers to establish pricing for certain
covered products. Under such agreements, the indirect customers independently select a wholesaler from which to purchase
the products at these agreed-upon prices. We will provide credit to the wholesaler for the difference between the agreed-
upon price with the indirect customer and the wholesaler’s invoice price. This credit is called a “chargeback.” For more
information on chargebacks, see the section entitled “Chargebacks” in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of this Form 10-K. These indirect sale transactions are recorded on our
books as sales to the wholesale customers.
We believe that retail-level consumer demand dictates the total volume of sales for various products. In the event that
wholesale and retail customers adjust their purchasing volumes, we believe that consumer demand will be fulfilled by other
wholesale or retail sources of supply. As a result, we attempt to develop and maintain strong relationships with most of the
major retail chains, wholesale distributors and mail-order pharmacies in order to facilitate the supply of our products through
whatever channel the consumer prefers. Although we have agreements with customers governing the transaction terms of
our sales, there are no minimum purchase quantities applicable to these agreements.
We promote our products through direct sales, trade shows and bids. We also market our products through private label
arrangements, under which we manufacture our products with a label containing the name and logo of a customer. This
practice is commonly referred to as “private label business.” Private label business allows us to leverage our internal sales
efforts by using the marketing services from other well-respected pharmaceutical dosage suppliers. The focus of our sales
efforts is the relationships we create with our customer accounts. Strong and dependable customer relationships have created
a positive platform for us to increase our sales volumes. Advertising in the generic pharmaceutical industry is generally
limited to trade publications, read by retail pharmacists, wholesale purchasing agents and other pharmaceutical decision-
makers. Historically and in fiscal years 2009, 2008 and 2007, our advertising expenses were immaterial. When our sales
representatives makes contact with a customer, we will generally offer to supply the customer our products at fixed prices. If
accepted, the customer’s purchasing department will coordinate the purchase, receipt and distribution of the products
throughout its distribution centers and retail outlets. Once a customer accepts our supply of a product, the customer typically
expects a high standard of service, including timely receipt of products ordered, availability of convenient, user-friendly and
effective customer service functions and maintaining open lines of communication.
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Competition
The manufacturing and distribution of generic pharmaceutical products is a highly competitive industry. Competition is
based primarily on price, service and quality. Our competitive advantage is based on our ability to provide strong and
dependable customer service by maintaining adequate inventory levels, employing a responsive order filling system and
prioritizing timely fulfillment of those orders. We ensure that our products are available from national suppliers as well as our
own warehouse. The modernization of our facilities, hiring of experienced staff and implementation of inventory and quality
control programs have improved our competitive cost position over the past five years.
We compete with other manufacturers and marketers of generic and brand drugs. Each product manufactured and/or sold by
us has a different set of competitors. The list below identifies the companies with which we primarily compete with respect
to each of our major products.
Product
Primary Competitors
Butalbital with Aspirin and Caffeine, with and without
Codeine Phosphate Capsules
Watson Pharmaceuticals and Breckenridge Pharmaceutical
(manufactured by Anabolic Laboratories)
Digoxin Tablets
Doxycycline
Levothyroxine Sodium tablets
Primidone tablets
Rifampin capsules
Unithroid tablets
Government Regulation
GlaxoSmithKline, Caraco Pharmaceutical Laboratories and
Westward Pharmaceuticals
Par Pharmaceuticals and Ranbaxy Laboratories
Abbott Laboratories, Monarch Pharmaceuticals, Mylan
Laboratories, Sandoz and Forest Laboratories
Watson Pharmaceuticals, Qualitest Pharmaceuticals, URL,
Westward Pharmaceuticals, Amneal Pharmaceuticals and
Impax Labs
Sandoz and Versapharm
Abbott Laboratories, Monarch Pharmaceuticals, Mylan
Laboratories and Sandoz
Pharmaceutical manufacturers are subject to extensive regulation by the federal government, principally by the FDA, and, in
cases of controlled drugs, the DEA, and to a lesser extent, by other federal regulatory bodies and state governments. The
FDCA, the Controlled Substance Act (the “CSA”) and other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, approval, pricing, advertising, and promotion of our generic drug
products. Noncompliance with applicable regulations can result in fines, recall and seizure of products, total or partial
suspension of production, personal and/or corporate prosecution and debarment, and refusal of the government to approve
new drug applications. The FDA also has the authority to revoke previously approved drug products.
Generally, FDA approval is required before a prescription drug can be marketed. A new drug is one not generally recognized
by qualified experts as safe and effective for its intended use. New drugs are typically developed and submitted to the FDA
by companies expecting to brand the product and sell it as a medical treatment. The FDA review process for new drugs is
very extensive and requires a substantial investment to research and test the drug candidate. However, less burdensome
approval procedures may be used for generic equivalents. Typically, the investment required to develop a generic drug is less
costly than the brand innovator drug.
There are currently three ways to obtain FDA approval of a drug:
• New Drug Applications (NDA): Unless one of the two procedures discussed in the following paragraphs is
available, a manufacturer must conduct and submit to the FDA complete clinical studies to establish a drug’s safety
and efficacy. The new drug approval process generally involves:
•
•
completion of preclinical laboratory and animal testing in compliance with the FDA’s GLP
regulations;
submission to the FDA of an Investigational New Drug (“IND”) application for human clinical testing,
which must become effective before human clinical trials may begin;
13
•
•
performance of adequate and well-controlled human clinical trials to establish the safety and efficacy
of the proposed drug product for each intended use;
satisfactory completion of an FDA pre-approval inspection of the facility or facilities at which the
product is produced to assess compliance with the FDA’s cGMP regulations; and
•
submission to and approval by the FDA of an NDA.
The results of preclinical tests, together with manufacturing information and analytical data, are submitted
to the FDA as part of an IND, which must become effective before human clinical trials may begin.
Further, each clinical trial must be reviewed and approved by an independent Institutional Review Board.
Human clinical trials are typically conducted in three sequential phases that may overlap. These phases
generally include:
•
•
•
Phase I, during which the drug is introduced into healthy human subjects or, on occasion, patients and
is tested for safety, stability, dose tolerance, and metabolism;
Phase II, during which the drug is introduced into a limited patient population to determine the efficacy
of the product in specific targeted indications, to determine dosage tolerance and optimal dosage, and
to identify possible adverse effects and safety risks; and
Phase III, during which the clinical trial is expanded to a larger and more diverse patient group at
geographically dispersed clinical trial sites to further evaluate clinical efficacy, optimal dosage, and
safety.
The drug sponsor, the FDA, or the independent Institutional Review Board at each institution at which a
clinical trial is being performed may suspend a clinical trial at any time for various reasons, including a
belief that the subjects are being exposed to an unacceptable health risk.
The results of preclinical animal studies and human clinical studies, together with other detailed
information, are submitted to the FDA as part of the NDA. The NDA also must contain extensive
manufacturing information. The FDA may approve or disapprove the NDA if applicable FDA regulatory
criteria are not satisfied or it may require additional clinical data. Once approved, the FDA may withdraw
the product approval if compliance with pre- and post-market regulatory standards is not maintained or if
problems occur or are identified after the product reaches the marketplace. In addition, the FDA may
require post-marketing studies to monitor the effect of approved products and may limit further marketing
of the product based on the results of these post-marketing studies. The FDA has broad post-market
regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay
issuance of approvals, seize or recall products, and withdraw approvals.
Satisfaction of FDA new drug approval requirements typically takes several years, and the actual time
required may vary substantially based upon the type, complexity, and novelty of the product or disease.
Government regulation may delay or prevent marketing of potential products for a considerable period of
time and impose costly procedures upon a manufacturer’s activities. Success in early stage clinical trials
does not assure success in later stage clinical trials. Data obtained from clinical activities is not always
conclusive and may be subject to varying interpretations that could delay, limit, or prevent regulatory
approval. Even if a product receives regulatory approval, later discovery of previously unknown problems
with a product may result in restrictions on the product or even complete withdrawal of the product from
the market.
• Abbreviated New Drug Applications (ANDA): An ANDA is similar to an NDA except that the FDA generally
waives the requirement of complete clinical studies of safety and efficacy. However, it may require bioavailability
and bioequivalence studies. Bioavailability indicates the rate of absorption and levels of concentration of a drug in
the bloodstream needed to produce a therapeutic effect. Bioequivalence compares one drug product with another
and indicates if the rate of absorption and the levels of concentration of a generic drug in the body are within
prescribed statistical limits to those of a previously approved drug. Under the Hatch-Waxman Act, an ANDA may
be submitted for a drug on the basis that it is the equivalent of an approved drug regardless of when such other drug
14
was approved. The FDA will approve the generic product as suitable for an ANDA application if it finds that the
generic product does not raise new questions of safety and effectiveness as compared to the innovator product. A
product is not eligible for ANDA approval if the FDA determines that it is not equivalent to the referenced innovator
drug, if it is intended for a different use, or if it is not subject to an approved Suitability Petition. However, such a
product might be approved under an NDA, with supportive data from clinical trials.
In addition to establishing a new ANDA procedure, the Hatch-Waxman Act created statutory protections for
approved brand name drugs. Under the Hatch-Waxman Act, an ANDA for a generic drug may not be made
effective until all relevant product and use patents for the brand name drug have expired or have been determined to
be invalid. Prior to this act, the FDA gave no consideration to the patent status of a previously approved drug. Upon
NDA approval, the FDA lists in its Orange Book the approved drug product and any patents identified by the NDA
applicant that relate to the drug product. Any applicant who files an ANDA seeking approval of a generic equivalent
version of a drug listed in the FDA’s Orange Book before expiration of the referenced patent(s), must certify to the
FDA that (1) no patent information on the drug product that is the subject of the ANDA has been submitted to the
FDA; (2) such patent has expired; (3) the date on which such patent expires; or (4) such patent is invalid or will not
be infringed upon by the manufacture, use, or sale of the drug product for which the ANDA is submitted. This last
certification is known as a Paragraph IV certification. A notice of the Paragraph IV certification must be provided to
each owner of the patent that is the subject of the certification and to the holder of the approved NDA to which the
ANDA refers. Before the enactment of the Medicare Prescription Drug Improvement and Modernization Act of
2003 (the “MMA”), which amended the Hatch-Waxman Act, if the NDA holder or patent owner(s) asserted a patent
challenge within 45 days of its receipt of the certification notice, the FDA was prevented from approving that
ANDA until the earlier of 30 months from the receipt of the notice of the paragraph IV certification, the expiration
of the patent, when the infringement case concerning each such patent was favorably decided in an ANDA
applicant’s favor, or such shorter or longer period as may be ordered by a court. This prohibition is generally
referred to as the 30-month stay. In some cases, NDA owners and patent holders have obtained additional patents for
their products after an ANDA had been filed but before that ANDA received final marketing approval, and then
initiated a new patent challenge, which resulted in more than one 30-month stay.
The MMA amended the Hatch-Waxman Act to eliminate certain unfair advantages of patent holders in the
implementation of the Hatch-Waxman Act. As a result, the NDA owner remains entitled to an automatic 30-month
stay if it initiates a patent infringement lawsuit within 45 days of its receipt of notice of a paragraph IV certification,
but only if the patent infringement lawsuit is directed to patents that were listed in the FDA’s Orange Book before
the ANDA was filed. An ANDA applicant is now permitted to take legal action to enjoin or prohibit the listing of
certain of these patents as a counterclaim in response to a claim by the NDA owner that its patent covers its
approved drug product.
If an ANDA applicant is the first-to-file a substantially complete ANDA with a paragraph IV certification and
provides appropriate notice to the FDA, the NDA holder, and all patent owner(s) for a particular generic product, the
applicant may be awarded a 180-day period of marketing exclusivity against other companies that subsequently file
ANDAs for that same product. A substantially complete ANDA is one that contains all the information required by
the Hatch-Waxman Act and the FDA’s regulations, including the results of any required bioequivalence studies. The
FDA may refuse to accept the filing of an ANDA that is not substantially complete or may determine during
substantive review of the ANDA that additional information, such as an additional bioequivalence study, is required
to support approval. Such a determination may affect an applicant’s first to file status and eligibility for a 180-day
period of marketing exclusivity for the generic product. The MMA also modified the rules governing when the 180-
day marketing exclusivity period is triggered or forfeited and shared exclusivity. Prior to the legislation, the 180-day
marketing exclusivity period was triggered upon the first commercial marketing of the ANDA or a court decision
holding the patent invalid, unenforceable, or not infringed. For ANDAs accepted for filing before March 2000, that
court decision had to be final and non-appealable (other than a petition to the U.S. Supreme Court for a writ of
certiorari). In March 2000, the FDA changed its position in response to two court cases that challenged the FDA’s
original interpretation of what constituted a court decision under the Hatch-Waxman Act. Under the changed policy,
the 180-day marketing exclusivity period began running immediately upon a district court decision holding the
patent at issue invalid, unenforceable, or not infringed, regardless of whether the ANDA had been approved and the
generic product had been marketed. In codifying the FDA’s original policy, the MMA retroactively applies a final
and non-appealable court decision trigger for all ANDAs filed before December 8, 2003 leaving intact the first
commercial marketing trigger. As for ANDAs filed after December 8, 2003, the marketing exclusivity period is only
triggered upon the first commercial marketing of the ANDA product, but that exclusivity may be forfeited under
certain circumstances, including, if the ANDA is not marketed within 75 days after a final and non-appealable court
decision by the first-to-file or other ANDA applicant, or if the FDA does not tentatively approve the first-to-file
applicant’s ANDA within 30 months.
15
In addition to patent exclusivity, the holder of the NDA for the listed drug may be entitled to a period of non-patent
market exclusivity, during which the FDA cannot approve an ANDA. If the listed drug is a new chemical entity, the
FDA may not accept an ANDA for a bioequivalent product for up to five years following approval of the NDA for
the new chemical entity. If the listed drug is not a new chemical entity but the holder of the NDA conducted clinical
trials essential to approval of the NDA or a supplement thereto, the FDA may not approve an ANDA for a
bioequivalent product before expiration of three years. Certain other periods of exclusivity may be available if the
listed drug is indicated for treatment of a rare disease or is studied for pediatric indications.
•
Section 505(b)(2) New Drug Applications: For a drug that is identical to a drug first approved after 1962, a
prospective manufacturer need not go through the full NDA procedure. Instead, it may demonstrate safety and
efficacy by relying on published literature and reports where at least some of information required for approval
comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of
reference. The Hatch-Waxman Act permits the applicant to rely upon certain preclinical or clinical studies
conducted for an approved product. The manufacturer must also submit, if the FDA so requires, bioavailability or
bioequivalence data illustrating that the generic drug formulation produces the same effects, within an acceptable
range, as the previously approved innovator drug. Because published literature to support the safety and efficacy of
post-1962 drugs may not be available, this procedure is of limited utility to generic drug manufacturers and the
resulting approved product will not be interchangeable with the innovator drug as an ANDA drug would be unless
bioeqivalency testing were undertaken and approved by FDA. Moreover, the utility of Section 505(b)(2)
applications have with the exception of “Grandfathered drugs” been diminished by the availability of the ANDA
process, as described above.
Manufacturing cGMP Requirements
Among the requirements for new drug approval is the requirement that the prospective manufacturer’s methods conform to
the FDA’s cGMP regulations to the satisfaction of the FDA pursuant to a pre-approval inspection before the facility may be
used to manufacture the product. The cGMP regulations must be followed at all times during which the approved drug is
manufactured and the manufacturing facilities are subject to periodic inspections by the FDA and other authorities, including
procedures and operations used in the testing and manufacture of our products to assess our compliance with application
regulations. FDA’s cGMP regulations require among other things, quality control and quality assurance as well as the
corresponding maintenance of records and documentation In complying with the standards set forth in the cGMP
regulations, we must continue to expend time, money, and effort in the areas of production and quality control to ensure full
technical compliance.
Failure to comply with statutory and regulatory requirements subjects a manufacturer to possible legal or regulatory action,
including but not limited to, the seizure or recall of noncomplying drug products injunctions, consent decrees placing
significant restrictions on or suspending manufacturing operations, and/or civil and criminal penalties. Adverse experiences
with the product must be reported to the FDA and could result in the imposition of market restriction through labeling
changes or in product removal. Product approvals may be withdrawn if compliance with regulatory requirements is not
maintained or if problems concerning safety or efficacy of the product occur following approval.
Other Regulatory Requirements
With respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on
entities that advertise and promote pharmaceuticals, which include, among others, standards for direct-to-consumer
advertising, off-label promotion, industry-sponsored scientific and educational activities, and promotional activities involving
the internet. The FDA has very broad enforcement authority under the FFDCA, and failure to abide by these regulations can
result in penalties, including the issuance of a warning letter directing entities to correct deviations from FDA standards, a
requirement that future advertising and promotional materials be pre-cleared by the FDA, and state and/or federal civil and
criminal investigations and prosecutions.
We are also subject to various laws and regulations regarding laboratory practices, the experimental use of animals, and the
use and disposal of hazardous or potentially hazardous substances in connection with our research. In each of these areas, as
above, the FDA has broad regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend
or delay issuance of approvals, seize or recall products, and withdraw approvals, any one or more of which could have a
material adverse effect on us.
16
Outside of the United States, our ability to market a product is contingent upon receiving marketing authorization from the
appropriate regulatory authorities. The requirements governing marketing authorization, pricing, and reimbursement vary
widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although
within the European Union registration procedures are available to companies wishing to market a product in more than one
European Union member state. The regulatory authority generally will grant marketing authorization if it is satisfied that we
have presented it with adequate evidence of safety, quality and efficacy.
DEA Regulation
We maintain registrations with the DEA that enable us to receive, manufacture, store, and distribute controlled substances in
connection with our operations. Controlled substances are those drugs that appear on one of five schedules promulgated and
administered by the DEA under the CSA. The CSA governs, among other things, the distribution, recordkeeping, handling,
security, and disposal of controlled substances. We are subject to periodic and ongoing inspections by the DEA and similar
state drug enforcement authorities to assess our ongoing compliance with DEA’s regulations. Any failure to comply with
these regulations could lead to a variety of sanctions, including the revocation or a denial of renewal of our DEA registration,
injunctions, or civil or criminal penalties.
Fraud and Abuse Laws
Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and
actively enforce, a number of laws whose purpose is to eliminate fraud and abuse in federal health care programs. Our
business is subject to compliance with these laws.
Anti-Kickback Statutes and Federal False Claims Act
The federal health care programs’ Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering,
receiving, or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or
the furnishing or arranging for a good or service, for which payment may be made under a federal health care program such
as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value,
including for example gifts, certain discounts, the furnishing of free supplies, equipment or services, credit arrangements,
payment of cash and waivers of payments. Several courts have interpreted the statute’s intent requirement to mean that if any
one purpose of an arrangement involving remuneration is to induce referrals of federal health care covered business, the
statute has been violated. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment,
and possible exclusion from Medicare, Medicaid, and other federal health care programs. In addition some kickback
allegations have been claimed to violate the Federal False Claims Act, discussed in more detail below.
The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of
the health care industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous
or beneficial arrangements, Congress authorized the Office of Inspector General of the U.S. Department of Health and
Human Services (“OIG”) to issue a series of regulations, known as “safe harbors.” These safe harbors, issued by the OIG
beginning in July 1991, set forth provisions that, if all their applicable requirements are met, will assure health care providers
and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or
arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution
will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result
in increased scrutiny by government enforcement authorities such as OIG.
Many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of
patients for health care items or services reimbursed by any source, not only the Medicare and Medicaid programs.
Government officials have focused their enforcement efforts on marketing of health care services and products, among other
activities, and recently have brought cases against companies, and certain sales, marketing, and executive personnel, for
allegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business.
Another development affecting the health care industry is the increased use of the federal Civil False Claims Act, and in
particular, action brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act
imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or
fraudulent claim for payment by a federal health care program. The qui tam provisions of the False Claims Act allow a
private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim
to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought against health
17
care providers by private individuals has increased dramatically. In addition, various states have enacted false claims law
analogous to the Civil False Claims Act, although many of these state laws apply where a claim is submitted to any third-
party payor and not merely a federal health care program.
When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual
damages sustained by the government, plus civil penalties of between $5,500 to $11,000 for each separate false claim. There
are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly
submits, or causes another to submit, a false claim for reimbursement to the federal government. The federal government has
used the False Claims Act to assert liability on the basis of inadequate care, kickbacks, and other improper referrals, and
improper use of Medicare numbers when detailing the provider of services, in addition to the more predictable allegations as
to misrepresentations with respect to the services rendered. In addition, the federal government has prosecuted companies
under the False Claims Act in connection with off-label promotion of products. Our future activities relating to the reporting
of wholesale or estimated retail prices of our products, the reporting of discount and rebate information and other information
affecting federal, state, and third-party reimbursement of our products, and the sale and marketing of our products may be
subject to scrutiny under these laws. We are unable to predict whether we will be subject to actions under the False Claims
Act or a similar state law, or the impact of such actions. However, the costs of defending such claims, as well as any
sanctions imposed, could significantly affect our financial performance.
HIPAA and Other Fraud and Privacy Regulations
Among other things, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) created two new federal
crimes: health care fraud and false statements relating to health care matters. The HIPAA health care fraud statute prohibits,
among other things, knowing and willfully executing, or attempting to execute, a scheme to defraud any health care benefit
program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment, and/or
exclusion from government-sponsored programs. The HIPAA false statements statute prohibits, among other things,
knowingly and willfully falsifying, concealing, or covering up a material fact or making any materially false, fictitious, or
fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items, or
services. A violation of this statute is a felony and may result in fines and/or imprisonment.
Pricing
In the United States, our sales are dependent upon the availability of coverage and reimbursement for our products from
third-party payers, including federal and state programs such as Medicare and Medicaid, and private organizations such as
commercial health insurance and managed care companies. Such third-party payers are increasingly challenging the price of
medical products and services and instituting cost containment measures to control or significantly influence the purchase of
medical products and services. This includes the placement of our pharmaceutical products on drug formularies or lists of
medications.
Over the past several years, the rising costs of providing health care services has triggered legislation to make certain changes
to the way in which pharmaceuticals, including our products, are covered and reimbursed, particularly by governmental
programs. For instance, recent federal legislation and regulations have created a voluntary prescription drug benefit,
Medicare Part D, revised the formula used to reimburse health care providers and physicians under Part B and have imposed
significant revisions to the Medicaid Drug Rebate Program. These changes have resulted in, and may continue to result in,
coverage and reimbursement restrictions and increased rebate obligations by manufacturers. in addition, there continue to be
legislative and regulatory proposals at the federal and state levels directed at containing or lowering the cost of health care.
Examples of how limits on drug coverage and reimbursement in the United States may cause reduced payments for drugs in
the future include:
•
•
•
•
•
changing Medicare reimbursement methodologies;
revising drug rebate calculations under the Medicaid program;
reforming drug importation laws;
fluctuating decisions on which drugs to include in formularies; and
requiring pre-approval of coverage for new or innovative drug therapies.
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We cannot predict the likelihood or pace of such additional changes or whether there will be significant legislative or
regulatory reform impacting our products. Nor can we predict with precision what effect such governmental measures would
have if they were ultimately enacted into law. However, in general, we believe that legislative and regulatory reform activity
likely will continue.
We are also subject to federal, state and local laws of general applicability, including laws regulating working conditions and
the storage, transportation, or discharge of items that may be considered hazardous substances, hazardous waste, or
environmental contaminants. We monitor our compliance with all environmental laws. We are in substantial compliance
with all regulatory bodies.
As a publicly-traded company, we are also subject to significant regulations, including the Sarbanes-Oxley Act of 2002.
Since its enactment, we have developed and instituted a corporate compliance program based on what we believe are the
current best practices and we continue to update the program in response to newly implemented or changing regulatory
requirements.
We operate in a highly regulated environment and are responsible for maintaining compliance with many regulatory
requirements. The U.S. Department of Justice, acting on behalf of the DEA, issued us a letter in August 2008 requesting
additional information on certain record keeping matters regarding a DEA inspection of our facilities. We fully complied
with their request and intend to fully comply with all requests for information that occur from time to time as a normal course
of business.
Employees
As of June 30, 2009, we had 277 employees, comprised of 217 employees at Lannett and an additional 60 employees at Cody
Labs.
Securities Exchange Act Reports
We maintain a website at www.lannett.com. We make available on or through our website our current and periodic reports,
including any amendments to those reports, that are filed with the Securities and Exchange Commission (the “SEC”) in
accordance with the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These reports include annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. This information is available on our
website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the
SEC. The contents of our website are not incorporated by reference in this Form 10-K and shall not be deemed “filed” under
the Exchange Act.
ITEM 1A.
RISK FACTORS
We materially rely on an uninterrupted supply of finished products from Jerome Stevens Pharmaceutical (“JSP”) for
a majority of our sales. If we were to experience an interruption of that supply, our operating results would suffer.
Approximately 75% of our sales are of distributed products, primarily manufactured by JSP. Two of theses products
are Levo and Digoxin, which accounted for 40% and 22%, respectively, of our Fiscal 2009 net sales, and 51% and 10%,
respectively, of our net sales for Fiscal 2008. If the supply of these products is interrupted in any way, including any form of
temporary or permanent business interruption to JSP, our operating results could be materially adversely affected. We do not
have, at this time, a second source for these products.
Extensive industry regulation has had, and will continue to have, a significant impact on our business, especially our
product development, manufacturing and distribution capabilities.
All pharmaceutical companies, including Lannett, are subject to extensive, complex, costly and evolving regulation
by the federal government, including the FDA and in the case of controlled drugs, the DEA, and state government agencies.
The FDCA, the CSA and other federal statutes and regulations govern or influence the development, testing, manufacturing,
packing, labeling, storing, record keeping, safety, approval, advertising, promotion, sale and distribution of our products.
The process for obtaining governmental approval to manufacture and market pharmaceutical products is rigorous,
time-consuming and costly, and we cannot predict the extent to which we may be affected by legislative and regulatory
developments. We are dependent on receiving FDA and other governmental or third-party approvals prior to manufacturing,
marketing and shipping our products. The FDA approval process for a particular product candidate can take several years
and requires us to dedicate substantial resources to securing approvals, and we may not be able to obtain regulatory approval
19
for our product candidates in a timely manner, or at all. In order to obtain approval for our generic product candidates, we
must demonstrate that our drug product is bioequivalent to a drug previously approved by the FDA through the new drug
approval process, known as an innovator drug. Bioequivalency may be demonstrated in vivo or in vitro by comparing the
generic product candidate to the innovator drug product in dosage form, strength, route of administration, quality, dissolution
performance characteristics, and intended use. The FDA may not agree that the bioequivalence studies we submit in the
ANDA applications for our generic drug products are adequate to support approval. If it determines that an ANDA
application is not adequate to support approval, the FDA could deny our application or request additional information,
including clinical trials, which could delay approval of the product and impair our ability to compete with other versions of
the generic drug product.
Consequently, there is always the chance that we will not obtain FDA or other necessary approvals, or that the rate,
timing and cost of such approvals, will adversely affect our product introduction plans or results of operations. We carry
inventories of certain product(s) in anticipation of launch, and if such product(s) are not subsequently launched, we may be
required to write-off the related inventory. Furthermore, the FDA also has the authority to revoke drug approvals previously
granted and remove these products from the market for a variety of reasons, including a failure to comply with applicable
regulations, the discovery of previously unknown problems with the product, or because the ingredients in the drug are no
longer approved by the FDA.
In addition, Lannett, as well as many of our significant suppliers of distributed product and raw materials, are
subject to periodic inspection of facilities, procedures and operations and/or the testing of the finished products by the FDA,
the DEA and other authorities, which conduct periodic inspections to confirm that pharmaceutical companies are in
compliance with all applicable regulations. The FDA conducts pre-approval and post-approval reviews and plant inspections
to determine whether systems and processes are in compliance with cGMP, and other FDA regulations. Following such
inspections, the FDA may issue notices on Form 483 that could cause us or our suppliers to modify certain activities
identified during the inspection. A Form 483 notice is generally issued at the conclusion of a FDA inspection and lists
conditions the FDA inspectors believe may violate cGMP or other FDA regulations. The DEA and comparable state-level
agencies also heavily regulate the manufacturing, holding, processing, security, record-keeping, and distribution of drugs that
are considered controlled substances. Some of the pain management products we manufacture contain controlled substances.
The DEA periodically inspects facilities for compliance with its rules and regulations. If our manufacturing facilities or those
of our suppliers fail to comply with applicable regulatory requirements, it could result in regulatory action and additional
costs to us.
Our inability or the inability of our suppliers to comply with applicable FDA and other regulatory requirements can
result in, among other things, delays in or denials of new product approvals, warning letters, fines, consent decrees restricting
or suspending manufacturing operations, injunctions, civil penalties, recall or seizure of products, total or partial suspension
of sales, and/or criminal prosecution. Any of these or other regulatory actions could materially harm our operating results and
financial condition. Although we have instituted internal compliance programs, if these programs do not meet regulatory
agency standards or if compliance is deemed deficient in any significant way, it could materially harm our business.
Our manufacturing operations as well as our suppliers manufacturing are subject to licensing by the FDA and/or
DEA. If we or our suppliers were unable to maintain the proper agency licensing arrangements, our operating results
would be materially negatively impacted.
All of our manufacturing operations as well as those of our suppliers rely on maintaining active licenses to produce
and develop generic drugs. Specifically, our Cody Labs operations rely on a DEA license to directly import and convert raw
opium into several APIs or dosage forms. This license is granted for a one year period and must be renewed successfully
each year in order for us to maintain Cody’s current operations and allow the Company to continue to work towards
becoming a fully integrated narcotics supplier. If the Company was unable to successfully renew its FDA and/or DEA
licenses, the financial results of Lannett would be negatively impacted.
If we are unable to successfully develop or commercialize new products, our operating results will suffer.
Our future results of operations will depend to a significant extent upon our ability to successfully commercialize
new generic products in a timely manner. There are numerous difficulties in developing and commercializing new products,
including:
•
•
•
developing, testing and manufacturing products in compliance with regulatory standards in a timely manner;
receiving requisite regulatory approvals for such products in a timely manner;
the availability, on commercially reasonable terms, of raw materials, including APIs and other key ingredients;
20
•
•
developing and commercializing a new product is time consuming, costly and subject to numerous factors that
may delay or prevent the successful commercialization of new products; and
commercializing generic products may be substantially delayed by the listing with the FDA of patents that have
the effect of potentially delaying approval of the off-patent product by up to 30 months, and in some cases, such
patents have been issued and listed with the FDA after the key chemical patent on the branded drug product has
expired or been litigated, causing additional delays in obtaining approval.
As a result of these and other difficulties, products currently in development by Lannett may or may not receive the
regulatory approvals necessary for marketing. If any of our products, when developed and approved, cannot be successfully
or timely commercialized, our operating results could be adversely affected. We cannot guarantee that any investment we
make in developing products will be recouped, even if we are successful in commercializing those products.
The generic pharmaceutical industry is highly competitive.
We face strong competition in our generic product business. Revenues and gross profit derived from the sales of
generic pharmaceutical products tend to follow a pattern based on certain regulatory and competitive factors. As patents for
brand name products and related exclusivity periods expire, the first generic manufacturer to receive regulatory approval for
generic equivalents of such products is generally able to achieve significant market penetration. As competing off-patent
manufacturers receive regulatory approvals on similar products or as brand manufacturers launch generic versions of such
products (for which no separate regulatory approval is required), market share, revenues and gross profit typically decline, in
some cases dramatically. Accordingly, the level of market share, revenue and gross profit attributable to a particular generic
product is normally related to the number of competitors in that product’s market and the timing of that product’s regulatory
approval and launch, in relation to competing approvals and launches. Consequently, we must continue to develop and
introduce new products in a timely and cost-effective manner to maintain our revenues and gross margins.
The loss of Arthur P. Bedrosian or our other key personnel could cause our business to suffer.
The success of our present and future operations will depend, to a significant extent, upon the experience, abilities
and continued services of Arthur P. Bedrosian and our other key personnel. If we lose the services of Mr. Bedrosian or our
other key personnel, or he or they are unable to devote sufficient attention to our operations for any other reason, our business
may be significantly impaired. If the employment of any of our current key personnel is terminated, we cannot assure you
that we will be able to attract and replace the employee with the same caliber of key personnel. As such, we have entered
into employment agreements with all of our senior executive officers to help prevent the loss of our key personnel.
Our gross profit may fluctuate from period to period depending upon our product sales mix, our product pricing and
our costs to manufacture or purchase products.
Our future results of operations, financial condition and cash flows depend to a significant extent upon our product
sales mix. Our sales of products that we manufacture tend to create higher gross margins than do the products we purchase
and resell. As a result, our sales mix will significantly impact our gross profit from period to period.
Factors that may cause our sales mix to vary include:
•
the amount of new product introductions;
• marketing exclusivity, if any, which may be obtained on certain new products;
•
•
•
the level of competition in the marketplace for certain products;
the availability of raw materials and finished products from our suppliers; and
the scope and outcome of governmental regulatory action that may involve us.
The profitability of our product sales is also dependent upon the prices we are able to charge for our products, the
costs to purchase products from third parties, and our ability to manufacture our products in a cost effective manner.
21
If branded pharmaceutical companies are successful in limiting the use of generics through their legislative and
regulatory efforts, our sales of generic products may suffer.
Many branded pharmaceutical companies increasingly have used state and federal legislative and regulatory means
to delay generic competition. These efforts have included:
•
•
•
•
•
pursuing new patents for existing products which may be granted just before the expiration of one patent which
could extend patent protection for additional years or otherwise delay the launch of generics;
using the Citizen Petition process to request amendments to FDA standards;
seeking changes to U.S. Pharmacopoeia, an organization which publishes industry recognized compendia of
drug standards;
attaching patent extension amendments to non-related federal legislation; and
engaging in state-by-state initiatives to enact legislation that restricts the substitution of some generic drugs,
which could have an impact on products that we are developing.
