AAIPHARMA INC (AAII) SPO
|Company Name||AAIPHARMA INC|
|Company Address||2320 SCIENTIFIC PARK DRIVE
WILMINGTON, NC 28405
|CEO||Frederick D. Sancilio|
|Employees (as of 12/31/2001)||1200|
|State of Inc||DE|
|Fiscal Year End||12/31|
|Exchange||Nasdaq National Market|
|Shares Over Alloted||0|
|Shareholder Shares Offered||1,138,000|
|Lockup Period (days)||180|
|Quiet Period Expiration||--|
We estimate that our net proceeds from this offering, assuming an offering price of $32.50 per share (which is the last reported sale price of the common stock on the Nasdaq Stock Market on April 4, 2002) and after deducting the estimated underwriting discount and offering expenses payable by us, will be approximately $45.5 million, or $50.6 million if the underwriters' over-allotment option is exercised in full. We intend to use these net proceeds to reduce the amounts outstanding under our senior credit facilities. We will not receive any proceeds from the shares of common stock sold by the selling stockholders. Our senior credit facilities provide for a $75 million revolving credit facility and a $100 million term loan facility and mature on March 28, 2007. At March 31, 2002, we had approximately $49.4 million of borrowings outstanding under our revolving credit facility. Our senior credit facilities were incurred to pay a portion of the purchase price of the Darvon and Darvocet acquisition, to refinance our prior senior credit facilities, to terminate our existing tax retention operating lease and purchase the underlying properties, and to pay transaction costs associated with these transactions. Borrowings under our revolving credit facility are also available for permitted acquisitions, for working capital and general corporate purposes and to fund all or a portion of our contingent payment obligations arising in connection with our acquisitions. The interest rates per annum applicable to our senior credit facilities are LIBOR plus the applicable margin (as defined below) or, at our option, the alternate base rate (which will be the higher of (i) the Bank of America, N.A. prime rate and (ii) the federal funds rate plus 0.50%), plus the applicable margin. The applicable margin for revolving credit loans will be, until November 2002, 3.75% per annum in the case of LIBOR rate advances and 2.75% per annum in the case of alternate base rate advances and, thereafter, shall be determined by a performance pricing grid based on our total leverage ratio. The applicable margin for term loans will be 4.50% per annum in the case of LIBOR rate advances and 3.50% per annum in the case of alternate base rate advances over the life of the facility. Until the aggregate principal amount of the term loan facility is reduced by at least the sum of $50.0 million plus, with respect to any date after December 31, 2002, the aggregate amount of all scheduled amortization of the term loan for the period from January 1, 2003 through the relevant measurement date, (i) we are obligated to pay, on December 31, 2002 and each six months thereafter occurring before the term loans are so reduced, a fee of 0.25% per annum on the entire amount of our senior credit facilities on such date and (ii) the applicable interest rates increase by 0.25% per annum on December 31, 2002 and each six months thereafter occurring before the term loans are so reduced. We are also obligated to pay a commitment fee of 0.5% per annum on the unused portion of our revolving credit facility. Affiliates of several of the underwriters of this offering are lenders under our senior credit facilities. See "Underwriting."
