Andrx Corporation

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Andrx Corporation

4955 Orange Drive
Davie, Florida 33314
U.S.A.
Telephone: (954) 584-0300
Fax: (954) 217-4327
Web site: http://www.andrx.com

Public Company
Incorporated: 1992 as Andrx Pharmaceuticals, Inc.
Employees: 1,837
Sales: $771 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: ADRX
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Andrx Corporation, operating out of Davie, Florida, is a pharmaceutical company that uses timed-release drug delivery technologies to create generic versions of popular brand-name drugs whose patents have expired. To fund its research efforts the company operates a generic drug distribution business, selling products manufactured by third parties to some 14,000 independent pharmacies and regional chains. This distribution arm, named Anda, also helps the company keep close tabs on developments in the generic pharmaceutical industry and serves as a sales platform for both generic drugs as well as original branded drugs using the company’s timed-release technology—a more recent emphasis at Andrx. Cash realized from drug distribution also helps pay Andrx’s considerable legal bills. Because major pharmaceutical firms zealously attempt to maintain a tight grip over their high-selling branded drugs, Andrx is involved in lengthy and expensive litigation on a continual basis.

Founding Andrx: 1992

Andrx’s founder, Alan P. Cohen, a registered pharmacist, first became involved in the distribution of generic drugs in 1984 when he founded Best Generics, Inc., which he then sold in 1988 to Miami-based Ivax Corp., a generic pharmaceutical company. He continued to serve as president of Best until June 1990. In August 1992 he incorporated a new company, naming it Andrx Pharmaceuticals, Inc. His goal was not to directly compete against generic manufacturers like Ivax, but to work with brand-name pharmaceutical companies to develop generic products using timed-release technologies, which Cohen recognized held significant advantages over prior dosage mechanisms. Rather than taking several doses of a medication each day, for example, a patient might take a single timed-release dose, the effects of which would be automatically produced throughout the day. Moreover, Cohen understood that the technology was expensive and difficult to master and that many pharmaceutical companies would want to team up with Andrx rather than invest in starting their own in-house operations. To help fund the necessary research and development, Cohen also established Andrx’s generic drug distribution business, a complementary activity with which he was well familiar.

To help him run Andrx, Cohen recruited two former colleagues at Ivax. One, Dr. Chih-Ming J. Chen, had been director of product development at Ivax, where he headed a research team involved in timed-release drug mechanisms. After graduating from The Ohio State University in 1981, Chen worked at both Bristol-Myers and Berlex Labs. In January 1992 he started his own company, ASAN Labs, Inc., which in November 1992 he sold to Andrx after agreeing to work with Cohen and become Andrx’s chief scientist, as well as a director of the company. It was at this point that Andrx Pharmaceutical changed its name to Andrx Corporation and launched its generic drug distribution business. Another Ivax executive, Dr. Elliot F. Hahn, then joined the company in February 1993. Serving as vice-president of scientific affairs at Ivax, Hahn handled product licensing and oversaw the maintenance of intellectual property. He now became president of Andrx and a director of the company. With Hahn’s arrival, Andrx began developing generic timed-release drugs using its proprietary delivery technologies.

Andrx soon began establishing development and licensing agreements with other pharmaceuticals. The first contract involved Ivax, signed in June 1993, to develop a generic version of the drug K-Dur. Later in the year, Andrx signed development and licensing agreements with California-based Watson Pharmaceuticals Inc. to develop generic versions of Verelan and Sudafed. Andrx also established international relationships, in July 1993 signing a deal with Yung Shin Pharmaceutical to develop generic versions of Cardizem CD, Seldane, and K-Dur for marketing in Taiwan, China, and parts of southeast Asia. In January 1994 Andrx landed another Taiwan-based partner, Purzer Pharmaceutical Co., to produce a generic version of Dilacor as well as some over-the-counter products for distribution in Russia and Asia. To help fuel its growth, Andrx also prepared to make a initial public offering (IPO) of stock. The company had two very strong trends in its favor: the sale of generic drugs was growing at an average rate in excess of 30 percent per year and the market for controlled release drugs, which totaled $4 billion in 1993, was estimated to grow to $15 billion by the end of the decade. Scheduled for March 1994, the IPO was canceled, however, due to poor market conditions. Although Andrx could have gone public at the time, the price would have been lower than management envisioned and the company opted to find alternative funding. In July 1994 Andrx received $6 million in cash from Circa Pharmaceuticals Inc. and established a joint venture called Ancirc to develop up to six generic timed-release products. A year later Watson acquired Circa, then further strengthened its ties with Andrx by making equity investments in the company, acquiring a 16 percent stake, as well as warrants to purchase additional shares of common stock, at a total cost of nearly $21.6 million.