If branded pharmaceutical companies are successful in limiting the use of generic products through these or other
means, our sales may decline. If we experience a material decline in product sales, our results of operations, financial
condition and cash flows will suffer.
Third parties may claim that we infringe their proprietary rights and may prevent us from manufacturing and selling
some of our products.
The manufacture, use and sale of new products that are the subject of conflicting patent rights have been the subject
of substantial litigation in the pharmaceutical industry. These lawsuits relate to the validity and infringement of patents or
proprietary rights of third parties. We may have to defend against charges that we violated patents or proprietary rights of
third parties. This is especially true in the case of generic products on which the patent covering the branded product is
expiring, an area where infringement litigation is prevalent, and in the case of new branded products where a competitor has
obtained patents for similar products. Litigation may be costly and time-consuming, and could divert the attention of our
management and technical personnel. In addition, if we infringe on the rights of others, we could lose our right to develop or
manufacture products or could be required to pay monetary damages or royalties to license proprietary rights from third
parties. Although the parties to patent and intellectual property disputes in the pharmaceutical industry have often settled
their disputes through licensing or similar arrangements, the costs associated with these arrangements may be substantial and
could include ongoing royalties. Furthermore, we cannot be certain that the necessary licenses would be available to us on
terms we believe to be acceptable. As a result, an adverse determination in a judicial or administrative proceeding or failure
to obtain necessary licenses could prevent us from manufacturing and selling a number of our products, which could harm
our business, financial condition, results of operations and cash flows.
If we are unable to obtain sufficient supplies from key suppliers that in some cases may be the only source of finished
products or raw materials, our ability to deliver our products to the market may be impeded.
We are required to identify the supplier(s) of all the raw materials for our products in our applications with the
FDA. To the extent practicable, we attempt to identify more than one supplier in each drug application. However, some
products and raw materials are available only from a single source and, in some of our drug applications, only one supplier of
products and raw materials has been identified, even in instances where multiple sources exist. To the extent any difficulties
experienced by our suppliers cannot be resolved within a reasonable time, and at reasonable cost, or if raw materials for a
particular product become unavailable from an approved supplier and we are required to qualify a new supplier with the
FDA, our profit margins and market share for the affected product could decrease, and our development and sales and
marketing efforts could be delayed.
Our policies regarding returns, allowances and chargebacks, and marketing programs adopted by wholesalers may
reduce our revenues in future fiscal periods.
Based on industry practice, generic drug manufacturers have liberal return policies and have been willing to give
customers post-sale inventory allowances. Under these arrangements, from time to time, we give our customers credits on
our generic products that our customers hold in inventory after we have decreased the market prices of the same generic
products due to competitive pricing. Therefore, if new competitors enter the marketplace and significantly lower the prices
22
of any of their competing products, we would likely reduce the price of our product. As a result, we would be obligated to
provide credits to our customers who are then holding inventories of such products, which could reduce sales revenue and
gross margin for the period the credit is provided. Like our competitors, we also give credits for chargebacks to wholesalers
that have contracts with us for their sales to hospitals, group purchasing organizations, pharmacies or other customers. A
chargeback is the difference between the price the wholesaler pays and the price that the wholesaler’s end-customer pays for
a product. Although we establish reserves based on our prior experience and our best estimates of the impact that these
policies may have in subsequent periods, we cannot ensure that our reserves are adequate or that actual product returns,
allowances and chargebacks will not exceed our estimates.
Health care initiatives and other third-party payor cost-containment pressures could cause us to sell our products at
lower prices, resulting in decreased revenues.
Some of our products are purchased or reimbursed by state and federal government authorities, private health
insurers and other organizations, such as health maintenance organizations, or HMOs, and managed care organizations, or
MCOs. Third-party payors increasingly challenge pharmaceutical product pricing. There also continues to be a trend toward
managed health care in the United States. Pricing pressures by third-party payors and the growth of organizations such as
HMOs and MCOs could result in lower prices and a reduction in demand for our products.
In addition, legislative and regulatory proposals and enactments to reform health care and government insurance
programs could significantly influence the manner in which pharmaceutical products and medical devices are prescribed and
purchased. We expect there will continue to be federal and state laws and/or regulations, proposed and implemented, that
could limit the amounts that federal and state governments will pay for health care products and services. The extent to which
future legislation or regulations, if any, relating to the health care industry or third-party coverage and reimbursement may be
enacted or what effect such legislation or regulation would have on our business remains uncertain. For example, the pending
American Recovery and Reinstatement Act of 2009, also known as the stimulus package, includes $1.1 billion in funding to
study the comparative effectiveness of health care treatments and strategies. If the stimulus package is approved in its current
form, this funding will be used, among other things, to conduct, support or synthesize research that compares and evaluates
the risk and benefits, clinical outcomes, effectiveness and appropriateness of products. Although Congress has indicated that
this funding is intended for improvement in quality of health care, it remains unclear how the research will impact coverage,
reimbursement or other third-party payor policies. Such measures or other health care system reforms that are adopted could
have a material adverse effect on our industry generally and our ability to successfully commercialize our products or could
limit or eliminate our spending on development projects and affect our ultimate profitability.
We may need to change our business practices to comply with changes to fraud and abuse laws.
We are subject to various federal and state laws pertaining to health care fraud and abuse, including the federal fraud
and abuse law (sometimes referred to as the “Anti-Kickback Statute”) which apply to our sales and marketing practices and
our relationships with physicians. At the federal level, the Anti-Kickback Statute prohibits any person or entity from
knowingly and willfully soliciting, receiving, offering, or paying any remuneration, including a bribe, kickback, or rebate,
directly or indirectly, in return for or to induce the referral of patients for items or services covered by federal health care
programs, or the furnishing, recommending, or arranging for products or services covered by federal health care programs.
Federal health care programs have been defined to include plans and programs that provide health benefits funded by the
federal government, including Medicare and Medicaid, among others. The definition of “remuneration” has been broadly
interpreted to include anything of value, including, for example, gifts, discounts, the furnishing of supplies or equipment,
credit arrangements, payments of cash, and waivers of payments. Several courts have interpreted the federal Anti-Kickback
Statute’s intent requirement to mean that if even one purpose in an arrangement involving remuneration is to induce referrals
or otherwise generate business involving goods or services reimbursed in whole or in part under federal health care programs,
the statute has been violated. The federal government has issued regulations, commonly known as safe harbors that set forth
certain provisions which, if fully met, will assure parties that they will not be prosecuted under the federal Anti-Kickback
Statute. The failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the
transaction or arrangement will be illegal or that prosecution under the federal Anti-Kickback Statute will be pursued, but
such transactions or arrangements face an increased risk of scrutiny by government enforcement authorities and an ongoing
risk of prosecution. If our sales and marketing practices or our relationships with physicians (such as physicians serving on
our Scientific Advisory Board) are considered by federal or state enforcement authorities to be knowingly and willfully
soliciting, receiving, offering, or providing any remuneration in exchange for arranging for or recommending our products
and services, and such activities do not fit within a safe harbor, then these arrangements could be challenged under the federal
Anti-Kickback Statute. If our operations are found to be in violation of the federal Anti-Kickback Statute we may be subject
to civil and criminal penalties including fines of up to $25,000 per violation, civil monetary penalties of up to $50,000 per
violation, assessments of up to three times the amount of the prohibited remuneration, imprisonment, and exclusion from
participating in the federal health care programs. In addition, HIPAA and its implementing regulations created two new
23
federal crimes: health care fraud and false statements relating to health care matters. The HIPAA health care fraud statute
prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health
care benefit program, including private payors. A violation of this statue is a felony and may result in fines, imprisonment
and/or exclusion from government-sponsored programs. The HIPAA false statements statute prohibits, among other things,
knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or
fraudulent statement or representation in connection with the delivery of or payment for health care benefits, items, or
services. A violation of this statute is a felony and may result in fines and/or imprisonment. A number of states also have
anti-fraud and anti-kickback laws similar to the federal Anti-Kickback Statute that prohibit certain direct or indirect payments
if such arrangements are designed to induce or encourage the referral of patients or the furnishing of goods or services. Some
states’ anti-fraud and anti-kickback laws apply only to goods and services covered by Medicaid. Other states’ anti-fraud and
anti-kickback laws apply to all health care goods and services, regardless of whether the source of payment is governmental
or private. Due to the breadth of these laws and the potential for changes in laws, regulations, or administrative or judicial
interpretations, we may have to change our business practices or our existing business practices could be challenged as
unlawful, which could materially adversely affect our business.
Certain federal and state governmental agencies, including the U.S. Department of Justice and the U.S. Department
of Health and Human Services, have been investigating issues surrounding pricing information reported by drug
manufacturers and used in the calculation of reimbursements as well as sales and marketing practices. For example, many
government and third-party payors, including Medicare and Medicaid, reimburse doctors and others for the purchase of
certain pharmaceutical products based on the product’s average wholesale price (“AWP”) reported by pharmaceutical
companies. While Lannett has only used Suggested Wholesale Prices since 2000, the federal government, certain state
agencies, and private payors are investigating and have begun to file court actions related to pharmaceutical companies’
reporting practices with respect to AWP, alleging that the practice of reporting prices for pharmaceutical products has
resulted in a false and overstated AWP, which in turn is alleged to have improperly inflated the reimbursement paid by
Medicare beneficiaries, insurers, state Medicaid programs, medical plans, and others to health care providers who prescribed
and administered those products. In addition, some of these same payors are also alleging that companies are not reporting
their “best price” to the states under the Medicaid program. We are not currently subject to any such investigations or actions,
but if we do become subject or if these investigations and actions were to result in changes to our operations, it could
materially adversely affect our results of operations.
We may become subject to federal and state false claims litigation brought by private individuals and the government.
We are subject to state and federal laws that govern the submission of claims for reimbursement. The federal False
Claims Act imposes civil liability and criminal fines on individuals or entities that knowingly submit, or cause to be
submitted, false or fraudulent claims for payment to the government. Violations of the False Claims Act and other similar
laws may result in criminal fines, imprisonment, and civil penalties for each false claim submitted and exclusion from
federally funded health care programs, including Medicare and Medicaid. The False Claims Act also allows private
individuals to bring a suit on behalf of the government against an individual or entity for violations of the False Claims Act.
These suits, known as qui tam actions, may be brought by, with only a few exceptions, any private citizen who has material
information of a false claim that has not yet been previously disclosed. These suits have increased significantly in recent
years because the False Claims Act allows an individual to share in any amounts paid to the federal government in fines or
settlement as a result of a successful qui tam action. If our past or present operations are found to be in violation of any of
such laws or any other governmental regulations that may apply to us, we may be subject to penalties, including civil and
criminal penalties, damages, fines, exclusion from federal health care programs, and/or the curtailment or restructuring of our
operations. Any penalties, damages, fines, curtailment, or restructuring of our operations could adversely affect our ability to
operate our business and our financial results, action against us for violation of these laws, even if we successfully defend
against them, could cause us to incur significant legal expenses and divert our management’s attention from the operation of
our business.
Sales of our products may continue to be adversely affected by the continuing consolidation of our distribution
network and the concentration of our customer base.
Our principal customers are wholesale drug distributors and major retail drug store chains. These customers
comprise a significant part of the distribution network for pharmaceutical products in the U.S. This distribution network is
continuing to undergo significant consolidation marked by mergers and acquisitions among wholesale distributors and the
growth of large retail drug store chains. As a result, a small number of large wholesale distributors control a significant share
of the market, and the number of independent drug stores and small drug store chains has decreased. We expect that
consolidation of drug wholesalers and retailers will increase pricing and other competitive pressures on drug manufacturers,
including Lannett.
24
For the fiscal year ended June 30, 2009, our three largest customers accounted for 31%, 11% and 9%, respectively, of our net
sales. The loss of any of these customers could materially adversely affect our business, results of operations and financial
condition and our cash flows. In addition, the Company has no long-term supply agreements with its customers that would
require them to purchase our products.
The design, development, manufacture and sale of our products involves the risk of product liability claims by
consumers and other third parties, and insurance against such potential claims is expensive and may be difficult to
obtain.
The design, development, manufacture and sale of our products involve an inherent risk of product liability claims
and the associated adverse publicity. Insurance coverage is expensive and may be difficult to obtain, and may not be
available in the future on acceptable terms, or at all. Although we currently maintain product liability insurance for our
products in amounts we believe to be commercially reasonable, if the coverage limits of these insurance policies are not
adequate, a claim brought against Lannett, whether covered by insurance or not, could have a material adverse effect on our
business, results of operations, financial condition and cash flows.
Rising insurance costs could negatively impact profitability.
The cost of insurance, including workers compensation, product liability and general liability insurance, have risen
in prior years and may increase in the future. In response, we may increase deductibles and/or decrease certain coverage to
mitigate these costs. These increases, and our increased risk due to increased deductibles and reduced coverage, could have a
negative impact on our results of operations, financial condition and cash flows.
Significant balances of intangible assets, including product rights acquired, are subject to impairment testing and may
result in impairment charges, which will adversely affect our results of operations and financial condition.
Our acquired contractual rights to market and distribute products are stated at cost, less accumulated amortization
and related impairment charges identified to date. We determined the initial cost by referring to the original fair value of the
assets exchanged. Future amortization periods for product rights are based on our assessment of various factors impacting
estimated useful lives and cash flows of the acquired products. Such factors include the product’s position in its life cycle,
the existence or absence of like products in the market, various other competitive and regulatory issues and contractual
terms. Significant changes to any of these factors would require us to perform an additional impairment test on the affected
asset and, if evidence of impairment exists, we would be required to take an impairment charge with respect to the asset.
Such a charge would adversely affect our results of operations and financial condition.
Federal regulation of arrangements between manufacturers of branded and generic products could adversely affect
our business.
As part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, companies are now
required to file with the Federal Trade Commission (“FTC”) and the Department of Justice certain types of agreements
entered into between brand and generic pharmaceutical companies related to the manufacture, marketing and sale of generic
versions of branded drugs. This new requirement could affect the manner in which generic drug manufacturers resolve
intellectual property litigation and other disputes with branded pharmaceutical companies and could result generally in an
increase in private-party litigation against pharmaceutical companies or additional investigations or proceedings by the FTC
or other governmental authorities. The impact of this new requirement and the potential private-party lawsuits associated
with arrangements between brand name and generic drug manufacturers is uncertain, and could adversely affect our business.
ITEM 2.
DESCRIPTION OF PROPERTY
Lannett owns two facilities in Philadelphia, Pennsylvania. The administrative offices, quality control laboratory and
manufacturing and production facilities are located in a 31,000 square foot facility at 9000 State Road in Philadelphia. The
second facility consists of 63,000 square feet, and is located within one mile of the State Road location at 9001 Torresdale
Avenue in Philadelphia. Our research laboratory, package, warehousing and distribution operations, sales and accounting
departments are located in the second building.
In June 2006, Lannett signed a lease agreement on a 66,000 square foot facility in Philadelphia. An additional agreement
which gives us the option to buy the facility was also signed. The Company expects to purchase this building in fall 2009 for
approximately $3.8 million plus the cost of fit out estimated to be approximately $2 million. A significant portion of the
purchase price and fit out costs are expected to be financed through a series of loans with a bank and a Pennsylvania state run
development agency. This new facility is initially going to be used for warehouse space with the expectation of making this
facility our headquarters and possibly additional manufacturing space. The other Philadelphia locations will continue to be
utilized as manufacturing, packaging, and as a research laboratory. This gives Lannett the space to fit its desire to expand.
25
Cody, a wholly-owned subsidiary of Lannett, leases a 73,000 square foot facility in Cody, Wyoming. This location houses
Cody’s manufacturing and production facilities. Cody leases the facility from Cody LCI Realty, LLC, Wyoming, which is
50% owned by Lannett and 50% by an officer of Cody Laboratories and his former spouse.
ITEM 3.
LEGAL PROCEEDINGS
In early June 2008, the Company filed a declaratory judgment suit in the Federal District Court of Delaware (Civil Action
No. 08-338 (JJF)) against KV Pharmaceuticals, DrugTech Corp. and Ther-Rx Corp (collectively, “KV”). The complaint
sought declaratory judgment for non-infringement and invalidity of certain patents owned by KV. The complaint further
sought declaratory judgment of anti-trust violations and federal and state unfair competition violations for actions taken by
KV in securing and enforcing these patents. After the complaint was filed, KV countered with a motion for a Temporary
Restraining Order (“TRO”) to prevent the Company from launching its Multivitamin with Mineral Capsules (“MMCs”), due
to alleged patent and trademark infringement issues. The TRO was heard and, ultimately, resulted in a conclusion by the
court that the Company’s product label on the MMCs should be modified. KV also countered with claims of infringement by
the Company of KV’s patents seeking the Company’s profits for sales of MMCs or other monetary relief, preliminary and
permanent injunctive relief, attorney’s fees and a finding of willful infringement. On March 17, 2009, the Company and KV
settled the litigation. In light of the withdrawal of KV’s innovator prenatal product, and the resulting anticipated decline in
sales and declining market for written prescription, the Company decided it was pointless to continue the litigation and
entered into the settlement arrangement with KV. Pursuant to the settlement, the Company received a license from KV and
became an authorized generic provider. During the terms of the license, the Company will pay KV a royalty on all future
sales of its Prenatal vitamin product. Lannett will cease offering its Prenatal vitamin product if and when the brand is
restored to the marketplace.
In or about July 2008, Albion International and Albion, Inc. filed suit in the United States District Court, District of Utah
(Case No. 2:08cv00515) against Lannett asserting claims for patent and trademark infringement, as well as unfair
competition, arising out of Lannett’s use of product that it purchased from Albion and used as an ingredient in its MMC.
Lannett filed a motion to dismiss the complaint on the basis that it purchased the product from Albion and, as such, was
authorized to use the product in its MMC. The Court granted the motion and dismissed the complaint but gave Albion leave
to file an amended complaint. On January 20, 2009, Albion filed an amended complaint. Lannett filed an answer to the
complaint and counterclaim, asserting, among other things, that Albion tortuously interfered with Lannett’s contracts.
Subsequent to the filing of the answer and counterclaim, Lannett and Albion reached an agreement in principal to settle the
case. Under terms of the settlement, the parties would each dismiss their claims against each other and provide releases. On
July 6, 2009, the settlement agreement was signed and on July 13, 2009, the case was dismissed.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of the Company’s security holders during the quarter ended June 30, 2009.
PART II
ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
On April 15, 2002, the Company’s common stock began trading on the American Stock Exchange (now the NYSE —
AMEX). Prior to this, the Company’s common stock traded in the over-the-counter market through the use of the inter-dealer
“pink-sheets” published by Pink Sheets LLC. The following table sets forth certain information with respect to the high and
low daily closing prices of the Company’s common stock during Fiscal 2009 and 2008, as quoted by the NYSE — AMEX.
Such quotations reflect inter-dealer prices without retail mark-up, markdown, or commission and may not represent actual
transactions.
Fiscal Year Ended June 30, 2009
First quarter ................................................................................................
Second quarter ............................................................................................
Third quarter...............................................................................................
Fourth quarter .............................................................................................
26
High
Low
$
$
$
$
4.20
5.00
5.86
$
$
$
7.52
$
2.25
1.79
4.60
4.86
Fiscal Year Ended June 30, 2008
First quarter.................................................................................................
Second quarter ............................................................................................
Third quarter ...............................................................................................
Fourth quarter .............................................................................................
High
Low
$
$
$
$
6.20
5.14
3.55
4.80
$
$
$
$
3.65
3.05
2.34
2.05
Holders
As of September 15, 2009, there were approximately 249 holders of record of the Company’s common stock.
Dividends
The Company did not pay cash dividends in Fiscal 2009 or Fiscal 2008. The Company intends to use available funds for
working capital, plant and equipment additions, and various product extension ventures. The Company does not expect to
pay, nor should shareholders expect to receive, cash dividends in the foreseeable future.
ITEM 6.
SELECTED FINANCIAL DATA
The following financial information as of and for the five years ended June 30, 2009, has been derived from our consolidated
financial statements. This information should be read in conjunction with our consolidated financial statements and related
notes thereto included elsewhere herein. The comparability of information is affected by the items described below.
In Fiscal 2008, we increased our returns reserve by $10.5 million, reflecting our expectation that 100% of the shipments of
Prenatal Multivitamin made in the fourth quarter of Fiscal 2008 would be returned. Our expectation that all of the product
would be returned was based on our inability to have the product specified as a brand equivalent, and information from our
customers regarding their intentions to return the product.
In Fiscal 2007, the Company wrote-off of a portion of a note receivable due from Cody Labs, and subsequently acquired
Cody Labs (a provider of API). Approximately $7.8 million of notes were written-off prior to the Cody Labs acquisition,
representing the excess of the note receivable over the fair value of assets received of approximately $4.4 million.
Statement of Financial Accounting Standards (SFAS) 123(R), “Share-Based Payment,” was adopted on July 1, 2005 using
the modified prospective transition method. Because the modified prospective transition method was elected, results for prior
periods have not been restated to include share-based compensation expense for stock options or the Company’s Employee
Stock Purchase Plan. See note 1 to our consolidated financial statements for more information.
In Fiscal 2005, the Company determined that an intangible asset related to acquired product rights was impaired. At that
time, the Company determined that this intangible was impaired and a $46.1 million impairment charge was recorded.
Lannett Company, Inc. and Subsidiaries
Financial Highlights
As of and for the Fiscal Year Ended June 30,
Operating Highlights
2009
2008
2007
2006
2005
Net Sales......................................................
Gross Profit..................................................
Operating Income/(Loss) .............................
Net Income/(Loss) .......................................
Basic Earnings/(Loss) Per Share..................
Diluted Earnings/(Loss) Per Share...............
$ 119,002,215
45,244,469
$
10,780,869
$
6,534,245
$
0.27
$
0.27
$
Balance Sheet Highlights
$ 72,403,283
$ 16,301,071
$
$
$
$
(5,430,534) $
(2,318,059) $
(0.10) $
(0.10) $
$ 82,577,591
$ 21,424,987
$ 64,060,375
$ 28,375,665
8,453,918
4,968,922
0.21
0.21
44,901,645
$
$
7,968,320
$ (53,639,658)
$ (32,779,596)
(1.36)
$
(1.36)
$
(5,964,409) $
(6,929,008) $
(0.29) $
(0.29) $
Total Assets .................................................
Total Debt....................................................
Long Term Debt ..........................................
Total Stockholders’ Equity ..........................
$ 124,577,121
8,138,768
$
$
7,703,382
77,553,969
$
$ 113,679,264
8,978,834
$
$
8,186,922
$ 69,271,480
$ 104,656,100
9,679,965
$
$
8,987,846
$ 70,183,175
$ 105,992,064
8,196,692
$
$
7,649,806
$ 75,755,916
$
$
$
$
94,917,060
9,532,448
7,262,672
69,249,244
27
ITEM 7.
RESULTS OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
In addition to historical information, this Form 10-K contains forward-looking information. The forward-looking information
is subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those
discussed in the following section, entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect
management’s analysis only as of the date of this Form 10-K. The Company undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or circumstances that may occur. Readers should carefully review
the risk factors described in other documents the Company files from time to time with the SEC, including the Quarterly
Reports on Form 10-Q to be filed by the Company in Fiscal 2010, and any Current Reports on Form 8-K filed by the
Company.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date
of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and potentially
result in materially different results under different assumptions and conditions. We believe that our critical accounting
policies include those described below. For a detailed discussion on the application of these and other accounting policies,
refer to Note 1 in the Notes to the Consolidated Financial Statements included herein.
Consolidation of Variable Interest Entity — The Company consolidates any Variable Interest Entity (“VIE”) of which we
are the primary beneficiary. The liabilities recognized as a result of consolidating a VIE do not represent additional claims on
our general assets; rather, they represent claims against the specific assets of the consolidated VIE. Conversely, assets
recognized as a result of consolidating a VIE do not represent additional assets that could be used to satisfy claims against
our general assets. Reflected in the June 30, 2009 and 2008 balance sheets are consolidated VIE assets of $1.9 million and
$1.9 million, respectively, which is comprised mainly of land and a building. VIE liabilities primarily consist of a mortgage
on that property in the amount of $1.7 million and $1.7 million at June 30, 2009 and 2008, respectively. This VIE was
initially consolidated by Cody, as Cody has been the primary beneficiary. Cody has then been consolidated within Lannett’s
financial statements since its acquisition in April 2007.
Revenue Recognition — The Company recognizes revenue when its products are shipped. At this point, title and risk of
loss have transferred to the customer and provisions for estimates, including rebates, promotional adjustments, price
adjustments, returns, chargebacks, and other potential adjustments are reasonably determinable. Accruals for these
provisions are presented in the consolidated financial statements as rebates and chargebacks payable and reductions to net
sales. The change in the reserves for various sales adjustments may not be proportionally equal to the change in sales because
of changes in both the product and the customer mix. Increased sales to wholesalers will generally require additional accruals
as they are the primary recipient of chargebacks and rebates. Incentives offered to secure sales vary from product to product.
Provisions for estimated rebates and promotional credits are estimated based upon contractual terms. Provisions for other
customer credits, such as price adjustments, returns, and chargebacks, require management to make subjective judgments on
customer mix. Unlike branded innovator drug companies, Lannett does not use information about product levels in
distribution channels from third-party sources, such as IMS Health and Wolters Kluwer, in estimating future returns and
other credits. Lannett calculates a chargeback/rebate rate based on contractual terms with its customers and applies this rate to
customer sales. The only variable is customer mix, and this assumption is based on historical data and sales expectations.
The chargeback/rebate reserve is reviewed on a monthly basis by management using several ratios and calculated metrics.
As we continue to obtain additional information about our historical experience for chargebacks, rebates and returns, we also
update our estimates of the required reserves.
Chargebacks — The provision for chargebacks is the most significant and complex estimate used in the recognition of
revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains, and
mail-order pharmacies. The Company also sells its products indirectly to independent pharmacies, managed care
organizations, hospitals, nursing homes, and group purchasing organizations, collectively referred to as “indirect customers.”
Lannett enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers
then independently select a wholesaler from which to actually purchase the products at these agreed-upon prices. Lannett
28
will provide credit to the wholesaler for the difference between the agreed-upon price with the indirect customer and the
wholesaler’s invoice price if the price sold to the indirect customer is lower than the direct price to the wholesaler. This
credit is called a chargeback. The provision for chargebacks is based on expected sell-through levels by the Company’s
wholesale customers to the indirect customers and estimated wholesaler inventory levels. As sales by the Company to the
large wholesale customers, such as Cardinal Health, AmerisourceBergen, and McKesson, increase, the reserve for
chargebacks will also generally increase. However, the size of the increase depends on the expected mix of product sales to
the indirect customers. The Company continually monitors the reserve for chargebacks and makes adjustments when
management believes that expected chargebacks on actual sales may differ from the amounts that were assumed in the
establishment of the chargeback reserves.
Rebates — Rebates are offered to the Company’s key chain drug store and wholesaler customers to promote customer
loyalty and increase product sales. These rebate programs provide customers with rebate credits upon attainment of pre-
established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive
programs offered to the customers. At the time of shipment, the Company estimates reserves for rebates and other
promotional credit programs based on the specific terms in each agreement. The reserve for rebates increases as sales to
rebate-eligible customers are recognized and decreases when actual rebate payments are made. However, since rebate
programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are
eligible to receive rebates.
Returns — Consistent with industry practice, the Company has a product returns policy that allows certain customers to
return product within a specified period prior to and subsequent to the product’s lot expiration date in exchange for a credit to
be applied to future purchases. The Company’s policy requires that the customer obtain pre-approval from the Company for
any qualifying return. The Company estimates its provision for returns based on historical experience, adjusted for any
changes in business practices or conditions that would cause management to believe that future product returns may differ
from those returns assumed in the establishment of reserves. Generally, the reserve for returns increases as sales increase and
decrease when credits are issued or payments are made for actual returns received. The reserve for returns is included in the
rebates, chargebacks and returns payable account on the balance sheet.
Other Adjustments — Other adjustments consist primarily of price adjustments, also known as “shelf stock adjustments,”
which are credits issued to reflect decreases in the selling prices of the Company’s products that customers have remaining in
their inventories at the time of a price reduction. Decreases in selling prices are discretionary decisions made by management
to reflect competitive market conditions. Amounts recorded for estimated shelf stock adjustments are based upon specified
terms with direct customers, estimated declines in market prices, and estimates of inventory held by customers. The
Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available.
Other adjustments are included in the rebates, chargebacks and returns payable account on the balance sheet. When
competitors enter the market for existing products, shelf stock adjustments may be issued to maintain price competitiveness.
The following tables identify the reserves for each major category of revenue allowance and a summary of the activity for
fiscal years 2009, 2008 and 2007. Unless we have specific information to indicate otherwise, actual credits issued in a given
year are assumed to be related to sales recorded in prior years based on the Company’s returns policy.
For the Year Ended June 30, 2009
Reserve Category
Reserve Balance as of June 30, 2008......
Chargebacks
$ 4,049,407
Rebates
$
632,314
Returns
$ 13,642,589
Other
$
2,107
Total
$ 18,326,417
Actual credits issued related to sales
recorded in prior fiscal years ..............
(3,954,794)
(632,314)
(12,853,342)
—
(17,440,450)
Reserves or (reversals) charged
during Fiscal 2009 related to
sales in prior fiscal years.....................
Reserves charged to net sales during
Fiscal 2009 related to sales
recorded in Fiscal 2009.......................
Actual credits issued related to sales
—
—
2,107
(2,107)
—
35,391,475
12,141,204
4,315,638
204,119
52,052,436
recorded in Fiscal 2009.......................
(29,396,286)
(9,603,458)
—
(204,119)
(39,203,863)
Reserve Balance as of June 30, 2009......
$ 6,089,802
$ 2,537,746
$ 5,106,992
$
—
$ 13,734,540
29
For the Year Ended June 30, 2008
Reserve Category
Reserve Balance as of June 30, 2007......
Chargebacks
$ 4,649,478
Rebates
Returns
Other
$
871,339
$
113,313
$
52,234
$
Total
5,686,364
Actual credits issued related to sales
recorded in prior fiscal years ..............
(4,556,488)
(1,741,804)
(4,909,659)
—
(11,207,951)
Reserves or (reversals) charged
during Fiscal 2008 related to
sales in prior fiscal years.....................
Reserves charged to net sales during
Fiscal 2008 related to sales
recorded in Fiscal 2008.......................
Actual credits issued related to sales
—
870,465
5,892,805
(50,000)
6,713,270
26,126,995
7,999,232
12,546,130
473,423
47,145,780
recorded in Fiscal 2008.......................
(22,170,578)
(7,366,918)
—
(473,550)
(30,011,046)
Reserve Balance as of June 30, 2008......
$ 4,049,407
$
632,314
$ 13,642,589
$
2,107
$ 18,326,417
For the Year Ended June 30, 2007
Reserve Category
Reserve Balance as of June 30, 2006......
Chargebacks
$ 10,137,400
Rebates
$ 2,183,100
Returns
$
416,000
$
Other
275,600
Total
$ 13,012,100
Actual credits issued related to sales
recorded in prior fiscal years ..............
(10,170,000)
(1,800,000)
(5,578,000)
(250,000)
(17,798,000)
Reserves or (reversals) charged
during Fiscal 2007 related to sales
in prior fiscal years .............................
Reserves charged to net sales during
Fiscal 2007 related to sales
recorded in Fiscal 2007.......................
Actual credits issued related to sales
—
(300,000)
3,572,313
—
3,272,313
28,034,000
9,562,000
1,703,000
1,044,800
40,343,800
recorded in Fiscal 2007.......................
(23,351,922)
(8,773,761)
—
(1,018,166)
(33,143,849)
Reserve Balance as of June 30, 2007......
$ 4,649,478
$
871,339
$
113,313
$
52,234
$
5,686,364
Reserve Activity 2009 vs. 2008
The total reserve for chargebacks, rebates, returns and other adjustments decreased from $18,326,417 at June 30, 2008 to
$13,734,540 at June 30, 2009. The decrease in the reserve balance was primarily the result of our decision to record during
the fourth quarter of Fiscal 2008 a $10,536,000 provision for the expected return of 100% of the shipments of Prenatal
Multivitamin. Our expectation that all of the product would be returned was based on our inability to have the product
specified as a brand equivalent, and information from our customers regarding their intentions to return the product.
Substantially all of these products were returned in Fiscal 2009. Partially offsetting this decrease was an increase primarily
due to an increase in sales volume in Fiscal 2009.
30
The increase in chargeback and rebate reserves between June 30, 2008 and June 30, 2009 was primarily due to an increase in
sales volume in 2009, as well as a change in our sales mix. The following tables compare the year-end reserve balances in
fiscal years 2009 and 2008 and the gross sales mix in Fiscal 2009 and Fiscal 2008.
Chargeback reserve..................................
Rebate reserve .........................................
Return reserve..........................................
Other reserve ...........................................
2009
6,089,802
2,537,746
5,106,992
—
13,734,540
$
$
%
Fiscal Year Ended June 30,
2008
4,049,407
632,314
13,642,589
2,107
18,326,417
44% $
19%
37%
0%
100% $
%
Chain drug stores .....................................
Mail Order ...............................................
Wholesalers .............................................