We compete with companies and organizations in multiple segments of the pharmaceutical industry. The branded drug products of our NeoSan business unit are subject to competition from the branded and generic products of other pharmaceutical companies, ranging from other small specialty pharmaceutical companies to the large pharmaceutical companies who are among the customers of the fee-for-service business of AAI International. The main competition for M.V.I.-12 is Infuvite Adult, which is marketed by Baxter Healthcare Corporation. The main competition of M.V.I.-Pediatric is Infuvite Pediatric, which also is marketed by Baxter Healthcare Corporation. Aquasol A is the only injectable Vitamin A product on the market. Aquasol E competes with various other vitamin E products. If approved by the FDA, the main competition of Aquasol D is expected to be Calcijex and Zemplar, marketed by Abbott Laboratories, and Hectorol, marketed by Bone Care International, Inc. Aquasol D has been submitted for approval by the FDA as a generic substitute for Calcijex, although Aquasol D will be packaged in a vial, rather than an ampoule, form. Brethine competes in the market for the treatment of asthma and related bronchial ailments, which is a market led by Volmax, Proventil, and branded and generic forms of albuterol sulfate. Darvon and Darvocet compete primarily in the broad pain management market, especially with products indicated for the management of mild to moderate pain. Competitive products indicated for the management of mild to moderate pain include Ultram and other non-steroidal anti-inflammatory drugs such as ibuprofen. Additionally, major promotional efforts in the U.S. pain management market today involve a relatively new class of drugs, the cyclo-oxygenase 2, or the COX-2 enzyme, inhibitors. They are designed to work as effectively as Darvon and Darvocet and NSAIDs, but without side effects such as ulcers and gastrointestinal bleeding. These new COX-2 inhibitors are more selective than traditional NSAIDS. The non-selective inhibition of both COX-1 and COX-2 enzymes in other NSAIDs is responsible for the toxicities and side effects. The Darvon and Darvocet product lines no longer have patent exclusivity. While precise data on generic substitution for these products is not available, we believe a vast majority of the prescriptions written for Darvon and Darvocet are filled with generic products. These generic substitutes are sold at significantly lower prices, without the research, development and approval costs associated with the branded Darvon and Darvocet products. Two of the world's largest manufacturers of generic products, Teva Pharmaceutical Industries Ltd. and Mylan Laboratories Inc., sell propoxyphene generic substitutes to Darvon and Darvocet. Sellers of generic products typically do not bear the related research and development costs associated with branded products and, thus, are able to offer their products at considerably lower prices. There are, however, a number of factors that enable branded products to remain profitable once patent protection has ceased. These include the establishment of a strong brand image with the prescriber or the consumer, supported by the development of improved products and line extensions to differentiate the branded products from the generic competition. Our AAI International and aaiResearch businesses compete primarily with in-house research, development, quality control, and other support service departments of pharmaceutical and biotechnology companies, as well as university research laboratories and other contract research organizations. In addition, we believe that although there are numerous fee-for-service competitors in our industry, there are few competitors that offer the depth or breadth of scientific capabilities that we provide. Some of our competitors, however, may have significantly greater resources than we do. Competitive factors generally include reliability, turn-around time, reputation for innovative and quality science, capacity to perform numerous required services, financial viability, and price. We believe that we compete favorably in each of these areas.
OVERVIEW We are a specialty pharmaceutical company focused on the commercialization of branded pharmaceutical products that we develop or acquire. We have over 20 years of pharmaceutical research and development experience, with operations primarily in the United States and Europe. We have
acquired three branded product lines since August 2001 which had $120.2 million of 2001 net revenues on a pro forma basis, assuming these acquisitions had been completed on January 1, 2001. In addition, we are developing our own proprietary products, as well as developing improvements and line extensions to our acquired products, by applying our scientific expertise and portfolio of proprietary and in-licensed drug-delivery technologies. Historically, we have generated our revenues by providing a comprehensive spectrum of pharmaceutical research and development services on a fee-for-service basis to a broad base of customers, including large pharmaceutical companies such as AstraZeneca PLC, Bayer AG, Eli Lilly and Company, and Novartis Corporation. In 2001, we began acquiring established branded pharmaceutical products whose sales we believe could be increased through enhanced promotion and marketing. We seek to acquire established, branded products that we believe we can improve by applying our significant research and development capabilities and that fall within targeted therapeutic classes -- critical care, central nervous system, pain management, oncology, immunosuppression and cardiology. Our product pipeline includes the following drugs that we intend to market and promote as branded drug products upon approval by the FDA: - Aquasol D, an injectable vitamin D nutritional product, for which we are awaiting FDA approval; - three new dosages of our