| ENDO PHARMACEUTICALS HOLDINGS INC Item 1A Risk Factors Risks Related to Our Business We face intense competition, in particular from companies that develop rival products to our branded products and from companies with which we compete to acquire rights to intellectual property assets |
| The pharmaceutical industry is intensely competitive, and we face competition across the full range of our activities |
| If we fail to compete successfully in any of these areas, our business, profitability and cash flows could be adversely affected |
| Our competitors include many of the major brand name and generic manufacturers of pharmaceuticals, especially those doing business in the United States |
| In the market for branded pharmaceutical products, our competitors, including Abbott Laboratories, Alpharma Inc, Johnson & Johnson, Ligand Pharmaceuticals Incorporated, Pfizer, Inc |
| and The Purdue Frederick Company, vary depending on product category, dosage strength and drug-delivery systems |
| In addition to product safety, development and efficacy, other competitive factors in the branded pharmaceutical market include product quality and price, reputation, service and access to scientific and technical information |
| It is possible that developments by our competitors will make our products or technologies uncompetitive or obsolete |
| Because we are smaller than many of our national competitors in the branded pharmaceutical products sector, we may lack the financial and other resources needed to maintain our profit margins and market share in this sector |
| The intensely competitive environment of the branded products business requires an ongoing, extensive search for medical and technological innovations and the ability to market products effectively, including the ability to communicate the effectiveness, safety and value of branded products to healthcare professionals in private practice, group practices and managed care organizations |
| Our branded products face competition from generic versions |
| Generic versions are generally significantly cheaper than the branded version, and, where available, may be required or encouraged in preference to the branded version under third party reimbursement programs, or substituted by pharmacies for branded versions by law |
| The entrance of generic competition to our branded products generally reduces our market share and adversely affects our profitability and cash flows |
| Generic competition with our branded products, including Percocet^^®^, has had and will continue to have a material adverse effect on the net sales and profitability of our branded products |
| Additionally, we compete to acquire the intellectual property assets that we require to continue to develop and broaden our product range |
| In addition to our in-house research and development efforts, we seek to acquire rights to new intellectual property through corporate acquisitions, asset acquisitions, licensing and joint venture arrangements |
| Competitors with greater resources may acquire assets that we seek, and even where we are successful, competition may increase the acquisition price of such assets or prevent us from capitalizing on such acquisitions or licensing opportunities |
| If we fail to compete successfully, our growth may be limited |
| If generic manufacturers use litigation and regulatory means to obtain approval for generic versions of our branded drugs, our sales may suffer |
| The Hatch Waxman Act permits the FDA to approve ANDAs for generic versions of branded drugs |
| The ANDA process permits competitor companies to obtain marketing approval for a drug with the same active ingredient for the same uses but does not require the conduct and submission of clinical studies demonstrating safety and efficacy for that product |
| In place of such clinical studies, an ANDA applicant essentially needs only to submit data demonstrating that its product is bioequivalent to the branded product |
| The Hatch Waxman Act requires an applicant for a drug that relies, at least in part, on data from the branded drug regarding the safety and efficacy of the same active ingredient, to notify us of their application and potential infringement of our patent rights |
| Upon receipt of this notice we would have 45 days to bring a patent infringement suit in federal district court against the company seeking to violate our patent rights |
| The discovery, trial and appeals process in such suits can take several years |
| If such a suit is commenced, the Hatch Waxman Act provides a 30-month stay on the approval of the competitor’s application |
| If the litigation is resolved in favor of the generic applicant or the challenged patent expires during the 30-month stay period, the stay is lifted and the FDA’s review of the application may be completed |
| Such litigation is often time-consuming and quite costly and may result in generic competition if such patent(s) are not upheld or if the generic competitor does not infringe such patent(s) |