Reserve Activity 2008 vs. 2007
Fiscal Year ended June 30,
2008
2009
Fiscal Fourth Quarter
2009
2008
37%
4%
59%
100%
34%
4%
62%
100%
33 %
3 %
64 %
100 %
22%
3%
74%
0%
100%
35%
4%
61%
100%
The total reserve for chargebacks, rebates, returns and other adjustments increased from $5,686,364 at June 30, 2007 to
$18,326,417 at June 30, 2008. The increase in the reserve balance was primarily the result of our decision to record during
the fourth quarter of Fiscal 2008 a $10,536,000 provision for the expected return of 100% of the shipments of Prenatal
Multivitamin. Our expectation that all of the product would be returned was based on our inability to have the product
specified as a brand equivalent, and information from our customers regarding their intentions to return the product. Also
during Fiscal 2008 we increased our estimated returns reserve by approximately $3.0 million, based on an analysis of our
historical returns experience, the average lag time between sales and returns and our understanding of the buying patterns and
inventory practices of both our direct and indirect customers. This change in estimate incorporated new information that
has allowed us to better estimate the average length of time between product sales and returns. As this change resulted from
new information that has allowed us to better estimate the average length of time between product sales and returns, we
consider it to be a change in estimate as defined in SFAS 154: Accounting Changes and Error Corrections — A Replacement
of APB Opinion No. 20 and FASB Statement No. 3.
During Fiscal 2008, we also experienced an unanticipated increase in our returns compared to historical experience that
required us to record a provision of approximately $3.0 million in fiscal year 2008 for returns related to sales in prior years.
We believe, however, that this increase in returns was largely related to certain specific nonrecurring events.
The decline in chargeback and rebate reserves between June 30, 2007 and June 30, 2008 was due in part to a change in our
sales mix away from wholesalers and toward the chain drug stores as well as a decrease in inventory levels at wholesaler
distribution centers. The following tables compare the year-end reserve balances in Fiscal 2008 and Fiscal 2007 and the sales
mix in Fiscal 2008 and Fiscal 2007.
Chargeback reserve..................................
Rebate reserve .........................................
Return reserve..........................................
Other reserve ...........................................
2008
4,049,407
632,314
13,642,589
2,107
18,326,417
$
$
%
Fiscal Year Ended June 30,
2007
4,649,478
871,339
113,313
52,234
5,686,364
22% $
3%
74%
0%
100% $
%
Chain drug stores .....................................
Mail Order ...............................................
Wholesalers .............................................
Fiscal Year ended June 30,
2007
2008
Fiscal Fourth Quarter
2008
2007
24%
4%
72%
100%
35%
4%
61%
100%
34%
4%
62%
100%
31
82%
15%
2%
1%
100%
34%
4%
62%
100%
Accounts Receivable - The Company performs ongoing credit evaluations of its customers and adjusts credit limits based
upon payment history and the customer’s current credit worthiness, as determined by a review of current credit information.
The Company continuously monitors collections and payments from its customers and maintains a provision for estimated
credit losses based upon historical experience and any specific customer collection issues that have been identified. While
such credit losses have historically been within both the Company’s expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.
The Company also regularly monitors accounts receivable (“AR”) balances by reviewing both net and gross day’s sales
outstanding (“DSO”). Net DSO is calculated by dividing gross accounts receivable less the reserve for rebates, chargebacks,
returns and other adjustments by the average daily net sales for the period. Gross DSO shows the result of the same
calculation without regard to rebates, chargebacks, returns and other adjustments.
The Company monitors both net DSO and gross DSO as an overall check on collections and to assess the reasonableness of
the reserves. Gross DSO provides management with an understanding of the frequency of customer payments, and the ability
to process customer payments and deductions. The net DSO calculation provides management with an understanding of the
relationship of the AR balance net of the reserve liability compared to net sales after charges to the reserves during the
period. Standard payment terms offered to customers are consistent with industry practice at 60 days. Net eliminates the
effect of timing of processing, which is inherent in the gross DSO calculation.
The following table shows the results of these calculations for the fiscal years ended June 30, 2009, 2008 and 2007:
Fiscal Year Ended June 30,
Net DSO (in days) ...........................................
Gross DSO (in days)........................................
2009
55
53
2008
65
70
2007
72
74
The level of both net and gross DSO at June 30, 2009 is slightly lower than the Company’s expectation that DSO will be in
the 60 to 70 day range based on 60 day payment terms for most customers due to significantly higher average daily sales in
the fourth quarter of Fiscal 2009 which were collected by June 30, 2009.
Inventories - The Company values its inventory at the lower of cost (determined by the first-in, first-out method) or market,
regularly reviews inventory quantities on hand, and records a provision for excess and obsolete inventory based primarily on
estimated forecasts of product demand and production requirements. The Company’s estimates of future product demand
may prove to be inaccurate, in which case it may have understated or overstated the provision required for excess and
obsolete inventory. In the future, if the Company’s inventory is determined to be overvalued, the Company would be required
to recognize such costs in cost of goods sold at the time of such determination. Likewise, if inventory is determined to be
undervalued, the Company may have recognized excess cost of goods sold in previous periods and would be required to
recognize such additional operating income at the time of sale.
New Accounting Pronouncements -
In June 2007, the Emerging Issues Task Force (“EITF”) reached a final consensus on EITF Issue No. 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities”
(“EITF 07-3”). EITF 07-3 was effective for our fiscal year beginning July 1, 2008. EITF 07-3 requires non-refundable
advance payments for future research and development activities to be capitalized until the goods have been delivered or
related services have been performed. As the guidance in EITF 07-03 is consistent with our existing policy, EITF 07-03 did
not have any impact on our financial statements or related disclosures.
In November 2007, the EITF reached a final consensus on EITF Issue No. 07-1, “Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property” (“EITF 07-1”). EITF 07-1 will be
effective for our fiscal year beginning July 1, 2009 and interim periods within that fiscal year. Adoption is on a retrospective
basis to all prior periods presented for all collaborative arrangements existing as of the effective date. We are currently
evaluating the impact of adopting EITF 07-1 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“FAS 141(R)”). FAS 141(R) significantly
changes the accounting for business combinations in a number of areas including the treatment of contingent consideration,
contingencies, acquisition costs, in-process research and development and restructuring costs. In addition, under FAS 141(R),
changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the
measurement period will impact income tax expense. In April 2009, FAS 141(R) was amended by FASB Staff Position FAS
141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
32
Contingencies,” (“FSP FAS 141(R)-1”) to address application issues regarding the accounting and disclosure provisions for
contingencies. FSP FAS 141(R) amends FAS 141R by replacing the guidance on the initial recognition and measurement of
assets and liabilities arising from contingencies acquired or assumed in a business combination. FSP FAS 141(R)-1 also
amends FAS 141R’s subsequent accounting guidance for contingent assets and liabilities recognized at the acquisition date
and amends the disclosure requirements for contingencies. FAS 141(R) and FSP FAS 141(R)-1 apply prospectively to
business combinations for which the acquisition date is on or after the beginning of the fiscal year beginning July 1, 2009.
Early application is not permitted. The effect of these standards on our consolidated financial statements will depend on the
nature and terms of any business combinations that occur after the effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”
(“FAS 160”). FAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the
noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary
that do not result in deconsolidation. FAS 160 is effective for our fiscal year beginning July 1, 2009. We do not expect the
adoption of FAS 160 to have a significant impact on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”
(“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and
Other Intangible Assets”. The FSP is intended to improve the consistency between the useful life of a recognized intangible
asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FAS
141(R) and other U.S. generally accepted accounting principles. The new standard is effective for our financial statements
issued for fiscal years and interim periods beginning July 1, 2009. We do not expect the adoption of FSP FAS 142-3 to have
a significant impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,” to make the guidance on other-than-temporary impairments of debt securities more
operational and improve the financial statement disclosures related to other-than-temporary impairments for debt and equity
securities. The FSP clarifies the interaction of the factors that should be considered when determining whether a debt security
is other-than-temporarily impaired. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. If an entity adopts either FSP FAS
157-4 or FSP FAS 107-1 and APB 28-1 for periods ending after March 15, 2009, then it must adopt this FSP at the same
time. The Company adopted FSP FAS 115-2 and FAS 124-2 effective June 30, 2009. The adoption of these standards did not
have a significant impact on our consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“FAS 165”). FAS 165 defines the period after the
balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements. The statement is effective for interim and annual periods
ending after June 15, 2009. The Company adopted FAS 165 effective with its financial statements as of and for the year
ended June 30, 2009. In preparing these financial statements, the Company has evaluated events and transactions for potential
recognition or disclosure through September 28, 2009, the date the financial statements were issued.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS 167”). FAS 167
amends Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable
interest or interests give it a controlling financial interest in a variable interest entity. It also amends Interpretation 46(R) to
require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. The statement
is effective for the annual reporting period that begins after November 15, 2009. We do not expect the adoption of FAS 167
to have a significant impact on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of
Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”), which establishes the
FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be
applied in the preparation of financial statements in conformity with generally accepted accounting principles. SFAS 168
explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal
securities laws as authoritative GAAP for SEC registrants. SFAS 168 will become effective in the first quarter of fiscal year
2010 and will not have a material impact on the Company’s consolidated financial statements.
33
Results of Operations — Fiscal 2009 compared to Fiscal 2008
Net sales increased 64% from $72,403,283 in Fiscal 2008 to $119,002,215 in Fiscal 2009. The increase was partly due to
sales of approximately $12,569,000 of our Prenatal vitamins during Fiscal 2009 which was the first year that the Company
has offered this product. In addition to the sales of the Prenatal vitamins, the following factors contributed to the
$46,598,932 increase in sales:
Medical indication
Migraine Headache...............................................................................................
Antibiotics ............................................................................................................
Epilepsy ................................................................................................................
Heart Failure .........................................................................................................
Thyroid .................................................................................................................
Sales volume
change %
Sales price
change %
(3 )%
51 %
2 %
159 %
28 %
(4)%
(43)%
(53)%
36%
(3)%
The increase in product sales can be attributed primarily to three products. Sales of drugs for the treatment of congestive
heart failure increased by approximately $18,847,000 for Fiscal 2009 compared to Fiscal 2008 due to a product recall by
several of our major competitors. For Fiscal 2009, the Company had sales of approximately $12,569,000 of the Prenatal
vitamins, which was the first year the Company offered this product. Sales of drugs used in the treatment of thyroid
deficiency increased by approximately $9,311,000. The main reason for this increase was due to an increase in sales to one
large existing retail chain customer along with the pick up of several new customers at our existing prices.
The Company expects to continue increasing the number of products available for sale to its customers, which will require
additional FDA approvals. The Company’s receipt of several approvals by the FDA to offer new products has resulted in
more sales of new products in Fiscal 2009 compared to Fiscal 2008.
The Company sells its products to customers in various categories. The table below presents the Company’s net sales to each
category.
Customer Category
Fiscal 2009 Net Sales
Fiscal 2008 Net Sales
Wholesaler/Distributor ...................................................................
$53.8 million
$30.5 million
Retail Chain ....................................................................................
$59.0 million
$37.1 million
Mail-Order Pharmacy .....................................................................
$5.8 million
$4.5 million
Private Label...................................................................................
$0.4 million
$0.3 million
Total ...............................................................................................
$119.0 million
$72.4 million
The sales to all customer categories except private label increased significantly as a result of an increase in the demand for
products for which the Company is the major supplier and also an increase in the number of products available for sale.
Cost of sales increased 31%, from $56,102,212 in Fiscal 2008 to $73,757,746 in Fiscal 2009. The increase reflected the
impact of the 64% increase in net sales as well as the overall fixed nature of some production costs.
Amortization expense primarily relates to the JSP Distribution Agreement. For the remaining five years of the JSP
Distribution Agreement, the Company will incur annual amortization expense of approximately $1,785,000.
Gross profit as a percent of net sales increased to 38% in Fiscal 2009 from 23% in Fiscal 2008, due to strong profit margins
on the new Prenatal vitamin, increased margins for our congestive heart failure medication, and the overall fixed nature of
some production costs versus the 64% increase in revenues. While the Company is continuously striving to keep product
costs low, there can be no guarantee that profit margins will not decline in future periods due to pricing pressure from
competitors and costs of producing or purchasing new drugs. Changes in the product mix may also occur which could affect
gross profit as a percent of sales in future periods.
Research and development (“R&D”) expenses increased 63% to $8,427,135 in Fiscal 2009 from $5,172,715 in Fiscal 2008.
The increase was primarily due to a increase in the production of drugs in development and preparation for submission to the
FDA. The Company expenses all production costs as R&D until the drug is approved by the FDA. R&D expenses may
fluctuate from period to period, based on planned submissions to the FDA.
34
Selling, general and administrative expenses increased 57% to $26,059,104 in Fiscal 2009 from $16,552,859 in Fiscal 2008.
The increase is primarily due to litigation expenses related to the patent challenge with KV Pharmaceuticals of approximately
$6,537,000, incentive compensation costs totaling approximately $4,200,000, and severance costs related to the departure of
the Company’s former chief financial officer of approximately $452,000. While the Company is focused on controlling
costs, increases in personnel costs may have an ongoing and longer lasting impact on the administrative cost structure. Other
costs are being incurred to facilitate improvements in the Company’s infrastructure. These costs are expected to be
temporary investments in the future of the Company and may not continue at the same level.
Interest expense decreased to $321,751 in Fiscal 2009 from $383,267 in Fiscal 2008, due to lower levels of long term debt.
Interest income increased to $209,188 in Fiscal 2009 from $170,040 in Fiscal 2008 due to interest income received on a large
income tax refund as well as interest earned on a higher level of investment securities.
The Company recorded income tax expense of $4,090,716 in Fiscal 2009 on a pretax income after minority interest of
$10,624,961 as compared to an income tax benefit of $3,376,011 in Fiscal 2008 on a pretax loss after minority interest of
$5,694,070. The inclusion of nondeductible expenses, state income taxes, the effects of federal income tax credits, and a
reduction in the valuation allowance for deferred tax assets were the principal reasons for the effective tax rate of 38.3% in
fiscal year 2009.
At June 30, 2009, the Company has recognized a net deferred tax asset of $18,054,474. The net deferred tax asset is net of a
valuation allowance of $2,097,175 that is related to the Cody notes receivable impairment incurred in conjunction with the
acquisition of Cody Labs. The Company has provided for the valuation allowance related to the notes receivable impairment
as this benefit will be realized only upon the disposition of Cody Labs. As the Company has no current plans to dispose of its
holdings in Cody, a full valuation allowance has been established. The Company expects the remaining net deferred tax
assets to be fully realizable based on the Company’s history and future expectations of generating sufficient taxable income.
The Company reported net income of $6,534,245 for Fiscal 2009, or $0.27 basic and diluted earnings per share, compared to
a net loss of $2,318,059 for Fiscal 2008, or $0.10 basic and diluted loss per share.
Results of Operations — Fiscal 2008 compared to Fiscal 2007
Net sales decreased 12% from $82,577,591 in Fiscal 2007 to $72,403,283 in Fiscal 2008. The decrease reflected increased
competition in the generic drug market which adversely affected Lannett’s sales of certain antibacterial drugs as well as sales
of drugs used in the treatment of epilepsy. Prices of antibiotic drugs declined 34% from prior year levels due to increased
competition, which partly offset higher sales volumes. Prices of Lannett’s heart failure drugs increased slightly from prior
year levels and sales volumes increased 49% from the prior year level, largely due to the impact of a product recall of one of
Lannett’s competitors during the quarter ended June 30, 2008. Thyroid medication, our largest product in terms of sales,
showed a continued growth in both volume and in price. The following table presents the percentage changes in process and
volumes for the Company’s products, by medical indication.
Medical indication
Migraine Headache...............................................................................................
Antibiotics ............................................................................................................
Epilepsy ................................................................................................................
Heart Failure .........................................................................................................
Thyroid .................................................................................................................
Sales volume
change %
Sales price
change %
18 %
136 %
(20 )%
49 %
5 %
(17)%
(34)%
(36)%
8%
4%
We plan to continue to increase the number of products available for sale to our customers, although FDA approvals are
needed to achieve this growth.
The Company sells its products to customers in various categories. The table below presents the Company’s net sales to each
category.
Customer Category
Fiscal 2008 Net
Sales
Fiscal 2007 Net
Sales
Wholesaler/Distributor ..........................................
$30.5 million
$49.4 million
Retail Chain ...........................................................
$37.1 million
$27.9 million
Mail-Order Pharmacy ............................................
$4.5 million
$5.1 million
Private Label..........................................................
$0.3 million
$0.2 million
Total.......................................................................
$72.4 million
$82.6 million
35
Wholesaler/Distributor sales decreased as a result of one of Lannett’s major wholesalers withdrawing from the one-stop
program which used Lannett as a first call supplier. Retail chain sales increased significantly as a result of an increase in the
number of products available for sale and a significant increase in the number of retail stores of one of our customers. Mail
order pharmacy sales decreased from the prior year due mainly to the market shift toward retail chains at the expense of mail
order pharmacy sales. Private label sales increased slightly from the prior year, although this channel is not expected to
contribute significantly to Lannett’s sales in the future as we have decided not to actively pursue additional private label
customers because of the lower margins for this business.
In 2006, prior to its acquisition by Lannett, Cody received an FDA warning letter, and stopped operations to remediate their
facility. This remediation occurred from August 2006 through February 2007. Upon completion of the remediation, Cody
requested an FDA inspection. Subsequent FDA inspection resulted in relatively minor Form 483 observations, which have
since been remediated. In March 2008, Cody Labs recommenced manufacturing operations after management concluded that
certain regulatory deficiencies identified by the FDA prior to Lannett’s acquisition were substantially remediated.
Cost of sales decreased 8%, from $61,152,604 in Fiscal 2007 to $56,102,212 in Fiscal 2008. The decrease reflected the 12%
decrease in net sales, partly offset by the impact of normal inflationary pressures on labor and material costs and expenses
related to the Company’s prenatal vitamin with mineral product.
Amortization expense relate to the JSP Distribution Agreement. For the remaining six years of the JSP Distribution
Agreement, the Company will incur annual amortization expense of approximately $1,785,000.
Gross profit as a percent of net sales declined to 23% in Fiscal 2008 from 26% in Fiscal 2007, due in part to expenses related
to the prenatal multivitamin with mineral product, and price erosion for antibiotics, heart failure products and epilepsy
medications. While the Company is continuously striving to keep product costs low, there can be no guarantee that profit
margins will not decline in future periods due to pricing pressure from competitors and costs of producing or purchasing new
drugs. Changes in the product mix may also occur which could affect gross profit as a percent of sales in future periods.
R&D expenses decreased 31% to $5,172,715 in Fiscal 2008 from $7,459,432 in Fiscal 2007. The decrease was primarily due
to a decrease in the production of drugs in development and preparation for submission to the FDA. The Company expenses
all production costs as R&D until the drug is approved by the FDA. R&D expenses may fluctuate from period to period,
based on planned submissions to the FDA.
Selling, general and administrative expenses increased 36% to $16,552,859 in Fiscal 2008 from $12,161,187 in Fiscal 2007,
primarily due to the inclusion of a full year of general and administrative expenses of Cody, which was acquired in the fourth
quarter of Fiscal 2007. The remaining increase in expense reflects increased legal expenses and higher professional fees.
While the Company is focused on controlling costs, increases in personnel costs may have an ongoing impact on the
administrative cost structure. Other costs are being incurred to facilitate improvements in the Company’s infrastructure.
On March 31, 2007, the Company recorded an impairment charge of $7,775,890 on a note receivable owed by Cody. On
April 10, 2007, it was decided to complete the acquisition of Cody by forgiving the remaining balance of the receivable. At
that point, Cody owed Lannett approximately $11.7 million, in the form of notes receivable and prepayments on products and
services. The remaining value of the amounts owed, or $4.4 million was approximately the net asset value of Cody at the
time of the acquisition.
The Note was determined to be uncollectible due to FDA reviews and operational delays by Cody to return to operation. In
2006, Cody received an FDA warning letter, and stopped operations to remediate their facility. This remediation occurred
from the months of August 2006 through February 2007. Upon completion of the remediation, Cody requested a future FDA
inspection. The timing of that inspection was, at that time, unknown, and Cody management was unable to conclude as to
the outcome of that inspection. With such a limited outlook, Cody management suggested that the full note was not likely to
be satisfied, and Lannett management was not willing to loan further funds to Cody to keep it in operation. Both companies
agreed to complete the acquisition for the value of the Cody’s net assets. The uncollected portion of debt was extinguished
prior to the acquisition.
Upon acquisition, the fair value of Cody’s assets was added to the Company’s Consolidated Balance Sheets, and the results
of operations were included in the Consolidated Statements of Operations from the acquisition date forward. Due to the fact
that most of the value of Cody consisted of physical assets that were recently acquired as part of the remediation, the fair
value closely approximated the book value of net assets. In accordance with the Financial Accounting Standards Board
Statement No. 141, “Business Combinations,” measurement is based on the fair value of the consideration given or the fair
value of the asset (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable.
36
Interest expense increased to $383,267 in Fiscal 2008 from $273,633 in Fiscal 2007, reflecting full year impact of the interest
expense on a mortgage held by Cody LCI Realty LLC. Effective with the acquisition of Cody Labs on April 10, 2007, the
Company consolidated the operations of Cody LCI Realty LLC, a variable interest entity that had been fully consolidated by
Cody Labs. See note 13 to our Consolidated Financial Statements.
The Company recorded an income tax benefit of $3,376,011 in Fiscal 2008 on a pretax loss after minority interest of
$5,694,070 as compared to tax expense of $1,007,929 in Fiscal 2007 on a pretax loss of $5,921,079. The inclusion of state
income taxes, federal income tax credits, and a reduction in the valuation allowance for deferred tax assets were the principal
reasons for the effective tax rate of 59.3% in fiscal 2008.
At June 30, 2008, the Company has recognized a net deferred tax asset of $21,198,706. The net deferred tax asset is net of a
valuation allowance of $2,314,498 for the specific total tax asset of $2,106,798 related to the Cody notes receivable
impairment incurred in conjunction with the acquisition of Cody Labs and the $207,700 tax benefit associated with the state
income tax net operating loss carryforwards. The Company has provided for the valuation allowance related to the notes
receivable impairment as this benefit will be realized only upon the disposition of Cody Labs. As the Company has no
current plans to dispose of its holdings in Cody, a full valuation allowance has been established. The valuation allowance
related to the tax benefit of the state operating loss carryforwards has been established as the Company does not expect these
carryforwards to be utilized due to the Company’s tax planning strategies at the state and local levels. The Company expects
the remaining net deferred tax assets to be fully realizable based on the Company’s history and future expectations of
generating sufficient taxable income.
The Company reported a net loss of $2,318,059 for Fiscal 2008, or $0.10 basic and diluted loss per share, compared to net
loss of $6,929,008 for Fiscal 2007, or $0.29 basic and diluted loss per share.
Liquidity and Capital Resources
The Company has historically financed its operations with cash flow generated from operations, supplemented with
borrowings from various government agencies and financial institutions. At June 30, 2009, working capital was
$38,632,170, as compared to $25,944,623 at June 30, 2008, an increase of $12,687,547.
Net cash provided by operating activities of $20,572,848 for the year ended June 30, 2009 reflected net income of $6,534,245
after adjusting for non-cash items of $9,404,639, as well as cash provided from changes in operating assets and liabilities of
$4,633,964. Significant changes in operating assets and liabilities are comprised of:
1.
2.
3.
4.
5.
6.
An increase in trade accounts receivable of $5,548,253 primarily as a result of increased sales in Fiscal 2009,
offset by the collection of approximately $10,545,000 of receivables outstanding at June 30, 2008 related to
sales of multivitamins for which related reserves were accrued subsequent to collection. The change in the
accounts receivable balance from June 30, 2008 to June 30, 2009 includes a non-cash decrease of
approximately $9,717,000 related to the issuance of credits for the returns of the multivitamin product received
by the Company through June 30, 2009.
An increase in inventories of $4,578,103 due to increased stocking levels at both Lannett and Cody Labs for
several products as of June 30, 2009 that are being carried in order to respond to the increased order volume we
are currently experiencing.
An increase in income taxes payable of $711,073 related to Fiscal 2009 taxable income as well as the Fiscal
2009 receipt of prior year overpayments and credit refund claims totaling $1,598,937 which were reflected as
prepaid taxes at June 30, 2008.
An increase in accounts payable of $3,719,696 due to the timing of payments at the end of the month.
An increase in rebates, chargebacks and returns payable of $5,125,610 primarily associated with the increase in
Fiscal 2009 sales offset by a non-cash decrease of approximately $9,717,000 related to the issuance of credits
for the returns of the multivitamin product received by the Company through June 30, 2009.
An increase in accrued payroll and payroll related costs of $4,505,949 primarily related to Fiscal 2009 accrued
incentive compensation costs totaling approximately $4,200,000.
Net cash used in investing activities of $173,576 for the year ended June 30, 2009 reflected the purchase of property, plant
and equipment of $1,604,114, partially offset by $1,429,038 of net proceeds related to the sale of the Company’s marketable
securities.
37
Net cash used in financing activities for the year ended June 30, 2009 was $823,528 primarily due to scheduled debt
repayments of $840,066. Proceeds from the issuance of stock of $160,766 were partially offset by the purchase of treasury
stock and repurchase of stock options totaling $20,228 and $124,000, respectively.
The Company has entered into agreements with various government agencies and financial institutions to provide additional
cash to help finance the Company’s operations. These borrowing arrangements as of June 30, 2009 are as follows:
The Company had a $3,000,000 line of credit from Wachovia Bank, N.A.(“Wachovia”) that bears interest at the prime
interest rate less 0.25% (3% at June 30, 2009). The Company had $3,000,000 available under this line of credit at June 30,
2009. The line of credit was renewed and extended to November 30, 2009.
The Company borrowed $4,500,000 from the Philadelphia Industrial Development Corporation (“PIDC”). The Company will
pay a bi-annual interest payment at a rate equal to two and one-half percent per annum. The outstanding principal balance
shall be due and payable 60 months from January 1, 2006.
The Company borrowed $1,250,000 through the Pennsylvania Industrial Development Authority (“PIDA”). The Company is
required to make equal payments each month for 180 months starting February 1, 2006 with interest of two and three-quarter
percent per annum. The PIDA Loan has $1,002,607 outstanding as of June 30, 2009 with $75,017 currently due.
The Company borrowed $500,000 from the Pennsylvania Department of Community and Economic Development Machinery
and Equipment Loan Fund. The Company is required to make equal payments for 60 months starting May 1, 2006 with
interest of two and three quarter percent per annum. As of June 30, 2009, $182,831 is outstanding and $103,100 is currently
due.
In April 1999, the Company entered into a loan agreement with the Philadelphia Authority for Industrial Development (the
“Authority” or “PAID”), to finance future construction and growth projects of the Company. The Authority issued
$3,700,000 in tax-exempt variable rate demand and fixed rate revenue bonds to provide the funds to finance such growth
projects pursuant to a trust indenture (“the Trust Indenture”). A portion of the Company’s proceeds from the bonds was used
to pay for bond issuance costs of approximately $170,000. The Trust Indenture requires that the Company repay the
Authority loan through installment payments beginning in May 2003 and continuing through May 2014, the year the bonds
mature. The bonds bear interest at the floating variable rate determined by the organization responsible for selling the bonds
(the “remarketing agent”). The interest rate fluctuates on a weekly basis. The effective interest rate at June 30, 2009 was
0.62%. At June 30, 2009, the Company has $680,000 outstanding on the Authority loan, of which $125,000 is classified as
currently due. The remainder is classified as a long-term liability. In April 1999, an irrevocable letter of credit of $3,770,000
was issued by Wachovia to secure payment of the Authority Loan and a portion of the related accrued interest. At June 30,
2009, no portion of the letter of credit has been utilized.
The Company entered into agreements (the “2003 Loan Financing”) with Wachovia to finance the purchase of the Torresdale
Avenue facility, the renovation and setup of the building, and other anticipated capital expenditures. The Company, as part
of the 2003 Loan Financing agreement, is required to make equal payments of principal and interest. The only portion of the
loan that remains outstanding at June 30, 2009 was the Equipment Loan which consists of a term loan with a term of five
years and had an outstanding balance of $80,130, all of which is classified as current. The terms of the Equipment loan
require that the Company meet certain financial covenants and reporting standards, including the attainment of specific
financial liquidity and net worth ratios. As of June 30, 2009, the Company was in compliance with all financial covenants
under this agreement.
The Company is required to maintain and comply with a debt service coverage ratio of not less than two to one (to be
measured quarterly). Debt service coverage is defined as the ratio of earnings before interest, taxes, depreciation and
amortization (EBITDA) to the sum of interest expenses plus scheduled current maturities of long-term debt and current
capitalized lease obligations. The terms of the agreement require the Company to at all times maintain deposit balances in
excess of $3,500,000 with the Wachovia. Additionally, the Company is required pay to Wachovia an availability fee equal to
0.50% per annum calculated daily, on the available but unused balance of the line of credit instead of the previous 0.25% per
annum rate. The financing facilities under the 2003 Loan Financing bear interest at a variable rate equal to the LIBOR rate
plus 150 basis points. As of June 30, 2009, the effective interest rate for the 2003 Loan Financing (of which only the
Equipment loan remains) was 1.81%.
The Company has executed Security Agreements with Wachovia, PIDA and PIDC in which the Company has pledged
substantially all of its assets to collateralize the amounts due.
38
Also as a result of the acquisition of Cody, the Company consolidates Cody LCI Realty, LLC, a variable interest entity
(“VIE”), for which Cody Labs is the primary beneficiary. See note 13 to our Consolidated Financial Statements for
“Consolidation of Variable Interest Entities.” A mortgage loan with First National Bank of Cody related to the purchase of
land and building by the VIE has also been consolidated in the Company’s consolidated balance sheets. The mortgage has
approximately 17 years of principal and interest payments remaining, with monthly payments of $14,782, at a fixed rate of
7.5%, to be made through June 2026. As of June 30, 2009, the Company has $1,693,200 outstanding under the mortgage
loan, of which $52,139 is classified as currently due. The mortgage is collateralized by the land and building.
In July 2004, the Company received $500,000 of grant funding from the Commonwealth of Pennsylvania, acting through the
Department of Community and Economic Development. The grant funding program requires the Company to use the funds
for machinery and equipment located at their Pennsylvania locations, hire an additional 100 full-time employees by June 30,
2006, operate its Pennsylvania locations a minimum of five years and meet certain matching investment requirements. If the
Company fails to comply with any of the requirements above, the Company would be liable to repay the full amount of the
grant funding ($500,000). The Company has recorded the unearned grant funds as a liability until the Company complies
with all of the requirements of the grant funding program. As of June 30, 2009, the Company has had preliminary discussions
with the Commonwealth of Pennsylvania to determine whether it will be required to repay any of the funds provided under
the grant funding program. Based on information available at June 30, 2009, the Company has recorded the grant funding as
a long-term liability under the caption of Unearned Grant Funds.
The following table represents annual contractual obligations as of June 30, 2009:
Total
Less than 1
year
1-3 years
3-5 years
years
More than 5
Long-Term Debt .....................
Operating Leases ....................
Purchase Obligations ..............
Interest on Obligations............
Total........................................
$
8,138,768
217,551
105,752,500
1,649,684
$ 115,758,503
$
$
435,386
133,675
20,572,500
274,907
21,416,468
$
$
5,117,119
83,876
43,930,000
346,295
49,477,290
$
$
579,694
—
41,250,000
261,682
42,091,376
$
$
2,006,569
—
—
766,800
2,773,369
Purchase obligations primarily relate to the JSP Distribution Agreement. See note 18 to our Consolidated Financial
Statements for more information on the terms, conditions and financial impact of the JSP Distribution Agreement.
Prospects for the Future
The Company has several generic products under development. These products are all orally-administered, topical and
parenteral products designed to be generic equivalents to brand named innovator drugs. The Company’s developmental drug
products are intended to treat a diverse range of indications. As one of the oldest generic drug manufacturers in the country,
formed in 1942, Lannett currently owns several ANDAs for products which it does not manufacture and market. These
ANDAs are dormant on the Company’s records. Occasionally, the Company reviews such ANDAs to determine if the
market potential for any of these older drugs has recently changed, so as to make it attractive for Lannett to reconsider
manufacturing and selling it. If the Company makes the determination to introduce one of these products into the consumer
marketplace, it must review the ANDA and related documentation to ensure that the approved product specifications,
formulation and other factors meet current FDA requirements for the marketing of that drug. The Company would then
redevelop the product and submit it to the FDA for supplemental approval. The FDA’s approval process for ANDA
supplements is similar to that of a new ANDA. Generally, in these situations, the Company must file a supplement to the
FDA for the applicable ANDA, informing the FDA of any significant changes in the manufacturing process, the formulation,
or the raw material supplier of the previously-approved ANDA.
A majority of the products in development represent either previously approved ANDAs that the Company is planning to
reintroduce (ANDA supplements), or new formulations (new ANDAs). The products under development are at various
stages in the development cycle—formulation, scale-up, and/or clinical testing. Depending on the complexity of the active
ingredient’s chemical characteristics, the cost of the raw material, the FDA-mandated requirement of bioequivalence studies,
the cost of such studies and other developmental factors, the cost to develop a new generic product varies and can range from
$100,000 to $1.5 million. Some of Lannett’s developmental products will require bioequivalence studies, while others will
not—depending on the FDA’s Orange Book classification. Since the Company has no control over the FDA review process,
management is unable to anticipate whether or when it will be able to begin producing and shipping additional products.
39
In addition to the efforts of its internal product development group, Lannett has contracted with several outside firms for the
formulation and development of several new generic drug products. These outsourced R&D products are at various stages in
the development cycle — formulation, analytical method development and testing and manufacturing scale-up. These
products are orally-administered solid dosage products, topical or parenterals intended to treat a diverse range of medical
indications. We intend to ultimately transfer the formulation technology and manufacturing process for all of these R&D
products to our own commercial manufacturing sites. The Company initiated these outsourced R&D efforts to complement
the progress of its own internal R&D efforts.
