Caraco third quarter net sales increases from $78.4 million to $97.8 million

Oct 30 2010

Caraco Pharmaceutical Laboratories, Ltd. (NYSE Amex: CPD) generated net sales of $97.8 million and $227.8 million during the second quarter ended September 30, 2010 and first six months of the Company's current fiscal year ("Fiscal 2011") ended September 30, 2010, respectively, as compared to $78.4 million and $126.4 million, respectively, for the corresponding periods of the previous fiscal year ("Fiscal 2010") ended September 30, 2009. During the second quarter and first six months of Fiscal 2011, sales of Caraco-owned products were $8.1 million and $11.0 million, respectively, as compared to $2.5 million and $15.6 million, respectively, during the corresponding periods of Fiscal 2010. The sales of distributed products during the second quarter and first six months of Fiscal 2011 were $89.7 million and $216.8 million, respectively, as compared to $75.9 million and $110.9 million, respectively, during the corresponding periods of Fiscal 2010. Caraco earned a gross profit of $9.5 million and $19.0 million during the second quarter and first six months of Fiscal 2011, respectively, as compared to incurring a gross loss of $4.1 million and $7.7 million, respectively, during the corresponding periods of Fiscal 2010. Caraco incurred pre-tax losses of $2.3 million and $0.4 million, respectively, during the second quarter and first six months of Fiscal 2011, as compared to earning pre-tax income of $10.6 and incurring a pre-tax loss of $3.9 million during the respective periods of Fiscal 2010. Pre-tax income in the second quarter of Fiscal 2011 was lower mainly due to non-recurring income earned during the second quarter of Fiscal 2010, in the amount of $20.0 million, as part of an asset purchase agreement arising out of a settlement agreement entered into by the Company, partially offset by the $7.5 million reserve for seized inventory established during the second quarter of Fiscal 2010. Pre-tax loss in the first six months of Fiscal 2011 was offset primarily by increased sales of certain distributed products. The sales of such products at these levels are not expected to continue in future periods. The Company recorded an income tax benefit of $0.8 million and $0.1 million, respectively, for the second quarter and first six months of Fiscal 2011, as compared to recording income tax expense of $3.9 million in the second quarter of Fiscal 2010 and providing for an income tax benefit of $1.1 million during the first six months of Fiscal 2010. Caraco incurred net losses of $1.5 million and $0.3 million, respectively, during the second quarter and first six months of Fiscal 2011, as compared to earning net income of $6.7 million and incurring a net loss of $2.8 million during the corresponding periods of Fiscal 2010. Caraco generated cash from operations in the amount of $1.9 million during the first six months of Fiscal 2011, as compared to generating cash from operations in the amount of $20.3 million during the corresponding period of Fiscal 2010.

Selling, general and administrative ("SG&A") expenses during the second quarter and first six months of Fiscal 2011 were $8.0 million and $13.8 million, respectively, as compared to $6.8 million and $10.5 million, respectively, during the corresponding periods of Fiscal 2010, representing increases of 17% and 32%, respectively. SG&A expenses were higher during Fiscal 2011 due to cGMP expert consultation fees and royalties related to certain Caraco-owned products. SG&A expenses, as a percentage of net sales, decreased to 8% and 6%, respectively, for the second quarter and first six months of Fiscal 2011, as compared to 9% and 8%, respectively, for the corresponding periods of Fiscal 2010. The lower percentage of SG&A is mainly due to the higher sales in the current year periods versus the corresponding periods last year.

Total R&D expenses incurred for the second quarter and first six months of Fiscal 2011 were $4.0 million and $6.1 million, respectively, as compared to $(1.5) million and $5.6 million, respectively, during the corresponding periods of Fiscal 2010. The R&D expenses during the second quarter of Fiscal 2011 were higher due to expenses related to filing ANDA supplements for certain products, which will allow them to be manufactured at alternate sites. The R&D expenses during the second quarter of Fiscal 2010 were lower, as Caraco was reimbursed an amount relating to litigation costs as part of a settlement agreement, as previously disclosed. R&D expenses have decreased since the Company ceased manufacturing operations, due to the focus of the Company on FDA remediation.

Caraco filed two ANDAs relating to two products with the FDA during the first six months of Fiscal 2011. These products have been developed in partnership with other product development and manufacturing companies. The total number of ANDAs pending approval by the FDA as of September 30, 2010 was 33 (including four tentative approvals) relating to 29 products. Out of the 33 ANDAs pending approval, 31 (including four tentative approvals) are from Caraco's Detroit, Michigan manufacturing facility and the remaining two are from the manufacturing sites of partner companies.

The Company has been actively working with cGMP consultants towards the resumption of manufacturing activities at its Michigan facilities. These consultants were appointed by the Company in accordance with the previously disclosed Consent Decree, which the Company entered into with the FDA on September 29, 2009. Under the terms of the Consent Decree, before resuming the manufacture of any product in the Company's Michigan facilities, a number of significant steps and processes are required to be completed, and certifications and approvals from both outside experts and the FDA are to be obtained. The Company has made significant progress toward completion of this endeavor for its first set of two products, and currently believes, as previously disclosed, that it will commence manufacture of these first two products by the end of Fiscal 2011. However, there is no assurance that the steps taken will be successful or result in resolution of the FDA compliance issues. A second set of two or three products is planned for manufacture during the third quarter of Fiscal 2012.  Accordingly, by the end of Fiscal 2012, the Company expects to be manufacturing and distributing four or five products generating insignificant annualized sales volume. All of the Company's prior approved products, together with the new products pending approval from the FDA, will be subject to these same processes, certification and approvals as set forth in the Consent Decree.  The Company believes that, even assuming a successful remediation process, it will take significant time before the Company reaches its previous levels of manufacturing in its Michigan facilities.

The Company intends to continue to augment this insignificant sales volume by the sale of Caraco owned products manufactured at third party sites and sales of distributed products, which are not impacted by the aforementioned actions of the FDA. However, any disruption in supplies of the products manufactured at these third party sites due to any cGMP or any other issues would significantly impact the revenues from such products. Further, a contract, representing a portion of distributed products manufactured by Caraco's parent, Sun Pharma, is currently scheduled to expire in January, 2011. Negotiations with Sun Pharma are currently underway for renewal and/or extension of this contract.