| The filing of any ANDA in respect to any of our branded drugs, particularly Lidoderm^^®^, could have an adverse impact on our stock price and, if the patents covering our branded drugs, including Lidoderm^^®^, were not upheld in litigation or if the generic competitor is found to not infringe these patents, the resulting generic competition would have a material adverse effect on our net sales, gross profit, operating income, net income and cash flows |
| We face intense competition from other manufacturers of generic versions of our generic products |
| Our generic products compete with branded products and with generic versions made by or for other manufacturers, such as Mallinckrodt Inc, Roxane Laboratories, Inc, Teva Pharmaceutical Industries Ltd |
| When additional versions of one of our generic products enter the market, we generally lose market share and our selling prices and margins on the product decline |
| Because we are smaller than many of our full-line competitors in the generic pharmaceutical products sector, we may lack the financial and other resources needed to maintain our profit margins and market share in this sector |
| 25 ______________________________________________________________________ [50]Table of Contents On June 7, 2005, we launched the 10mg, 20mg, 40mg and 80mg strengths of our bioequivalent versions of OxyContin^^®^ |
| We had 180 days of marketing exclusivity under the Hatch Waxman Act with respect to the 10mg, 20mg and 40mg strengths of this product, since we were the first applicant to file an ANDA containing a Paragraph IV certification for these oxycodone extended release strengths |
| After the expiration of our marketing exclusivity period on December 5, 2005, several competitors launched bioequivalent versions of the 10mg, 20mg and 40mg strengths of OxyContin^^®^ |
| Other competitors may launch additional generic versions of all four strengths of OxyContin^^®^ |
| The entrance of other competitors has and will continue to reduce our market share for bioequivalent versions of OxyContin^^®^ and adversely affect the profitability of these products |
| Net sales of Lidoderm^^®^, generic oxycodone extended release, Percocet^^®^, Endocet^^®^, and generic morphine sulfate accounted for: 51prca, 14prca, 13prca, 8prca and 5prca; 50prca, 0prca, 14prca, 19prca and 10prca; and 30prca, 0prca, 36prca, 11prca and 16prca of our net sales for the years ended December 31, 2005, 2004 and 2003, respectively |
| The FDA has granted Lidoderm^^®^ orphan drug status for the treatment of the pain associated with post herpetic neuralgia, which means, generally, that no other lidocaine containing product can be approved for this indication prior to March 19, 2006 |
| On June 7, 2005, we launched our generic extended release oxycodone product, our bioequivalent, or generic, version of OxyContin^^®^ |
| After the expiration of our marketing exclusivity period in December 2005, several competitors launched bioequivalent versions of the 10mg, 20mg and 40mg strengths of OxyContin^^®^ |
| In addition, we could be forced to stop selling our generic OxyContin^^®^ product if the District Court or Federal Circuit Court of Appeals reverses their decisions in our favor and one or more of the Purdue patents are found valid and enforceable and there is a final court decision adverse to us |
| See “—We face intense competition from other manufacturers of generic versions of our generic products |
| ” and “—Although we were successful in our patent challenge against Purdue for our generic OxyContin^^®^ product, both at trial and on appeal, the Court of Appeals has vacated its unanimous affirmance of the Opinion and Order in our favor and affirmed the District Court’s finding that, if Purdue’s patents are enforceable, Endo’s oxycodone extended-release tablets infringe these patents |
| Further, the Federal Circuit issued a new opinion on February 1, 2006 remanding the case to the same District Court for its further consideration as to whether the Purdue patents are unenforceable |
| If we are ultimately unsuccessful, we may be liable for damages and the price of our common stock may decline |
| ” If we were unable to continue to market any of these products, if any of them were to lose market share, for example, as the result of the entry of new competitors, particularly from generic versions of branded drugs, or if the prices of any of these products were to decline significantly, our net sales, profitability and cash flows would be materially adversely affected |
| The introduction of other bioequivalent versions of the 10mg, 20mg and 40mg strengths of OxyContin^^®^ has had and will continue to have an adverse effect by reducing our market share and adversely affecting our profitability and cash flows that we would have otherwise achieved if we supplied the exclusive generic equivalent to the 10mg, 20mg and 40mg strengths of OxyContin^^®^ and to MS Contin^^®^ |