Occasionally, the Company will work on developing a drug product that does not require FDA approval. Certain prescription
drugs do not require prior FDA approval before marketing. For instance, drugs listed as DESI drugs (Drug Efficacy Study
implementation) which are under evaluation by FDA, Grandfathered Drugs, and prescription multivitamin drugs. A generic
manufacturer may sell products which are chemically equivalent to innovator drugs, under FDA rules by simply performing
and internally documenting the normal research and development involved in bringing a new product to market. Under this
scenario, a generic company can forego the time required for FDA approval.
More specifically, certain products, marketed prior to the FDCA may be considered GRASE or Grandfathered. GRASE
products are those “old drugs that do not require prior approval from FDA in order to be marketed because they are generally
recognized as safe and effective based on published scientific literature.” Similarly, Grandfathered products are those which
“entered the market before the passage of the 1938 act or the 1962 amendments to the act.” Under the grandfather clause,
such a product is exempted from the “effectiveness requirements [of the act] if its composition and labeling have not changed
since 1962 and if, on the day before the 1962 amendments became effective, it was (1) used or sold commercially in the
United States, (2) not a new drug as defined by the act at that time, and (3) not covered by an effective application.”
The Company has entered supply and development agreements with certain international companies, including Wintac of
India, Orion Pharma of Finland, Azad Pharma AG and Swiss Caps of Switzerland, Pharma 2B (formerly Pharmaseed) of
Israel, as well as certain domestic companies, including Banner Pharmacaps, Cerovene and Inverness. The Company is
currently in negotiations on similar agreements with other international companies, through which Lannett will market and
distribute products manufactured by Lannett or by third parties. Lannett intends to use its strong customer relationships to
build its market share for such products, and increase future revenues and income.
The majority of the Company’s R&D projects are being developed in-house under Lannett’s direct supervision and with
Company personnel. Hence, the Company does not believe that its outside contracts for product development and
manufacturing supply are material in nature, nor is the Company substantially dependent on the services rendered by such
outside firms.
Lannett may increase its focus on certain specialty markets in the generic pharmaceutical industry. Such a focus is intended
to provide Lannett customers with increased product alternatives in categories with relatively few market participants. While
there is no guarantee that Lannett has the market expertise or financial resources necessary to succeed in such a market
specialty, management is confident that such future focus will be well received by Lannett customers and increase
shareholder value in the long run.
The Company plans to enhance relationships with strategic business partners, including providers of product development
research, raw materials, active pharmaceutical ingredients as well as finished goods. Management believes that mutually
beneficial strategic relationships in such areas, including potential financing arrangements, partnerships, joint ventures or
acquisitions, could allow for potential competitive advantages in the generic pharmaceutical market. The Company plans to
continue to explore such areas for potential opportunities to enhance shareholder value.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Report of the Independent Registered Public Accounting Firm filed as a part of
this Form 10-K are listed in the Exhibit Index filed herewith.
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
40
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We carried out an evaluation under the supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the
“Exchange Act”), as amended for financial reporting as of June 30, 2009. Based on that evaluation, our chief executive
officer and chief financial officer concluded that these controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported as specified in Securities and Exchange Commission rules and forms. There were no changes in
these controls or procedures identified in connection with the evaluation of such controls or procedures that occurred during
our last fiscal quarter, or in other factors that have materially affected, or are reasonably likely to materially affect these
controls or procedures.
Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods
specified in the rules and forms of the Securities and Exchange Commission. These disclosure controls and procedures
include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the
reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by,
or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors and
management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles and includes those policies and
procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of our management and board of
directors;
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2009. In making
this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, our management believes that, as of June 30, 2009, our internal control over financial reporting is
effective.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2009, there were no changes in the Company’s internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) that materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
41
Registered Public Accounting Firm Report on Internal Control over Financial Reporting
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that require only management’s report in this Annual Report.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
Directors and Executive Officers
The directors and executive officers of the Company are set forth below:
Directors:
William Farber
Ronald A. West
Arthur P. Bedrosian
Jeffrey Farber
Kenneth Sinclair
Albert Wertheimer
Myron Winkelman
Officers:
Age
78
75
63
49
63
67
71
Position
Chairman of the Board
Vice Chairman of the Board, Director
Director
Director
Director
Director
Director
Arthur P. Bedrosian
63
President and Chief Executive Officer
Keith R. Ruck
48
Interim Chief Financial Officer and Corporate Controller
Stephen Kovary
52
Vice President of Operations
William Schreck
60
Senior Vice President and General Manager
Kevin Smith
Ernest Sabo
49
Vice President of Sales and Marketing
61
Vice President of Regulatory Affairs and Chief Compliance
Officer
William Farber, R.Ph., was elected as Chairman of the Board of Directors in August 1991. From April 1993 to the end of
1993, Mr. Farber was the President and a director of Auburn Pharmaceutical Company. From 1990 through March 1993,
Mr. Farber served as Director of Purchasing for Major Pharmaceutical Corporation. From 1965 through 1990, Mr. Farber
was the Chief Executive Officer of Michigan Pharmacal Corporation. Mr. Farber is a registered pharmacist in the State of
Michigan.
42
Ronald A. West was elected a Director of the Company in January 2002. In September 2004, Mr. West was elected Vice
Chairman of the Board of Directors. Mr. West is currently a Director of Beecher Associates, an industrial real estate
investment company. Prior to this, from 1983 to 1987, Mr. West, member of the audit committee at Lannett, served as
Chairman and Chief Executive Officer of Dura Corporation, an original equipment manufacturer of automotive products and
other engineered equipment components. In 1987, Mr. West sold his ownership position in Dura Corporation, at which time
he retired from active management positions. Mr. West was employed at Dura Corporation since 1969. Prior to this, he
served in various financial management positions with TRW, Inc., Marlin Rockwell Corporation and National Machine
Products Group, a division of Standard Pressed Steel Company. Mr. West studied Business Administration at Michigan State
University and the University of Detroit.
Jeffrey Farber was elected a Director of the Company in May 2006. Jeffrey Farber joined the Company in August 2003 as
Secretary. For the past 13 years, Mr. Farber has been President and the owner of Auburn Pharmaceutical (“Auburn”), a
national generic pharmaceutical distributor. Prior to starting Auburn, Mr. Farber served in various positions at Major
Pharmaceutical (“Major”), where he was employed for over 15 years. At Major, Mr. Farber was involved in sales, purchasing
and eventually served as President of the mid-west division. Mr. Farber also spent time working at Major’s manufacturing
division — Vitarine Pharmaceuticals — where he served on its Board of Directors. Mr. Farber graduated from Western
Michigan University with a Bachelors of Science Degree in Business Administration and participated in the Pharmacy
Management Graduate Program at Long Island University. Mr. Farber is the son of William Farber, the Chairman of the
Board of Directors and the principal shareholder of the Company.
Kenneth Sinclair, Ph.D., was elected a Director of the Company in September 2005. Dr. Sinclair is currently Professor of
Accounting and Senior Advisor to the College of Business and Economics Dean at Lehigh University, where he began his
academic career in 1972. Dr. Sinclair has been recognized for his teaching innovation, held leadership positions with
professional accounting organizations and served on numerous academic and advisory committees. He has received a number
of awards and honors for teaching and service, and has researched and written on a myriad of subjects related to accounting.
Dr. Sinclair earned a Bachelor of Business Administration degree in Accounting, a Master of Science degree in accounting
and a Doctorate Degree in Business Administration from the University of Massachusetts.
Albert I. Wertheimer, Ph.D., was elected a Director of the Company in September 2004. Dr. Wertheimer has a long and
distinguished career in various aspects of pharmacy, health care, education and pharmaceutical research. Since 2000,
Dr. Wertheimer has been a professor at the School of Pharmacy at Temple University, and director of its Center for
Pharmaceutical Health Services Research. From 1997 to 2000, Dr. Wertheimer was Director of Outcomes Research and
Management at Merck & Co., Inc. In addition to his academic responsibilities, he is the author of 26 books and more than
380 journal articles. Dr. Wertheimer also provides consulting services to institutions in the pharmaceutical industry.
Dr. Wertheimer’s academic experience includes professorships and other faculty and administrative positions at several
educational institutions, including the Medical College of Virginia, St. Joseph’s University, Philadelphia College of
Pharmacy and Science and the University of Minnesota. Dr. Wertheimer’s previous professional experience includes
pharmacy services in commercial and non-profit environments. Professor Wertheimer is a licensed pharmacist in five states,
and is a member of several health associations, including the American Pharmacists Association and the American Public
Health Association. Dr. Wertheimer is the editor of the “Journal of Pharmaceutical Finance, Economic and Policy”; and he
has been on the editorial board of the Journal of Managed Pharmaceutical Care, Medical Care, and other healthcare journals.
Dr. Wertheimer has a Bachelor of Science Degree in Pharmacy from the University of Buffalo, a Master of Business
Administration from the State University of New York at Buffalo, a Doctorate from Purdue University and a Post Doctoral
Fellowship from the University of London, St. Thomas’ Medical School.
Myron Winkelman, R.Ph., was elected a Director of the Company in June 2003. Mr. Winkelman has significant career
experience in various aspects of pharmacy and health care. He is currently President of Winkelman Management Consulting
(“WMC”), which provides consulting services to both commercial and governmental clients. He has served in this position
since 1994. Mr. Winkelman has recently managed multi-state drug purchasing initiatives for both Medicaid and state
entities. Prior to creating WMC, he was a senior executive with ValueRx, a large pharmacy benefits manager, and served for
many years as a senior executive for the Revco, Rite Aid and Perry Drug chains. While at ValueRx, Mr. Winkelman served
on the Board of Directors of the Pharmaceutical Care Management Association. He belongs to a number of pharmacy
organizations, including the Academy of Managed Care Pharmacy and the Michigan Pharmacy Association. Mr. Winkelman
is a registered pharmacist and holds a Bachelor of Science Degree in Pharmacy from Wayne State University.
Arthur P. Bedrosian, J.D. was promoted to President of the Company in May 2002 and CEO in January of 2006. Prior to
this, he served as the Company’s Vice President of Business Development from January 2002 to April 2002. Mr. Bedrosian
was elected as a Director in February 2000 and served to January 2002. Mr. Bedrosian was re-elected a Director in
January 2006. Mr. Bedrosian has operated generic drug manufacturing, sales, and marketing businesses in the healthcare
43
industry for many years. Prior to joining the Company, from 1999 to 2001, Mr. Bedrosian served as President and Chief
Executive Officer of Trinity Laboratories, Inc., a medical device and drug manufacturer. Mr. Bedrosian also operated
Pharmaceutical Ventures Ltd, a healthcare consultancy, Pharmeral, Inc. a drug representation company selling generic drugs
and Interal Corporation, a computer consultancy to Fortune 100 companies. Mr. Bedrosian holds a Bachelor of Arts Degree
in Political Science from Queens College of the City University of New York and a Juris Doctorate from Newport University
in California.
Keith R. Ruck joined the Company in September 2008 as Corporate Controller. As of March 23, 2009, the Company named
Mr. Ruck Interim Chief Financial Officer. Mr. Ruck, a Certified Public Accountant (CPA), has more than 26 years of public
company financial management experience. Prior to joining Lannett, he served as Corporate Controller of Optium
Corporation from April 2007 to September 2008. From 2000 to 2007, he was Vice President - Finance of MAAX KSD
Corporation and from 1998 to 2000, he served as Vice President of Finance and Chief Financial Officer of Total
Containment, Inc. Mr. Ruck earned a bachelor of science degree in business administration and a master of finance degree
from LaSalle University.
Stephen Kovary joined the Company in September 2009 as Vice President of Operations. Prior to joining Lannett,
Mr. Kovary was the Vice President, Plant Manager for PF Laboratories, a division of Purdue Pharma, LP, since 2003.
Formerly, Mr. Kovary held senior level management positions at Pliva, Inc, Abbott Laboratories and Parke-Davis.
Mr. Kovary holds a Bachelor of Science in Pharmacy from the Rutgers University Ernest Mario School of Pharmacy and a
Masters in Business Administration in Management from Fairleigh Dickenson University. Mr. Kovary is a member of the
American and New Jersey Pharmaceutical Associations, the International Society of Pharmaceutical Engineers and the
Parenteral Drug Association. Mr. Kovary is a registered pharmacist in the State of New Jersey and a member of the Alumni
Association of the Rutgers University Ernest Mario School of Pharmacy.
William Schreck joined the Company in January 2003 as Materials Manager. In May 2004, he was promoted to Vice
President of Logistics. In August 2009, Mr. Schreck has been promoted to Senior Vice President and General Manager.
Prior to this, from 1999 to 2001, he served as Vice President of Operations at Nature’s Products, Inc., an international
nutritional and over-the-counter drug product manufacturing and distribution company; from 2001 to 2002 he served as an
independent consultant for various companies. Mr. Schreck’s prior experience also includes executive management positions
at Ivax Pharmaceuticals, Inc., a division of Ivax Corporation, Zenith-Goldline Laboratories and Rugby-Darby Group
Companies, Inc. Mr. Schreck has a Bachelor of Arts Degree from Hofstra University.
Kevin Smith joined the Company in January 2002 as Vice President of Sales and Marketing. Prior to this, from 2000 to
2001, he served as Director of National Accounts for Bi-Coastal Pharmaceutical, Inc., a pharmaceutical sales representation
company. Prior to this, from 1999 to 2000, he served as National Accounts Manager for Mova Laboratories Inc., a
pharmaceutical manufacturer. Prior to this, from 1991 to 1999, Mr. Smith served as National Sales Manager at Sidmak
Laboratories, a pharmaceutical manufacturer. Mr. Smith has extensive experience in the generic sales market, and brings to
the Company a vast network of customers, including retail chain pharmacies, wholesale distributors, mail-order wholesalers
and generic distributors. Mr. Smith has a Bachelor of Science Degree in Business Administration from Gettysburg College.
Ernest Sabo joined Lannett in March 2005 as Director of Quality Assurance. In May 2008, Mr. Sabo was promoted to Vice
President of Regulatory Affairs and Chief Compliance Officer. Prior to this, he served at Wyeth Pharmaceuticals as Manager
of QA Compliance from 2001 to 2003 and as Associate Director of QA Compliance from 2003 to 2005. Mr. Sabo held
former positions as Director of Validation, Quality Assurance, Quality Control and R&D at Delavau/Accucorp, Inc. from
1993 thru 2001. He has over 30 years experience in the pharmaceutical industry, his background spans from Quality
Assurance, Quality Control, Cleaning/Process Validation and Manufacturing turn-key operations. Mr. Sabo holds a Bachelor
of Arts in Biology from Trenton State College.
To the best of the Company’s knowledge, there have been no events under any bankruptcy act, no criminal proceedings and
no judgments or injunctions that are material to the evaluation of the ability or integrity of any director, executive officer, or
significant employee during the past five years.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors, officers, and persons who own more
than 10% of a registered class of the Company’s equity securities to file with the SEC reports of ownership and changes in
ownership of common stock and other equity securities of the Company. Officers, directors and greater-than-10%
stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
44
Based solely on review of the copies of such reports furnished to the Company or written representations that no other reports
were required, the Company believes that during Fiscal 2009, all filing requirements applicable to its officers, directors and
greater-than-10% beneficial owners under Section 16(a) of the Exchange Act were complied with, except for certain Form 4s
that were filed late related to certain stock option and restricted share grants in the current and prior years and except for
transactions for which no filings were made by Mr. Bedrosian with respect to trades made by a family member.
Code of Ethics and Financial Expert
The Company has adopted the Code of Professional Conduct (the “code of ethics”), a code of ethics that applies to the
Company’s Chief Executive Officer, Chief Financial Officer, and Corporate Controller, and other finance organization
employees. The code of ethics is publicly available on our website at www.lannett.com. If the Company makes any
substantive amendments to the finance code of ethics or grant any waiver, including any implicit waiver, from a provision of
the code to our Chief Executive Officer, Chief Financial Officer, or Corporate Controller, we will disclose the nature of such
amendment or waiver on our website or in a report on Form 8-K.
The Board of Directors has determined that Mr. Sinclair, current director of Lannett as well as current Professor of
Accounting and Senior Advisor to the College of Business and Economics Dean at Lehigh University, where he began his
academic career in 1972, is the audit committee financial expert as defined in section 3(a)(58) of the Exchange Act and the
related rules of the Commission.
ITEM 11.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to or earned by the named executive officers of the Company for
Fiscal 2009, Fiscal 2008 and Fiscal 2007.
Name and Principal
Position
(a)
Arthur P. Bedrosian..........................
President and Chief Executive
Officer
Brian Kearns (1) ...............................
Chief Financial Officer,
Treasurer
Keith R. Ruck (2) .............................
Interim Chief Financial Officer and
Corporate Controller
Bernard Sandiford (3).......................
Vice President of Operations
William Schreck ...............................
Senior Vice President and
General Manager
Kevin Smith......................................
Vice President of Sales and
Marketing
Fiscal
Year
(b)
Salary
(c)
Stock
Awards
Options
Awards
(e)
(f)
Non-equity
incentive plan
compensation
(g)
All Other
Compensation
(i)
Total
(j)
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
$
$
367,202
324,825
301,016
244,155
—
122,234
$
—
42,381
158,303
$
$
244,365
—
43,358
$
43,796
22,099
34,159
899,518
389,305
659,070
176,484
210,361
202,678
128,854
—
—
170,190
166,547
154,525
180,722
170,670
162,871
200,180
192,005
183,230
8,680
—
83,021
30,308
—
—
111,673
—
64,799
118,485
—
68,021
129,362
—
61,490
—
28,254
161,830
5,202
—
—
—
2,825
161,830
—
22,603
161,830
—
22,603
161,830
—
—
27,719
60,617
—
—
111,508
—
16,628
118,947
—
16,724
130,825
—
18,814
690,274
18,460
22,841
1,234
—
—
17,476
17,493
41,888
18,341
18,044
25,334
21,502
21,495
24,076
875,438
257,075
498,089
226,215
—
—
410,847
186,865
439,670
436,495
211,317
434,780
481,869
236,103
449,440
(1) Mr. Kearns resigned effective March 23, 2009. As part of his separation agreement, he will receive a total of $669,440.
See “Employment Agreements” section below.
(2) Mr. Ruck assumed the title of Interim Chief Financial Officer on March 23, 2009.
(3) Mr. Sandiford retired effective July 3, 2009
45
(i)
Supplemental All Other Compensation Table
The following table summarizes the components of column (i) of the Summary Compensation Table:
Name and Principal
Position
Fiscal
Year
Company
Match
Contributions
401(k) Plan
Pay in
Lieu of
Allowance Vacation
Auto
Housing
Allowance Insurances
Excess Life Termination
related
Total
Arthur P. Bedrosian ..........
President and Chief
Executive Officer
Brian Kearns.....................
Chief Financial Officer,
Treasurer
Keith R. Ruck ...................
Interim Chief Financial
Officer and Corporate
Controller
Bernard Sandiford.............
Vice President of
Operations
William Schreck ...............
Senior Vice President
And General Manager
Kevin Smith......................
Vice President of Sales
And Marketing
2009 $
8,823 $
13,500 $
20,993 $
— $
480 $
— $
43,796
2008
2007
8,195
10,935
13,500
13,265
—
9,540
2009
12,052
8,723
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
2009
2008
2007
7,590
12,222
1,182
—
—
6,676
6,693
9,212
7,114
6,872
9,382
7,905
7,889
9,309
10,800
10,559
—
—
—
10,800
10,800
10,601
10,800
10,800
10,589
13,500
13,500
13,188
—
—
—
—
—
—
—
—
11,258
—
—
5,095
—
—
1,486
—
—
—
—
—
—
—
—
—
—
10,817
—
—
—
—
—
—
404
419
59
70
60
52
—
—
—
—
—
427
372
268
97
106
93
—
—
22,099
34,159
669,440
690,274
—
—
—
—
—
—
—
—
—
—
—
—
—
—
18,460
22,841
1,234
—
—
17,476
17,493
41,888
18,341
18,044
25,334
21,502
21,495
24,076
Aggregated Options/SAR Exercises and Fiscal Year-end Options/SAR Values
GRANTS OF PLAN-BASED AWARDS
Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards
Target
($)
(d)
Maximum
($)
(e)
Threshold
($)
(c)
Name
(a)
Arthur P. Bedrosian .......
President and Chief
Executive Officer
Grant Date
(b)
9/18/2008
Brian Kearns ..................
Chief Financial Officer and
Treasurer
9/18/2008
Keith R. Ruck ................
Interim Chief Financial
Officer and Corporate
Controller
Bernard Sandiford..........
Vice President of
Operations
10/17/2008
9/18/2008
William Schreck ............
Vice President of Logistics
9/18/2008
Kevin Smith ...................
Vice President of Sales and
Marketing
9/18/2008
All Other
Stock
Awards:
Number of
Shares of
Stocks or
Units (#)
(i)
All Other
Option
Awards:
Number of
Securities
Underlying
Options (#)
(j)
Exercise
or Base
Price of
Option
Awards
($/sh)
(k)
Grant Date
Fair Value of
Stock and
Options
Awards
(i)
30,000 $
2.80 $
42,390
20,000 $
2.80 $
28,260
15,000 $
2.79 $
22,170
2,000 $
2.80 $
2,826
16,000 $
2.80 $
22,608
16,000 $
2.80 $
22,608
Estimated Future Payouts Under
Equity Incentive Plan Awards
Target
($)
(g)
Threshold
($)
(f)
Maximum
($)
(h)
46
Employment Agreements
The Company has entered into employment agreements with Arthur P. Bedrosian, President and Chief Executive Officer,
Kevin Smith, Vice President of Sales and Marketing, William Schreck, Senior Vice President and General Manager, Ernest
Sabo, Vice President of Regulatory Affairs and Chief Compliance Officer and Stephen Kovary, Vice President of
Operations. Each of the agreements provide for an annual base salary and eligibility to receive a bonus. The salary and
bonus amounts of these executives are determined by the Board of Directors. Additionally, these executives are eligible to
receive stock options, which are granted at the discretion of the Board of Directors, and in accordance with the Company’s
policies regarding stock option grants. Under the agreements, these executive employees may be terminated at any time with
or without cause, or by reason of death or disability. In certain termination situations, the Company is liable to pay severance
compensation to these executives of between 18 months and three years.
During the third quarter of Fiscal Year 2009, the Company’s Vice President of Finance, Treasurer, Secretary and Chief
Financial Officer resigned. As part of his separation agreement, the Company is obligated to pay to him approximately
$670,000 to settle any outstanding obligations from his employment agreement, including any salary, bonus, vacation, stock
options and medical benefits. Of this amount, $300,440 was paid in Fiscal 2009 with $165,000 designated for the payment of
pro rated bonus, and $11,440 was designated for the payment of accrued but unused paid time off. As part of the settlement,
$124,000 was designated as the portion of the settlement related to the repurchase of his outstanding stock options. The
Company therefore charged this amount to Additional Paid in Capital, as it represents the fair value of the options
repurchased on the repurchase date. Additional payments totaling $369,000 for severance and benefits will be paid in Fiscal
2010 and Fiscal 2011 pursuant to the separation agreement.
Compensation of Directors
DIRECTOR COMPENSATION
Name
(a)
Fees
Earned
($)
(b)
Stock
Awards
($)
(c)
Options
Awards
($)
(d)
Non-Equity
Incentive Plan
Compensation
($)
(e)
Change in
Pension Value
and Nonqualified
Deferred
Compensation
($)
(f)
All Other
Compensation
($)
(g)
Total
($)
(h)
William Farber..........
$ 3,000 $ 16,900 $
— $
— $
— $
— $
19,900
Ronald A. West.........
22,000
16,900
Jeffrey Farber............
9,000
16,900
Kenneth Sinclair .......
24,500
16,900
Albert Wertheimer ....
23,000
16,900
Myron Winkelman....
11,500
16,900
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
38,900
25,900
41,400
39,900
28,400
COMPENSATION DISCUSSION AND ANALYSIS
Overview of Our Compensation Program
A fundamental goal of our compensation program is to maximize stockholder value. In order to accomplish this goal, we
must attract and retain talented and capable executives, and we must provide those executives with incentives that motivate
and reward them for achieving Lannett’s short and longer-term goals. To this end, our executive compensation is guided by
the following key principles:
•
that executive compensation should depend upon group and individual performance factors;
that the interests of executives should be closely aligned with those of stockholders through equity-based
•
compensation; and
that compensation should be appropriate and fair in comparison to the compensation provided to similarly situated
•
executives within the pharmaceutical industry and within other publicly-traded companies similar in market
capitalization to Lannett.
47
Important to our compensation program are the decisions of, and guidance from, the Compensation Committee of our Board
of Directors. The Compensation Committee (which we refer to, for purposes of this analysis, as “the Committee”) is
composed entirely of directors who are independent of Lannett under the independence standards established by the
American Stock Exchange, the securities exchange where our common stock is traded. The Committee operates pursuant to a
written charter adopted by the Board. If you would like to review the Committee’s charter, it is available to any stockholder
who requests a copy from our Chief Financial Officer, at 9000 State Road, Philadelphia, Pennsylvania 19136.
The Committee has the authority and responsibility to establish and periodically review our executive compensation
principles, described above. Importantly, the Committee also has sole responsibility for approving the corporate goals and
objectives upon which the compensation of the chief executive officer (the “CEO”) is based, for evaluating the CEO’s
performance in light of these goals and objectives, and for determining the CEO’s compensation, including his equity-based
compensation.
The Committee also reviews and approves the recommendations of the CEO with regard to the compensation and benefits of
other executive officers. In accomplishing this responsibility, the Committee meets regularly with the CEO, approves cash
and equity incentive objectives of the executive officers, reviews with the CEO the accomplishment of these objectives and
approves the base salary and other elements of compensation for the executive officers. The Committee has full discretion to
modify the recommendations of the CEO in the course of its approval of executive officer compensation.
The Committee also annually reviews recommendations from their consultant, and makes recommendations to the Board
about, the compensation of non-employee directors.
During Fiscal 2007, the Committee recommended the adoption of a new Incentive Plan to supplement our existing stock
option plans. The Incentive Plan was approved by our stockholders in January 2007. The Incentive Plan provides for the
grant of various equity awards, including stock options and restricted stock, to Lannett employees and directors. The
Committee is responsible for administering this Plan and it has sole authority to make grants to the CEO or any other
executive officer.
In conjunction with its responsibilities related to executive compensation, the Committee also oversees the management
development process, reviews plans for executive officer succession and performs various other functions.
The Committee consults as needed with an outside compensation consulting firm retained by the Committee. As it makes
decisions about executive compensation, the Committee obtains data from its consultant regarding current compensation
practices and trends among United States companies in general and pharmaceutical companies in particular, and reviews this
information with its consultant. In addition, the Chairman of the Committee is in contact with management outside of
Committee meetings regarding matters being considered or expected to be considered by the Committee.
The individuals who served as Chief Executive Officer and Chief Financial Officer during Fiscal 2009, as well as the other
individuals included in the Summary Compensation Table on page 58, are referred to as the “named executive officers.”
Our Fiscal 2009 Compensation Program
In Fiscal 2009, the Committee’s approach to compensation was intended to focus our executives on accomplishing our short
and longer-term objectives, and it had as its ultimate objective sustained growth in stockholder value. This approach was
intended to compensate executives at levels at or near the median levels of compensation offered by other pharmaceutical
companies similar in size to Lannett and with whom we compete.
In making decisions about the elements of Fiscal 2009 compensation, the Committee not only considered available market
information about each element but also considered aggregate compensation for each executive. Base salary provided core
compensation to executives, but it was accompanied by:
the potential for incentive-based cash compensation based upon our attainment of Fiscal 2009 operating income,
•
other targeted corporate goals and individual or departmental objectives,
various forms of equity compensation, including some grants based upon Fiscal 2009 sales growth results and upon
•
our return on invested capital results,
•
•
various benefits and perquisites, and
the potential for post-termination compensation under certain circumstances.
48
Summary of Fiscal 2009 Compensation Elements
The table below provides detailed information regarding each element of the Fiscal 2009 compensation program.
Compensation Element Overview
Purpose of the Compensation Element
Base Salary ...
Short-Term
Incentives......
Long-Term
Incentives......
Base salary pays for competence in the executive
role. An executive’s salary level depends on the
decision making responsibilities, experience, work
performance, achievement of key goals and team
building skills of each position, and the relationship
to amounts paid to other executives at peer
companies.
Annual Incentive Bonus Plan (AIBP) The AIBP
program rewards with cash awards for annual
achievement of overall corporate objectives, and
specific individual or departmental operational
objectives. In Fiscal 2009, objectives for the
Officers were tied to Lannett’s achievement of
operating income targets, other targeted corporate
goals and individual objectives.
Stock Options
Stock options reward sustained stock price
appreciation and encourage executive retention
during a three-year vesting term and a ten-year
option life.
Restricted Stock
Restricted stock rewards sustained stock price
appreciation and encourages executive retention
during its three-year vesting term.
The value of participants’ restricted stock increases
and decreases according to Lannett’s stock price
performance during the vesting period and
thereafter.
To provide competitive fixed compensation based
on sustained performance in the executive’s role
and competitive market practice.
To motivate and focus our executive team on the
achievement of our annual performance goals.
We strive to deliver a balanced long-term
incentive portfolio to executives, focusing on
(a) share price appreciation, (b) retention, and
(c) internal financial objectives.
The primary objectives of the overall design are:
to align management interests with those of
stockholders,
to increase management’s potential for stock
ownership opportunities (all awards are earned in
shares),
to attract and retain excellent management talent,
and
to reward growth of the business, increased
profitability, and sustained stockholder value.
Benefits .........
In General
Executives participate in employee benefit plans
available to all employees of Lannett, including
health, life insurance and disability plans. The cost
of these benefits is partially borne by the employee,
but mostly paid by the Company.
These benefits are designed to attract and retain
employees and provide security for their health
and welfare needs. We believe that these benefits
are reasonable, competitive and consistent with
Lannett’s overall executive compensation
program.
401(k) Plan
Executives may participate in Lannett’s
401(k) retirement savings plan, which is available to
all employees. In calendar 2006, the Company
matched employees’ contributions to the plan, on a
dollar for dollar basis, up to 3% of their base salary,
subject to regulatory limits. Beginning in calendar
2007, Lannett began matching contributions, at a
rate of $.50 on the dollar up to 8% of base salary.
49
Compensation Element Overview
Purpose of the Compensation Element
Life Insurance
Lannett provides life insurance benefits to all
employees. The coverage amount for executives is
one times base compensation up to a limit of
$115,000 and premiums paid for coverage above
$50,000 are treated as imputed income to the
executive.
Disability Insurance
Lannett provides short-term and long-term disability
insurance to employees which would, in the event of
disability, pay an employee 60% of his or her base
salary with limits.
Lannett does not utilize perquisites or personal
benefits extensively. The few perquisites that are
provided complement other compensation vehicles
and enable the Company to attract and retain key
executives. These perquisites include:
automobile allowances in various amounts to key
executives.
Severance Plan
Lannett’s Severance Pay Plan is designed to pay
severance benefits to an executive for a qualifying
separation. For the Chief Executive Officer, the
Severance Pay Plan provides for a payment of three
times the sum of base salary plus a pro rated annual
cash bonus for the current year calculated as if all
targets and goals are achieved.
For the other named executive officers, the
Severance Pay Plan provides for a payment of
eighteen months of base salary plus a pro rated
annual cash bonus for the current year calculated as
if all targets and goals are achieved.
Perquisites ....
Post-
Termination
Pay.................
We believe these benefits better allow us to
attract and retain superior employees for key
positions.
The Severance Pay Plan is intended (1) to allow
executives to concentrate on making decisions in
the best interests of Lannett (or any successor
organization in the event that a change of control
is to occur), and (2) generally alleviate an
executive’s concerns about the loss of his or her
position without cause.
The use of the above compensation tools enables Lannett to reinforce its pay for performance philosophy as well as to
strengthen its ability to attract and retain high-performing executive officers. The Committee believes that this combination
of programs provides an appropriate mix of fixed and variable pay, balances short-term operational performance with long-
term stockholder value creation, and encourages executive recruitment and retention in a high-performance culture.
50
Market Data and Our Peer Group
In determining 2008 and 2009 compensation for the named executive officers, the Committee relied on market data provided
by its consultant. This information was principally related to a group of 13 peer companies similar in size to Lannett with
median revenues of $40 million to $133 million (we refer to this group of companies as the “Peer Group”). Information on
these companies was derived from two sources: (1) the consultant and broader market survey data analysis, and (2) publicly-
available information appearing in the proxy statements of these companies. The members of the Peer Group were:
Bradley Pharmaceutical
Savient Pharm. Inc.
Hi Tech Pharm. Co. Inc.
Quigley Corp.
Noven Pharmaceuticals Inc.
Viropharma Inc.
Balchem Corp.
Orasure Technologies Inc.
Interpharm Holdings Inc
Able Laboratories Inc
Caraco Pharm. Labs
Neogen Corp.
Akorn Inc.
The Committee plans to evaluate the Peer Group periodically and revise it as necessary to ensure that it continues to be
appropriate for benchmarking our executive compensation program.
Base Salary
Base salaries for the named executive officers are intended, in general, to approach median salaries for similarly situated
executives among Peer Group companies. A number of additional factors are considered, however, in determining base
salary, such as the executive’s individual performance, his or her experience, competencies, skills, abilities, contribution and
tenure, internal compensation consistency, the need to attract new, talented executives, and the Company’s overall annual
budget. Base salaries are generally reviewed on an annual basis.