Revenues grew at a steady clip for Andrx, due almost entirely to its generic drug distribution business, which was enjoying success in penetrating the generic market. During its first full year in operation the company posted sales of nearly $5.7 million, followed by $25.9 million in 1994 and $50.5 million in 1995. The company’s losses also kept pace while Andrx developed its own generic drugs to manufacture: the net loss for 1993 topped $2 million, followed by another $3.1 million in 1994 and $5.2 million in 1995. Tangible progress on the generic drug development side of the business was made later in 1995 when Andrx submitted Abbreviated New Drug Applications (ANDAs) to the U.S. Food and Drug Administration (FDA) for generic versions of Cardizem CD and Dilacor, which in 1995 had combined sales of more than $870 million. Moreover, Andrx had a dozen other generics in the pipeline, the brand name equivalents of which had combined U.S. sales of some $3 billion in 1995. Years of patent litigation would ensue, however, before Andrx could actually sell any of its drugs. The salary of scientists and lawyers were both regarded as developmental costs for the company. By law the brand drug patent holder had the right to challenge AND As, file suit for patent infringement, and gain 30 months time in which to sell the drug while the two sides fought in court. With a lot of money at stake, and a lot of expensive legal talent available to major pharmaceuticals, firms such as Andrx faced a difficult task in getting their products to market.

Going Public: 1996

Despite this uncertainty, Andrx finally went public in June 1996, selling 2.53 million shares of common stock at $12 per share, and in the end netted $27.4 million. Also in 1996 Andrx established Cybear, a venture designed to serve as an Internet Service Provider and Application Services Provider for the healthcare industry. Among Cybear’s capabilities would be hospital messaging, purchasing, eligibility verification, claims processing, lab results, and prescription writing. At the end of the year Andrx posted revenues of $86.7 million and a net loss of $4 million, which represented a positive step in light of the company’s 1995 loss of $5.2 million.

In 1997 Andrx continued its efforts to receive FDA approval on AND As for timed-release generic drug equivalents of brand name drugs, including Cardizem CD, a Hoechst Marion Roussel drug. Ancirc also submitted ANDAs for two generics. More importantly, Andrx was finally able to manufacture a product, a generic version of Dilacor that the company began selling in the fourth quarter of the year after the FDA granted final approval. Before the end of the year Andrx was able to post net sales of $3.3 million. When compared to the growth in revenues in the generic drug distribution business, which enjoyed an increase of $59.5 million over the previous year, these sales were negligible but represented a major step in the company’s development and move toward profitability. The company also looked to expand beyond generic drugs and started a program to produce its own brand drugs, which offered much higher profit margins. For the year Andrx generated revenues of $149.7 million and a net loss of $7.6 million, but the company had clearly turned a corner.

Andrx continued to submit ANDAs in 1998 and further engaged in litigation with pharmaceutical companies attempting to fend off generics. Of particular importance was the April acceptance by the FDA of an Andrx ANDA for a generic version of Prilosec, the top-selling prescription drug in the country, marketed as the “purple pill” and used to treat heartburn, ulcers, acid reflux disease, and a variety of other chronic gastrointestinal conditions. In addition to U.S. sales of $2 billion, Prilosec boasted worldwide sales of $4 billion. The patent for the drug’s active ingredient, held by AstraZeneca, was set to expire in April 2001, and Andrx was preparing the way to market its generic equivalent at that time, although with such high stakes involved the company anticipated a vigorous legal challenge from the patent holder. Andrx also became involved in legal difficulties of a different sort. In October 1998 it learned that it was being investigated by the Federal Trade Commission. In question was an agreement with Aventis that paid Andrx $10 million each quarter for not marketing its generic equivalent of Cardizem CD, a deal that grew out of the company’s patent litigation. The question was whether this agreement violated antitrust legislation, as the FTC began to look into the matter on an industry-wide basis. Although Andrx maintained that new competitors were not prevented from entering the market, the FTC ultimately concluded in 2001 that the agreement had blocked entry. Moreover, 15 states launched a suit against Andrx and Aventis claiming $100 million in compensation for the higher prices consumers had to pay because there was no generic version of Cardizem CD on the market.