| We face intense competition from brand-name companies that sell or license their own generic versions of our generic products or seek to delay the introduction of generic products |
| Brand-name pharmaceutical companies have taken aggressive steps to thwart competition from generic equivalents of their brand-name products |
| In particular, brand-name companies sell directly to the generics market or license their products for sale to the generics market through licensing arrangements or strategic alliances with generic pharmaceutical companies (so-called “authorized generics”) |
| No significant regulatory approvals are required for a brand-name manufacturer to sell directly or through a third party to the generic market |
| Brand-name manufacturers do not face any other significant barriers to entry into such market |
| to distribute the so-called “authorized generic” versions of OxyContin^^®^ and MS Contin^^®^, the branded version of our morphine sulfate extended release tablets, pursuant to one or more distribution arrangements with Purdue |
| The introductions of these so-called “authorized generics” have had and may continue to have an adverse effect by reducing our market share and adversely affecting our profitability and cash flows |
| In addition, brand-name companies continually seek new ways to delay generic introduction and decrease the impact of generic competition, such as filing new patents on drugs whose original patent protection is about to expire; filing an increasing number of patents that are more complex and costly to challenge; filing suits for patent infringement that automatically delay approval by the FDA; developing patented controlled release or other next generation products, which often reduces the demand for the generic version of the existing product for which we may be seeking approval; changing product claims and product labeling; developing and marketing as over-the-counter products those branded products that are about to face generic competition; or filing citizens’ petitions with the FDA seeking restraints on our products or seeking to prevent them from coming to market |
| These strategies may increase the costs and risks associated with our efforts to introduce generic products and may delay or prevent such introduction altogether |
| 26 ______________________________________________________________________ [51]Table of Contents We entered into a tax sharing agreement with Endo Pharma LLC in July 2000, pursuant to which we have made and may continue to make large cash payments to Endo Pharma LLC Endo Pharma LLC is a limited liability company that currently holds a significant portion of our common stock, in which affiliates of Kelso & Company and certain members of management have an interest |
| Endo Pharma LLC was formed in connection with the acquisition of Algos Pharmaceutical Corporation in July 2000 to ensure that the stock options granted pursuant to the Endo Pharma LLC stock option plans diluted only the Endo common stock held by persons and entities that held such shares prior to our merger with Algos |
| Upon the exercise of the stock options granted under the Endo Pharma LLC stock option plans, only currently outstanding shares of our common stock held by Endo Pharma LLC will be received by holders of such options upon exercise |
| Upon exercise of any of these Endo Pharma LLC stock options, we generally will be permitted to deduct as a compensation charge, for income tax purposes, an amount equal to the difference between the market price of our common stock and the exercise price paid upon exercise of these options (as of December 31, 2005, we had recognized compensation deductions of approximately dlra669 million, which is estimated to result in a tax benefit amount of approximately dlra257 million) |
| Because Endo Pharma LLC, and not us, will provide the shares upon the exercise of the stock options granted pursuant to the Endo Pharma LLC stock option plans, we entered into a tax sharing agreement with Endo Pharma LLC under which we are required to pay to Endo Pharma LLC upon the occurrence of a liquidity event, as described further below, the amount of the tax benefit usable by us as a result of the exercise of these stock options into shares of our common stock held by Endo Pharma LLC As of December 31, 2005, approximately 32dtta7 million of these stock options had been exercised into shares of our common stock held by Endo Pharma LLC Under the tax sharing agreement, we are required to pay approximately dlra257 million to Endo Pharma LLC to the extent that a compensation charge deduction is usable by us to reduce our taxes and based upon the assumption that all other deductions of Endo are used prior thereto |
| We had no obligation to make any payments under the tax sharing agreement to Endo Pharma LLC prior to the occurrence of a liquidity event |