Base salary increases were granted to Mr. Bedrosian for $43,200 effective on September 1, 2008, Mr. Kearns for $8,482
effective on September 1, 2008, Mr. Smith for $7,757, effective on September 1, 2008, Mr. Schreck for $10,342 effective on
September 1, 2008, and Mr. Sandiford for $3,350 effective on September 1, 2008, based on their performance.
Fiscal 2009 Annual Incentive Bonus Plan
Design
In November 2006, the Committee approved the 2007 Annual Incentive Bonus Plan (or “AIBP”) program. This program
allowed executive officers the opportunity to earn cash awards upon the accomplishment of the Fiscal 2009 operating income
goal, other targeted corporate goals and a number of individual objectives. The relative weighting of these objectives for each
executive was fifty percent (50%) for operating income, twenty-five percent (25%) for other targeted corporate goals, twenty
percent (20%) for individual objectives and five percent (5%) based on CEO and Committee discretion. For the CEO, the
five percent (5%) discretionary portion will be determined by the Committee.
51
Based on market data provided by its consultant, and considering the relatively low base salaries of the named executive
officers, the Committee formulated potential AIBP awards which exceeded the 50th percentile among Peer Group
companies, expressed as percentages of base salary. Actual payouts depended upon the degree to which objectives were
accomplished as well as the weight accorded to each objective, as described above. The table below shows the potential
payout amounts for each of the named executive officers, expressed as percentages of base salary.
Performance
Level
Superior Level .............................................
Goal Level ...................................................
Threshold Level ...........................................
Arthur
Bedrosian
120-150%
100-120%
50-100%
Brian
Kearns
120-150%
100-120%
50-100%
Bernard
Sandiford
120-150%
100-120%
50-100%
William
Schreck
120-150%
100-120%
50-100%
Kevin
Smith
120-150%
100-120%
50-100%
The Committee also determined that, if results for any objectives were between the minimum and maximum of the ranges,
the Committee would determine appropriate payout percentage.
As discussed above, each named executive officer’s objectives for Fiscal 2009 included Company operating income targets
and other targeted corporate goals. The Committee reviewed and approved these targets following discussions with
management, a review of our historical results, consideration of the various circumstances facing the Company during Fiscal
2009 and taking into account the expectations of our annual plan. The Fiscal 2009 operating income and other corporate
goals AIBP targets approved by the Committee are detailed in the table below.
Objective
Operating Income* ........................................
R&D Submissions .........................................
R&D Acceptances .........................................
R&D Launches ..............................................
Superior
Goal
Target
$
6.0 M $
5.0 M $
9
8
7
8
7
6
4.0 M
7
6
5
∗
For purposes of determining achievement of the AIBP targets, these measures exclude certain categories of
non-recurring items that the Committee believes do not reflect the performance of Lannett’s core
continuing operations.
Operational objectives for Mr. Bedrosian related to finalizing a production and sales contract with acceptable returns and a
successful launch of a specific new product and achieving profitability for its subsidiary operations. Mr. Kearns’s objectives
related to achieving cash flow targets, establishing internal controls, developing and achieving SAP implementation.
Objectives for Mr. Smith included achieving sales targets and margin targets in addition to obtaining new customers in new
channels and reducing short dated goods in inventory. For Mr. Schreck, the objectives included reducing obsolete inventory
and utilizing SAP more efficiently along with the warehouse relocation. Mr. Sandiford’s objectives related to assisting Cody
achieve Divisional goals, zero 483 deficiencies and no batch rejections.
All payouts to executive officers under the 2009 AIBP were contingent upon the Committee’s review and certification of the
degree to which Lannett achieved the 2009 AIBP objectives, and upon the Committee’s certification of the degree to which
individual objectives had been achieved. The program provided that payout for any objective would be limited to 20% of the
actual operating income attained by Lannett.
The 2009 AIBP program provided that the Committee could, in its discretion: modify, amend, suspend or terminate the Plan
at any time.
Results
In September 2009, the Committee reviewed and certified Lannett’s Fiscal 2009 results for purposes of the AIBP program,
determining that the objectives for operating income and other corporate objectives far surpassed the goals set at the
beginning of the year. The Committee also reviewed and certified the performance of the executive officer individual
objectives, determining that these objectives were achieved to varying degrees. In calculating the 2009 bonus payments to the
named executives as well as the other employees, it was determined that the Superior Level bonuses could not be paid
because the accumulated total of payments to all employees would exceed 20% of the actual operating income achieved by
the Company in Fiscal 2009 (“20% cap”). The Committee, in its discretion, altered the 2009 bonus payments in two ways as
a one-time adjustment: First, the Committee lowered the overall calculation of the payout to the high end of the Goal Level.
52
Second, it decided to grant unrestricted shares of stock that would make up the difference between the 20% cap and the
amount that employees would have received if the 20% cap were not in place. These unrestricted shares will immediately
vest upon grant, which is anticipated to occur in November 2009. The total value of the 2009 bonus payouts, including the
unrestricted stock grant is expected to approximate 27.7% of the pre-bonus actual operating profit for the 2009 Fiscal Year.
The Company expects to review and possibly alter its current compensation structure, including the AIBP program in the fall
of 2009 so that fair compensation can be paid to its employees while still respecting the 20% cap requirement.
2009 Long Term Incentive Awards (LTIA)
Design
The Committee believes that long-term equity incentives are an important part of a complete compensation package because
they focus executives on: increasing the value of the assets that are entrusted to them by the stockholders, achieving Lannett’s
long-term goals, aligning the interests of executives with those of stockholders, encouraging sustained stock performance and
helping to retain executives.
Prior to the approval of the Incentive Plan by stockholders in 2007, Lannett’s equity grants consisted only of stock options.
The Incentive Plan expanded the types of equity vehicles which the Committee could grant to executives by including
restricted stock. In September 2009, the Committee determined the amount of both stock options and restricted stock to be
granted to executives, each designed to emphasize particular elements of the Company’s immediate and long-term objectives
and to retain key executives. As of the date of the filing of this Form 10-K, these options and restricted stock shares had not
yet been granted. We refer to these grants collectively as the 2009 Long Term Incentive Awards (LTIA). The types of grants
were:
• stock options, becoming exercisable over three years (approximately one-third increments on each anniversary)
from the date of the grant and having a total term of ten years,
• shares of restricted stock, vesting over three years (approximately one-third increments on each anniversary) from
the date of grant,
The Committee assessed the appropriate overall value of these equity grants to executives by reviewing survey results and
other market data provided by its consultant. This information included the value of equity grants made to similarly situated
executives among the Peer Group. The overall value of LTIA grants for each executive was determined by the Committee
with assistance from their consultant.
In determining the overall value of LTIA grants, the Committee also considered the potential value of equity compensation
relative to other elements of compensation for each named executive officer. It likewise assessed the appropriate distribution
of equity value among the grant types, as well as the corporate objectives each type of grant was intended to encourage.
Stock Options and Restricted Stock
The stock options and restricted stock granted as part of the 2009 LTIA were designed to reward sustained stock price
appreciation and to encourage executive retention during a three-year vesting term and, in the case of stock options, a ten-
year option life. Stock option and restricted stock awards are intended to align executives’ motivation with stockholders’ best
interests. Grants of stock options were not contingent upon any conditions. They are to be granted independent of
organizational performance. Stock options become exercisable approximately in one-third increments on the first three
anniversaries of the date of grant. Restricted stock was contingent upon Lannett achieving annual sales growth and return on
invested capital goals. Restricted stock will vest in approximately one-third increments on the first three anniversaries of the
date of the grant. The Committee determined for each executive officer a target number of options and restricted shares and
those targets appear in the tables below.
Restricted Stock Targets:
Performance Level
Superior .........................................
Goal ...............................................
Threshold .......................................
Bedrosian
Kearns
Sandiford
Schreck
Smith
16,600
12,500
8,300
8,300
6,600
5,000
8,300
6,600
5,000
8,300
6,600
5,000
8,300
6,600
5,000
53
Stock Option Targets:
Range
High ...............................................
Medium..........................................
Low................................................
Bedrosian
Kearns
Sandiford
Schreck
Smith
50,000
37,500
25,000
25,000
20,000
15,000
25,000
20,000
15,000
25,000
20,000
15,000
25,000
20,000
15,000
Results
In September 2009, the Committee reviewed and certified the Fiscal 2009 financial results for purposes of the Restricted
Share Grants and determined that the performance levels surpassed the superior performance level. As a result of the
Committee’s review, the Committee expects to grant 70,000 restricted shares and 200,000 options to be apportioned in the
following manner:
Awards
Options...........................................
Restricted Shares ...........................
Bedrosian
Ruck
Kovary
Schreck
Smith
75,000
30,000
15,000
10,000
—
—
60,000
15,000
50,000
15,000
Perquisites and Other Benefits
We provide named executive officers with perquisites and other personal benefits that we believe are reasonable and
consistent with our overall compensation program to better enable us to attract and retain superior employees for key
positions. The Committee periodically reviews the levels of perquisites and other personal benefits provided to named
executive officers.
During calendar year 2006, Lannett matched employees’ contributions to the Lannett Company, Inc. 401(k) Retirement
Savings Plan on a dollar for dollar basis up to 3% of an employee’s base salary, subject to regulatory limits. Contributions by
the named executive officers were matched in this way, subject to the limitations of the Plan and applicable law. Beginning in
calendar year 2007 and continuing to present, Lannett matched contributions to the 401(k) plan on a fifty cents on the dollar
basis up to 8% of the contributing employee’s base salary. The named executive officers are also provided with car
allowances, for which the taxes are also paid by the Company.
Lannett provides life insurance for executive officers which would, in the event of death, pay $115,000 to designated
beneficiaries. Premiums paid for coverage above $50,000 are treated as imputed income to the executive. Lannett also
provides short-term and long-term disability insurance which would, in the event of disability, pay the executive officer sixty
percent (60%) of his base salary up to the plan limits of $2,000/week for short term disability and $15,000/month for long
term disability. Executive officers participate in other qualified benefit plans, such as medical insurance plans, in the same
manner as all other employees.
Attributed costs of the personal benefits available to the named executive officers for the fiscal year ended June 30, 2009, are
included in column (i) of the Summary Compensation Table on page 58.
Severance and Change of Control Benefits
We believe that reasonable severance and change in control benefits are necessary in order to recruit and retain qualified
senior executives and are generally required by the competitive recruiting environment within our industry and the
marketplace in general. These severance benefits reflect the fact that it may be difficult for such executives to find
comparable employment within a short period of time, and are designed to alleviate an executive’s concerns about the loss of
his or her position without cause. We also believe that a change in control arrangement will provide an executive security that
will likely reduce the reluctance of an executive to pursue a change in control transaction that could be in the best interests of
our stockholders. Lannett’s Severance Pay Plan is designed to pay severance benefits to an executive for a qualifying
separation. For the Chief Executive Officer, the Severance Pay Plan provides for a payment of three times the sum of base
salary plus a pro rated annual cash bonus for the current year calculated as if all targets and goals are achieved. For the other
named executive officers, the Severance Pay Plan provides for a payment of eighteen months of base salary plus a pro rated
annual cash bonus for the current year calculated as if all targets and goals are achieved.
54
Timing of Committee Meetings and Grants; Option and Share Pricing
The Committee typically holds four regular meetings each year, and the timing of these meetings is generally established
during the year. The Committee holds special meetings from time to time as its workload requires. Historically, annual grants
of equity awards have typically been accomplished at a meeting of the Committee in September of each year. Individual
grants (for example, associated with the hiring of a new executive officer or promotion to an executive officer position) may
occur at any time of year. We expect to coordinate the timing of equity award grants to be made within thirty (30) days of
Lannett’s earnings release announcement following the completion of the fiscal year. The exercise price of each stock option
and restricted share awarded to our executive officers is the closing price of our common stock on the date of grant.
Tax and Accounting Implications
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended, precludes the deductibility of an executive officer’s
compensation that exceeds $1.0 million per year unless the compensation is paid under a performance-based plan that has
been approved by stockholders. The Committee believes that it is generally preferable to comply with the requirements of
Section 162(m) through, for example, the use of our Incentive Plan. However, to maintain flexibility in compensating
executive officers in a manner that attracts, rewards and retains high quality individuals, the Committee may elect to provide
compensation outside of those requirements when it deems appropriate. The Committee believes that stockholder interests
are best served by not restricting the Committee’s discretion in this regard, even though such compensation may result in
non-deductible compensation expenses to the Company.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis set forth above with
management. Taking this review and discussion into account, the undersigned Committee members recommended to the
Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.
The Compensation Committee
Ronald West (Chair)
Albert Wertheimer
Myron Winkelman
55
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of September 15, 2009, information regarding the security ownership of the directors and
certain executive officers of the Company and persons known to the Company to be beneficial owners of more than five (5%)
percent of the Company’s common stock:
Name and Address of
Beneficial Owner
Directors/Executive Officers:
William Farber ..............................
9000 State Road
Philadelphia, PA 19136
Ronald A. West .............................
9000 State Road
Philadelphia, PA 19136
Jeffrey Farber ................................
9000 State Road
Philadelphia, PA 19136
Kenneth Sinclair ............................
9000 State Road
Philadelphia, PA 19136
Albert Wertheimer.........................
9000 State Road
Philadelphia, PA 19136
Myron Winkelman ........................
9000 State Road
Philadelphia, PA 19136
Arthur P. Bedrosian.......................
9000 State Road
Philadelphia, PA 19136
William Schreck ............................
9000 State Road
Philadelphia, PA 19136
Kevin Smith...................................
9000 State Road
Philadelphia, PA 19136
Office
Chairman of the Board
Vice Chairman of the Board,
Director
Interim Chairman of the Board,
Director
Director
Director
Director
President and Chief
Executive Officer
Senior Vice President of
Logistics
Vice President of Sales and
Marketing
Ernest Sabo....................................
9000 State Road
Philadelphia, PA 19136
Vice President of Regulatory
Affair and Chief Compliance
Officer
David Farber..................................
6884 Brook Hollow Ct West
Bloomfield, MI 48322
Keith R. Ruck ................................
9000 State Road
Philadelphia, PA 19136
Interim Chief Financial
Officer and Corporate
Controller
Farber Properties ...........................
1775 John R Road Troy, MI 48083
All directors and ............................
executive officers as a group
(11 persons)
Excluding Options
and Restricted Shares
Including Options (*)
and Restricted Shares
Number of
Shares
Percent of
Class
Number of
Shares
Percent of
Class
8,675,796 (1)
35.46% 8,768,296 (1),(2)
35.71%
5,977 (3)
0.02%
60,925 (3),(4)
0.25%
5,158,787 (5)
21.08% 5,206,287 (5),(6)
21.24%
6,667 (7)
0.03%
31,667 (7),(8)
0.13%
7,667 (9)
0.03%
32,667 (9),(10)
0.13%
7,667 (11)
0.03%
47,667 (11),(12)
0.19%
542,530 (13)
2.22%
830,964 (13),(14)
3.36%
6,657 (15)
0.03%
88,169 (15),(16)
0.36%
11,033 (17)
0.05%
146,560 (17),(18)
0.60%
3,604 (19)
0.01%
33,197 (19),(20)
0.14%
5,160,708(21)
21.10% 5,183,208 (21),(22)
21.17%
767 (23)
0.00%
5,767 (23),(24)
0.02%
5,000,000 (25)
20.44% 5,000,000
20.44%
14,427,150
58.98% 15,252,165
62.36%
Includes 197,825 shares owned by William Farber’s spouse, Audrey Farber; 10,000 shares owned by William
(1)
Farber’s mother, Doris Farber, whose affairs Mr. Farber controls; and 132,212 shares held by William Farber as custodian for
his seven minor grandchildren. Mr. Farber disclaims beneficial ownership of these shares. Includes 26,250 shares held in
William Farber’s IRA account. Includes 1,667 vested shares received pursuant to a restricted stock award granted in
September 2007 and 5,000 vested shares received pursuant to a restricted stock award granted in September 2008.
56
Includes 37,500 vested options to purchase common stock at an exercise price of $7.97 per share, 25,000 vested
(2)
options to purchase common stock at an exercise price of $17.36 per share, 25,000 vested options to purchase common stock
at an exercise price of $16.04 per share, 3,333 vested options to purchase common stock at an exercise price of $6.89 per
share and includes 1,667 restricted shares vesting September 18, 2009.
(3)
vested shares received pursuant to a restricted stock award granted in September 2008.
Includes 1,667 vested shares received pursuant to a restricted stock award granted in September 2007 and 5,000
Includes 9,948 vested options to purchase common stock at an exercise price of $7.97 per share, 15,000 vested
(4)
options to purchase common stock at an exercise price of $17.36 per share, 25,000 vested options to purchase common stock
at an exercise price of $16.04 and 3,333 vested options to purchase common stock at an exercise price of $6.89 and includes
1,667 restricted shares vesting September 18, 2009.
Includes 5,000,000 shares held by Farber Properties Group LLC (“FPG”). Farber Properties Group, LLC is
(5)
managed and jointly owned by Jeffrey Farber and David Farber. David Farber and Jeffrey Farber each disclaim beneficial
ownership of 2,500,000 shares held by FPG. Indirect shares include 150 shares held by Jeffrey Farber as custodian for his
son. Also includes 9,500 shares held by Farber Investment Company, LLC (“FIC”), which holds 38,000 shares of common
stock. Jeffrey Farber and David Farber each beneficially owns 25% of FIC and each disclaims beneficial ownership of all but
9,500 shares held by FIC. Also includes 1,667 vested shares received pursuant to a restricted stock award granted in
September 2007 and 5,000 vested shares received pursuant to a restricted stock award granted in September 2008.
Includes 10,000 vested options to purchase common stock at an exercise price of $17.36 per share, 12,500 vested
(6)
options to purchase common stock at an exercise price of $16.04, 20,000 vested options to purchase common stock at an
exercise price of $4.55, and 3,333 vested options to purchase common stock at an exercise price of $6.89 and includes 1,667
restricted shares vesting September 18, 2009.
(7)
vested shares received pursuant to a restricted stock award granted in September 2008.
Includes 1,667 vested shares received pursuant to a restricted stock award granted in September 2007 and 5,000
Includes 20,000 vested options to purchase common stock at an exercise price of $4.55 per share and 3,333 vested
(8)
options to purchase common stock at an exercise price of $6.89 per share and includes 1,667 restricted shares vesting
September 18, 2009.
(9)
vested shares received pursuant to a restricted stock award granted in September 2008.
Includes 1,667 vested shares received pursuant to a restricted stock award granted in September 2007 and 5,000
Includes 20,000 vested options to purchase common stock at an exercise price of $9.02 per share and 3,333 vested
(10)
options to purchase common stock at an exercise price of $6.89 per share and includes 1,667 restricted shares vesting
September 18, 2009.
(11)
vested shares received pursuant to a restricted stock award granted in September 2008.
Includes 1,667 vested shares received pursuant to a restricted stock award granted in September 2007 and 5,000
Includes 15,000 vested options to purchase common stock at an exercise price of $17.36, 20,000 vested options to
(12)
purchase common stock at an exercise price of $16.04 and 3,333 vested options to purchase common stock at an exercise
price of $6.89 per share and includes 1,667 restricted shares vesting September 18, 2009.
Includes 33,150 shares owned by Arthur Bedrosian’s wife, Shari, and 1,000 shares owned by his daughter Talin.
(13)
Mr. Bedrosian disclaims beneficial ownership of these shares. Includes 19,264 vested shares received pursuant to a restricted
stock award granted in September 2007. Also includes 25,452 shares of common stock held through employee stock
purchase plan.
Includes 18,000 vested options to purchase common stock at an exercise price of $4.63 per share, 96,900 vested
(14)
options to purchase common stock at an exercise price of $7.97 per share, 33,000 vested options to purchase common stock
at an exercise price of $17.36 per share, 30,000 vested options to purchase common stock at an exercise price of $16.04 per
share, 25,000 vested options to purchase common stock at an exercise price of $8.00 per share, 20,000 vested options to
purchase common stock at an exercise price of $6.89 per share, 50,000 vested options to purchase common stock at an
exercise price of $4.03 per share, and 10,000 vested options to purchase common stock at an exercise price of $2.80 per share
and includes 5,533 restricted shares vesting September 18, 2009.
(15)
Includes 6,657 vested shares received pursuant to a restricted stock award granted in September 2007.
57
(16)
Includes 17,745 vested options to purchase common stock at an exercise price of $11.27 per share, 12,000 vested
options to purchase common stock at an exercise price of $5.18 per share and 10,000 vested options to purchase common
stock at an exercise price of $6.89 per share, 33,333 vested options to purchase common stock at an exercise price of $4.03
per share, and 5,333 vested options to purchase common stock at an exercise price of $2.80 per share and 3,100 restricted
shares vesting September 18, 2009.
(17)
Includes 6,697 vested shares received pursuant to a restricted stock award granted in September 2007.
Includes 38,760 vested options to purchase common stock at an exercise price of $7.97 per share, 13,000 vested
(18)
options to purchase common stock at an exercise price of $17.36 per share, 20,000 vested options to purchase common stock
at an exercise price of $16.04 per share, 12,000 vested options to purchase common stock at an exercise price of $5.18 per
share, 10,000 vested options to purchase common stock at an exercise price of $6.89 per share, 33,333 vested options to
purchase common stock at an exercise price of $4.03 per share, and 5,333 vested options to purchase common stock at an
exercise price of $2.80 per share and includes 3,100 restricted shares vesting September 18, 2009.
(19)
Includes 3,604 vested shares received pursuant to a restricted stock award granted in September 2007.
Includes 3,260 vested options to purchase common stock at an exercise price of $7.48 per share, 4,000 vested
(20)
options to purchase common stock at an exercise price of $5.18 per share, 5,000 vested options to purchase common stock at
an exercise price of $6.89 per share, 10,000 vested options to purchase common stock at an exercise price of $4.03 per share,
and 5,333 vested options to purchase common stock at an exercise price of $2.80 per share and includes 2,000 restricted
shares vesting September 18, 2009.
Includes 5,000,000 shares held by Farber Properties Group LLC (“FPG”). Farber Properties Group, LLC is
(21)
managed and jointly owned by Jeffrey Farber and David Farber. David Farber and Jeffrey Farber each disclaim beneficial
ownership of 2,500,000 shares held by FPG. Indirect shares include 7,488 shares held by David Farber as custodian for his
children, and 2,850 shares held by David Farber’s spouse. Also includes 9,500 shares held by Farber Investment Company,
LLC (“FIC”), which holds 38,000 shares of common stock. Jeffrey Farber and David Farber each beneficially owns 25% of
FIC and each disclaims beneficial ownership of all but 9,500 shares held by FIC.
(22)
options to purchase common stock at an exercise price of $16.04 per share.
Includes 10,000 vested options to purchase common stock at an exercise price of $17.36 per share and 12,500 vested
(23)
Includes 767 shares of common stock held through employee stock purchase plan.
(24)
Includes 5,000 vested options to purchase common stock at an exercise price of $2.79 per share.
(25)
Farber Properties Group, LLC is managed and jointly owned by Jeffrey Farber and David Farber.
* Assumes that all options exercisable within sixty days have been exercised, and all restricted shares vesting within sixty
days have vested, which results in 25,284,968 shares outstanding.
Equity Compensation Plan Information
The following table summarizes the equity compensation plans as of June 30, 2009:
Plan Category
Equity Compensation plans approved by
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
security holders..................................................
1,585,681
$
Equity Compensation plans not approved by
security holders..................................................
—
Total...................................................................
1,585,681
$
7.54
—
7.54
3,181,471
—
3,181,471
58
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The Company had sales of approximately $786,000, $787,000, and $763,000 during the fiscal years ended June 30, 2009,
2008 and 2007, respectively, to a generic distributor, Auburn Pharmaceutical Company. Jeffrey Farber (the “related party”), a
board member and the son of the Chairman of the Board of Directors and principal shareholder of the Company, William
Farber, is the owner of Auburn Pharmaceutical Company. Accounts receivable includes amounts due from the related party
of approximately $125,000 and $305,000 at June 30, 2009 and 2008, respectively. In the Company’s opinion, the terms of
these transactions were not more favorable to the related party than would have been to a non-related party.
In January 2005, Lannett Holdings, Inc. entered into an agreement in which the Company purchased for $100,000 and future
royalty payments the proprietary rights to manufacture and distribute a product for which Pharmeral, Inc. owned the ANDA.
In Fiscal 2008, the Company obtained FDA approval to use the proprietary rights. Accordingly, the Company originally
capitalized this purchased product right as an indefinite lived intangible asset and tested this asset for impairment on a
quarterly basis. During the fourth quarter of Fiscal 2009, it was determined that this intangible asset no longer has an
indefinite life. No impairment existed because the estimated fair value exceeded the carrying amount on that date.
Accordingly, the $100,000 carrying amount of this intangible asset will be amortized on a straight line basis prospectively
over its 10 year remaining estimated useful life.
Arthur Bedrosian, President and Chief Executive Officer of the Company, Inc. currently owns 100% of Pharmeral, Inc. This
transaction was approved by the Board of Directors of the Company and in their opinion the terms were not more favorable
to the related party than they would have been to a non-related party. In May 2008, Mr. Bedrosian and Pharmeral waived
their rights to any royalty payments on the sales of the drug by Lannett under Lannett’s current ownership structure. Should
Lannett undergo a major change in control where a third party is involved, this royalty would be reinstated.
At June 30, 2009 and 2008, respectively, the Company had $0 and approximately $983,000 of deferred revenue as a result of
prepayments on inventory received from Provell Pharmaceuticals, LLC (“Provell”). The Company recognized revenues of
approximately $29,000, $141,000 and $45,000 during the fiscal years ended June 30, 2009, 2008 and 2007, respectively.
Accounts receivable includes amounts due from Provell of approximately $55,000 and $60,000 at June 30, 2009 and 2008,
respectively. Provell is a joint venture to distribute pharmaceutical products through mail order outlets. In exchange for
access to Lannett’s drug providers, Lannett received a 33% ownership of this venture. After June 30, 2008, Lannett’s
ownership portion of this venture decreased to 25% due to outside investment in the venture from a third party. The
investment is valued at zero, due to losses incurred to date by Provell. During June 2009, the Company terminated its
participation in this joint venture.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Grant Thornton LLP served as the independent auditors of the Company during Fiscal 2009, 2008 and 2007. No relationship
exists other than the usual relationship between independent public accountant and client. The following table identifies the
fees incurred for services rendered by Grant Thornton LLP in Fiscal 2009, 2008 and 2007.
Audit Fees
Audit-Related (1)
Tax Fees (2)
All Other Fees (3)
Total Fees
Fiscal 2009:..................................
Fiscal 2008:..................................
Fiscal 2007:..................................
$
$
$
295,084
335,894
338,660
$
$
$
—
5,900
—
$
$
$
179,677
78,880
36,528
$
$
$
10,932
49,964
70,300
$
$
$
485,693
470,638
445,460
(1) Audit-related fees include fees paid for preparation of an S-8 filing.
(2) Tax fees include fees paid for preparation of annual federal, state and local income tax returns, quarterly estimated income
tax payments, Cody tax issues, sales and use tax review and various tax planning services.
(3) Other fees include:
Fiscal 2009 — Fees paid for review of various SEC correspondences.
Fiscal 2008 — Fees paid for review of various SEC correspondences.
Fiscal 2007 — Fees paid for review of various SEC correspondences, disclosures, and fixed asset review.
59
The non-audit services provided to the Company by Grant Thornton LLP were pre-approved by the Company’s audit
committee. Prior to engaging its auditor to perform non-audit services, the Company’s audit committee reviews the
particular service to be provided and the fee to be paid by the Company for such service and assesses the impact of the
service on the auditor’s independence.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Consolidated Financial Statements and Supplementary Data
(1) The following financial statements are included herein:
Consolidated Balance Sheets as of June 30, 2009 and 2008
Consolidated Statements of Operations for each of the three years ended June 30, 2009
Consolidated Statements of Changes in Shareholders’ Equity for each of the three years ended June 30,
2009
Consolidated Statements of Cash Flows for each of the three years ended June 30, 2009
Notes to Consolidated Financial Statements for the three years ended June 30, 2009
Supplementary Data
(2) The following financial statement schedule is included herein
Schedule II — Valuation and Qualifying Accounts
(b)
A list of the exhibits required by Item 601 of Regulation S-K to be filed as of this Form 10-K is shown on the
Exhibit Index filed herewith
60
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: September 28, 2009
Date: September 28, 2009
LANNETT COMPANY, INC.
By: / s / Arthur P. Bedrosian
Arthur P. Bedrosian,
President and Chief Executive Officer
By: / s / Keith R. Ruck
Keith R. Ruck
Interim Chief Financial Officer and
Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date: September 28, 2009
Date: September 28, 2009
By: / s / William Farber
William Farber,
Chairman of the Board of Directors
By: / s / Ronald West
Ronald West,
Director, Vice Chairman of the Board,
Chairman of Compensation Committee
Date: September 28, 2009
By: / s / Arthur P Bedrosian
Date: September 28, 2009
Date: September 28, 2009
Date: September 28, 2009
Date: September 28, 2009
Arthur P. Bedrosian,
Director, President and Chief Executive Officer
By: / s / Jeffrey Farber
Jeffrey Farber,
Director
By: / s / Kenneth Sinclair
Kenneth Sinclair,
Director, Chairman of Audit Committee
By: / s / Albert Wertheimer
Albert Wertheimer,
Director
By: / s / Myron Winkelman
Myron Winkelman,
Director, Chairman of Strategic Plan Committee
61
Exhibit Index
Exhibit
Number
Description
Method of Filing
3.1
Articles of Incorporation
Incorporated by reference to the Proxy Statement filed
with respect to the Annual Meeting of Shareholders held
on December 6, 1991 (the “1991 Proxy Statement”).
3.2
4
10.1
10.2
10.3
10.4
By-Laws, as amended
Incorporated by reference to the 1991 Proxy Statement.
Specimen Certificate for Common Stock
Line of Credit Note dated March 11, 1999
between the Company and First Union
National Bank
Philadelphia Authority for Industrial
Development Taxable Variable Rate
Demand/Fixed Rate Revenue Bonds,
Series of 1999
Philadelphia Authority for Industrial
Development Tax-Exempt Variable Rate
Demand/Fixed Revenue Bonds (Lannett
Company, Inc. Project) Series of 1999
Letter of Credit and Agreements
supporting bond issues between the
Company and First Union National Bank
Incorporated by reference to Exhibit 4(a) to Form 8 dated
April 23, 1993 (Amendment No. 3 to Form 10-KSB for
Fiscal 1992) (“Form 8”)
Incorporated by reference to Exhibit 10(ad) to the Annual
Report on 1999 Form 10-KSB
Incorporated by reference to Exhibit 10(ae) to the Annual
Report on 1999 Form 10-KSB
Incorporated by reference to Exhibit 10(af) to the Annual
Report on 1999 Form 10-KSB
Incorporated by reference to Exhibit 10(ag) to the Annual
Report on 1999 Form 10-KSB
10.5
2003 Stock Option Plan
Incorporated by reference to the Proxy Statement for
Fiscal Year Ending June 30, 2002
10.6
10.7
Terms of Employment Agreement with
Kevin Smith
Incorporated by reference to Exhibit 10.6 to the Annual
Report on 2003 Form 10-KSB
Terms of Employment Agreement with
Arthur Bedrosian
Incorporated by reference to Exhibit 10 to the Quarterly
Report on Form 10-Q dated May 12, 2004.
10.9 (Note A)
Agreement between Lannett Company,
Inc and Siegfried (USA), Inc.
Incorporated by reference to Exhibit 10.9 to the Annual
Report on 2003 Form 10-KSB
10.10 (Note A)
Agreement between Lannett Company,
Inc and Jerome Stevens,
Pharmaceutical, Inc.
Incorporated by reference to Exhibit 2.1 to Form 8-K
dated April 20, 2004
10.11
10.12
13
21
Terms of Employment Agreement with
Stephen J. Kovary
Filed Herewith
Agreement of Sale Between Anvil
Construction Company, Inc. and Lannett
Company, Inc.
Filed Herewith
Annual Report on Form 10-K
Filed Herewith
Subsidiaries of the Company
Filed Herewith
62
23.1
Consent of Grant Thornton, LLP
Filed Herewith
31.1
31.2
32
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certifications of Chief Executive Officer
and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
Filed Herewith
Filed Herewith
Filed Herewith
63
Exhibit 13
Annual Report on Form 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Lannett Company, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Lannett Company, Inc. (a Delaware corporation) and
Subsidiaries (collectively, the Company) as of June 30, 2009 and 2008, and the related consolidated statements of operations,
changes in shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2009. Our audits of
the basic financial statements included the financial statement schedule listed in the index appearing under Item 15. These
financial statements and financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit
of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Lannett Company, Inc. and Subsidiaries as of June 30, 2009 and 2008, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended June 30, 2009 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 16 to the consolidated financial statements, the Company has adopted Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Tax Positions, in 2008.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
September 28, 2009
F-1
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets.................................................................................................................
Cash and cash equivalents ......................................................................................
Investment securities - available for sale ................................................................
Trade accounts receivable (net of allowance of $132,000 and
$207,151, respectively).......................................................................................
Inventories, net .......................................................................................................
Interest receivable ...................................................................................................
Prepaid taxes...........................................................................................................
Deferred tax assets ..................................................................................................
Other current assets.................................................................................................
Total Current Assets.................................................................................
Property, plant and equipment ........................................................................................
Less accumulated depreciation ...............................................................................
