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VITARINE SUSTAINED RELEASE INDOMETHACIN CAPTURED ONE-THIRD OF MARKET FROM MERCK's INDOCIN SR IN FY 1988; ACQUISITIONS MAKE VITARINE $ 150 MIL. COMPANY

Executive Summary

Vitarine's lock on the generic sustained release indomethacin market in 1988 resulted in sales of $ 12 mil. from its generic product during the fiscal year ended Sept. 30, the generic firm indicated in a prospectus covering the company's initial public offering. Sales of its generic sustained release indomethacin represented 14.6% of Vitarine's $ 82.1 mil. in net sales in fiscal 1988, which translates into $ 12 mil. Based on Vitarine's estimate of the total sustained release indomethacin market of $ 35 mil., the generic product captured nearly 35% of the market from Merck's Indocin SR in the last fiscal year. Since its approval in July 1987, Vitarine's sustained release indomethacin has been the sole product in that market. The product is "AB" rated to Merck's branded sustained release indomethacin, according to FDA's "Orange Book." Indomethacin SR, desipramine (Merrell Dow's Norpramin), and triamterene/hydrochlorothiazide (Lederle/Mylan's Maxzide) generated over 40% of Vitarine's FY 1988 sales, or approximately $ 33.5 mil. Combined with an aggressive acquisition program of generic distributors in 1988, which added another $ 33 mil. in sales, Vitarine's sales nearly quintupled in FY 1988. Pro forma sales now put the company in the $ 150 mil. per year range. Vitarine's first generic approval for desipramine in June 1987 and successful patent challenge of Lederle's Maxzide in December 1987 have paid off handsomely for the Springfield Gardens, New York-based generic firm. The prospectus indicates that the two generics each generated nearly $ 11 mil. in sales in the last fiscal year. Because of the successful paragraph four challenge of Mylan's patent for triamterene/hydrochlorothiazide, Vitarine had an exclusive position in the generic market for that product from December 1987 to May 1988. Vitarine was also the second generic manufacturer, after Bolar, to receive ANDA approval for SmithKline's Dyazide brand of triamterene/hydrochlorothiazide in February 1988. A fourth generic best-seller, cephalexin capsules (Lilly's Keflex) contributed sales of approximately $ 7 mil. in FY 1988. The four generic products -- indomethacin SR, triamterene/hydrochlorothiazide, desipramine, and cephalexin were responsible for 78% of sales and 92% of gross profits from Vitarine's manufacturing operations, the prospectus notes. Vitarine's explosive growth since 1986 demonstrates the opportunities available to those generic manufacturers that are successful in winning first ANDA approvals in the post-Waxman/Hatch era. Since the company's restructuring in 1985 and change in focus on winning first ANDA approvals, manufactured product sales have risen over 400% in two years. Vitarine sales doubled in fiscal 1987 from $ 8.7 mil. in FY 1986 to $ 17.1 mil. In FY 1988, manufactured product sales tripled to $ 51.9 mil. In the prospectus, the company outlines a generic drug development strategy tailored to the vagaries and opportunities of the Waxman/Hatch act: * "to be among the first to develop and receive FDA approval for the manufacture of high volume or otherwise significant generic equivalents of brand-name drugs whose patent protection has or is about to expire, in order to achieve higher margins which can be obtained before numerous competitors obtain FDA approval; * to develop generic drug products which are difficult to formulate or manufacture, such as sustained release products; and to develop generic equivalents of drugs under patent protection * which can be manufactured without infringing such patents or which the company believes can be manufactured after a successful challenge to such patents." As a company, Vitarine represents a rebirth of Phoenix Pharmaceuticals, which, after two successive years of operating losses near $ 7 mil., was recapitalized, restructured and renamed by a new management team led by current Chairman Benno Schmidt, President and CEO Roger Jordan, and Exec VP-Technical Affairs Seymour Hyden. Schmidt is a managing partner of venture capital firm J. H. Whitney, which helped finance the turnaround. Jordan and Hyden were both execs at Ciba-Geigy's generic subsidiary, Geneva Generics, prior to joining Vitarine. The prospectus points out that when current management took control of Phoenix, the company had only two ANDAs on file at FDA. "New management instituted a product development program, increasing the company research and development expenses fourfold, and began the process of developing new generic drugs and obtaining the required FDA approvals," the prospectus adds. In fiscal years 1986, 1987, and 1988, Vitarine has spent $ 1.7 mil., $ 2.1 mil. and $ 2.8 mil., respectively, on R&D. "Since January 1987, the company has received first FDA approvals for generic versions of six drugs and second approvals for two," the prospectus notes. In addition to first approvals for indomethacin SR, desipramine, and cephalexin, Vitarine has also received first approvals for baclofen tablets (Ciba-Geigy's Lioresal), clindamycin caps (Upjohn's Cleocin), and trimipramine caps (Wyeth's Surmontil). Vitarine estimated the combined branded products market for the latter three drugs at $ 44 mil. Since January 1987, Vitarine said it has obtained ANDA approvals to market 36 dosage strengths of 18 drugs and has introduced 19 dosage strengths of 15 additional drugs that did not require FDA approval. Vitarine reported that it has ANDAs pending for 48 dosage strengths of 31 additional drugs at FDA, including five dosage strengths of three sustained release products. However, success in the generic market can be short-lived and transitory since subsequent ANDA approvals significantly reduce prices to commodity levels. Vitarine acknowledges in its prospectus that its recent success is unusual in that both its indomethacin SR and its generic version of Maxzide were blessed with relatively long periods of exclusive generic marketing. In fact, Vitarine's first quarter results for fiscal 1989 show a leveling off in manufacturing sales -- which slowed to 15% growth (to $ 13.8 mil.). The growth was due primarily to increased business through Vitarine's recently acquired distribution business. Volume from the newly established Major Group distribution business resulted in a 200% corporate sales gain to $ 36.6 mil. for the three month period ended Dec. 31, 1988. The Major Group represents a consolidation of six regional generic distributors acquired by Vitarine in the eight months from May 1988 to January 1989, purchased at a total price of $ 53.4 mil. Connected with the purchases, Vitarine paid an additional $ 7.6 mil. to secure non-competition agreements with the distributors. The prospectus notes that in May 1988, Vitarine acquired four distributors -- Crown Drug, for $ 13.6 mil.; Michigan Pharmacal for $ 16.1 mil.; Murray Drug for $ 9 mil.; and Ultra Drug for $ 7 mil. Last December, Vitarine acquired Ellis Pharmaceuticals for $ 7 mil., followed shortly by the purchase of Texas Drug Reps in January for $ 763,000. Vitarine hopes to raise between $ 18.7 mil. and $ 22.1 mil. from the 1.7 mil. share IPO based on an offering price of between $ 11 and $ 13 a share. The proceeds will go toward eliminating debt taken on during Vitarine's acquisition campaign last year. Alex. Brown & Sons and Robertson, Colman & Stephens are the underwriters.

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