| The tax sharing agreement defines a liquidity event as a transaction or series of transactions resulting in (a) a sale of greater than 20prca on a fully diluted basis of our common equity (either through (i) primary offerings by us, (ii) secondary sales by Endo Pharma LLC or other holders of common stock or (iii) a combination of both such primary and secondary offerings), (b) a change in control of Endo or (c) a sale of all or substantially all of our assets |
| On April 30, 2004, we amended the tax sharing agreement to clarify when a liquidity event has occurred and to provide for a specific schedule upon which payments currently contemplated by the tax sharing agreement would be made once a liquidity event has occurred |
| The amendment established a formula for calculating when a sale of 20prca of the common equity of Endo had occurred and specified that secondary sales of Endo common stock include sales pursuant to a shelf registration statement |
| The amendment also provides that upon the occurrence of a liquidity event, we are obligated to pay to Endo Pharma LLC, within 30 business days, the amount of the tax benefits usable by us in each of the previous taxable years for which we have filed a federal income tax return |
| Moreover, with respect to all taxable years for which we file our federal income tax return after the occurrence of a liquidity event, the amount of the tax benefits usable by us in each such year will be paid to Endo Pharma LLC in two installments: (i) 50prca of the estimated amount shall be paid within 15 business days of our receipt from our independent registered public accounting firm of an opinion on our final audited financial statements, and (ii) the remaining amount shall be paid within 30 business days of the filing of our federal income tax return |
| A liquidity event occurred on August 9, 2004, when Endo Pharma LLC completed the secondary sale of 11 million shares of common stock |
| The closing of this offering, when combined with the sale by Endo Pharma LLC of the sale of 16dtta6 million shares on July 8, 2003, constituted a liquidity event under the tax sharing agreement and triggered a payment obligation with respect to tax benefits usable by us in previous years |
| In 2004, we paid dlra13dtta5 million to Endo Pharma LLC to satisfy the tax sharing obligations attributable to 2001, 2002 and 2003 |
| Since 6dtta6 million shares underlying stock options granted under the Endo Pharma LLC stock option plans were exercised into common stock and sold in the offerings on August 9, 2004 and November 29, 2004, at prices of dlra17dtta46 and dlra20dtta02, respectively, with a weighted average exercise price of dlra2dtta44, and an assumed tax rate of 38dtta7prca, we were obligated to pay Endo Pharma LLC a tax benefit of approximately dlra41 million |
| Fifty percent of the tax benefit amount attributable to these two 2004 offerings and other Endo Pharma LLC stock option exercises in 2004, aggregating dlra21dtta4 million, was due and was paid within 15 business days of the date we received an opinion on our audited 2004 financial statements from our independent registered public accounting firm and the remaining fifty percent of the tax benefit amount attributable to 2004 was due within 30 business days of the date on which we filed our 2004 tax return with the Internal Revenue Service (which occurred in September 2005) and approximately dlra21dtta4 million was paid in October 2005 to satisfy the tax sharing obligations attributable to 2004 |
| On October 12, 2005, as part of the sale of 33dtta35 million shares of our common stock, approximately 19dtta5 million shares underlying stock options granted under the Endo Pharma LLC stock option plans were exercised at a market price of dlra26dtta04, with a weighted average exercise price of dlra2dtta72, and an assumed tax rate of 38dtta4prca |
| Since the attributable compensation charge deductions are usable to reduce our taxes in 2005, we are obligated, under our amended tax sharing agreement, to pay to Endo Pharma LLC an additional tax benefit amount of approximately dlra175 million, which has been accrued in the fourth quarter of 2005 |
| Fifty percent of the estimated tax benefit amount attributable to the October 12, 2005 offering and any additional tax benefits attributable to 27 ______________________________________________________________________ [52]Table of Contents the exercise of stock options granted under the Endo Pharma LLC stock option plans in 2005 will be due within 15 business days of the date we receive an opinion on our final audited 2005 financial statements from our independent registered public accounting firm and the remaining tax benefit amount attributable to 2005 is due within 30 business days of the date on which we file our 2005 tax return with the Internal Revenue Service |
| Additionally, since approximately 2dtta7 million additional stock options granted under the Endo Pharma LLC stock option plans were exercised prior to January 1, 2006 and since the attributable compensation charge deductions are usable to reduce our taxes in 2005, we will be obligated, under our amended tax sharing agreement, to pay to Endo Pharma LLC an additional tax benefit amount of approximately dlra26 million in 2006 |