June 30, 2009
June 30, 2008
$
25,832,456
347,921
$
6,256,712
354,155
29,945,748
16,195,361
90,425
—
4,296,929
602,335
77,311,175
34,114,982
11,617,258
51,781
1,598,937
6,997,935
591,415
61,583,175
41,431,158
(18,533,773)
22,897,385
39,996,008
(15,261,905)
24,734,103
Construction in progress .................................................................................................
Investment securities - available for sale ........................................................................
Intangible assets (product rights) - net of accumulated amortization .............................
Deferred tax assets..........................................................................................................
Other assets.....................................................................................................................
Total Assets................................................................................................
591,685
801,748
9,118,710
13,757,545
98,873
$ 124,577,121
458,046
2,145,980
10,361,835
14,200,771
195,354
$ 113,679,264
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Current Liabilities...........................................................................................................
Accounts payable....................................................................................................
Accrued expenses ...................................................................................................
Accrued payroll and payroll related........................................................................
Deferred revenue.....................................................................................................
Income taxes payable..............................................................................................
Current portion of long-term debt...........................................................................
Rebates, chargebacks and returns payable ..............................................................
Total Current Liabilities ..........................................................................
Long-term debt, less current portion...............................................................................
Unearned grant funds......................................................................................................
Other long-term liabilities...............................................................................................
Total Liabilities .........................................................................................
Commitment and Contingencies, See notes 9 and 10 .....................................................
Minority Interest in Cody LCI Realty, LLC, net of taxes ...............................................
SHAREHOLDERS’ EQUITY
Common stock - authorized 50,000,000 shares, par value $0.001; issued and
outstanding, 24,517,696 and 24,283,963 shares, respectively ............................
Additional paid in capital........................................................................................
Retained earnings / (accumulated deficit)...............................................................
Accumulated other comprehensive income ............................................................
Less: Treasury stock at cost - 82,228 and 74,970 shares, respectively ...................
Total Shareholders’ Equity .....................................................................
$
16,805,468
1,842,434
5,150,104
—
711,073
435,386
13,734,540
38,679,005
7,703,382
500,000
47,111
46,929,498
$ 13,085,772
1,807,628
644,155
982,668
—
791,912
18,326,417
35,638,552
8,186,922
500,000
32,001
44,357,475
93,654
50,309
24,518
76,250,309
1,743,565
24,751
78,043,143
(489,174)
77,553,969
24,284
74,497,100
(4,790,680)
9,722
69,740,426
(468,946)
69,271,480
Total Liabilities and Shareholders’ Equity ............................................
$ 124,577,121
$ 113,679,264
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-2
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
2009
Fiscal Year Ended June 30,
2008
2007
Net sales............................................................................................
Cost of sales......................................................................................
Amortization of intangible assets......................................................
Product royalties ...............................................................................
$
$ 119,002,215
71,272,859
1,787,167
697,720
72,403,283
54,080,947
1,784,664
236,601
$
82,577,591
57,394,751
1,784,664
1,973,189
Gross profit ...............................................................................
45,244,469
16,301,071
21,424,987
Research and development expenses ................................................
Selling, general, and administrative expenses ..................................
Loss on impairment ..........................................................................
(Gain) loss on sale of investments ....................................................
Loss (gain) on sale of assets .............................................................
8,427,135
26,059,104
—
(53,524)
30,885
5,172,715
16,552,859
—
4,338
1,693
7,459,432
12,161,187
7,775,890
—
(7,113)
Operating income (loss)............................................................
10,780,869
(5,430,534 )
(5,964,409)
Other income (expense):
Interest income..............................................................................
Interest expense ............................................................................
209,188
(321,751)
(112,563)
170,040
(383,267 )
(213,227 )
316,963
(273,633)
43,330
Income (loss) before income tax expense (benefit) and
minority interest............................................................................
10,668,306
(5,643,761 )
(5,921,079)
Income tax expense (benefit)............................................................
Minority interest in Cody LCI Realty, LLC, net of taxes .................
Net income (loss)..............................................................................
Basic net income (loss) per common share.......................................
Diluted net income (loss) per common share....................................
4,090,716
43,345
6,534,245
0.27
0.27
$
$
$
$
$
$
(3,376,011 )
50,309
1,007,929
—
(2,318,059 ) $
(6,929,008)
(0.10 ) $
(0.10 ) $
(0.29)
(0.29)
Basic weighted average number of shares outstanding.....................
Diluted weighted average number of shares outstanding .................
24,447,016
24,587,378
24,227,181
24,227,181
24,159,251
24,159,251
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-3
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Stock
Shares
Issued
Amount
Additional
Paid-in
Capital
Retained
Earnings /
(accumulated Treasury
deficit)
Stock
Accum. Other
Comp. Income (Loss)
Shareholders’
Equity
Balance, June 30, 2006 .....
24,141,325 $
24,141 $ 71,742,402 $
4,456,387 $ (394,570) $
(72,444) $
75,755,916
Exercise of stock options....
Shares issued in connection
with employee stock
purchase plan.................
Share based compensation .
Stock options .................
Other comprehensive income,
net of income tax ...........
Net loss ...............................
375
29,517
—
—
—
—
30
—
—
—
281
134,860
1,176,235
—
—
—
—
—
—
(6,929,008)
—
—
—
—
—
—
—
—
281
134,890
1,176,235
44,861
—
44,861
(6,929,008)
Balance, June 30, 2007 .....
24,171,217 $
24,171 $ 73,053,778 $
(2,472,621) $ (394,570) $
(27,583) $
70,183,175
Shares issued in connection
with employee stock
purchase plan.................
Share based compensation .
Restricted stock .............
Stock options .................
Shares issued in connection
with restricted stock
grant...............................
Purchase of treasury stock..
Other comprehensive income,
net of income tax ...........
Net loss ...............................
38,282
—
—
74,464
—
—
—
38
—
—
75
—
—
—
138,592
134,794
869,921
300,015
—
—
—
—
—
—
—
—
—
—
(74,376)
—
—
—
—
—
138,630
—
134,794
869,921
300,090
(74,376)
—
—
—
(2,318,059)
—
—
37,305
—
37,305
(2,318,059)
Balance, June 30, 2008 .....
24,283,963 $
24,284 $ 74,497,100 $
(4,790,680) $ (468,946) $
9,722 $
69,271,480
Exercise of stock options....
Shares issued in connection
with employee stock
purchase plan.................
Share based compensation .
Restricted stock .............
Stock options .................
Employee stock purchase
plan ...........................
Shares issued in connection
with restricted stock
grant...............................
Shares issued for contingent
consideration for Cody
Labs Acquisition ...........
Stock options
repurchased....................
Purchase of treasury
stock...............................
Other comprehensive income,
net of income tax ...........
Net income..........................
10,800
11
45,801
49,331
—
—
—
49
—
—
—
114,905
172,028
930,878
81,871
68,602
69
101,331
105,000
105
430,395
—
—
—
—
—
—
—
—
(124,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
6,534,245
—
—
—
—
—
—
—
—
(20,228)
—
—
—
—
—
—
—
—
—
—
—
45,812
114,954
172,028
930,878
81,871
101,400
430,500
(124,000)
(20,228)
15,029
—
15,029
6,534,245
Balance, June 30, 2009 .....
24,517,696 $
24,518 $ 76,250,309 $
1,743,565 $ (489,174) $
24,751 $
77,553,969
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-4
LANNETT COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Net income (loss).....................................................................................
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.............................................................
Deferred tax expense (benefit).............................................................
Stock compensation expense ...............................................................
Loss on disposal/impairment of assets.................................................
(Gain) loss on sale of assets .................................................................
Other noncash expenses.......................................................................
Interest income accrued on note ..........................................................
Minority interest in Cody LCI Realty, LLC, net of taxes ....................
Changes in assets and liabilities which provided (used) cash:
Trade accounts receivable....................................................................
Inventories ...........................................................................................
Prepaid and income taxes payable .......................................................
Prepaid expenses and other assets........................................................
Accounts payable.................................................................................
Accrued expenses ................................................................................
Rebates, chargebacks and returns payable...........................................
Accrued payroll and payroll related.....................................................
Deferred revenue..................................................................................
Fiscal Year Ended June 30,
2008
2009
2007
$ 6,534,245 $ (2,318,059) $ (6,929,008)
5,099,108
2,983,538
1,286,177
30,885
(53,524)
15,110
—
43,345
(5,548,253)
(4,578,103)
2,310,010
46,917
3,719,696
34,806
5,125,610
4,505,949
(982,668)
5,229,358
(4,743,854)
1,029,923
—
1,693
13,339
—
50,309
(14,641,004)
2,901,226
1,594,748
(69,679)
1,968,824
563,992
12,640,053
(447,322)
(655,325)
4,465,393
1,779,843
1,176,235
7,774,098
—
—
(267,672)
—
5,447,693
(2,716,610)
18,826
140,195
9,441,359
448,096
(7,325,720)
(2,415,401)
1,637,993
Net cash provided by operating activities ........................................
20,572,848
3,118,222
12,675,320
INVESTING ACTIVITIES:
Cash paid for acquisition of business, net cash received .........................
Purchases of property, plant and equipment (including construction
in progress) ..........................................................................................
Proceeds from sale of assets ....................................................................
Proceeds from sale of investment securities - available for sale..............
Purchase of investment securities - available for sale..............................
Issuance of note receivable ......................................................................
—
—
167,728
(1,604,114)
1,500
7,408,295
(5,979,257)
—
(2,295,817)
21,380
2,023,616
(1,140,945)
—
(2,465,075)
10,000
1,845,838
—
(7,059,567)
Net cash used in investing activities ................................................
(173,576)
(1,391,766)
(7,501,076)
FINANCING ACTIVITIES:
Repayments of debt .................................................................................
Proceeds from issuance of stock ..............................................................
Purchase of treasury stock .......................................................................
Repurchase of stock options ....................................................................
Net cash used in financing activities................................................
(840,066)
160,766
(20,228)
(124,000)
(823,528)
(701,131)
113,422
(74,376)
—
(662,085)
(585,433)
135,171
—
—
(450,262)
NET INCREASE IN CASH AND CASH EQUIVALENTS ......................
19,575,744
1,064,371
4,723,982
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...............
6,256,712
5,192,341
468,359
CASH AND CASH EQUIVALENTS, END OF YEAR.............................
$ 25,832,456 $ 6,256,712 $ 5,192,341
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION —
Interest paid .............................................................................................
Income taxes paid ....................................................................................
Lannett stock issued - contingent consideration - Cody Labs
$
$
217,463 $
250,000 $
270,691 $
— $
194,656
684,670
acquisition............................................................................................
$
581,175 $
— $
—
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-5
LANNETT COMPANY, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Lannett Company, Inc., a Delaware corporation, and subsidiaries (the “Company”), develops, manufactures, packages,
markets and distributes pharmaceutical products sold under generic chemical names.
The Company is engaged in an industry which is subject to considerable government regulation related to the development,
manufacturing and marketing of pharmaceutical products. In the normal course of business, the Company periodically
responds to inquiries or engages in administrative and judicial proceedings involving regulatory authorities, particularly the
Food and Drug Administration (FDA) and the Drug Enforcement Agency (DEA).
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation - The consolidated financial statements include the accounts of the operating parent company,
Lannett Company, Inc., and its wholly owned subsidiaries, Lannett Holdings, Inc. and Cody Laboratories, Inc. Cody
Laboratories, Inc includes the consolidation of Cody LCI Realty, LLC, a variable interest entity, as a result of the acquisition
of Cody Laboratories, Inc. See Note 13 regarding the consolidation of this variable interest entity. All intercompany
accounts and transactions have been eliminated.
Reclassifications — Certain prior year amounts have been reclassified to conform to the current year financial statement
presentation.
Revenue Recognition — The Company recognizes revenue when its products are shipped. At this point, title and risk of loss
have transferred to the customer and provisions for estimates, including rebates, promotional adjustments, price adjustments,
returns, chargebacks, and other potential adjustments are reasonably determinable. Accruals for these provisions are
presented in the consolidated financial statements as rebates, chargebacks and returns payable and reductions to net sales. The
change in the reserves for various sales adjustments may not be proportionally equal to the change in sales because of
changes in both the product and the customer mix. Increased sales to wholesalers will generally require additional accruals as
they are the primary recipient of chargebacks and rebates. Incentives offered to secure sales vary from product to product.
Provisions for estimated rebates and promotional credits are estimated based upon contractual terms. Provisions for other
customer credits, such as price adjustments, returns, and chargebacks, require management to make subjective judgments on
customer mix. Unlike branded innovator drug companies, Lannett does not use information about product levels in
distribution channels from third-party sources, such as IMS and NDC Health, in estimating future returns and other credits.
Lannett calculates a chargeback/rebate rate based on contractual terms with its customers and applies this rate to customer
sales. The only variable is customer mix, and this assumption is based on historical data and sales expectations.
Chargebacks — The provision for chargebacks is the most significant and complex estimate used in the recognition of
revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains, and
mail-order pharmacies. The Company also sells its products indirectly to independent pharmacies, managed care
organizations, hospitals, nursing homes, and group purchasing organizations, collectively referred to as “indirect customers.”
Lannett enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers
then independently select a wholesaler from which to actually purchase the products at these agreed-upon prices. Lannett
will provide credit to the wholesaler for the difference between the agreed-upon price with the indirect customer and the
wholesaler’s invoice price if the price sold to the indirect customer is lower than the direct price to the wholesaler. This
credit is called a chargeback. The provision for chargebacks is based on expected sell-through levels by the Company’s
wholesale customers to the indirect customers and estimated wholesaler inventory levels. As sales by the Company to the
large wholesale customers, such as Cardinal Health, AmerisourceBergen, and McKesson, increase, the reserve for
chargebacks will also generally increase. However, the size of the increase depends on the product mix. The Company
continually monitors the reserve for chargebacks and makes adjustments when management believes that expected
chargebacks on actual sales may differ from actual chargeback reserves.
F-6
Rebates — Rebates are offered to the Company’s key chain drug store and wholesaler customers to promote customer loyalty
and increase product sales. These rebate programs provide customers with rebate credits upon attainment of pre-established
volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs
offered to the customers. At the time of shipment, the Company estimates reserves for rebates and other promotional credit
programs based on the specific terms in each agreement. The reserve for rebates increases as sales to certain wholesale and
retail customers increase. However, since these rebate programs are not identical for all customers, the size of the reserve
will depend on the mix of customers that are eligible to receive rebates.
Returns — Consistent with industry practice, the Company has a product returns policy that allows customers to return
product within a specified period before and after the product’s lot expiration date in exchange for a credit to be applied to
future purchases. The Company’s policy requires that the customer obtain pre-approval from the Company for any
qualifying return. The Company estimates its provision for returns based principally on historical experience. However, the
Company continually monitors the provisions for returns and makes adjustments when management believes that future
product returns may differ from historical experience. Generally, the reserve for returns increases as net sales increase.
During our fiscal year 2008 we increased our estimated returns reserve approximately $3.0 million, of which $1.5 million
occurred in the fourth quarter, This adjustment was based on an analysis of our historical returns experience, the average lag
time between sales and returns and an evaluation of changing buying and inventory trends of both our direct and indirect
customers. As this change resulted from new information that has allowed us to better estimate the average length of time
between product sales and returns, we consider it to be a change in estimate as defined in SFAS 154: Accounting Changes
and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3. The reserve for returns is
included in the rebates, chargebacks and returns payable account on the balance sheet.
Other Adjustments — Other adjustments consist primarily of price adjustments, also known as “shelf stock adjustments,”
which are credits issued to reflect decreases in the selling prices of the Company’s products that customers have remaining in
their inventories at the time of the price reduction. Decreases in selling prices are discretionary decisions made by
management to reflect competitive market conditions. Amounts recorded for estimated shelf stock adjustments are based
upon specified terms with direct customers, estimated declines in market prices, and estimates of inventory held by
customers. The Company regularly monitors these and other factors and evaluates the reserve as additional information
becomes available. Other adjustments are included in the rebates, chargebacks and returns payable account on the balance
sheet.
The following tables identify the reserves for each major category of revenue allowance and a summary of the activity for the
fiscal years ended June 30, 2009, 2008 and 2007:
For the Year Ended June 30, 2009
Reserve Category
Reserve Balance as of June 30, 2008.............
Chargebacks
$ 4,049,407
Rebates
Returns
Other
Total
$
632,314
$ 13,642,589 $
2,107 $ 18,326,417
Actual credits issued related to sales
recorded in prior fiscal years .....................
(3,954,794)
(632,314)
(12,853,342)
—
(17,440,450)
Reserves or (reversals) charged during Fiscal
2009 related to sales in prior fiscal years...
Reserves charged to net sales during Fiscal
2009 related to sales recorded in Fiscal
2009 ...........................................................
Actual credits issued related to sales
—
—
2,107
(2,107)
—
35,391,475
12,141,204
4,315,638
204,119
52,052,436
recorded in Fiscal 2009..............................
(29,396,286)
(9,603,458)
—
(204,119)
(39,203,863)
Reserve Balance as of June 30, 2009.............
$ 6,089,802
$ 2,537,746
$ 5,106,992 $
— $ 13,734,540
F-7
For the Year Ended June 30, 2008
Reserve Category
Reserve Balance as of June 30, 2007.................
Chargebacks
$ 4,649,478 $
Rebates
Returns
Other
Total
871,339 $
113,313 $
52,234 $ 5,686,364
Actual credits issued related to sales
recorded in prior fiscal years .........................
(4,556,488)
(1,741,804)
(4,909,659)
—
(11,207,951)
Reserves or (reversals) charged during Fiscal
2008 related to sales in prior fiscal years.......
Reserves charged to net sales during Fiscal 2008
related to sales recorded in Fiscal 2008 .........
Actual credits issued related to sales
—
870,465
5,892,805
(50,000)
6,713,270
26,126,995
7,999,232
12,546,130
473,423
47,145,780
recorded in Fiscal 2008..................................
(22,170,578)
(7,366,918)
—
(473,550)
(30,011,046)
Reserve Balance as of June 30, 2008.................
$ 4,049,407 $
632,314 $ 13,642,589 $
2,107 $ 18,326,417
For the Year Ended June 30, 2007
Reserve Category
Reserve Balance as of June 30, 2006.................
Chargebacks
Rebates
Returns
Other
Total
$ 10,137,400 $ 2,183,100 $
416,000 $ 275,600 $ 13,012,100
Actual credits issued related to sales
recorded in prior fiscal years .........................
(10,170,000)
(1,800,000)
(5,578,000)
(250,000)
(17,798,000)
Reserves or (reversals) charged during
Fiscal 2007 related to sales recorded in
prior fiscal years ............................................
Reserves charged to net sales in fiscal 2007
—
(300,000)
3,572,313
—
3,272,313
related to sales recorded in fiscal 2007 ..........
28,034,000
9,562,000
1,703,000
1,044,800
40,343,800
Actual credits issued related to sales in
fiscal 2007......................................................
(23,351,922)
(8,773,761)
—
(1,018,166)
(33,143,849)
Reserve Balance as of June 30, 2007.................
$
4,649,478 $
871,339 $
113,313 $
52,234 $ 5,686,364
The Company ships its products to the warehouses of its wholesale and retail chain customers. When the Company and a
customer enter into an agreement for the supply of a product, the customer will generally continue to purchase the product,
stock its warehouse(s), and resell the product to its own customers. The Company’s customer will reorder the product as its
warehouse is depleted. The Company generally has no minimum size orders for its customers. Additionally, most
warehousing customers prefer not to stock excess inventory levels due to the additional carrying costs and inefficiencies
created by holding excess inventory. As such, the Company’s customers continually reorder the Company’s products. It is
common for the Company’s customers to order the same products on a monthly basis. For generic pharmaceutical
manufacturers, it is critical to ensure that customers’ warehouses are adequately stocked with its products. This is important
due to the fact that multiple generic competitors may compete for the consumer demand for a given product. Availability of
inventory ensures that a manufacturer’s product is considered. Otherwise, retail prescriptions would be filled with
competitors’ products. For this reason, the Company periodically offers incentives to its customers to purchase its products.
These incentives are generally up-front discounts off its standard prices at the beginning of a generic campaign launch for a
newly-approved or newly-introduced product, or when a customer purchases a Lannett product for the first time. Customers
generally inform the Company that such purchases represent an estimate of expected resale for a period of time. This period
of time is generally up to three months. The Company records this revenue, net of any discounts offered and accepted by its
customers at the time of shipment. The Company’s products generally have either 24 months or 36 months of shelf-life at the
time of manufacture. The Company monitors its customers’ purchasing trends to attempt to identify any significant lapses in
purchasing activity. If the Company observes a lack of recent activity, inquiries will be made to such customer regarding the
success of the customer’s resale efforts. The Company attempts to minimize any potential return (or shelf life issues) by
maintaining an active dialogue with the customers.
F-8
The products that the Company sells are generic versions of brand named drugs. The consumer markets for such drugs are
well-established markets with many years of historically-confirmed consumer demand. Such consumer demand may be
affected by several factors, including alternative treatments and costs, etc. However, the effects of changes in such consumer
demand for the Company’s products, like generic products manufactured by other generic companies, are gradual in nature.
Any overall decrease in consumer demand for generic products generally occurs over an extended period of time. This is
because there are thousands of doctors, prescribers, third-party payers, institutional formularies and other buyers of drugs that
must change prescribing habits and medicinal practices before such a decrease would affect a generic drug market. If the
historical data the Company uses and the assumptions management makes to calculate its estimates of future returns,
chargebacks, and other credits do not accurately approximate future activity, its net sales, gross profit, net income and
earnings per share could change. However, management believes that these estimates are reasonable based upon historical
experience and current conditions.
Cash and cash equivalents — The Company considers all highly liquid securities purchased with original maturities of 90
days or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value, and consist of
certificates of deposit that are readily converted to cash.
Accounts Receivable - The Company performs ongoing credit evaluations of its customers and adjusts credit limits based
upon payment history and the customer’s current credit worthiness, as determined by a review of current credit information.
The Company continuously monitors collections and payments from its customers and maintains a provision for estimated
credit losses based upon historical experience and any specific customer collection issues that have been identified. While
such credit losses have historically been within both the Company’s expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past.
Inventories - The Company values its inventory at the lower of cost (determined by the first-in, first-out method) or market,
regularly reviews inventory quantities on hand, and records a provision for excess and obsolete inventory based primarily on
estimated forecasts of product demand and production requirements. The Company’s estimates of future product demand
may fluctuate, in which case estimated required reserves for excess and obsolete inventory may increase or decrease. If the
Company’s inventory is determined to be overvalued, the Company recognizes such costs in cost of goods sold at the time of
such determination. Likewise, if inventory is determined to be undervalued, the Company may have recognized excess cost
of goods sold in previous periods and would recognize such additional operating income at the time of sale.
Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation is provided for by the
straight-line method for financial reporting purposes over the estimated useful lives of the assets. Depreciation expense for
the fiscal years ended June 30, 2009, 2008, and 2007 was approximately $3,275,000, $3,444,000 and $2,765,000,
respectively.
Investment Securities — The Company’s investment securities consist of marketable debt securities, primarily in U.S.
government and agency obligations. All of the Company’s marketable debt securities are classified as available-for-sale and
recorded at fair value, based on quoted market prices. Unrealized holding gains and losses are recorded, net of any tax effect,
as a separate component of accumulated other comprehensive income (loss). No gains or losses on marketable debt securities
are realized until they are sold or a decline in fair value is determined to be other-than-temporary. In accordance with
Financial Accounting Standards Board (“FASB”) Staff Position Nos. FAS 115-1 and FAS 124-1 “The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), the Company periodically reviews
its marketable securities and determines whether the investments are other-than-temporarily impaired. If the investments are
deemed to be other-than-temporarily impaired, the investments are written down to their then current fair market value with a
new cost basis being established. There were no securities determined by management to be other-than-temporarily impaired
for the fiscal years ended June 30, 2009, 2008 and 2007.
Shipping and Handling Costs — The cost of shipping products to customers is recognized at the time the products are
shipped, and is included in cost of sales.
Research and Development — Research and development costs are charged to expense as incurred.
Intangible Assets — In March 2004, the Company entered into an agreement with Jerome Stevens Pharmaceuticals, Inc.
(JSP) for the exclusive marketing and distribution rights in the United States to the current line of JSP products in exchange
for four million (4,000,000) shares of the Company’s common stock. As a result of the JSP agreement, the Company
recorded an intangible asset of $67,040,000 for the exclusive marketing and distribution rights obtained from JSP. The
intangible asset was recorded based upon the fair value of the four million (4,000,000) shares at the time of issuance to JSP.
F-9
During the quarter ended March 31, 2005, the Company recorded a non-cash impairment loss of approximately $46,093,000
in accordance with SFAS 144, Accounting for Impairment or Disposal of Long-lived Assets to reduce the carrying value of
the intangible asset to its fair value of approximately $16,062,000 as of the date of the impairment. As of June 30, 2009 and
2008, management concluded the carrying value of the intangible asset was less than its fair value and, therefore, no further
impairment was required. The Company will incur annual amortization expense of approximately $1,785,000 for the JSP
intangible asset over the remaining term of the agreement.
On April 10, 2007, the Company entered into a Stock Purchase Agreement to acquire Cody by purchasing all of the
remaining shares of common stock of Cody. The consideration for the April 10, 2007 acquisition was approximately
$4,438,000, which represented the fair value of the tangible net assets acquired. The agreement also required Lannett to issue
to the sellers up to 120,000 shares of unregistered common stock of the Company contingent upon the receipt of a license
from a regulatory agency. This license was subsequently received in July 2008 and triggered the payment of 105,000 shares
(87.5% of the 120,000 shares as the Company already owned 12.5%) of Lannett stock to the former owners of Cody Labs,
which was completed in October 2008. Therefore, the Company recorded an intangible asset related to the acquisition of a
drug import license in the original amount of $581,175 and recorded a corresponding deferred tax liability of approximately
$150,700 due to the non-deductibility of the amortization for tax purposes. The Company has assigned a 15 year life to this
intangible asset based on average life cycles of Lannett products. See Note 12.
In January 2005, Lannett Holdings, Inc. entered into an agreement in which the Company purchased for $100,000 and future
royalty payments the proprietary rights to manufacture and distribute a product for which Pharmeral, Inc. owned the ANDA.
In May 2008, the Company and Pharmeral waived their rights to any royalty payments on the sales of the drug by Lannett,
under Lannett’s current ownership structure. Should Lannett undergo a major change in control where a third party is
involved, this royalty will be reinstated. In Fiscal 2008, the Company obtained FDA approval to use these proprietary rights.
Accordingly, the Company has capitalized this purchased product right as an indefinite lived intangible asset which is tested
for impairment at least on an annual basis. During the fourth quarter of fiscal 2009, it was determined that this intangible
asset no longer has an indefinite life. No impairment existed because the estimated fair value exceeded the carrying amount
on that date. Accordingly, the $100,000 carrying amount of this intangible asset will be amortized on a straight line basis
prospectively over its 10 year remaining estimated useful life. See Note 17.
For the fiscal years ended June 30, 2009, 2008 and 2007, the Company incurred amortization expense of approximately
$1,824,000, $1,785,000, and $1,785,000, respectively.
Future annual amortization expense consists of the following:
Fiscal Year Ending June 30,
2010 ............................................................
2011 ............................................................
2012 ............................................................
2013 ............................................................
2014 ............................................................
Thereafter....................................................
$
Annual Amortization Expense
1,833,412
1,833,412
1,833,412
1,833,412
1,387,245
397,817
9,118,710
$
Advertising Costs - The Company charges advertising costs to operations as incurred. Advertising expense for the fiscal
years ended June 30, 2009, 2008 and 2007 was approximately $48,000, $9,000, and $75,000, respectively.
Income Taxes - The Company uses the liability method specified by Statement of Financial Accounting Standards No. 109
(FAS), Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which are expected to be in
effect when these differences reverse. Deferred tax expense/ (benefit) is the result of changes in deferred tax assets and
liabilities. In July 2006, the FASB issued FIN 48, which addresses the determination of whether tax benefits claimed or
expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may
recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the
financial statements from such a position should be measured based on the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest
and penalties on income taxes, accounting in interim periods and requires increased disclosures. We adopted the provisions
of FIN 48 on July 1, 2007.
F-10
Segment Information — The Company reports segment information in accordance with Statement of Financial Accounting
Standard No. 131 (FAS 131), Disclosures about Segments of an Enterprise and Related Information. The Company operates
one business segment - generic pharmaceuticals, accordingly the Company has one reporting segment. In accordance with
FAS 131, the Company aggregates its financial information for all products and reports as one operating segment. The
following table identifies the Company’s approximate net product sales by medical indication for the fiscal years ended
June 30, 2009, 2008 and 2007:
Medical Indication
For the Fiscal Year Ended June 30,
2008
2007
2009
Migraine Headache..........................................................
Epilepsy ...........................................................................
Pre Natal Vitamin ............................................................
Heart Failure ....................................................................
Thyroid Deficiency..........................................................
Antibiotic .........................................................................
Other ................................................................................
$
$
$
9,553,143
1,777,820
12,569,304
26,421,467
47,740,834
6,483,190
14,456,457
10,302,868
3,811,963
—
7,574,240
38,429,663
3,449,429
8,835,120
10,738,109
7,593,547
—
4,728,907
35,350,388
3,095,241
21,071,399
Total.................................................................................
$
119,002,215
$
72,403,283
$
82,577,591
Concentration of Market and Credit Risk — Six of the Company’s products, defined as generics containing the same active
ingredient or combination of ingredients, accounted for approximately 40%, 22%, 11%, 8%, 3%, and 2% of net sales for the
fiscal year ended June 30, 2009. Those same products accounted for 53%, 10%, 0%, 14%, 4%, and 0%, respectively, of net
sales for the fiscal year ended June 30, 2008, and 43%, 6%, 0%, 12%, 3%, and 0%, respectively, for the fiscal year ended
June 30, 2007.
Four of the Company’s customers accounted for 31%, 11%, 9%, and 8%, respectively, of net sales for the fiscal year ended
June 30, 2009; 36%, 9%, 5%, and 6%, respectively, of net sales for the fiscal year ended June 30, 2008; and 15%, 12%, 6%,
and 24%, respectively, of net sales for the fiscal year ended June 30, 2007.
Credit terms are offered to customers based on evaluations of the customers’ financial condition. Generally, collateral is not
required from customers. Accounts receivable payment terms vary and are stated in the financial statements at amounts due
from customers net of an allowance for doubtful accounts. Accounts remaining outstanding longer than the payment terms
are considered past due. The Company determines its allowance by considering a number of factors, including the length of
time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its
obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off
accounts receivable when they become uncollectible.
Share-based Payments - The Company follows the guidance in Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 123 (R), “Share-Based Payment” (SFAS 123(R)). SFAS 123(R) addresses the
accounting for share-based compensation in which we receive employee services in exchange for our equity instruments.
Under the standard, the Company recognizes compensation cost for share-based compensation issued to or purchased by
employees, net of estimated forfeitures, under share-based compensation plans using a fair value method. Compensation cost
related to share-based payments is included in the income statement in the same line item as the related other compensation
costs.
At June 30, 2009, the Company had three stock-based employee compensation plans (the “Old Plan,” the “2003 Plan,” and
the “Long-term Incentive Plan,” or “LTIP”).
During the fiscal year ended June 30, 2009, the Company awarded 30,000 shares of restricted stock under the LTIP which
vested immediately. Stock compensation expense of $101,400 was recognized during the fiscal year ended June 30, 2009,
related to these shares of restricted stock.
During the fiscal year ended June 30, 2008, the Company awarded 209,264 shares of restricted stock under the LTIP of
which, 74,464 of these shares vested 100% on January 1, 2008, the remainder vest in equal portions on September 18, 2008,
2009 and 2010. Stock compensation expense of $172,028 and $134,794 was recognized during the fiscal years ended
June 30, 2009 and 2008, related to the vesting of these shares of restricted stock.
F-11
The Company is required to record compensation expense for all awards granted after the date of adoption of SFAS
123(R) and for the unvested portion of previously granted awards that remain outstanding as of the beginning of the period of
adoption. The Company measures share-based compensation cost for options using the Black-Scholes option pricing model.
The following table presents the weighted average assumptions used to estimate fair values of the stock options granted
during the years ended June 30 and the estimated annual forfeiture rates used to recognize the associated compensation
expense:
Incentive
Stock
Options
FY 2009
Non-
qualified
Stock
Options
FY 2009
Incentive
Stock
Options
FY 2008
Non-
qualified
Stock
Options
FY 2008
Incentive
Stock
Options
FY 2007
Non-
qualified
Stock
Options
FY 2007
2.46%
61%
0.0%
5.0%
2.52%
56%
0.0%
5.0%
4.15%
56%
0.0%
5.0%
4.21%
56%
0.0%
5.0%
4.71%
59%
0.0%
5.0%
4.79%
59%
0.0%
5.0%
5.0 years
5.0 years
5.0 years
5.0 years
5.0 years
5.0 years
Risk-free interest rate..........
Expected volatility ..............
Expected dividend yield......
Forfeiture rate .....................
Expected term (in years) .....
Weighted average fair
value................................
$
2.20
$
1.41
$
2.11
$
2.11
$
3.36
$
3.20
Approximately 147,000 options were issued under the LTIP during the year ended June 30, 2009. This compares to
approximately 582,000 options issued during the year ended June 30, 2008 and approximately 354,000 options issued during
the year ended June 30, 2007. 10,800 options were exercised in the year ended June 30, 2009, resulting in proceeds of
$45,812 to the Company. There were no shares under option that were exercised in the year ended June 30, 2008. 375
options were exercised in the year ended June 30, 2007, resulting in proceeds of $281 to the Company. At June 30, 2009,
there were 1,585,681 options outstanding. Of those, 602,900 were options issued under the LTIP, 771,548 were issued under
the 2003 Plan, and 211,233 under the Old Plan. There are no further shares authorized to be issued under the Old Plan.