azathioprine tablet, which treats rheumatoid arthritis and post-transplant organ rejection, for which we are awaiting FDA approval; - imidapril, an angiotensin-converting-enzyme (ACE) inhibitor for the treatment of cardiovascular diseases, for which we are planning Phase III clinical trials; - ProSorb-D, a pain management product combining diclofenac with our patented ProSorb drug-delivery technology, currently in Phase III clinical trials; and - 6-omeprazole, which is a quick-dissolving tablet for the treatment of gastrointestinal ailments, currently in prototype development. Our company is structured within three divisions: - NeoSan Pharmaceuticals. NeoSan commercializes branded pharmaceutical products in our targeted therapeutic classes. NeoSan had $130.1 million of net revenues in 2001 on a pro forma basis assuming the acquisitions of the M.V.I., Aquasol, Brethine, Darvon, and Darvocet product lines had occurred on January 1, 2001. - aaiResearch. aaiResearch applies our research and development expertise and our portfolio of proprietary and in-licensed drug-delivery technologies and intellectual property rights to improve our acquired products and internally develop new products. Additionally, we offer these product improvement, or life cycle management, activities to our customers for royalties, milestone payments and fees. Net revenues for aaiResearch in 2001 were $20.4 million. - AAI International. AAI International offers on a fee-for-service basis a comprehensive range of pharmaceutical product development services to our customers on an international basis. Net revenues for AAI International were $93.2 million in 2001. OUR COMPETITIVE STRENGTHS We believe that our competitive position is attributable to our scientific expertise and a number of our other key strengths, including the following: Established Pharmaceutical Business Infrastructure. We have a long history of assisting our customers in developing and commercializing pharmaceutical products and have an established infrastructure to do so. We offer our customers a wide range of scientific capabilities, including analytical services, biopharmaceutical services, pharmaceutical product development services, Phase I to IV clinical services, product manufacturing, and regulatory and other consulting services, in addition to product life cycle management activities. We have approximately 700 employees working on the development of drugs and have worked with over 2,000 pharmaceutical compounds in the past 20 years. We plan to use these capabilities to enhance our internal proprietary product candidates. Well Recognized Brands. Each of the product lines we have acquired has been sold in the U.S. for over 18 years, and the Darvon and Darvocet products have been sold in the U.S. for over 25 years. These branded product lines have generated sales and gross profits for many years despite competition from generic and other competitive products. These acquired product lines had a gross margin of 79% in 2001, based on their 2001 pro forma net revenues. We believe that the cash flows that these products generate are sustainable, and, moreover, we believe we can increase sales of these products by actively promoting them. Expertise in Product Life Cycle Management. Through AAI International and aaiResearch, we offer our customers a strong base of resources, expertise and ideas to better understand and improve their existing products and develop new products. Our portfolio of patents and proprietary and in-licensed technologies may provide our customers with new formulations, delivery systems, indications and dosage forms to improve the safety, efficacy or cost effectiveness, or reduce the side effects, of their drugs. This can result in renewed regulatory or patent exclusivity, adding to the commercially valuable life of the product. For example, we are currently working with a major pharmaceutical company to reformulate their allergy product to be taken once a day instead of four times a day. In the past, we also have worked with a major pharmaceutical company to develop a long acting version of a cardiovascular product to be taken once a day instead of twice a day and with another major pharmaceutical company to develop a chewable tablet form of an antidepressant. Established Customer Base Enhances Product Acquisition Opportunities. We have developed strong relationships with major pharmaceutical companies through years of client service on research, product development, and product life cycle management projects. For example, AAI International provided development services to AstraZeneca for both M.V.I.-12 and M.V.I.-Pediatric for several years prior to our acquisition of these products. We have, over the past 15 years, worked on some element of over 80% of the top 200 drug products in the U.S., as ranked by IMS data for 2000. These relationships position us to acquire established, branded products that are no longer the focus of our customers' development, marketing and promotional efforts. We have more than 50 representatives in our research service business who regularly call on key decision makers of the large pharmaceutical companies. These relationships provide important insights into product portfolios and development pipelines and may allow for more rapid identification and acquisition of attractive branded pharmaceutical products. Experienced Management Team. We have an experienced management team that is led by Frederick D. Sancilio, Ph.D., Chairman and Chief Executive Officer, Philip S. Tabbiner, D.B.A., President and Chief Operating Officer, William L. Ginna, Jr., Executive Vice President and Chief Financial Officer, David Johnston, Ph.D., President of AAI International, George E. Van Lear, Ph.D., President of aaiResearch, and David M. Hurley, President of NeoSan Pharmaceuticals. These senior executives have an average of over 20 years of experience in the pharmaceutical industry.