| As a result of the significant tax deductions expected to have been generated in 2005 from the exercise of the 22dtta2 million stock options discussed above, we have incurred a net operating loss in 2005 for tax purposes which will permit us to obtain a tax refund of a portion of prior years’ payments during 2006 |
| All payments that have been, or will be, made or accrued pursuant to the tax sharing agreement have been, or will be, reflected as a reduction of stockholders’ equity in our consolidated financial statements |
| As of December 31, 2005, there are approximately 2dtta8 million stock options remaining to be exercised under the Endo Pharma LLC stock option plans |
| Using a weighted average exercise price of dlra2dtta42 per share and an assumed tax rate of 38dtta4prca, if all of these remaining stock options under the Endo Pharma LLC stock option plans were vested and exercised, and assuming the price of our common stock was dlra30dtta26 per share, the closing price on December 30, 2005, we would generally be able to deduct, for income tax purposes, compensation of approximately dlra78 million, which could result in a tax benefit amount of approximately dlra30 million payable to Endo Pharma LLC in 2007 and beyond |
| Our tax sharing liability as of December 31, 2005 payable to Endo Pharma LLC is approximately dlra195 million |
| Although we were successful in our patent challenge against Purdue for our generic OxyContin^^®^ product, both at trial and on appeal, the Court of Appeals has vacated its unanimous affirmance of the Opinion and Order in our favor and affirmed the District Court’s finding that, if Purdue’s patents are enforceable, Endo’s oxycodone extended-release tablets infringe these patents |
| Further, the Federal Circuit issued a new opinion on February 1, 2006 remanding the case to the same District Court for its further consideration as to whether the Purdue patents are unenforceable |
| If we are ultimately unsuccessful, we may be liable for damages and the price of our common stock may decline |
| The Purdue Frederick Company and related parties filed suit against us and our subsidiary, Endo Pharmaceuticals Inc, or EPI, in October 2000 (and again in March 2001 and August 2001) alleging that our 10mg, 20mg, 40mg and 80mg bioequivalent versions of OxyContin^^®^, for which we filed an ANDA, violate three of their patents |
| The US District Court for the Southern District of New York issued an Opinion and Order on January 5, 2004 holding that, while Endo infringes the three Purdue patents, the patents are unenforceable due to Purdue’s inequitable conduct |
| Accordingly, the district court dismissed Purdue’s patent infringement suit against us and EPI, declared the patents invalid, and enjoined Purdue from further enforcement of the patents |
| Purdue filed an appeal as well as motions to stay the injunction against the enforcement of their patents pending the outcome of the appeal and to expedite the appeal |
| Both motions were denied on March 18, 2004 |
| On June 7, 2005, the US Court of Appeals for the Federal Circuit in Washington, DC affirmed the Opinion and Order of the District Court issued in Endo’s favor on January 5, 2004 |
| This affirmance by the Federal Circuit Court dismissed the claims that Endo’s oxycodone extended release tablets infringe Purdue patents, and permanently enjoined Purdue from enforcing these patents |
| On June 21, 2005, Purdue filed a petition with the Federal Circuit Court of Appeals seeking rehearing of the case by the panel that issued the June 7, 2005 decision, or alternatively by the entire court |
| On July 18, 2005, the Federal Circuit Court of Appeals requested that Endo submit a response brief as part of its review process of Purdue’s petition for rehearing and rehearing en banc |
| Endo submitted this response on August 1, 2005 |
| On February 1, 2006, we announced that the Federal Circuit Court of Appeals had vacated its unanimous June 7, 2005 affirmance of the Opinion and Order in our favor and affirmed the District Court’s finding that, if Purdue’s patents are enforceable, Endo’s oxycodone extended-release tablets infringe these patents |
| Further, the Federal Circuit issued a new opinion on February 1, 2006 remanding the case to the same District Court for its further consideration as to whether the Purdue patents are unenforceable |
| We intend to continue marketing our generic oxycodone extended-release tablets at this time |
| In the event there is a final nonappealable judgment that Purdue’s patents are valid and enforceable, we could face substantial liability for patent infringement and be obligated to pay Purdue damages in an amount to be determined by the District Court |
| Although there can be no assurance, we believe that we would be able to fund the payment of these damages without materially adversely affecting our business operations, |