1,125,000 shares were authorized to be issued under the 2003 Plan, with 12,090 shares under option having already been
exercised under that plan. 2,500,000 shares were authorized to be issued under the LTIP, with 6,400 shares under option
having already been exercised under that plan.
Expected volatility is based on the historical volatility of the price of our common shares since the date we commenced
trading on the NYSE - Amex, April 2002, or a historical period equal to the expected term of the option, whichever is shorter.
We use historical information to estimate expected term within the valuation model. The expected term of awards represents
the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life
of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation cost is recognized using a
straight-line method over the vesting or service period and is net of estimated forfeitures.
The forfeiture rate assumption is the estimated annual rate at which unvested awards are expected to be forfeited during the
vesting period. This assumption is based on our historical forfeiture rate. Periodically, management will assess whether it is
necessary to adjust the estimated rate to reflect changes in actual forfeitures or changes in expectations. For example,
adjustments may be needed if, historically, forfeitures were affected mainly by turnover that resulted from a business
restructuring that is not expected to recur. The forfeiture rate used to calculate compensation expense was 5% for fiscal years
2009, 2008 and 2007. Under the provisions of FAS 123R, the Company will incur additional expense if the actual forfeiture
rate is lower than originally estimated. A recovery of prior expense will be recorded if the actual rate is higher than originally
estimated.
The following table presents all share-based compensation costs recognized in our statements of income as part of selling,
general and administrative expenses:
Share based compensation
Stock options ................................................................................
Employee stock purchase plan......................................................
Restricted stock.............................................................................
Tax benefit at effective rate ..............................................................
$
$
$
$
930,878
81,871
273,428
79,560
$
$
$
$
869,921
25,208
134,794
108,127
$
$
$
$
1,142,912
33,323
—
187,762
Twelve months ended June 30,
2008
2009
2007
F-12
As part of the former CFO’s resignation, the Company repurchased all of his 185,000 outstanding stock options. Therefore,
the Company recorded, as incremental stock compensation expense, the previously unrecognized compensation cost totaling
approximately $83,000 related to options for which the requisite service period had not been rendered as of the repurchase
date. See Note 10 for additional information.
Options outstanding that have vested and are expected to vest as of June 30, 2009 are as follows:
Options vested .....................................................
Options expected to vest ......................................
Total vested and expected to vest ........................
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
9.53
4.27
7.60
$
$
$
723,174
1,474,106
2,197,280
Awards
986,237
569,472
1,555,709
$
$
$
Weighted
Average
Remaining
Contractual
Life
5.5
8.5
6.6
A summary of nonvested restricted stock award activity as of June 30, 2009, 2008, and 2007 and changes during the years
then ended, is presented below:
Nonvested at June 30, 2007 .........................................
Granted ........................................................................
Vested ..........................................................................
Forfeited.......................................................................
Nonvested at June 30, 2008 .........................................
Granted ........................................................................
Vested ..........................................................................
Forfeited.......................................................................
Nonvested at June 30, 2009 .........................................
Awards
—
209,264
(74,464)
(10,000)
124,800
30,000
(68,602)
(9,000)
77,198
Weighted
Average Grant -
date Fair Value
—
$
843,334
(300,090)
(40,300)
502,944
101,400
(256,966)
(36,270)
311,108
$
A summary of stock option award activity under the Plans as of June 30, 2009, 2008 and 2007 and changes during the years
then ended, is presented below:
Incentive Stock Options
Weighted-
Average
Exercise
Awards
Price
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
Nonqualified Stock Options
Weighted-
Average
Exercise
Weighted
Average
Remaining
Intrinsic Contractual
Aggregate
Awards
Price
Value
Life
Outstanding at
July 1, 2008..............
Granted ........................
Exercised .....................
Forfeited, expired
991,267 $
187,102 $
(10,800) $
5.76
4.03
4.24
703,064 $
37,998 $
—
10.16
2.80
—
or repurchased..........
(208,660) $
5.06
(114,290) $
5.75
Outstanding at
June 30, 2009 ...........
958,909 $
5.60 $ 1,844,125
7.4
626,772 $
10.52 $ 430,739
5.5
Outstanding at June
30, 2009 and not
yet vested .................
Exercisable at
478,551 $
4.27 $ 1,234,175
8.6
120,893 $
4.23 $ 317,515
June 30, 2009 ...........
480,358 $
6.91 $
609,950
6.2
505,879 $
12.02 $ 113,224
8.2
4.9
F-13
Incentive Stock Options
Weighted
Average
Exercise
Aggregate
Intrinsic
Value
Awards
Price
Outstanding at
July 1, 2007.............. 501,349 $
Granted ........................ 496,818 $
Exercised .....................
Forfeited or expired .....
Outstanding at
—
(6,900) $
7.48
4.03
—
5.67
Weighted
Average
Remaining
Contractual
Nonqualified Stock Options
Weighted
Average
Exercise
Weighted
Average
Remaining
Intrinsic Contractual
Aggregate
Life
Awards
Price
Value
Life
617,982 $
85,082 $
—
—
11.00
4.03
—
—
June 30, 2008 ........... 991,267 $
5.76 $
6,300
8.0
703,064 $
10.16 $
—
6.5
Outstanding at
June 30, 2008
and not yet vested .... 660,538 $
Exercisable at
4.54 $
—
9.0
183,651 $
5.05 $
June 30, 2008 ........... 330,729 $
8.21 $
6,300
6.1
519,413 $
11.96 $
—
—
8.7
5.8
Incentive Stock Options
Weighted
Average
Exercise
Aggregate
Intrinsic
Value
Awards
Price
Weighted
Average
Remaining
Contractual
Nonqualified Stock Options
Weighted
Average
Exercise
Weighted
Average
Remaining
Intrinsic Contractual
Aggregate
Life
Awards
Price
Value
Life
Outstanding at
July 1, 2006.............. 307,541 $
Granted ........................ 220,263 $
(375) $
Exercised .....................
Forfeited or expired .....
(26,080) $
Outstanding at
8.47
6.14
0.75 $
7.84
2,063
484,462 $
133,520 $
—
—
12.42
5.84
—
—
June 30, 2007 ........... 501,349 $
7.48 $ 201,763
7.8
617,982 $
11.00 $ 103,320
7.1
Outstanding at
June 30, 2007 and
not yet vested ........... 276,222 $
Exercisable at
6.11 $ 133,375
9.0
177,817 $
6.16 $ 99,680
June 30, 2007 ........... 225,127 $
9.16 $ 68,388
6.3
440,165 $
12.96 $
3,640
8.9
6.4
Options with a fair value of approximately $786,000 completed vesting during 2009. As of June 30, 2009, there was
approximately $1,129,000 of total unrecognized compensation cost related to nonvested share-based compensation awards
granted under the Plans. That cost is expected to be recognized over a weighted average period of 1.4 years. As of June 30,
2008, there was approximately $1,790,000 of total unrecognized compensation cost related to non-vested share-based
compensation awards granted under the Plans. The Company issues new shares when stock options are exercised.
Unearned Grant Funds — The Company records all grant funds received as a liability until the Company fulfills all the
requirements of the grant funding program.
Earnings per Common Share — SFAS No. 128, Earnings per Share, requires a dual presentation of basic and diluted
earnings per share on the face of the Company’s consolidated statement of income and a reconciliation of the computation of
basic earnings per share to diluted earnings per share. Basic earnings per share excludes the dilutive impact of common stock
equivalents and is computed by dividing net income by the weighted-average number of shares of common stock outstanding
for the period. Diluted earnings per share include the effect of potential dilution from the exercise of outstanding common
stock equivalents into common stock using the treasury stock method. Earnings per share amounts for all periods presented
have been calculated in accordance with the requirements of SFAS No. 128. A reconciliation of the Company’s basic and
diluted earnings per share follows:
F-14
2009
2008
2007
Net Income
(Numerator)
Shares
(Denominator)
Net Loss
(Numerator)
Shares
(Denominator)
Net Loss
(Numerator)
Shares
(Denominator)
Basic earnings/(loss) per
share factors ........................... $ 6,534,245
24,447,016 $ (2,318,059)
24,227,181 $ (6,929,008)
24,159,251
Effect of potentially
dilutive options ......................
—
140,361
—
—
—
—
Diluted earnings/(loss) per
share factors ........................... $ 6,534,245
24,587,378 $ (2,318,059)
24,227,181 $ (6,929,008)
24,159,251
Basic earnings/(loss) per share .. $
Diluted earnings/(loss)
0.27
per share................................. $
0.27
$
$
(0.10)
(0.10)
$
$
(0.29)
(0.29)
Dilutive shares have been excluded in the weighted average shares used for the calculation of earnings per share in periods of
net loss because the effect of such securities would be anti-dilutive. The number of anti-dilutive shares that have been
excluded in the computation of diluted earnings per share for the fiscal years ended June 30, 2009, 2008 and 2007 were
980,781, 1,949,131, and 1,119,331, respectively.
As disclosed in Note 12, the Company entered into a Stock Purchase Agreement on April 10, 2007 to acquire Cody
Laboratories, Inc. (“Cody”) by purchasing all of the remaining shares of common stock of Cody. As part of the consideration,
the agreement required Lannett to issue to the sellers up to 120,000 shares of unregistered common stock of the Company
contingent upon the receipt of a license from a regulatory agency. In accordance with paragraph 30 of SFAS 128, these
contingently issuable shares were not included in the calculation of diluted EPS because the conditions necessary for the
issuance of the shares had not been satisfied at the end of the reporting period. In July, 2008, the license was received from
the regulatory agency and the contingent shares were issued to the sellers in accordance with the Stock Purchase Agreement.
Note 2. New Accounting Standards
In June 2007, the Emerging Issues Task Force (“EITF”) reached a final consensus on EITF Issue No. 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities”
(“EITF 07-3”). EITF 07-3 was effective for our fiscal year beginning July 1, 2008. EITF 07-3 requires non-refundable
advance payments for future research and development activities to be capitalized until the goods have been delivered or
related services have been performed. As the guidance in EITF 07-03 is consistent with our existing policy, EITF 07-03 did
not have any impact on our financial statements or related disclosures.
In November 2007, the EITF reached a final consensus on EITF Issue No. 07-1, “Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual Property” (“EITF 07-1”). EITF 07-1 will be
effective for our fiscal year beginning July 1, 2009 and interim periods within that fiscal year. Adoption is on a retrospective
basis to all prior periods presented for all collaborative arrangements existing as of the effective date. We are currently
evaluating the impact of adopting EITF 07-1 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“FAS 141(R)”). FAS 141(R) significantly
changes the accounting for business combinations in a number of areas including the treatment of contingent consideration,
contingencies, acquisition costs, in-process research and development and restructuring costs. In addition, under FAS 141(R),
changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the
measurement period will impact income tax expense. In April 2009, FAS 141(R) was amended by FASB Staff Position FAS
141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies,” (“FSP FAS 141(R)-1”) to address application issues regarding the accounting and disclosure provisions for
contingencies. FSP FAS 141(R) amends FAS 141R by replacing the guidance on the initial recognition and measurement of
assets and liabilities arising from contingencies acquired or assumed in a business combination. FSP FAS 141(R)-1 also
amends FAS 141R’s subsequent accounting guidance for contingent assets and liabilities recognized at the acquisition date
and amends the disclosure requirements for contingencies. FAS 141(R) and FSP FAS 141(R)-1 apply prospectively to
business combinations for which the acquisition date is on or after the beginning of the fiscal year beginning July 1, 2009.
Early application is not permitted. The effect of these standards on our consolidated financial statements will depend on the
nature and terms of any business combinations that occur after the effective date.
F-15
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”
(“FAS 160”). FAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the
noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary
that do not result in deconsolidation. FAS 160 is effective for our fiscal year beginning July 1, 2009. We do not expect the
adoption of FAS 160 to have a significant impact on our consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”
(“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and
Other Intangible Assets”. The FSP is intended to improve the consistency between the useful life of a recognized intangible
asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FAS
141(R) and other U.S. generally accepted accounting principles. The new standard is effective for our financial statements
issued for fiscal years and interim periods beginning July 1, 2009. We do not expect the adoption of FSP FAS 142-3 to have
a significant impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments,” to make the guidance on other-than-temporary impairments of debt securities more
operational and improve the financial statement disclosures related to other-than-temporary impairments for debt and equity
securities. The FSP clarifies the interaction of the factors that should be considered when determining whether a debt security
is other-than-temporarily impaired. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. If an entity adopts either FSP FAS
157-4 or FSP FAS 107-1 and APB 28-1 for periods ending after March 15, 2009, then it must adopt this FSP at the same
time. The Company adopted FSP FAS 115-2 and FAS 124-2 effective June 30, 2009. The adoption of these standards did not
have a significant impact on our consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“FAS 165”). FAS 165 defines the period after the
balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements. The statement is effective for interim and annual periods
ending after June 15, 2009. The Company adopted FAS 165 effective with its financial statements as of and for the year
ended June 30, 2009. In preparing these financial statements, the Company has evaluated events and transactions for potential
recognition or disclosure through September 28, 2009, the date the financial statements were issued.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS 167”). FAS 167
amends Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable
interest or interests give it a controlling financial interest in a variable interest entity. It also amends Interpretation 46(R) to
require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. The statement
is effective for the annual reporting period that begins after November 15, 2009. We do not expect the adoption of FAS 167
to have a significant impact on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of
Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”), which establishes the
FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be
applied in the preparation of financial statements in conformity with generally accepted accounting principles. SFAS 168
explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal
securities laws as authoritative GAAP for SEC registrants. SFAS 168 will become effective in the first quarter of fiscal year
2010 and will not have a material impact on the Company’s consolidated financial statements.
Note 3. Inventories
Inventories at June 30, 2009 and 2008 consist of the following:
Raw Materials..................................................
Work-in-process ..............................................
Finished Goods ................................................
Packaging Supplies..........................................
2009
2008
$ 5,755,982 $ 3,530,951
1,034,360
6,767,718
284,229
$ 16,195,361 $ 11,617,258
2,846,600
6,664,193
928,586
F-16
The preceding amounts are net of inventory obsolescence reserves of $2,744,305 and $1,642,668 at June 30, 2009 and 2008,
respectively.
Note 4. Property, Plant and Equipment
Property, plant and equipment at June 30, 2009 and 2008 consist of the following:
Land ............................................................
Building and improvements........................
Machinery and equipment ..........................
Furniture and fixtures .................................
$
Useful Lives
-
10 - 39 years
5 - 10 years
5 - 7 years
2009
918,314 $
17,048,351
22,573,324
891,169
2008
918,314
16,806,057
21,434,375
837,262
Less accumulated depreciation ...................
Total............................................................
Note 5. Investment Securities - Available-for-Sale
41,431,158
(18,533,773)
22,897,385 $
39,996,008
(15,261,905)
24,734,103
$
On July 1, 2008, the Company adopted FAS 157, which clarifies the definition of fair value, establishes a framework for
measuring fair value, and expands the disclosures on fair value measurements. In February 2008, the FASB issued FSP 157-1
which amends FAS 157 to remove certain leasing transactions from its scope and FSP 157-2 that deferred the effective date
of FAS 157 for one year for nonfinancial assets and liabilities recorded at fair value on a non-recurring basis. In
October 2008, the FASB issued FSP 157-3, which clarifies the application of FAS 157 in a market that is not active. In
April 2009, the FASB issued FSP 157-4 which provides additional guidance when the volume and level of activity for the
asset or liability have significantly decreased. FAS 157 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. FAS 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. FAS 157 describes three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities. The Company does not have any level 1
available-for-sale securities as of June 30, 2009.
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted
prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are
observable or whose significant value drivers are observable. The Company’s Level 2 assets and liabilities primarily include
debt securities with quoted prices that are traded less frequently than exchange-traded instruments, corporate bonds,
U.S. government and agency securities and certain mortgage-backed and asset-backed securities whose values are determined
using pricing models with inputs that are observable in the market or can be derived principally from or corroborated by
observable market data. The fair value of the Company’s available-for-sale securities in the table below are derived solely
from level 2 inputs.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments
whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as
instruments for which the determination of fair value requires significant judgment or estimation. The Company does not
have any level 3 available-for-sale securities as of June 30, 2009.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the
categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
F-17
The amortized cost, gross unrealized gains and losses, and fair value of the Company’s available-for-sale securities as of
June 30, 2009 and June 30, 2008:
June 30, 2009
Available-for-Sale
Amortized Cost
Gross Unrealized
Gains
Gross
Unrealized
Losses
U.S. Government Agency...............
Corporate Bonds .............................
$
$
928,910 $
179,507
1,108,417 $
40,352 $
900
41,252 $
Fair Value
— $
—
— $
969,262
180,407
1,149,669
June 30, 2008
Available-for-Sale
Amortized Cost
Gross Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
U.S. Government Agency...............
Asset-Backed Securities .................
$
$
2,036,039 $
447,893
2,483,932 $
48,059 $
1,013
49,072 $
(9,854) $
(23,015)
(32,869) $
2,074,244
425,891
2,500,135
The amortized cost and fair value of the Company’s current available-for-sale securities by contractual maturity at June 30,
2009 and June 30, 2008 are summarized as follows:
June 30, 2009
Available for Sale
June 30, 2008
Available for Sale
Amortized
Cost
Fair
Value
Amortized
Cost
Due in one year or less............................
Due after one year through five years.....
Due after five years through ten years ....
Due after ten years ..................................
Total available-for-sale securities ...........
Less current portion ................................
Long-term available-for-sale securities ..
$
$
338,159 $
770,258
—
—
1,108,417
338,159
770,258 $
347,921 $
801,748
—
—
1,149,669
347,921
801,748 $
343,638 $
1,692,401
121,608
326,285
2,483,932
343,638
2,140,294 $
Fair
Value
354,155
1,720,089
121,769
304,122
2,500,135
354,155
2,145,980
The Company uses the specific identification method to determine the cost of securities sold. For the fiscal years ended
June 30, 2009, the Company had realized gains of $53,524, whereas for fiscal years 2008 and 2007, the Company had
realized losses of $4,338 and $0, respectively.
As of June 30, 2009 and 2008, there were no securities held from a single issuer that represented more than 10% of
shareholders’ equity. As of June 30, 2009, there were no individual securities in a continuous unrealized loss position.
Note 6. Bank Line of Credit
The Company has a $3,000,000 line of credit from Wachovia Bank, N.A. (now a subsidiary of Wells Fargo & Co.) that bears
interest at the prime interest rate less 0.25% (3.00% and 4.75% at June 30, 2009 and 2008, respectively). As of June 30, 2009
and 2008, the Company has $3,000,000 and $2,912,247 of availability under this line of credit. The Company entered into a
letter of credit in the amount of $917,000 of which $87,753 was outstanding as of June 30, 2008. There were no outstanding
letters of credit as of June 30, 2009. The line of credit was renewed and extended to November 30, 2009. The line of credit
is collateralized by substantially all of the Company’s assets. The agreement contains covenants with respect to working
capital, net worth and certain ratios, as well as other covenants. As of June 30, 2009, the Company was in compliance with
all financial covenants under the agreement.
The Company is required to maintain and comply with a debt service coverage ratio of not less than 2 to 1 (to be measured
quarterly). Debt service coverage is defined as the ratio of earnings before interest, taxes, depreciation and amortization
(EBITDA) to the sum of interest expenses plus scheduled current maturities of long-term debt and current capitalized lease
obligations. The terms of the agreement require the Company to at all times maintain deposit balances in excess of
F-18
$3,500,000 with the Wachovia for the balance of the arrangement. Additionally, the Company is now required to pay
Wachovia an availability fee equal to 0.50% per annum calculated daily, on the available but unused balance of the line of
credit instead of the previous 0.25% per annum rate.
Note 7. Unearned Grant Funds
In July 2004, the Company received $500,000 of grant funding from the Commonwealth of Pennsylvania, acting through the
Department of Community and Economic Development. The grant funding program requires the Company to use the funds
for machinery and equipment located at their Pennsylvania locations, hire an additional 100 full-time employees by June 30,
2006, operate its Pennsylvania locations a minimum of five years and meet certain matching investment requirements. If the
Company fails to comply with any of the requirements above, the Company would be liable to repay the full amount of the
grant funding ($500,000). The Company has recorded the unearned grant funds as a liability until the Company complies
with all of the requirements of the grant funding program. As of June 30, 2009, the Company has had preliminary
discussions with the Commonwealth of Pennsylvania to determine whether it will be required to repay any of the funds
provided under the grant funding program. Based on information available at June 30, 2009, the Company has recorded the
grant funding as a long-term liability under the caption of Unearned Grant Funds.
Note 8. Long-Term Debt
Long-term debt at June 30, 2009 and 2008 consists of the following:
PIDC Regional Center, LP III loan.................................................................................
Pennsylvania Industrial Development Authority loan ....................................................
Pennsylvania Department of Community & Economic Development loan....................
Tax-exempt bond loan (PAID) .......................................................................................
Equipment loan...............................................................................................................
SBA loan.........................................................................................................................
First National Bank of Cody mortgage...........................................................................
$
June 30,
2009
4,500,000 $
1,002,607
182,831
680,000
80,130
—
1,693,200
June 30,
2008
4,500,000
1,075,732
283,475
795,000
400,653
183,750
1,740,224
Total debt........................................................................................................................
Less current portion ........................................................................................................
8,138,768
435,386
8,978,834
791,912
Long term debt................................................................................................................
$
7,703,382 $
8,186,922
Current Portion of Long Term Debt
PIDC Regional Center, LP III loan................................................................................
Pennsylvania Industrial Development Authority loan ...................................................
Pennsylvania Department of Community & Economic Development loan...................
Tax-exempt bond loan (PAID) ......................................................................................
Equipment loan..............................................................................................................
SBA loan........................................................................................................................
First National Bank of Cody mortgage..........................................................................
$
June 30,
2009
June 30,
2008
$
—
75,017
103,100
125,000
80,130
—
52,139
—
73,132
100,614
115,000
400,653
54,025
48,488
Total current portion of long term debt..........................................................................
$
435,386
$
791,912
The Company financed $4,500,000 through the Philadelphia Industrial Development Corporation (PIDC). The Company
pays a bi-annual interest payment at a rate equal to two and one-half percent per annum. The outstanding principal balance is
due and payable January 1, 2011.
The Company financed $1,250,000 through the Pennsylvania Industrial Development Authority (PIDA). The Company is
required to make equal payments each month for 180 months starting February 1, 2006 with interest of two and three-quarter
percent per annum.
F-19
An additional $500,000 was financed through the Pennsylvania Department of Community and Economic Development
Machinery and Equipment Loan Fund. The Company is required to make equal payments for 60 months starting May 1,
2006 with interest of two and three quarter percent per annum.
In April 1999, the Company entered into a loan agreement (the “Agreement”) with a governmental authority, the
Philadelphia Authority for Industrial Development (the “Authority” or “PAID”), to finance future construction and growth
projects of the Company. The Authority issued $3,700,000 in tax-exempt variable rate demand and fixed rate revenue bonds
to provide the funds to finance such growth projects pursuant to a trust indenture (“the Trust Indenture”). A portion of the
Company’s proceeds from the bonds was used to pay for bond issuance costs of approximately $170,000. The Trust
Indenture requires that the Company repay the Authority loan through installment payments beginning in May 2003 and
continuing through May 2014, the year the bonds mature. The bonds bear interest at the floating variable rate determined by
the organization responsible for selling the bonds (the “remarketing agent”). The interest rate fluctuates on a weekly basis.
The effective interest rate at June 30, 2009 and 2008 was 0.62% and 1.67%, respectively.
The Company entered into agreements (the “2003 Loan Financing”) with Wachovia to finance the purchase of the Torresdale
Avenue facility, the renovation and setup of the building, and other anticipated capital expenditures. The Company, as part
of the 2003 Loan Financing agreement, is required to make equal payments of principal and interest. The only portion of the
loan that remains outstanding at June 30, 2009 was the Equipment Loan which consists of a term loan with a term of five
years and had an outstanding balance of $80,130 and $400,653 at June 30, 2009 and 2008, respectively. The terms of the
Equipment loan require that the Company meet certain financial covenants and reporting standards, including the attainment
of specific financial liquidity and net worth ratios. As of June 30, 2009, the Company was in compliance with all financial
covenants under this agreement.
The Company is required to maintain and comply with a debt service coverage ratio of not less than 2 to 1 (to be measured
quarterly). Debt service coverage is defined as the ratio of earnings before interest, taxes, depreciation and amortization
(EBITDA) to the sum of interest expenses plus scheduled current maturities of long-term debt and current capitalized lease
obligations. The terms of the agreement require the Company to at all times maintain deposit balances in excess of
$3,500,000 with Wachovia for the balance of the arrangement. Additionally, the Company now pays to Wachovia an
availability fee equal to 0.50% per annum calculated daily, on the available but unused balance of the line of credit instead of
the previous 0.25% per annum rate.
The financing facilities under the 2003 Loan Financing, of which only the Equipment Loan is left, bear interest at a variable
rate equal to the LIBOR rate plus 150 basis points. The LIBOR rate is the rate per annum, based on a 30-day interest period,
quoted two business days prior to the first day of such interest period for the offering by leading banks in the London
interbank market of dollar deposits. As of June 30, 2009 and 2008, the interest rate for the 2003 Loan Financing (of which
only the Equipment loan remains) was 1.81% and 3.89%, respectively.
The Company has executed Security Agreements with Wachovia, PIDA and PIDC in which the Company has agreed to
pledge substantially all of its assets to collateralize the amounts due.
Included in the acquisition of Cody was a loan from the Small Business Administration (“SBA”). The loan required fixed
monthly payments, with an effective interest rate of 8.75%, through July 31, 2012. This loan was paid off in the third quarter
of fiscal 2009.
Also as part of the Cody acquisition, the Company became primary beneficiary to a variable interest entity (“VIE”) called
Cody LCI Realty, LLC. See Note 13, Consolidation of Variable Interest Entity for additional description. The VIE owns
land and a building which is being leased to Cody. A mortgage loan with First National Bank of Cody has been consolidated
in the Company’s financial statements, along with the related land and building. The mortgage has 17 years remaining.
Principal and interest payments of $14,782, at a fixed interest rate of 7.5%, are being made on a monthly basis through
June 2026. The mortgage loan is collateralized by the land and building.
F-20
Long-term debt amounts are due as follows:
Fiscal Year Ending
June 30,
2010 ..................................................................................
2011 ..................................................................................
2012 ..................................................................................
2013 ..................................................................................
2014 ..................................................................................
Thereafter..........................................................................
Amounts Payable
to Institutions
$
$
435,386
4,842,534
274,585
280,706
298,988
2,006,569
8,138,768
Some of the Company’s debt instruments are fixed rate, with a lower interest rate than the prevailing market rates. The
Company has been able to obtain favorable rates through Philadelphia and Pennsylvania Industrial Development Authorities.
Note 9. Contingencies
In early June 2008, the Company filed a declaratory judgment suit in the Federal District Court of Delaware (Civil Action
No. 08-338 (JJF)) against KV Pharmaceuticals, DrugTech Corp., and Ther-Rx Corp (collectively “KV”). The complaint
sought declaratory judgment for non-infringement and invalidity of certain patents owned by KV. The complaint further
sought declaratory judgment of anti-trust violations and federal and state unfair competition violations for actions taken by
KV in securing and enforcing these patents. After the complaint was filed, KV countered with a motion for a Temporary
Restraining Order (“TRO”) to prevent the Company from launching its Multivitamin with Mineral Capsules (“MMCs”), due
to alleged patent and trademark infringement issues. The TRO was heard and, ultimately, resulted in a conclusion by the
court that the Company’s product label on the MMCs should be modified. KV also countered with claims of infringement by
the Company of KV’s patents seeking the Company’s profits for sales of MMCs or other monetary relief, preliminary and
permanent injunctive relief, attorney’s fees and a finding of willful infringement. On March 17, 2009 the Company and KV
settled the litigation. In light of the withdrawal of KV’s innovator prenatal product, and the resulting anticipated decline in
sales and declining market for written prescription, the Company decided it was pointless to continue the litigation and
entered into the settlement arrangement with KV. Pursuant to the settlement, the Company received a license from KV and
became an authorized generic provider. During the terms of the license, the Company will pay KV a royalty on all future
sales of its Prenatal vitamin product. Lannett will cease offering its Prenatal vitamin product if and when the brand is
restored to the marketplace.
In or about July 2008, Albion International and Albion, Inc. filed suit in the United States District Court, District of Utah
(Case No. 2:08cv00515) against Lannett asserting claims for patent and trademark infringement, as well as unfair
competition, arising out of Lannett’s use of product that it purchased from Albion and used as an ingredient in its MMC.
Lannett filed a motion to dismiss the complaint on the basis that it purchased the product from Albion and, as such, was
authorized to use the product in its MMC. The Court granted the motion and dismissed the complaint but gave Albion leave
to file an amended complaint. On January 20, 2009, Albion filed an amended complaint. Lannett filed an answer to the
complaint and counterclaim, asserting, among other things, that Albion tortuously interfered with Lannett’s contracts.
Subsequent to the filing of the answer and counterclaim, Lannett and Albion reached an agreement in principle to settle the
case. Under terms of the settlement, the parties would each dismiss their claims against each other and provide releases. On
July 6, 2009, the settlement agreement was signed and on July 13, 2009, the case was dismissed.
Note 10. Commitments
Leases
In June 2006, Lannett signed a lease agreement on a 66,000 square foot facility located on approximately seven acres in
Philadelphia. An additional agreement which gives the Company the option to buy the facility was also signed. The
Company expects to purchase this building in the Fall of 2009 for approximately $3.8 million plus the cost of fit out. A
significant portion of the purchase price and fit out costs are expected to be financed through a series of loans with a bank and
a Pennsylvania state run development agency. This new facility is initially going to be used for warehouse space with the
expectation of making this facility the Company’s headquarters and possibly additional manufacturing space. This purchase
and potential fit out of this new facility is expected to be financed either through a bank, a state development agency or both.
The other Philadelphia locations will continue to be utilized as manufacturing, packaging, and as a research laboratory.
Lannett’s subsidiary, Cody leases a 73,000 square foot facility in Cody, Wyoming. This location houses Cody’s
manufacturing and production facilities. Cody leases the facility from Cody LCI Realty, LLC, a Wyoming limited liability
company which is 50% owned by Lannett. See Note 13.
F-21
Rental and lease expense for the years ended June 30, 2009, 2008 and 2007 was approximately $449,000, $449,000, and
$380,000, respectively.
Contractual Obligations
The following table represents annual contractual obligations as of June 30, 2009:
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
Long-Term Debt ................
Operating Leases ...............
Purchase Obligations .........
Interest on Obligations.......
Total...................................
$
8,138,768 $
217,551
105,752,500
1,649,684
$ 115,758,503 $
435,386 $
133,675
20,572,500
274,907
21,416,468 $
5,117,119 $
83,876
43,930,000
346,295
49,477,290 $
579,694 $
—
41,250,000
261,682
42,091,376 $
2,006,569
—
—
766,800
2,773,369
The purchase obligations above are primarily due to the agreement with Jerome Stevens Pharmaceuticals, Inc. (JSP). If the
minimum purchase requirement is not met, JSP has the right to terminate the contract within 60 days of Lannett’s failure to
meet the requirement. If JSP terminates the contract, Lannett does not pay any fee, but could lose its exclusive distribution
rights in the United States. If Lannett’s management believes that it is not in the Company’s best interest to fulfill the
minimum purchase requirements, it can also terminate the contract without any penalty. If either party were to terminate the
purchase agreement, there would be a significant impact on the operating cash flows of the Company from the termination.
Employment Agreements
The Company has entered into employment agreements with Arthur P. Bedrosian, President and Chief Executive Officer,
Kevin Smith, Vice President of Sales and Marketing, William Schreck, Senior Vice President and General Manager, Ernest
Sabo, Vice President of Regulatory Affairs and Chief Compliance Officer and Stephen Kovary, Vice President of
Operations. Each of the agreements provide for an annual base salary and eligibility to receive a bonus. The salary and
bonus amounts of these executives are determined by the Board of Directors. Additionally, these executives are eligible to
receive stock options, which are granted at the discretion of the Board of Directors, and in accordance with the Company’s
policies regarding stock option grants. Under the agreements, these executive employees may be terminated at any time with
or without cause, or by reason of death or disability. In certain termination situations, the Company is liable to pay severance
compensation to these executives of between 18 months and three years.
During the third quarter of Fiscal Year 2009, the Company’s Vice President of Finance, Treasurer, Secretary and Chief
Financial Officer resigned. As part of his separation agreement, the Company is obligated to pay to him approximately
$670,000 to settle any outstanding obligations from his employment agreement, including any salary, bonus, vacation, stock
options and medical benefits. Of this amount, $300,440 was paid in Fiscal 2009 with $165,000 designated for the payment of
pro rated bonus, and $11,440 was designated for the payment of accrued but unused paid time off. As part of the settlement,
$124,000 was designated as the portion of the settlement related to the repurchase of his outstanding stock options. The
Company therefore charged this amount to Additional Paid in Capital, as it represents the fair value of the options
repurchased on the repurchase date. Additional payments totaling approximately $369,000 for severance and benefits will be
paid in Fiscal 2010 and Fiscal 2011 pursuant to the separation agreement.