Company Perspectives:

Andrx Corporation is a specialty pharmaceutical company that applies its ten proprietary and patented oral controlled-release drug delivery technologies and formulation skills to the research and development of bioequivalent/generic and brand/proprietary products.

In October 1998 Andrx posted its first profitable quarter, and for the year the company produced a net profit of nearly $8.4 million on revenues of more than $247 million. Investors, however, focused on the problems with the FTC and litigation that delayed Andrx from marketing its generic drugs, both of which had an adverse impact on the price of the company’s stock. Andrx continue to persevere in 1999, entering into a significant product development agreement with Bayer and receiving ANDA approval for generic versions of the drugs Oruvail, Wellbutrin SR, Zyban, and K-Dur. Andrx also resolved one of its lawsuits and began to market its generic version of Cardizem CD. As a result of these positive developments, the price of the company’s stock soared, on its way to topping $100 per share in early 2000, leading to a two-for-one split. Revenues for 1999 totaled nearly $476 million, and net profits jumped to more than $94 million. In March 2000 Andrx received tentative approval for its generic version of Prilosec, which served as a lead-in to a secondary stock offering in May 2000, when the company was able to raise approximately $235 million. The situation with Prilosec also concerned some analysts who maintained serious reservations about Andrx. Not only was patent holder AstraZeneca vigorously defending its rights in courts, there was some question about the market for Prilosec once Andrx was able to sell its version. AstraZeneca was already selling a drug called Nexium, positioning it as the replacement for Prilosec, which it had stopped actively promoting. Andrx countered that Nexium was only effective as a heartburn treatment and that Prilosec would continue to be a major prescription drug. The company also downplayed the possibility that Prilosec might even go over-the-counter.

A number of concerns in 2001 led to a drop in the price of Andrx stock, which fell from a high of $76.52 to the low $20s. Not only were investors troubled about the state of the Prilosec generic, they were concerned about changes in management. In October of that year Cohen resigned as CEO, replaced by Hahn on an interim basis, and Chen soon announced that he was leaving, too. Nevertheless, the company continued to prepare for future growth, especially as it looked forward to marketing its own brand drugs. In 2001 Andrx acquired CTEX Pharmaceuticals, a sales and marketing company; Armstrong Pharmaceuticals, makers of pharmaceutical aerosols; and the Entex line of cough and cold products.

New CEO, New Focus on Brand Drugs: 2002

In June 2002 a new CEO took over, Richard J. Lane, an executive with experience at Bristol-Myers Squibb and Merck. He quickly reassured shareholders that prospects for the company remained promising. Several months after he took office the Prilosec matter was finally resolved when Andrx and AstraZeneca agreed to share in the profits of the Prilosec generic developed by the Kudco unit of Schwarz Pharma. Under Lane’s leadership Andrx also began to sell off its stake in Cybear, which had lost more than $35 million in 2001. The CEO was also very supportive of the company’s move into brand drugs to augment its generic program. By marketing both generic and brand drugs Lane hoped that Andrx would be able to post revenues between $1.5 billion and $2 billion by 2007. Andrx’s first brand drug, Altocor, a timed-release form of the anti-cholesterol drug lovastatin, went on sale in 2002. To help bolster its manufacturing capabilities, Andrx in January 2003 bought a 500,000-square-foot, Morrisville, North Carolina plant for $28 million and made plans to invest another $85 million in upgrades. According to Lane in an interview with Chemical Week, “We believe that this facility, together with our existing facilities, will enable Andrx to meet market demand for our current and new product introductions well into the future.” With some 30 generics and one brand drug in the pipeline awaiting FDA approval, Andrx would very likely need that extra capacity.