Note 11. Comprehensive Income (Loss)
The Company’s other comprehensive income (loss) is comprised of unrealized gains (losses) on investment securities
classified as available-for-sale. The components of comprehensive income (loss) and related taxes consisted of the following
as of June 30, 2009, 2008 and 2007:
2009
For Fiscal Year Ended June 30,
2008
2007
Other Comprehensive Income (Loss):
Net Income (Loss) .........................................................
Unrealized Holding Gain on Securities .........................
Add: Tax savings at statutory rate .................................
$
6,534,245 $
25,049
(10,020)
(2,318,059) $
62,174
(24,869)
(6,929,008)
74,769
(29,908)
Total Other Comprehensive Income ..............................
15,029
37,305
44,861
Total Comprehensive Income (Loss).............................
$
6,549,274 $
(2,280,754) $
(6,884,147)
F-22
Note 12. Acquisition of Cody Laboratories, Inc.
On March 31, 2007, the Company wrote down $7,775,890 of a note receivable owed by Cody Laboratories, Inc. The
Company determined that the value of the note receivable was impaired, and on April 10, 2007, it was decided to complete
the acquisition of Cody by forgiving the amount of loans that exceeded the fair value of assets received The remaining value
of the amounts owed to Lannett approximated the value of Cody at the acquisition date.
On April 10, 2007, the Company entered into a Stock Purchase Agreement to acquire Cody by purchasing all of the
remaining shares of common stock of Cody. The Company initially acquired a 12.5% direct interest in Cody Labs in
July 2005. The consideration for the April 10, 2007 acquisition was approximately $4,438,000, which represented the fair
value of the tangible net assets acquired. The agreement also required Lannett to issue to the sellers up to 120,000 shares of
unregistered common stock of the Company contingent upon the receipt of a license from a regulatory agency. This license
was subsequently received in July 2008 and triggered the payment of 105,000 shares (87.5% of the 120,000 shares as the
Company already owned 12.5%) of Lannett stock to the former owners of Cody Labs, which was completed in October 2008.
Therefore, the Company recorded an intangible asset related to the acquisition of a drug import license in the original amount
of $581,175 and recorded a corresponding deferred tax liability of $150,675 due to the non-deductibility of the amortization
for tax purposes. The Company has assigned a 15 year life to this intangible asset based on average life cycles of Lannett
products.
Cody was a privately owned manufacturer and supplier of bulk active pharmaceutical ingredients (API). The Company
acquired all outstanding stock in this supplier in order to expand the breadth of its product offerings, and to maximize the
profit margin on these products being offered.
The Company accounted for the transaction by following the guidance under SFAS 15, Accounting by Debtors and Creditors
for Troubled Debt Restructuring and under the purchase method of accounting as provided in SFAS 141, Business
Combinations. The operating results of the acquired business have been included in the consolidated statements of
operations, financial condition and cash flows since the April 10, 2007 acquisition date. During Fiscal 2008, the Company
adjusted the original purchase price allocation for Cody Labs, as a result of a study and additional analysis of assets acquired.
The result of this study was to increase the deferred tax assets by $1,255,000 and decrease the value of Cody Labs’ property,
plant and equipment by the same amount.
A condensed balance sheet of Cody at the date of acquisition, April 10, 2007, is as follows:
Cash ............................................................................
Inventory.....................................................................
Other current assets.....................................................
Total current assets .....................................................
$
Property, plant and equipment, net .............................
Deferred tax asset .......................................................
Total assets .................................................................
Accounts payable........................................................
Current portion of long-term debt...............................
Accrued expenses .......................................................
Total current liabilities................................................
$
$
157,962
325,372
89,445
572,779
3,202,455
1,255,000
5,030,234
258,660
48,524
91,476
398,660
Long term debt, less current portion ...........................
193,417
Total shareholders’ equity ..........................................
4,438,157
Total liabilities and shareholders’ equity ....................
$
5,030,234
F-23
The following pro forma historical results of operations for the year ended June 30, 2007 is presented as if the Company had
acquired Cody on July 1, 2006.
Net Sales...................................................................................................
Net loss .....................................................................................................
Loss per common share - basic and diluted ..............................................
(Unaudited)
Year Ended
June 30,
2007
82,578,000
(3,197,000)
(0.13)
$
$
$
Weighted average common shares outstanding - basic ............................
Weighted average common shares outstanding - diluted..........................
24,159,251
24,159,251
The unaudited pro forma financial information is presented for informational purposes only and does not purport to represent
what the operating results actually would have been had the acquisition occurred on that date.
Note 13. Consolidation of Variable Interest Entity
Lannett consolidates any Variable Interest Entity (“VIE”) of which we are the primary beneficiary. The liabilities recognized
as a result of consolidating a VIE do not represent additional claims on our general assets rather, they represent claims
against the specific assets of the consolidated VIE. Conversely, assets recognized as a result of consolidating a VIE do not
represent additional assets that could be used to satisfy claims against our general assets. Reflected in each of the June 30,
2009 and 2008 balance sheets are consolidated VIE assets of approximately $1.9 million and $1.9 million, which are
comprised mainly of land and a building. VIE liabilities consist primarily of a mortgage on that property in the amount of
$1.7 million and $1.7 million at June 30, 2009 and 2008, respectively.
Cody LCI Realty LLC (“Realty”) is the only VIE that is consolidated. Realty has been consolidated by Cody prior to its
acquisition by Lannett. Realty is a 50/50 joint venture with a former shareholder of Cody. Its purpose was to acquire the
facility used by Cody. Until the acquisition of Cody in April 2007, Lannett had not consolidated the VIE because Cody had
been the primary beneficiary of the VIE. The risks associated with our interests in this VIE is limited to a decline in the
value of the land and building as compared to the balance of the mortgage note on that property, up to Lannett’s 50% share of
the venture. Realty owns the land and building, and Cody leases the building and property from Realty for $15,000 per
month. All intercompany rent expense is eliminated upon consolidation with Cody.
The Company is not involved in any other VIE of which Lannett is primary beneficiary.
Note 14. Employee Benefit Plan
The Company has a defined contribution 401k plan (the “Plan”) covering substantially all employees. During calendar year
2006, Lannett matched employees’ contributions to the Lannett Company, Inc. 401(k) Retirement Savings Plan on a dollar
for dollar basis up to 3% of an employee’s base salary, subject to regulatory limits. Beginning in calendar year 2007 and
continuing to present, Lannett matched contributions to the 401(k) plan on a fifty cents on the dollar basis up to 8% of the
contributing employee’s base salary. Contributions to the Plan during the years ended June 30, 2009, 2008 and 2007 were
approximately $330,000, $350,000, and $375,000, respectively.
Note 15. Employee Stock Purchase Plan
In February 2003, the Company’s shareholders approved an Employee Stock Purchase Plan (“ESPP”). Employees eligible to
participate in the ESPP may purchase shares of the Company’s stock at 85% of the lower of the fair market value of the
common stock on the first day of the calendar quarter, or the last day of the calendar quarter. Under the ESPP, employees
can authorize the Company to withhold up to 10% of their compensation during any quarterly offering period, subject to
certain limitations. The ESPP was implemented on April 1, 2003 and is qualified under Section 423 of the Internal Revenue
Code. The Board of Directors authorized an aggregate total of 1,125,000 shares of the Company’s common stock for
issuance under the ESPP. As of June 30, 2009, 175,591 shares have been issued under the ESPP. Compensation expense of
$81,871, $25,208, and $33,322 was recognized in fiscal years 2009, 2008 and 2007, respectively, relating to the ESPP.
F-24
Note 16. Income Taxes
The provision (benefit) for income taxes consists of the following for the years ended June 30:
2009
2008
2007
Current Income Taxes
Federal............................................................................
State and Local Taxes ....................................................
Total...........................................................................
$
1,074,723 $
32,455
1,107,178
1,367,843 $
—
1,367,843
(771,913)
—
(771,913 )
Deferred Income Taxes
Federal............................................................................
State and Local Taxes ....................................................
Total...........................................................................
3,151,911
(168,373)
2,983,538
(3,986,449)
(757,405)
(4,743,854)
1,503,322
276,520
1,779,842
Total ............................................
$
4,090,716 $
(3,376,011) $
1,007,929
A reconciliation of the differences between the effective rates and federal statutory rates is as follows:
2009
2008
2007
Federal income tax at statutory rate .........................
State and local income tax, net ................................
Nondeductible expenses ..........................................
Change in valuation allowance ................................
Income tax credits....................................................
Other........................................................................
Income tax expense .................................................
34.0%
(0.4)%
2.3%
(0.7)%
(1.6)%
4.7%
38.3%
35.0%
2.4%
(3.5)%
6.2%
15.3%
3.9%
59.3%
35.0%
0%
(4.4)%
(45.1)%
0%
(2.5)%
(17.0)%
The principal types of differences between assets and liabilities for financial statement and tax return purposes are accruals,
reserves, impairment of intangibles, accumulated amortization, accumulated depreciation and stock compensation which
began in Fiscal 2006. A deferred tax asset is recorded for the future benefits created by the timing of accruals and reserves
and the application of different amortization lives for financial statement and tax return purposes. In addition to the deferred
tax assets shown in the table below, a $16,501 and $6,482 current deferred tax liability is also included on the balance sheet
related to the tax effect of accumulated other comprehensive income at June 30, 2009 and 2008, respectively. A deferred tax
asset valuation allowance was established based on the likelihood that it is more likely than not that the Company will be
unable to realize certain of the deferred tax assets. A deferred tax liability is recorded for the future liability created by
different depreciation methods for financial statement and tax return purposes.
As of June 30, 2009 and 2008, temporary differences which give rise to deferred tax assets and liabilities are as follows:
Deferred tax assets:
Accrued expenses..................................................................................................................
Stock compensation expense.................................................................................................
Unearned grant funds ............................................................................................................
Reserve for returns ................................................................................................................
Reserves for accounts receivable and inventory....................................................................
Intangible impairment ...........................................................................................................
State net operating loss..........................................................................................................
Income tax credit carryforwards............................................................................................
Federal net operating loss......................................................................................................
Impairment on Cody note receivable.....................................................................................
Accumulated amortization on intangible asset ......................................................................
$
Valuation allowance ..................................................................................................................
Total .............................................................................................................................
2009
2008
118,965 $
740,687
194,109
1,982,629
2,748,381
11,929,502
74,255
—
1,156,131
2,097,175
1,977,804
23,019,638
(2,097,175)
20,922,463
30,550
673,154
195,000
5,321,431
1,707,006
13,182,667
207,700
63,083
1,255,065
2,106,798
2,011,146
26,753,600
(2,314,498)
24,439,102
Deferred tax liabilities:
Prepaid expenses ...................................................................................................................
Property, plant and equipment...............................................................................................
Other .....................................................................................................................................
69,199
2,756,793
25,496
54,570
3,179,344
—
Net deferred tax asset.................................................................................................................
$
18,070,975 $
21,205,188
F-25
On April 10, 2007, the Company entered into a Stock Purchase Agreement to acquire Cody by purchasing all of the
remaining shares of common stock of Cody. The consideration for the April 10, 2007 acquisition was approximately
$4,438,000, which represented the fair value of the tangible net assets acquired. The agreement also required Lannett to issue
to the sellers up to 120,000 shares of unregistered common stock of the Company contingent upon the receipt of a license
from a regulatory agency. This license was subsequently received in July 2008 and triggered the payment of 105,000 shares
of Lannett stock to the former owners of Cody Labs, which was completed in October 2008. Therefore, the Company
recorded an intangible asset related to the acquisition of a drug import license in the original amount of $581,175 and
recorded a corresponding deferred tax liability in the amount of $150,675 due to the non-deductibility of the amortization for
tax purposes.
In the third quarter of Fiscal 2008, the Company adjusted the original purchase price allocation for Cody, as a result of a
study and additional analysis of assets acquired. The result of this study was to increase the deferred tax assets by $1,255,065
and decrease the value of Cody’s property, plant and equipment by the same amount. This adjustment was made in
accordance with SFAS No. 141, Business Combinations. The increase in deferred tax assets related to Cody’s federal net
operation loss (NOL) carry forwards totaling approximately $3,774,000 at the date of acquisition with $1,902,000 expiring in
2026 and $1,872,000 in 2027. At June 30, 2009, the remaining gross deferred tax asset is $3,400,385. The income tax
benefit associated with the NOL carry forwards has been recognized in accordance with Section 382 of the Internal Revenue
Code of 1986.
On July 1, 2007, we adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109 (FIN 48), which provides a financial statement recognition threshold and measurement attribute for
a tax position taken or expected to be taken in a tax return. Under FIN 48, we may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position
should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax
disclosures. The Company did not recognize any additional current or deferred income tax assets or liabilities as a result of
the implementation of FIN 48.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (exclusive of interest and penalties)
is as follows:
Balance at June 30, 2008 ..........................................................
Additions for tax positions of the current year .........................
Additions for tax positions of prior years .................................
Reductions for tax positions of prior years ...............................
Settlements................................................................................
Lapse of statute of limitations...................................................
Balance at June 30, 2009 ..........................................................
$
$
—
65,033
232,630
—
—
—
297,663
As of June 30, 2009, the Company reported total unrecognized benefits of $297,663, all of which would affect the
Company’s effective tax rate if recognized. As a result of the positions taken during the year, the Company has not recorded
any interest and penalties for the year ended June 30, 2009 in the statement of operations and no cumulative interest and
penalties have been recorded either in the Company’s statement of financial position as of June 30, 2009. The Company will
recognize interest accrued on unrecognized tax benefits in interest expense and any related penalties in operating expenses.
The Company does not believe that the total unrecognized tax benefits will significantly increase or decrease in the next
twelve months.
The Company files tax returns in the United States federal jurisdiction, Pennsylvania, New Jersey and California. The
Company’s tax returns for Fiscal 2005 and prior generally are no longer subject to review as such years generally are closed.
The Company has been notified that its federal income tax return for Fiscal 2008 will be reviewed by the IRS during Fiscal
2010. The Company believes that an unfavorable resolution for open tax years would not be material to the financial position
of the Company.
F-26
Note 17. Related Party Transactions
The Company had sales of approximately $786,000, $787,000, and $763,000 during the fiscal years ended June 30, 2009,
2008 and 2007, respectively, to a generic distributor, Auburn Pharmaceutical Company. Jeffrey Farber (the “related party”),
who is a current board member and the son of the Chairman of the Board of Directors and principal shareholder of the
Company, William Farber, is the owner of Auburn Pharmaceutical Company. Accounts receivable includes amounts due
from the related party of approximately $125,000 and 305,000 at June 30, 2009 and 2008, respectively. In the Company’s
opinion, the terms of these transactions were not more favorable to the related party than would have been to a non-related
party.
In January 2005, Lannett Holdings, Inc. entered into an agreement in which the Company purchased for $100,000 and future
royalty payments the proprietary rights to manufacture and distribute a product for which Pharmeral, Inc. owned the ANDA.
In Fiscal 2008, the Company obtained FDA approval to use the proprietary rights. Accordingly, the Company originally
capitalized these rights as an indefinite lived intangible asset and tested this asset for impairment at least on an annual basis.
During the fourth quarter of Fiscal 2009, it was determined that this intangible asset no longer has an indefinite life. No
impairment existed because the estimated fair value exceeded the carrying amount on that date. Accordingly, the $100,000
carrying amount of this intangible asset will be amortized on a straight line basis prospectively over its 10 year remaining
estimated useful life.
Arthur Bedrosian, President and Chief Executive Officer currently owns 100% of Pharmeral, Inc. This transaction was
approved by the Board of Directors of the Company and in their opinion the terms were not more favorable to the related
party than they would have been to a non-related party. In May 2008, Mr. Bedrosian and Pharmeral waived their rights to any
royalty payments on the sales of the drug by Lannett under Lannett’s current ownership structure. Should Lannett undergo a
major change in control where a third party is involved, this royalty would be reinstated.
At June 30, 2009 and 2008, respectively, the Company had approximately $0 and $983,000 of deferred revenue as a result of
prepayments on inventory received from Provell Pharmaceuticals, LLC (“Provell”). The Company recognized revenues of
approximately $29,000, $141,000 and $45,000 during the fiscal years ended June 30, 2009, 2008 and 2007, respectively.
Accounts receivable includes amounts due from Provell of approximately $55,000 and $60,000 at June 30, 2009 and 2008,
respectively. Provell is a joint venture to distribute pharmaceutical products through mail order outlets. In exchange for
access to Lannett’s drug providers, Lannett received a 33% ownership of this venture. After June 30, 2008, Lannett’s
ownership portion of this venture decreased to 25% due to outside investment in the venture from a third party. The
investment is valued at zero, due to losses incurred to date by Provell. During June 2009, the Company terminated its
participation in this joint venture.
Note 18. Material Contracts with Suppliers
Jerome Stevens Pharmaceuticals agreement:
The Company’s primary finished product inventory supplier is Jerome Stevens Pharmaceuticals, Inc. (JSP), in Bohemia, New
York. Purchases of finished goods inventory from JSP accounted for approximately 71% of the Company’s inventory
purchases in Fiscal 2009, 71% in Fiscal 2008 and 63% in Fiscal 2007. On March 23, 2004, the Company entered into an
agreement with JSP for the exclusive distribution rights in the United States to the current line of JSP products, in exchange
for four million (4,000,000) shares of the Company’s common stock. The JSP products covered under the agreement
included Butalbital, Aspirin, Caffeine with Codeine Phosphate capsules, Digoxin tablets and Levothyroxine Sodium tablets,
sold generically and under the brand name Unithroid®. The term of the agreement is ten years, beginning on March 23, 2004
and continuing through March 22, 2014. Both Lannett and JSP have the right to terminate the contract if one of the parties
does not cure a material breach of the contract within thirty (30) days of notice from the non-breaching party.
During the term of the agreement, the Company is required to use commercially reasonable efforts to purchase minimum
dollar quantities of JSP’s products being distributed by the Company. The minimum quantity to be purchased in the first
year of the agreement is $15.0 million. Thereafter, the minimum quantity to be purchased increases by $1.0 million per year
up to $24.0 million for the last year of the ten-year contract. The Company has met the minimum purchase requirement for
the first five years of the contract, but there is no guarantee that the Company will be able to continue to do so in the future. If
the Company does not meet the minimum purchase requirements, JSP’s sole remedy is to terminate the agreement.
Under the agreement, JSP is entitled to nominate one person to serve on the Company’s Board of Directors (the “Board”)
provided, however, that the Board shall have the right to reasonably approve any such nominee in order to fulfill its fiduciary
duty by ascertaining that such person is suitable for membership on the board of a publicly traded corporation. Suitability is
determined by, but not limited to, the requirements of the Securities and Exchange Commission, the American Stock
Exchange, and other applicable laws, including the Sarbanes-Oxley Act of 2002. As of June 30, 2009, JSP has not exercised
the nomination provision of the agreement.
F-27
Management determined that the intangible product rights asset created by this agreement was impaired as of March 31,
2005. See Note 1 Summary of Significant Accounting Policies — Intangible Assets for additional disclosure and discussion
of this impairment.
The Company’s financial condition, as well as its liquidity resources, are very dependent on an uninterrupted supply of
product from Jerome Stevens. Should there be an interruption in the supply of product from Jerome Stevens for any reason,
this event would have a material impact to the financial condition of Lannett.
Other agreements:
In August 2005, the Company signed an agreement with a finished goods provider to purchase, at fixed prices, and distribute
a certain generic pharmaceutical product in the United States. The term of the agreement was three years, beginning on
August 22, 2005 and continuing through August 21, 2008. Following its expiration on August 21, 2008, the agreement was
not renewed. Purchases of finished goods inventory from this provider accounted for approximately 1% of the Company’s
costs of purchased inventory in Fiscal 2009, 14% in 2008, and 23% in 2007.
Note 19. Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and debt obligations. The carrying values of these assets and liabilities approximate fair value based upon
the short-term nature of these instruments. The Company has estimated that the fair value of long-term debt associated with
the 20 year mortgage on its land and building in Cody, Wyoming approximates the discounted amount of future payments to
the mortgage-holder.
Note 20. Quarterly Financial Information (Unaudited)
Lannett’s quarterly consolidated results of operations are shown below:
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fiscal 2009
Net Sales .......................................................
Cost of Goods Sold.......................................
Gross Profit...............................................
Other Operating Expenses ............................
Operating Income .........................................
Other (Expense) Income ...............................
Income Tax Expense.....................................
Minority Interest ...........................................
Net Income ...................................................
Basic Earnings Per Share..........................
Diluted Earnings Per Share.......................
Fiscal 2008
Net Sales .......................................................
Cost of Goods Sold.......................................
Gross Profit...............................................
Other Operating Expenses ............................
Operating Loss..............................................
Other (Expense) ............................................
Income Tax (Benefit)....................................
Minority Interest ...........................................
Net Loss........................................................
Basic Loss Per Share ................................
Diluted Loss Per Share .............................
$
$
$
$
$
$
$
$
35,448,874
21,835,563
13,613,311
9,722,714
3,890,597
(69,110)
1,393,983
6,968
2,420,536
0.10
0.10
$
$
$
$
28,761,316
17,154,288
11,607,028
9,434,449
2,172,579
2,537
851,310
9,324
1,314,482
0.05
0.05
Fourth
Quarter
Third
Quarter
16,579,512
12,682,018
3,897,494
5,739,007
(1,841,513)
(29,786)
(615,454)
—
$
20,748,799
17,878,596
2,870,203
5,553,598
(2,683,395)
(98,691)
(2,554,889)
50,309
(277,506) $
(0.01) $
(0.01) $
F-28
$
$
$
$
$
$
$
$
$
$
29,224,372
18,201,534
11,022,838
8,489,249
2,533,589
(25,548)
925,433
9,546
1,573,062
0.06
0.06
Second
Quarter
17,534,942
13,107,326
4,427,616
5,201,499
(773,883)
(43,647)
(159,983)
—
25,567,653
16,566,361
9,001,292
6,817,188
2,184,104
(20,442)
919,990
17,507
1,226,165
0.05
0.05
First
Quarter
17,540,030
12,434,272
5,105,758
5,231,858
(126,100)
(46,746)
(45,685)
—
(127,161)
(0.01)
(0.01)
(1,255,845) $
(0.05) $
(0.05) $
(657,547) $
(0.03) $
(0.03) $
Fiscal 2007
Net Sales .......................................................
Cost of Goods Sold.......................................
Gross Profit...............................................
Other Operating Expenses ............................
Operating (Loss) Income ..............................
Other (Expense) Income ...............................
Income Tax Expense (Benefit) .....................
Net (Loss) Income ........................................
Basic (Loss) Earnings Per Share...............
Diluted (Loss) Earnings Per Share............
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
$
$
$
$
17,390,842
14,441,928
2,948,914
5,143,647
(2,194,733)
(57,978)
322,138
(2,574,849) $
(0.11) $
(0.11) $
$
20,302,576
15,090,163
5,212,413
12,661,477
(7,449,064)
22,898
(818,807)
(6,607,359) $
(0.27) $
(0.27) $
22,916,347
17,790,927
5,125,420
3,577,296
1,548,124
43,828
636,781
955,171
0.04
0.04
$
$
$
$
21,967,826
13,829,586
8,138,240
6,006,976
2,131,264
34,582
867,817
1,298,029
0.05
0.05
On March 31, 2007, the Company wrote down $7,775,890 of a note receivable owed by Cody Laboratories, Inc. The
Company determined that the value of the note receivable was impaired, and on April 10, 2007, it was decided to complete
the acquisition of Cody by forgiving the amount of loans that exceeded the fair value of assets received. The remaining value
of the amounts owed approximated the value of Cody at the time of the acquisition.
Net sales for the fourth quarter of Fiscal 2007 have decreased as a result of change in sales mix and customer mix. The
Company was able to increase sales to retail drug stores, however the Company experienced declines in sales to wholesaler
customers. This change in mix was a result of purchasing patterns of wholesalers and revised purchase agreements with the
wholesalers.
In the fourth quarter of Fiscal 2008 net sales increased largely due to a product recall of one of Lannett’s competitors.
Overall net sales for Fiscal 2008 decreased over Fiscal 2007 as a result of the increased competition in the generic drug
market which adversely affected Lannett’s sales of drugs used for the treatment of epilepsy and antibiotic drugs. Retail chain
sales increased significantly in Fiscal Year 2008 as a result of an increase in the number of products available for sale and a
significant increase in the number of retails stores of one of our customers.
Also during the fourth quarter of Fiscal 2008, the Company increased its returns reserve by $10.5 million, reflecting its
expectation that 100% of the shipments of Prenatal Multivitamin made in the fourth quarter would be returned. The
Company’s expectation that all of the product would be returned was based on its inability to have the product specified as a
brand equivalent, and information from its customers regarding their intentions to return the product. In addition, the
Company increased the returns reserve in the fourth quarter by approximately $1.5 million based on an analysis of its
historical returns experience, the average lag time between sales and returns and an evaluation of changing buying and
inventory trends of both its direct and indirect customers. As this change resulted from new information that has allowed the
Company to better estimate the average length of time between product sales and returns, the Company considers it to be a
change in estimate as defined in SFAS 154: Accounting Changes and Error Corrections — A Replacement of APB Opinion
No. 20 and FASB Statement No. 3.
F-29
Schedule II - Valuation and Qualifying Accounts
For the years ended June 30:
Description
Balance at
Beginning of
Fiscal Year
Charged to
(reduction of)
Expense
Deductions
Balance at
End of Fiscal
Year
Allowance for Doubtful Accounts
2009 ..............................................................................
2008 ..............................................................................
2007 ..............................................................................
Inventory Valuation
2009 ..............................................................................
2008 ..............................................................................
2007 ..............................................................................
Deferred Tax Asset Valuation Allowance
2009 ..............................................................................
2008 ..............................................................................
2007 ..............................................................................
$
$
$
$
$
$
207,151
250,000
250,000
1,642,668
923,920
1,054,499
2,314,498
2,667,550
—
(87,913) $
48,284
—
(12,762 ) $
91,133
—
132,000
207,151
250,000
$
2,004,403
2,679,902
1,717,357
902,767
1,961,154
1,847,936
(217,323) $
(353,052)
2,667,550
—
—
—
$
$
2,744,305
1,642,668
923,920
2,097,175
2,314,498
2,667,550
F-30
The following list identifies the subsidiaries of the Company:
Subsidiary Name
State of Incorporation
Subsidiaries of the Company
Lannett Holdings, Inc.
Cody Laboratories, Inc
Delaware
Wyoming
Exhibit 21
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated September 28, 2009, with respect to the consolidated financial statements and schedule (which report
expressed an unqualified opinion and contains and explanatory paragraph relating to the adoption of Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Tax Provisions, in 2008) included in the Annual Report of Lannett
Company, Inc. and Subsidiaries on Form 10-K for the year ended June 30, 2009. We hereby consent to the incorporation by reference
of said report in the Registration Statements of Lannett Company, Inc. and Subsidiaries on Form S-3 (File No. 33-115746, effective
May 21, 2004) and on Forms S-8 (File No. 33-103235, effective February 14, 2003, File No. 103236, effective 14, 2003, and File
No. 33-14710, effective November 15, 2007).
Exhibit 23.1
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
September 28, 2009
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Arthur P. Bedrosian, certify that:
1.
I have reviewed this report on Form 10-K of Lannett Company, Inc.;
Exhibit 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
/s/Arthur P. Bedrosian
Date: September 28, 2009
President and Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Keith R. Ruck, certify that:
1.
I have reviewed this report on Form 10-K of Lannett Company, Inc.;
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s/Keith R. Ruck
Date: September 28, 2009
Interim Chief Financial Officer and Corporate Controller
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32
In connection with the Annual Report of Lannett Company, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2009 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Arthur P. Bedrosian, the Chief Executive
Officer of the Company, and I, Keith R. Ruck, the Interim Chief Financial Officer and Corporate Controller of the Company, hereby
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report complies with the requirements of Section13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Dated: September 28, 2009
/s/Arthur P. Bedrosian
Arthur P. Bedrosian,
President and Chief Executive Officer
Dated: September 28, 2009
/s/Keith R. Ruck
Keith R. Ruck,
Interim Chief Financial Officer and
Corporate Controller
COMPANY PROFILE
Lannett Company, Inc. (NYSE Amex:LCI) develops, manufactures and distributes
generic prescription pharmaceutical products in tablet, capsule, topical and oral liquid
forms to customers throughout the United States.
FINANCIAL HIGHLIGHTS
FISCAL YEAR ENDED JUNE 30,
2009
2008
2007
2006
2005
Net Sales
Cost of Sales
Gross Profit
$119,002,215
$72,403,283
$82,577,591
$64,060,375
$44,901,645
73,757,746
56,102,212
61,152,604
35,684,710
36,933,325
45,244,469
16,301,071
21,424,987
28,375,665
7,968,320
Operating Expenses
34,463,600
21,731,605
27,389,396
19,921,747
61,607,978
Operating Income (Loss)
10,780,869
(5,430,534)
(5,964,409)
8,453,918
(53,639,658)
Net Income (Loss)
$6,534,245
$(2,318,059)
$(6,929,008)
$4,968,922
$(32,779,596)
Cash, cash equivalents and investments
$26,982,125
$8,756,847
$8,512,973
$6,089,968
$12,054,309
Total current assets
77,311,175
61,583,175
44,483,940
43,486,847
33,938,115
Property, plant and equipment, net
22,897,385
24,734,103
27,443,161
19,645,549
16,624,848
Total assets
Current liabilities
Long-term debt
124,577,121
113,679,264
101,453,265
103,446,330
92,907,478
38,679,005
35,638,552
22,250,243
20,040,608
16,395,562
8,138,768
8,978,834
9,679,965
8,196,692
9,532,448
QUARTERLY NET SALES TREND
(In Millions of Dollars)
PERCENTAGE OF NET SALES
(By Customer Type)
$17.5
$17.5
$16.6
$20.8
$25.6
$29.2
$28.8
$35.4
50%
5%
45%
Distributors/Wholesalers
Chain Pharmacies
Mail Order Pharmacies
Q1
FY08
Q2
FY08
Q3
FY08
Q4
FY08
Q1
FY09
Q2
FY09
Q3
FY09
Q4
FY09
BOARD OF DIRECTORS
William Farber, R.Ph.
Chairman of the Board
Ronald West
Vice Chairman and L ead Director
Director, Beecher Associates
Arthur P. Bedrosian, J.D.
President, Chief Executive Officer and Director,
Lannett Company, Inc.
Jeffrey Farber
President, Auburn Pharmaceutical
Kenneth Sinclair, Ph.D.
Professor of Accounting,
Lehigh University
Albert Wertheimer, Ph.D.
Professor, Temple University School of Pharmacy,
Director, Center for Pharmaceutical Health Services Research
Myron Winkelman, R.Ph.
President, Winkelman Management Consulting, Inc.
MANAGEMENT TEAM
Arthur P. Bedrosian, J.D.
President, Chief Executive Officer and Director
William Schreck
Senior Vice President and General Manager
Kevin Smith
Vice President—Sales & Marketing
Ernest Sabo
Vice President—Regulatory and Corporate Compliance
Keith R. Ruck
Vice President of Finance and Chief Financial Officer
Stephen J. Kovary
Vice President—Operations
CORPORATE INFORMATION
Corporate Headquarters
9000 State Road
Philadelphia, PA 19136
(215) 333-9000
Independent Registered Public Accounting Firm
Grant Thornton LLP
2001 Market Street
Two Commerce Square, Suite 3100
Philadelphia, PA 19103
Legal Counsel
Fox Rothschild LLP
2000 Market Street
Philadelphia, PA 19103
Investor Relations
PondelWilkinson Inc.
1880 Century Park East, Suite 350
Los Angeles, CA 90067
(310) 279-5980
Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
Securities Listing
The common stock of Lannett Company, Inc. is traded on
the NYSE Amex under the symbol “LCI.”
Annual Report and Form 10-K
Additional copies of this annual report
and the Company’s Form 10-K may be
obtained without charge and the exhibits
to the Form 10-K may be obtained for a
nominal fee by writing to:
Lannett Company, Inc.
Investor Relations
9000 State Road
Philadelphia, PA 19136
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements in “Item 1A – Risk Factors”, “Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and in other statements located elsewhere in this Annual Report. Any statements made in this Annual
Report that are not statements of historical fact or that refer to estimated or anticipated future events are forward-looking statements. We have based
our forward-looking statements on our management’s beliefs and assumptions based on information available to them at this time. Such forward-look-
ing statements reflect our current perspective of our business, future performance, existing trends and information as of the date of this filing. These
include, but are not limited to, our beliefs about future revenue and expense levels and growth rates, prospects related to our strategic initiatives and
business strategies, express or implied assumptions about government regulatory action or inaction, anticipated product approvals and launches, busi-
ness initiatives and product development activities, assessments related to clinical trial results, product performance and competitive environment,
and anticipated financial performance. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,”
“intend,” “could,” “would,” “estimate,” “continue,” or “pursue,” or the negative other variations thereof or comparable terminology, are intended to
identify forward-looking statements. The statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions
that are difficult to predict. We caution the reader that certain important factors may affect our actual operating results and could cause such results to
differ materially from those expressed or implied by forward-looking statements. We believe the risks and uncertainties discussed under the “Item 1A -
Risk Factors” and other risks and uncertainties detailed herein and from time to time in our SEC filings, may affect our actual results.
We disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We
also may make additional disclosures in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and in other filings that we may make from
time to time with the SEC. Other factors besides those listed here could also adversely affect us. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995, as amended.
Lannett Company, Inc.
9000 State Road
Philadelphia, PA 19136
(215) 333-9000, (800) 325-9994
Fax (215) 333-9004
www.lannett.com
09
MANUFACTURING
AND DISTRIBUTING
HIGH QUALITY
PHARMACEUTICAL
PRODUCTS